Monday, October 10, 2016

Donald's Smart Ways

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By Jeremiah Ho
In teaching American contract and remedies law in the years after the Great Recession, I have often encountered several examples from the U.S. mortgage crisis that seemed to broaden the scope of traditional contract doctrines, particularly in the realm of excuse doctrines.  What does this have to do with human rights?  Well, as I see it, it would not be far-fetched to suppose that we can derive endless lessons—individually and societally—from examining the mortgage crisis of the last decade.  From deceptive lending practices to the use of robo-signers, there are many instances that show us how we humans can be our own worst enemy and how we make choices that eventually prompt catastrophes of global impact.  We do not need natural disasters to impede us; our legacy sometimes says it all.  Generally-speaking, in contract law, that old classic adage, pacta sunt servanda, stands as the way in which contract law embodies a type of absolute liability—basically: if you break the contract, you pay for it.  But in the Great Recession, it seemed as if pacta sunt servanda was stretched—at least in commercial mortgages to further perhaps a “less absolute” system of contractual enforcement.  And the example started and ended with none other than, an example from Donald Trump.


The recent release of 3 pages of presidential candidate Donald Trump’s 1995 tax returns, showing—as he would claim it—how “smart” he was in averting taxes by claiming a $916 million dollar loss reminds me of how he dodged his mortgage default suit with Deutsche Bank during the Great Recession: by attempting to excuse himself against his creditors on a $640 million construction loan obligation for a Chicago high-rise through a commercial impracticability argument likened the Great Recession to a force majeur—essentially to an act of God.  Thus, in his argument, it would not be commercially practicable for him to complete his mortgage obligations because he could not have anticipated that such a world-wide economic downtown would have impaired his ability to honor those obligations to pay back the loans.  In contract law, breaching parties on a contract, who usually try to excuse themselves based on a reasoning that bad economic market conditions are like acts of God, get laughed out of court.  Even during bad market conditions, if you break it, you still have to pay for it.       

But the court here bought his argument.  Trump was excused.  What about all of the defaulting homeowners who would not and could not have been allowed to use the same impracticability excuse and same argument of the Great Recession to get themselves out of terrible mortgage obligations that they took on in homeownership?  Or even the individual consumers who bought real estate from Trump during that time and could not repay?  Likely they would not have been able to take advantage of Trump’s reasoning and excuse themselves from defaulting because their individual mortgage agreements for condos or apartments were not near the gargantuan worth of $640 million.  Trump got away with it because of the commercial aspects of his agreement and because of the money involved.  But why should the size of someone’s purse-strings shut them out from possibly a just recourse?  It’s interesting that in the eyes of contract law, often there is so little room for economic and human dignity.

In a “change election,” in which both presidential candidates have talked about economic disparity, my hope is our candidates do mean to both act with economic integrity and not with the leveraging power of their bank accounts.  That is not always the “smart” way in the long run.

Business, Jeremiah Ho | Permalink


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