Last week, a New York court issued judgments against Donald J. Trump and his sons, asserting violation of state anti-fraud law in connection with several real estate mortgage loans.  The judgments, which aggregate $355 million and may escalate to $454 million or more, shocked Republicans and Democrats alike and stunned the national real estate community.  It was immediately apparent that something was wildly wrong, since the Trump transactions were nothing unusual or remarkable for the real estate industry.  

Essential Requirements for Claims of Fraud

The case primarily involves applications for mortgage loans submitted by Trump entities to major federal banks.  The state of New York claims that Trump, in connection with such loans, committed repeated fraudulent and illegal acts.  The judge acknowledges that common law fraud (also known as “misrepresentation”) requires a finding of five elements: (1) A material statement of fact (not opinion), (2) falsity, (3) knowledge of the falsity, (4) justifiable reliance by the alleged victim, and (5) damages.  Although the judge apparently concludes that all of the elements have been proven, it is quite obvious that none, let alone all, of the required elements of fraud and misrepresentation were proven. 

1. Material Statement of Fact: Most of the 92-page document relates to alleged false statements in so-called Statements of Financial Condition (SFCs), which were schedules of values allocated to various Trump properties.  Values, by their nature, are opinions (not facts) and therefore cannot serve as a basis for a claim of fraud.
2. Falsity: The Statements of Financial Condition were merely statements of opinion submitted by the proposed borrowers and guarantor(s) and, thus, were neither true nor false. 
3. Knowledge of the Falsity: The proposed borrowers knew that the SFCs were schedules of opinions as to values, were subject to debate, and were neither true nor false.
4. Justifiable Reliance by the Alleged Victim: The word justifiable appears only twice, only on page 2 of the document, and only with respect to a listing of the required elements of fraud and misrepresentation.  The judge reports that some of the bankers indicated that they had relied on statements in the SFCs (i.e., as to valuations) in connection with making a loan, but the judge’s findings do not provide any grounds for determining whether or not any such reliance was justified.  Valid justifiable reliance does not even appear to be possible:

1. The Office of the Controller of the Currency (OCC) has promulgated laws and regulations prohibiting federally chartered banks from making large commercial mortgage loans without first securing an appraisal by an independent and state-licensed and/or state-certified appraiser, which appraisal must comply with additional applicable requirements. Reliance upon other valuations that deviate from the required appraisals is clearly not justified.
2. Valuations by the borrower or appraisers engaged by the borrower are subject to bias and conflicts of interest.  Reliance on such tainted valuations is unwarranted and unwise and unjustified.
3. The judge’s findings contain evidence that valuations contained in the SFCs submitted by Trump entities were summarily reduced 50% by one of the lenders, which lender also reduced valuations submitted by similar borrowers in similar situations in similar amounts.  Such policies evidence that bankers recognize and acknowledge that they are not justified in relying on borrower valuations and, in fact, do not and will not so rely.  

5. Damages: The findings confirm that all of the lenders suffered no loss or damage and apparently were paid in full and in a timely manner.  Thus, yet another essential element for recovery for common law fraud and misrepresentation did not exist.  As the Wall Street Journal concluded (2/17-18/2024), “there was no real financial victim.”

Notwithstanding that New York, for the above reasons, has no valid claim on behalf of itself or any of the lenders for common law fraud and misrepresentation, New York is claiming under a state statute that some immaterial mistakes or misrepresentations justify recovery, not for the banks, but for the benefit of the state of New York, of all gains or profits that the borrower may have made on each project where claimed illegality may have occurred.  All of this comes about, according to the judge, notwithstanding that the lenders suffered no financial or other loss, were not fraudulently induced to do anything, and were aware and comfortable with the notion that the banks are totally responsible for performing their own due diligence, securing of their own appraisals, and developing their own valuations.

In the Trump case, that approach has led to a claim that New York is entitled to recover for its own account (not for the account of any lender) the sum of at least $355 million, apparently just to teach Trump and others a lesson.  The findings reveal no evidence of the amount or extent to which any bank would have raised its interest rate if the guarantor’s (Trump’s) net worth valuation had potentially been reduced by various amounts.  New York’s entitlement to such recovery and the amounts thereof will assuredly be challenged on appeal for the above reasons and for constitutional, equitable, and other reasons. 

Pre-emption

A remedy for the disaster being thrust upon normal nationwide borrower/lender policies and procedures may be for Trump and one or more of the national banks to seek a judicial or OCC determination that New York is prevented and pre-empted by federal law from utilizing its state law for the purposes and in the manner utilized in the Trump case or in any other specific manner that “prevents or significantly interferes with” a national bank’s exercise of its powers in connection with the Trump cases.  If any lie can put a borrower out of business, even if there is no reliance on it, the entire nature of loan transactions will need wholesale realignment, at great expense to both borrower and lender.

Consequences

Other extremely damaging consequences will befall banks and other businesses alike.

The Trump judgment has caused consternation in the business community, especially in the real estate sector, the mortgage sector, and other business lending sectors.  In cases where there may be claimed fraud or misrepresentation (material or otherwise), borrowers are now at great risk that New York will come after them for all their profits and gains on a project, notwithstanding that no one has suffered financial loss or damage.  The Trump case provides excuse and incentive and warning for borrowers, lenders, and other businesses to avoid subjecting themselves to similar outrageous claims.  That may, indeed, necessitate removing their businesses and all negotiations, contracts, meetings, and property from the jurisdiction of the state of New York.

Image: Gage Skidmore via Flickr, CC BY-SA 2.0.