The Corporate Death Penalty
Greetings from the very functional, if somewhat uninspired, Lufthansa airport lounge in Frankfurt. I have strong internet and just about an hour to my connecting flight, so I’ll make this brief.
On Tuesday evening, New York state court Judge Arthur Engoron (referred to as a justice in New York) issued a catastrophic ruling against the defendants in the Trump family’s and Trump Organization’s civil fraud case, brought by state Attorney General Letitia James. Engoron’s 35-page opinion granted partial summary judgment on the question of liability, finding as a matter of law, based on the material facts not in dispute, that for decades Donald Trump and his companies had committed consistent fraud by inflating the value of their assets.
Perhaps of most concern to the defendants was Engoron’s deployment of what some colloquially refer to as the “Corporate Death Penalty.” Specifically, Engoron canceled the business certificates that allow Trump’s various properties to continue to operate in the state. It could prove a death knell for his entire business.
Let’s review what Engoron’s central holdings were, what his ruling means for the Trump Organization and the Trump family going forward, and what happens next in the case.
The “Worthless” clause and other defenses
The thrust of state Attorney General James’s case is simple, even if the case is sprawling: for decades, Trump massively inflated values on his properties in order to secure more loans at better terms. It is illegal to do so, even if the banks wind up not relying on your statements, and even if you wind up paying back all your loans to them. It’s the fraud that triggers liability under New York law, and the people harmed include the residents of the state.
While it was difficult for Trump to defend the “yugely” inflated values presented on some of his financial disclosures, he hung a great deal of his case on what he called the “worthless clause.” It’s a standard disclaimer warning anyone reviewing the documents to do their own research and diligence. Trump argued that it wasn’t his fault if the valuations presented by him were wrong. The “worthless clause” was a get-out-of-fraud-free card, so to speak.
Defendants also argued that the Trump “brand” added massive value to their properties after Trump became president, and that event accounts for huge mark-ups in valuation. The fun thing about this argument is that it is very difficult to refute because the value of the brand is by its nature nebulous.
Problems with the papers
Trump almost never had his properties appraised or assessed because, he claimed, that would eat up too much time. Instead, he would use his “common sense” to make the valuations.
At one point the game became too much even for his long-time accountants, Mazars, to stand behind. In 2022, Mazars issued a letter indicating to financial institutions that they could not trust the truthfulness of the financial statements they had prepared for the previous decade.
Kind of a bad sign.
The court doesn’t buy it
Justice Engoron was scathing in his assessment of the evidence and arguments presented by the Trump defendants, pointing out that they ignored reality when it suited their business needs. “In defendants’ world,” he wrote, “rent-regulated apartments are worth the same as unregulated apartments; restricted land is worth the same as unrestricted land; restrictions can evaporate into thin air.”
“That is a fantasy world, not the real world,” he added.
James had seized on one glaring example of the kind of fraud Trump perpetrated. The apartment in Trump Tower in which Trump had lived for decades was around 11,000 square feet in size. But Trump insisted it was 30,000 feet. Engoron observed that the defendants had “absurdly” suggested that the calculation of the apartment’s square footage was subjective rather than a question of fact. He noted that good-faith measurements might swing 10 to 20 percent, but not 200 percent.
“A discrepancy of this order of magnitude, by a real estate developer sizing up his own living space of decades, can only be considered fraud,” he wrote.
At another point, Trump argued that the property values were not inflated because Trump “could find a ‘buyer from Saudi Arabia’ to pay any price he suggests.” This is of course purely hypothetical, and in a footnote Engoron noted that the statement may “suggest influence buying more than savvy investing.”
Earlier in the case, Engoron had made clear that he was angry with Trump’s lawyers, who insisted on raising legal arguments that he had already ruled to be incorrect. Eventually Engoron sanctioned them and emphasized the problem in his ruling.
“Defendants’ conduct in repeating these frivolous arguments is egregious,” Engoron wrote. “The defenses Donald Trump attempts to articulate in his sworn deposition are wholly without basis in law or fact.”
Cancellations of business certificates
As legal observer Renato Mariotti observed, “In addition to finding that Trump committed fraud, the judge canceled the certificates of various Trump businesses, appointed a former judge as an independent monitor of the Trump Organization, and will appoint receivers to manage the canceled LLCs.”
What does this mean in practice? As legal expert Lisa Rubin noted, on dissolution “the assets belonging to these LLCs—which include many of the jewels in Trump’s crown—will be dispensed with on the recommendation of the appointed receiver, as approved by the court.” Whether Trump will be able to maintain control over the properties is unclear, because if there is a judgment in the case (James is seeking $250 million), these properties could be sold to satisfy that judgment.
The ruling threatens to upend the entire Trump empire because it provides just 10 days for the parties to recommend receivers to manage the dissolution of these companies.
The trial and the appeal
Justice Engoron handed down partial summary judgment in favor of New York, but the trial is still on. Still at issue, for example, is the proper amount of damages given the conduct.
In the meantime, Trump will file an appeal, and that could put the Corporate Death Penalty sentence on hold while that winds its way through the courts. Engoran’s order will likely be stayed pending appeal, but that’s not guaranteed.
The upshot is, the Trump family and Trump Organization may lose many of their “crown jewel” properties in New York State, shutting down numerous business operation and cutting off a critical flow of cash right as Trump heads into many months of criminal and further civil trials, to say nothing of a presidential campaign.
Trump has issued a statement that repeats much of what we’ve heard before, but he’s added an appeal to his followers: “If they can do this to me they can do this to YOU!”
As Ron Filipkoswki of Meidas Touch Network noted, “That is true. If you claim your name is worth $10 billion dollars and all your properties are worth 3x market value because you own them.”
But who among us hasn’t done this, right?
If Trump ends up in a 9x9 cell, he's free to claim it's 27x27.
I hope some of the money coming from the eventual sale of his properties goes to the contractors who were screwed over when he refused to pay them what they were owed.