Donald Trump, Prolific Frivolous Litigator, Part I

Donald Trump, Prolific Frivolous Litigator, Part I

Donald Trump, Prolific Frivolous Litigator, Part I by Lawrence Cunningham

For about two years, Chicago’s skyline has had the letters T R U M P adorning a showy luxury building the presumptive Republican presidential nominee put up during the financial crisis. While locals led by Mayor Rahm Emanuel recoiled at the Donald’s bad taste in design, lawyers and citizens alike should recall some of the poor judgment, tone deafness, and ignorance of the law he displayed during the long construction process.

As told in my book aimed at new or aspiring law students, Contracts in the Real World: Stories of Popular Contracts and Why They Matter, Donald Trump thought the so-called “Great Recession” of 2008-09 so calamitous to count as an “Act of God.” He was in the midst of building what would be one of Chicago’s tallest skyscrapers, rivaling the old Sears (now Willis) Tower, a combination luxury hotel and condominiums.

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To finance the project, Donald Trump borrowed $640 million from lenders led by Deutsche Bank in February 2005. By the end of 2008, Trump had only sold condos netting him $204 million along with others under contract that would yield another $353 million. That left him facing a shortfall of nearly $100 million when he was obligated to repay his lenders $40 million per month. Trump cited the Great Recession as an excuse to delay making monthly payments. The banks refused to accept the excuse from timely payment, so Trump, a prolific litigant, went to court.

Circumstances had changed, he observed, and law has long recognized excuse from contract for some kinds of surprising supervening events loosely called forces majeure, from the French meaning “superior forces,” or Acts of God.   If you rent a banquet hall for your wedding, and it burns down with no one at fault, you and the hall are both excused from the agreement; when Hurricane Katrina destroyed New Orleans in September 2005, contracts to buy or sell homes and businesses there were excused.

Recognized forces majeure include fire, flood, lightening, famine, and deep freezes that destroy the subject matter of a contract. Death excuses promises made to render personal service to others. People are not held to deals when it becomes objectively impossible to perform them, at least so long as they did not have reason to foresee the risk and did not address it in their contract.

Trump would stress that man-made calamities can also excuse bargains when, though something is possible to perform, it would be idle to perform it given a deal’s purpose. A rental agreement for a hotel room to watch a parade can be excused if the parade is cancelled, though the room could be occupied, under the aptly-named doctrine “frustration of purpose”—unless, of course, the contract states otherwise.

In extreme cases, a party can be excused when the economics of a deal make performance impracticable. But that excuse is usually limited to prevention by governmental authorities restricting some activity and does not let people out of bargains that prove more costly, even due to events like war. The excuse does not cover a bargain to transport goods, like oil from Texas to India, though a wartime blockade prevents the cheapest route and the alternative costs twice as much.

Deutsche Bank and Trump’s other lenders stressed the narrowness of these excuses, reflected in a longstanding principle of contract law called pacta sunt servanda, a Latin phrase meaning “promises are kept.” Akin to venerable caveat emptor, the traditional idea is that people make bargains and must stick to them, all risk being taken when they make their deal, whatever those risks are.

Back in England of 1647, this stance was rigid. “Yet, he ought to pay his rent,” is a famous legal conclusion from that year’s grand case of Paradine v. Jane. A tenant had to keep a promise to pay rent though the premises were uninhabitable as they were located in a war-ravaged region occupied by marauding bandits and battling armies of the German Prince Rupert. Courts for the next two centuries firmly invoked pacta sunt servanda, as they did caveat emptor. There was no way out, however burdensome performance might be.

But modern law gradually softened pacta sunt servanda to recognize excuses based on impossibility, frustration, and impracticability. And it is easy to see why: contracts allocate risks, but not necessarily all risks. They don’t allocate risks that people did not think about or could not reasonably foresee.  When those types of risks occur, there is reason to excuse the obligation, not insist on it. Otherwise, law would hold people to bargains they did not intend to make. Still, the impulse to keep promises and enforce valid bargains remains strong and excuses based on impossibility, frustration, and impracticability are narrowly defined and typically require calamitous events.

As Donald Trump knows, these limits on excuse from changed circumstances prompt people to allocate risks expressly in contracts. A common method is a provision naming what events count as excuses, called a “force majeure clause.” In these clauses, parties can list any sorts of events they wish, including both manmade and natural causes.  Here is an example:

“If either party to this contract shall be delayed or prevented from the performance of any obligation through no fault of their own by reason of labor disputes, inability to procure materials, failure of utility service, restrictive governmental laws or regulations, riots, insurrection, war, adverse weather, Acts of God, or other similar causes beyond the control of such party, the performance of such obligation shall be excused for the period of the delay.”

Force Majeure

That clause appeared in a lease Kel-Kim Corporation made for a vacant supermarket it planned to use as a public roller skating rink. The 10-year lease required it to keep liability insurance in minimum amounts to cover accidents and injuries. Insurance was no problem for the first half of the lease term. But then the insurance market toughened amid a proliferation of liability claims, making it cost-prohibitive for Kel-Kim to obtain the minimum insurance. In court Kel-Kim said its duty to keep insurance should be excused, either by contract law’s general impossibility doctrine or by virtue of the parties’ specific force majeure clause.

But the court held that Kel-Kim’s duty was not excused under either escape hatch. Excuse from impossibility is limited to cases where the subject matter of a contract is destroyed or the means of performance so impaired that performance is objectively impossible. To be considered “impossible,” the situation has to be unanticipated so that it could not have reasonably been foreseen and addressed in the contract.

In Kel-Kim’s case, the property had not been destroyed and astronomical insurance costs can still be paid and are easy to foresee and address in a contract. The contract expressly addressed insurance and required Kel-Kim to maintain it. If the parties wanted Kel-Kim to be excused from obtaining insurance if some events should occur, they needed to explicitly say so in the contract. They did not.

Nor was Kel-Kim’s problem included in the contract’s force majeure clause. The clause addresses problems that could arise in daily operations, concerning things like labor, materials, and utilities. It does not address insurance or Kel-Kim’s ability to get it. True, the clause ends with a catch-all referring to “other similar causes beyond the control of such party.” But that general wording relates to the specific listing—“similar causes”—so only events of that sort may qualify as excuses.

Donald Trump’s position was analogous to Kel-Kim’s. Accordingly, his claim would fail under contract law’s general impossibility excuse. It was not impossible for him to repay the banks on time. Even if he did not have the money, the impossible act must be objectively impossible—something no one could do, like revive a dead person or deliver a building that has burned to the ground.

Trump’s claim would therefore also fare no better than Kel-Kim’s under the force majeure clause in its lease. To make his claim persuasive, his loan agreement’s force majeure clause would have to include something like:“. . . riots, insurrection, war, adverse weather, Acts of God, national financial crisis of magnitude unprecedented in modern time, or other similar causes . . . .” But banks do not agree to that kind of risk allocation.

On the contrary, force majeure clauses in business agreements, including commercial loan agreements, usually say that the excused duties exclude duties to pay money. These clauses begin by saying something like:“If Borrowers shall be delayed or prevented from the performance of any obligation, other than the payment of money, through no fault of their own . . . .”

Despite weaknesses in Donald Trump’s arguments, he got accommodations from Deutsche Bank in the repayment schedule amid the Great Recession, stretching the case out through settlement in July 2010, after the financial storm passed. As Trump fought that battle, millions of other American borrowers struggled to repay their real estate loans as well.   People wondered, if Donald Trump could be excused from repaying his loans on time, why could not they? Some of these were Trump customers, including those buying condos in his Chicago development project. When asked whether they should be excused, Trump said no. He explained: his contract included a force majeure clause that their contracts lacked.

But the clause in Donald Trump’s contract did not give him the excuse to delay payment. The difference between Trump and mortgage borrowers was not the contracts or contract law, but scale. Banks compete vigorously to get Trump’s billions in business; they care proportionately less about individual loans in the hundreds of thousands of dollars. Thus, banks have an incentive to settle their dispute with him and permit a change in his payment schedule. The law, however, is clear: as the court in the seventeenth-century case of Paradine v. Jane might have said, even in a financial crisis, Donald Trump must pay his debts.  Having done so, he is also free to put his name on the side of his building, however garish most everyone else perceives that to be.

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Larry is a professor of law at the George Washington University Law School. He joined the GW Law School faculty in 2007, having previously taught for 6 years at Boston College (where he served a 2-year term as Academic Dean) and for 8 years at Cardozo (where he served a 5-year term as Director of the Heyman Center on Corporate Governance). He also taught courses at many other schools in the US and abroad, including Central European University, Columbia University, Hebrew University, University of Navarra, and Vanderbilt University. Before entering academia, he practiced corporate law for 4 years at Cravath, Swaine & Moore. He earned his BA from University of Delaware and his JD magna cum laude from Cardozo. Larry writes extensively in corporate and securities law, with a special emphasis on law and accounting and investor perspectives. He teaches courses in those fields as well as Contracts. He has published a dozen books and 50 law review articles. His recent books include: Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012), The AIG Story (Wiley 2013), The Essays of Warren Buffett: Lessons for Corporate America (Carolina Academic Press 2013), and Berkshire Hathaway’s Value of Values (Columbia University Press 2014). Areas of Interest: Accounting, Auditing, Contracts, Corporate Law, Finance, Investing, Legal Education, Securities Regulation
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