Donald Trump is trying to finish building his massive Chicago International Hotel and Tower along the Chicago River, but his consortium of commercial lenders has pulled the plug. The lenders sued Trump and Trump sued them back for refusing to finish providing the loan funds previously agreed upon, necessary to finish the huge project which should change Chicago’s skyline.
The lenders, led by Deutsche Bank, sued Trump for $40 Million on his own personal guarantee (payable in ‘The Donald-Dollars’), his individual promise to pay his own money – chump change by today’s TARP BailOut standards. But, as anybody in real estate development will tell you, there is a world of difference when the money is coming from a source other than OPM (Other People’s Money), like out of your own pocket perhaps.
After a financial scandal laden week which featured a Ringling Bros Barnum & Bailey atmosphere of financial scandals: 1) the hirsute Illinois Governor’s unsuccessful attempt to sell Obama’s Senate seat with proceeds going to his 401k; 2) NY Hotshot Lawyer Drier stealing some $380 Million and being arrested like in a Laurel & Hardy movie for impersonating a guy who then actually walked into the same Canada meeting, and; 3) topped only by the Madoff Ponzi scheme which skimmed perhaps $50 Billion which is actually causing some formerly rich in Palm Beach to pawn their Ferraris, I thought it might be interesting to look in on The Donald’s creative argument for why his lenders need to keep lending so he can finish this project.
Trump argues that we are living through an unprecedented financial meltdown the likes of which, because it has never happened before (pardon the redundancy), not even in the ‘30’s, should be regarded as Force Majeure (An Act of God – French for “A Superior Force”) and thus, under his voluminous loan documents, a sufficient excuse to give him both more time and more money. Most, if not all, massive commercial lending documents include a Force Majeure Clause.
We are schooled in the legal profession learn in law school of those WWII cases where somebody produced rubber somewhere in the world but was unable to deliver on their contract because the Japanese had overrun the countries where their rubber was grown – then, and only then, the Courts have allowed this Force Majeure defense to repayment, holding, in effect, that this Act of God prevented the borrower or obligor, through no fault of his or her own – that’s the key, from being able to fully perform their contractual obligations. Therefore, there is no default or, as we commonly call it, no ‘breach of contract’ has occurred.
Why is The Donald’s defense of Force Majeure being watched closely by real estate litigators like me all over the country right now? Because, if it works, and so far, in the New York trial court (called, interestingly, the NY Supreme Court) Force Majeure has been rejected, leaving Trump personally liable (so far). But, if the NY Court of Appeals or higher Court does accept that these times we are now living in are so extreme, so unusual, as to qualify as an Act of God, then this defense just might work.
And, if they do, that will spawn a new cottage industry of real estate litigation of Force Majeure defenses (that I, as borrower, should be excused or allowed to delay paying back my loan) for times when lenders don’t lend and Paulson and Bernanke & Co. tell Congress that the sky is falling unless they immediately pony up some $700/750 Billion (three-quarters of a Trillion) with undoubtedly Trillions more along the way, to save America’s, if not the world’s economy. And that will help pay a lot of lawyers’ kids’ school tuitions and maybe a cruise or two.
The rule of Unintended Consequences says that, when you are a high governmental official who pronounces this or that crisis as unprecedented, you ought to consider all that might flow from such pronouncement, like people avoiding or extending their contractual liabilities based on Force Majeure, arguing that such pronouncements are like a major storm, terrorist attack, or out and out war, an Act of God, delaying or preventing, and most importantly, legal excusing performance or legally delaying the time to perform.
The implications are staggering for owners of commercial real estate all over the US who are facing maturity dates or who are well past maturity dates on their financing and who planned, as so many do, to refinance and get their money out for other projects in a year or two after acquisition, but, who are now facing frozen up lenders who will not lend and real estate values dropping like a rock.
Now, I am not predicting that this bit of creative lawyering will work – the consensus of mature and experienced real estate litigators will say that it won’t right now – but, we are all watching the Donald’s case very closely indeed. And, if Trump’s Force Majeure defenses actually succeeds, you will be seeing it playing in a Courtroom near you real soon. Stay tuned, keep reading the newspapers, and, if The Donald pulls this off and you or someone you know owns commercial real estate and is similarly situated, get ready to get ‘Lawyered Up.’