Wednesday, March 02, 2016

Fraud claim by NY AG against Donald Trump revived on appeal

People ex rel. Schneiderman v. Trump Entrepreneur Initiative LLC, --- N.Y.S.3d ----, 2016 WL 783216, 2016 N.Y. Slip Op. 01430 (Sup. Ct. Mar. 1, 2016)
Snarky political note: It doesn't appear that Trump could object to this ruling on the grounds that the judges were "Hispanic."  (Looking forward to learning more about that recusal argument: Your Honor, my client is too biased to be judged by you.)
The AG sued Donald Trump individually and “several business entities bearing his name.”  Trump, with others, incorporated Trump University LLC in 2004; “Trump University purported, by way of seminars and mentoring programs, to instruct small business owners and individual entrepreneurs in real estate investing.”  In 2005, the NY State Department of Education notified Trump and Trump University that they were violating the New York Education Law by using the word “University” when it was not actually chartered as one, and by operating without a license to offer student instruction or training in New York State. Trump University would not be subject to the license requirement if it had no physical presence in New York State, moved the business organization outside of New York, and ceased running live programs in the State. Trump University thus told the state that it would merge its operation into a new Delaware LLC, and would stop holding live programs in New York State.
The AG alleged that Trump University failed to do as it promised.  New York learned in 2009 through newspaper advertisements and a student complaint to the AG that Trump University was continuing to provide live programming and instruction in New York.  In 2010, the Department of Education sent Trump University another demand letter; Trump University finally filed a certificate of amendment to its Articles of Organization, formally changing its name to TEI.  But TEI still lacked a license to operate, and the State sent another letter, at which point TEI informed it that TEI had ceased to operate.
In 2013, the AG sued for injunctive relief, restitution, disgorgement, damages, and civil penalties for conduct between 2005 and 2011, when respondents allegedly operated an unlicensed, illegal educational institution. In addition, respondents allegedly intentionally misled more than 5,000 students nationwide, including over 600 New York residents, into paying as much as $35,000 each to participate in live seminars and mentor programs that the students thought were part of a licensed university.  The ads represented that real estate experts “handpicked by Trump himself” would teach successful strategies for real estate investing, including quotes attributed to Trump such as “I can turn anyone into a successful real estate investor, including you” and “In just 90 minutes, my hand-picked instructors will share my techniques, which took my entire career to develop …. Then just copy exactly what I’ve done and get rich.” At the free seminars urging further investment, instructors played a video featuring Donald Trump telling prospective students, “We’re going to have professors that are absolutely terrific—terrific people, terrific brains, successful, the best” and noted that they were “all people that are handpicked by me.”
In fact, according to the AG, Trump did not handpick the instructors, participate in the creation of the content, or review any curricula; “indeed, only one of the live event speakers for Trump University had even ever met Donald Trump.”  But people still relied on these claims.  In an affidavit submitted to the Attorney General, one student stated that he “had some trust in the program because it was run by Donald Trump” and was “led to believe that ... based on Trump’s marketing materials, the course professors had been handpicked by Donald Trump.” The AG alleged that the instructors had been inadequately vetted and in fact had little or no experience in real estate investing, instead having prior work experience such as food service management and graphic design.  Moreover, the “free” seminars were merely extended ads attempting to induce students to enroll in increasingly expensive seminars.  While speakers represented that an initial three-day $1,495 seminar would teach students all they needed to know to be successful real estate investors, “the instructors at those three-day seminars then engaged in a ‘bait and switch,’ telling students that they needed to attend yet another seminar for an additional $5,000 in order to learn more about particular lenders.” They also urged students to sign up for “Trump mentorship packages, which ranged anywhere from $10,000 to $35,000” and supposedly provided “the only way to succeed in real estate investment.”
While not involved in selecting instructors or determining content, Donald Trump was allegedly significantly involved with the operation and overall business strategy, including “attending frequent meetings” with another key individual to “discuss Trump University operations.” Trump’s photographs and signature appeared on all of Trump University’s advertising; “Trump personally reviewed and approved all the ads that were in the newspapers.”
The AG brought claims for fraud under Executive Law § 63(12); fraudulent and deceptive practices under General Business Law § 349; false advertising under GBL § 350; violating Education Law § 224 by calling the business “Trump University” when it was not, in fact, chartered as a university; violating Education Law § 5000 et seq. by operating an unlicensed school that did not meet State standards; and violating 16 CFR § 429, which, in connection with a contract of sale, obliges a seller to include the buyer’s right to cancel the transaction within three days.
The trial court dismissed the Education Law § 224 claim in its entirety, and held that the AG was bound by a three-year statute of limitations on all the statutory claims in the petition. But the court also held that the Attorney General’s general fraud claims were viable and subject to the six-year statute of limitations governing fraud actions.  Then the court granted dismissal of the fraud claim under Executive Law § 63(12) (as opposed to the common law fraud), stating that the statute does not provide a standalone cause of action for fraud, and dismissed the claim for violation of 16 CFR § 429. The court denied the AG’s request for a summary determination of liability, except for the claim for violation of Education Law §§ 5001–5010.
This appeal followed.  Executive Law § 63(12) states, in relevant part:
Whenever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business, the attorney general may apply, in the name of the people of the state of New York, to the supreme court of the state of New York, on notice of five days, for an order enjoining the continuance of such business activity or of any fraudulent or illegal acts [and] directing restitution and damages ... and the court may award the relief applied for or so much thereof as it may deem proper.
“Fraud” is defined as “any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions.” Fraud under § 63(12) may be established without proof of scienter or reliance, making it different from common-law fraud.  The Supreme Court thus concluded that the trial court erred in dismissing that claim, because it can be brought as its own cause of action.  That fraud claim was subject to New York’s residual six-year statute of limitations, though material issues of fact precluded summary judgment in the AG’s favor.  The court also affirmed the dismissal of seven affirmative defenses, and commented that the court should have considered allegations relating to post-May 2010 conduct (after the second letter).

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