A N.Y. Appeals Court Just Tore Up Another Political Prosecution

Unpacking the Court of Appeals hearing from September 26th: an embarrassing day for New York, for America and, especially, for Letitia James.

Factual Background:

Way back in 2011, the Trump Organization got a loan from Deutsche Bank, who had financed over 20 loans for the organization in years gone by, all of which had been paid back in full. This 2011 loan was secured by Trump Organization assets (the “collateral”) and guaranteed by Donald Trump himself. As is typical of these types of loan agreements, the Trump Organization provided estimates of the collateral’s value to the Bank. In addition to these valuations, the Bank also independently reviewed the collateral, to be sure they did not loan more money than they could claim back through foreclosure. Because Trump had also guaranteed the loan, in an event of default (if the Trump Organization missed a payment), Deutsche Bank would, before foreclosing on the collateral, first look to Trump to remedy the default by making a payment to the Bank. The Trump Organization never did miss a payment and, long before this lawsuit was filed, repaid the loan in full, on time, and with interest. The transaction proceeded as planned and everyone received the benefit they expected: the Trump Organization received their loan and Deutsche Bank received scheduled interest and principal repayments. Everyone is happy… that is, everyone was happy. Letitia James, the New York Attorney General, had other ideas.

Plaintiffs’ Argument:

The plaintiffs argued that, even though the loan had already been repaid in full and on-time, the Trump Organization committed fraud by providing statements to Deutsche Bank which, plaintiffs say, overestimated the value of Trump assets. The plaintiffs claim, if these valuations had been accurate, either (1) the terms of the loan would have been less favorable to the Trump Organization (higher interest rate, etc.) or (2) the Trump Organization may not have gotten the loan at all.

On February 16, 2024, the trial court ruled for the plaintiffs in an amount of over $450 million. Trump appealed the case, and a NY Court of Appeals hearing took place on September 26, 2024.

Legal Background:

To highlight the true absurdity of this case, it’ll be useful to first explain some basic legal concepts:

Plaintiffs: In nearly all civil (non-criminal) cases, the plaintiff (the party initiating the lawsuit) is a private party seeking money from the defendant to make up for a ‘wrong’ perpetrated by the defendant against the plaintiff. But in this civil case, the New York Attorney General is the plaintiff and is suing on behalf of the state of New York. State action is usually reserved for criminal trials or other cases where the defendant threatened or harmed the general public. Here, it is highly unusual, as this is a transaction between two private (non-government) parties. It is unclear how the public was (or could have been) harmed in any way. It should also raise red flags that the supposed ‘victim’ of the ‘fraud’ (Deutsche Bank) had no desire to sue Trump at all…

Damages: Civil actions require that the defendant caused palpable, quantifiable harm to some party, otherwise the court should not hear the case at all. Because the goal is to compensate the victim, the defendant’s conduct must not only have violated the law, but someone (usually the plaintiff) must also have been damaged, either physically or financially. For example, if someone steps across a small corner of your lawn, technically they’ve violated the law by trespassing. But if you tried to sue them for it, a normal trial judge would likely slap you upside the head, because clearly no one was actually harmed by the defendant’s actions.

The Bank testified it viewed client reports of their own net worth as “estimates” and that overestimates “weren’t necessarily unusual or alarming”. So the Bank never even expected these valuations to be accurate. Further, banks are obligated to perform their own diligence and encouraged to independently verify the valuations provided to them. However, even assuming (against the evidence) Trump’s valuations caused Deutsche Bank to approve a loan they would not have otherwise, the only ‘victim’ would be Deutsche Bank. But, not only was the ‘victim’ not harmed by this transaction, it profited from it.  

Freedom of Contract: This is the principle underlying contract law, enshrined in Article I, Section 10 of the Constitution. This doctrine guarantees private individuals freedom to enter into contracts without government interference. Thus, when two private parties with equal bargaining power enter into a contract, the government should allow the parties to see out the contract as planned, unless there is a strong reason for intervening. Even if the contract is more burdensome on one party than the other, the state must defer to the parties’ judgement. For example, imagine I (an adult of sound mind) agree to sell you (hopefully an adult of sound mind) my used car for $5,000, when the car was actually worth $6,000, fair market value. Now imagine, ten years from now, you get a knock on your door. It’s the government—they’re here to tell you that you now owe significantly more than you ever “gained” from the original transaction (say, $10,000 in fines, to be sure you learned your lesson). Obviously, that would be absurdly unfair. As adults, we are free to engage in contracts we subjectively believe to be fair and beneficial.

Here, two private parties (Deutsche and the Trump Organization) agreed a contract—both parties had sufficient resources and experience to calculate risk, neither was coerced into signing, and the contract was performed as agreed. Even if President Trump were a normal citizen, rather than a current Presidential frontrunner, this lawsuit would be a gross and dangerous overstep of government oversight—a violation of the Constitutional right to Freedom of Contract. That it appears to be politically motivated only compounds the dangerous precedent being set here.

Court of Appeals Hearing:

Now for the fun part. Essentially, the New York Appeals process involves a panel of judges asking clarifying and critical questions of the defense and the plaintiffs, to decide whether the verdict should be upheld or overturned. Usually, before the decision is released, the Court’s tone and framing of questions will provide hints about what they think of each side’s argument and how the Court will rule. From the transcript of the hearing, it seems the Court reviewed the evidence and asked the same question the rest of us have been asking since last year: What the f***?

The Court’s first question to the plaintiffs:

“Can you identify any previous case [in] which the attorney general sued … to upset a private business transaction between equally sophisticated partners, where the supposed victim had the ability and legal obligation to discover the allegedly misrepresented matters by conducting its own due diligence, where the supposed wrongdoer advised the supposed victim, through written disclaimers, to conduct its own due diligence and to draw its own conclusions, where the alleged misrepresentation almost entirely concerned inherently subjective valuations of properties and businesses?”

Ouch. With this one question, the Court dismantled the plaintiffs’ entire case. Let me explain. Firstly, the judge points out why this case makes no sense logically. Let’s unpack this:

1.      The Court references the loan as a “private business transaction”. Meaning, these were two private parties negotiating a contract, from which each party expected (and got) a substantial benefit. As discussed, the Constitution guarantees private parties the freedom to contract with one another, no matter the terms. So why is the government getting involved at all?

2.      The loan was between “two equally sophisticated partners.” Meaning, no one was taken advantage of. As a major financial institution, Deutsche Bank had the resources to conduct its own due diligence and make an independent assessment of the loan’s risk. The Trump Organization was certainly not better-placed to value their assets than a multinational bank. So where is the victim?

3.      Deutsche Bank had the “ability and legal obligation to discover the allegedly misrepresented matters.” Meaning, the relevant financials were given to the Bank, who were required to analyze the data, discover any grossly inflated assets, and adjust their calculations accordingly. In other words, the Trump Organization’s valuations were “inherently subjective” and intended to be treated as such by the Bank, who were expected to calculate their own risk assessment. So where was the harm?

4.      The Trump Organization had advised Deutsche Bank in writing to “conduct its own due diligence and to draw its own conclusions” from the financial statements. Meaning, the Trump team told Deutsche Bank not to take these valuations as gospel, and to treat them as a best-effort estimation. As discussed, a plaintiff must show damages to even sue in the first place. Deutsche Bank stated these valuations were not a major basis for approving the terms of the loan: So where are the damages? How did Deutsche Bank lose out?

Secondly, the Court is implicitly calling out the political motivation for even bringing the case in the first place. Let me explain. The Court’s question can be summarized as Have you ever brought such an absurd, illogical case before, at any time in the past? The obvious follow-up question is Then why bring this case here, why bring it now? No need to answer that one…

Next, the Court asks the plaintiffs:

“… haven't you yourself conceded the assets were sufficient to get the [same] interest rate…?”

Here, the judge is referencing the testimony of Deutsche Bank officials who stated that, with or without these valuations, the Bank would have extended the same loan, with the same interest rate to the Trump Organization. As the plaintiffs scrambled to pull together an overwrought, overcomplicated response, the Court again rebuffed them, concluding that the case seems like a “potential commercial dispute between private actors”. Meaning, this is a gross waste of our time. The Court goes on to explain that, in all the cases cited by the plaintiffs, where the government initiated this type of civil action on behalf of the public, the intention was to protect consumers—the general public—from potential future harm. This, on the other hand, is a case between “two really sophisticated parties in which no one lost any money.” The Court is essentially begging the plaintiffs to come up with an excuse for breaking precedent and investigating a private transaction where both parties received the intended benefit. Remember: every civil and criminal trial is an expenditure of taxpayer money and a burden on the congested judicial system. In every case, the state prosecutor should be able to explain why the people’s interests are served by the litigation at hand. The Court’s questions indicate the plaintiffs fell badly short of this standard.

At one point, the Court even began to wonder out-loud why the NY Attorney General’s office had no restrictions in place to prevent an absurd case like this in the first place: “There has to be some limitation in what the attorney general can do in interfering in these private transactions . . . where people don’t claim harm. So what is the limiting principle?”

Finally, the Court signaled their frustration at this nonsensical case by raising a discussion about sanctions. Sanctioning a lawyer is a big deal—Courts will only do so in rare instances where lawyers violate rules of conduct or severely waste time and resources of the Court. It is not hard to avoid sanctions—as long as a case is “grounded in fact and is warranted by existing law” the Court will be willing to hear it without any threat of sanction. In this case, that the Court even mentioned sanctioning the plaintiffs does not merely signal that the State has a “weak” or “bad” case. It signals that the Court views the case as frivolous. This means the court believes the plaintiffs (1) brought the case for an improper purpose like “harassment”, (2) showed “intentional or reckless disregard” for the justice system and their oath as attorneys, and/or (3) acted so “unreasonably” as to justify sanction. Regardless of your feelings about Donald J. Trump, this alone should tell you everything about about this case and the mindset of the attorneys responsible.

Damages: Revealing a Nasty Motivation

But how can we be sure political malice was indeed the motivation for this lawsuit? The answer is revealed through an understanding of the type of damages sought by the plaintiffs. Usually, in civil actions relating to contracts, the goal is to compensate the plaintiff for financial losses. Even assuming everything the plaintiffs say is true, the damages would maybe equal the additional interest the Trump Organization would have paid under a higher interest rate—at worst, a few million dollars—a tiny fraction of the verdict approved by the trial court.

So why the obscene verdict? Because, rather than seeking restitution, the plaintiffs asked for “Disgorgement”, a rarely used remedy which strips the defendant of ALL profits he/she may have received from harming the plaintiff—this remedy is reserved for cases where the defendant really screwed the plaintiff and got something gooood out of it.

To apply disgorgement here is laughable. This is a case where the ‘victim’ had no desire to sue the defendant at all, a case where the ‘defrauded’ party admitted they were not harmed or even influenced by the alleged fraud. A case where, if the ‘victim’ were given the chance to enter into the exact same transaction, there is no doubt they would do so. This was a case brought by a corrupt prosecutor, designed to bring a political candidate into disrepute, to drain him of campaign funds, and to influence public perception. This was lawfare.

Luckily, the Court of Appeals saw through each of the many holes in the plaintiffs’ threadbare case, and even gave them a verbal ‘slap on the wrist’ for good measure. Although the outcome of the appeal will not be released until after the election, we now know with some certainty that justice will be served. But still, the parties responsible for this lawfare must be exposed and the consequences brought to bear…

In other news, Attorney General Letitia James is being considered as a candidate to be the next Mayor of New York City. How odd…