Trumping the Law
When the Rule of Law Goes to Sleep
The Case Against Trump
Unless you have been living in a cave in the Himalayas, you have probably heard about the case against Donald Trump in New York, where a judge has ruled that Trump is liable to pay 354.9 million dollars as a penalty, for overstating the value of real estate which was used as collateral to obtain loans from various banks, a decade or so ago.
The amount, which has to be paid as a penalty to New York State, and not to the banks, is an estimate of how much Trump is supposed to have benefited because he got better loan terms due to overstating the value of the collateral, as well as some additional profit he subsequently made as a consequence of those loans.
As this legal action was initiated in 2019, the final amount after interest is over 450 million dollars. To make matters worse for Trump, he has been barred from borrowing money from New York banks for three years, meaning that he cannot easily raise money for an appeal, which would require that he put up a bond which is equivalent to the penalty amount.
No Victims
The strange thing about this case is that none of the banks concerned filed a complaint — in fact, not only were all the loans paid back on time, with the banks making a hefty profit out of the transaction, they testified that they did their own due diligence regarding the value of these properties, and did not take Trump at his word.
Instead, the charges were brought against him by the New York State Attorney General, using a New York State law called Executive Law Section 63(12). This statute, which gives broad powers to the Attorney General to bring such charges, had previously only been used in situations where someone had incurred a loss due to fraud by another party.
It is therefore extremely unusual, to put it mildly, for the government to step in, and bring a case like this, given that two private parties willingly carried out a commercial transaction, and both walked away fully satisfied with the final outcome.
Brand Value
How do you determine what was a fair market value of those pieces of real estate, ten years ago? Like him or not, the name Trump does carry some brand value. In other words, a suite in Trump Tower, as compared to an identical suite in a nearby, no brand name tower, would be expected to sell at a premium.
How much that premium should be is determined by the market, i.e. how much extra customers are willing to pay for a brand name. If there are not enough transactions to determine this premium, then it is somewhat subjective, and dependent on the assessor’s analysis.
This is not at all unusual. In Dubai, where I live, real estate from Emaar Properties (to give one example) sells at a hefty premium when compared to a less well-known developer. That does not mean that Emaar is ripping off its customers; on the contrary, it is a reflection of the fact that customers are willing to pay a premium for the Emaar name, whatever the underlying reasons may be.
To give a more prosaic example, a bottle of perfume with the brand name of Armani on the bottle will sell for a hundred dollars. Change the name to Dunhill, and the price drops to half of that. Now change to an unknown brand, and you will be able to buy it for less than ten dollars.
If Armani goes to a bank to borrow money, should it value its brand at ten dollars for collateral purposes? And ten years later, should two officers of the law, who may never have worked in the perfume industry, be allowed to retroactively judge what the correct market value should have been?
Contracts
This is not even a complete picture, for it ignores the fact that, at that particular time, both parties (i.e. Trump and the banks), willingly entered into a contract, with defined terms and conditions which were known to, and agreed by, both parties.
Provided that all the conditions for a contract to be valid are fulfilled i.e., there was no coercion, no deception, nothing illegal, each party gave something, and so on, then the exact terms and conditions of the contract are entirely left to the discretion of the parties to the contract.
In this case, the legal system in New York is effectively arguing, retroactively, that the contract was fraudulent, because Trump deceived the banks as to the true value of the real estate.
Try to digest this for a moment. A large bank, full of real estate assessors and steely-eyed accountants, decided that the value of the real estate, which was put up as collateral, justified a certain amount of loan, at a certain rate of interest.
But ten years later, a judge and a lawyer, who may never have worked in the private sector in their whole lives, leave alone as real estate assessors, now have the power to retroactively decide that all those steely-eyed accountants were wrong, and reopen the terms of the contract.
Not only that, if the contract is found to be fraudulent, the proceeds go to the government, and not the banks — which, one would assume, should be the wronged party in this case.
Consequences
It is difficult to believe that this legal action was taken for objective reasons, i.e. it had nothing to do with the fact that Trump is, well, Trump, and there is a significant possibility that he may be the next US President.
You may think that Trump is fascist, racist, and vile. You may even be right. But this cure is far, far worse than the disease. It sets a terrible precedent, because theoretically, any commercial transaction between two parties can be opened up, at any time in the future, just because some officer of the law — an attorney or a judge — decides that he feels like doing this.
If you lose, you could end up with your company and assets being liquidated. If you win, you will still incur millions of dollars in legal fees. If you hate Trump, you may gloat today, but remember that under a different Attorney General, tomorrow, it is a different group of businessmen who could face the same legal risks.
In any other jurisdiction in USA, this would be a problem for business and investor confidence. But in an international financial center? It is suicidal.
