Trump Wins by Losing a Court Fight Over Debt
"I'm the king of debt. I'm great with debt. Nobody knows debt better than me."
Remember when then-candidate Donald Trump made that boast? (In case you don't, it was June of last year, during an interview with Norah O'Donnell of CBS News.) On Wednesday, a court ruling was issued that offers an illuminating case study of just how our new president deals with debt.
Ostensibly, the ruling by U.S. District Judge Kenneth A. Marra went against Trump: A golf resort in Jupiter, Florida that he had purchased in 2012 was ordered to pay $5.8 million to some 65 aggrieved former members. But that doesn't even begin to tell the story of what really happened.
When Trump bought what is now known as Trump National Golf Club Jupiter, it was a decade old and its owner, Ritz-Carlton, was looking to unload it. Although the resort was built as part of a successful development, the club itself had never made money, losing over $1 million a year. Trump snapped it up for $5 million.
He also agreed to take on some $40 million in liabilities. Much of that debt was owed to club members in the form of refundable deposits they had paid when they first joined. They ranged from $35,000 to $200,000. When a member wanted to quit, he put himself on a resignation list and waited for the club to add new members. New deposits would then be used to reimburse people who wanted to leave. In the meantime, the members on the resignation list continued to pay dues and use the club.
Trump, of course, could have continued this system, which would have cost him nothing. But he wanted to spruce up the place and make it "ultra-prestigious" and "world class," as he put it at the time. For that, he needed cash. And the easiest way to get that cash was to grab it from the members.
Shortly after the sale closed, Trump held a meeting with the members. He told them that refundable deposits were "impractical" given the investment he wanted to make in the club. So he gave them three choices, none of them appetizing.
Members who gave up their deposits and stayed in the club would get a small, three-year reduction in their annual dues, plus the right to play (for a fee, of course) at other Trump courses. Members who wanted to stay in the club but didn't want to give up their refundable deposits would be hit with an immediate dues increase. And those on the resignation list -- more than half the club at that point -- were "out," as he put it in a letter he sent to members a few days after the meeting. "I don't want them to utilize the club, nor do I want their dues," he wrote.
Sure enough, beginning on Jan. 1, 2013, the members on the resignation list were barred from using the club. So they sued, claiming that because they could no longer use the club, the resort had broken its contract with them and was thus obligated to repay their deposits within 30 days.
In classic Trump fashion, both Trump and his son Eric denied in depositions that they had kept any of those on the resignation list from using the club. Eric Trump even said that such an exclusion would "violate a fundamental principle of life." But the evidence was so overwhelming that on the witness stand last summer, Eric Trump was forced to acknowledge that the plaintiffs had indeed been barred from the club.
Trump's lawyers argued that the contract gave them the right to change the rules, but Judge Marra ruled on Wednesday that the plaintiffs' interpretation was correct. He ordered that the president of the United States pay the 65 plaintiffs $4.85 million in deposits, plus $925,010 in interest.
Here's the key to understanding this deal: $5.8 million is a lot less than the original $40 million liability. Despite this legal setback, Trump essentially gained control of most of the Jupiter members' deposits. Many of the members who lived or time-shared in the development gave up their rights to the deposits; they didn't really have a lot of choice. Many others sued individually and wound up settling for 30 or 50 cents on the dollar as they saw their litigation costs rise.
Whether Trump winds up paying the $5.8 million or not -- and his lawyers are vowing to appeal -- he has come out way ahead at the expense of the club's members.
The king of debt indeed. I'll bet you can't wait for him to try this tactic on China.
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