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Stormy Daniel's Three-Way (Contract) & Donald Trump's Performance Problem

posted by Adam Levitin
I want to return to the Stormy Daniels-Donald Trump-Michael Cohen Three-Way Contract.  It's actually really interesting from a contract doctrine perspective (besides being of prurient interest). The continued media coverage and scholarly commentary seems to be missing a key point, namely that this is a contractual ménage à trois, not a typical pairing. The fact that there are three parties, not two to the contract actually matters quite a bit doctrinally.
 
Let’s start with a point on which I think everyone agrees.  For there to be a contract, there needs to be mutual assent. This assent may be manifested in different ways—it may be manifested expressly, say through a signature, or implicitly, say through performance or, in rare cases, through silence. 
 
The complication we have in this contract is that it is a 3-party contract, not the standard 2-party contract.  That’s a problem because basically everything in contract doctrine is built around 2-party contracts.  Traditional contract doctrine is monogamous and doesn't really know what to do with three-ways, especially when one party has a performance problem.  It's not, for what it's worth, that multi-party contracts are rare--they're not. In fact, they're the common arrangement in corporate finance where a contract will involve numerous affiliates. But traditional contract doctrine developed in an era in which these multi-party contracts were rarer (indeed, look at how the Bankruptcy Code is not drafted with the contemplation of multi-entity debtors!) and there's always been a wink-wink, nod-nod about the separateness of corporate affiliates. 
 
 If Trump & Stormy had a monogamous contract
 
If Stormy (Peggy Peterson=PP) and Donald (David Dennison=DD) had a traditional, monogamous contract, this would be very easy.  Let’s imagine that's the case:  DD paid PP $130k and gave her certain releases in exchange for her providing him with a release (teehee...).  In that case, under the Restatement (Second) of Contracts the fact that DD didn’t sign wouldn’t matter a whit in terms of his ability to enforce the contract against PP because there would be assent through performance by Dennison in the form of the $130K payment.  The lack of a DD signature would matter, however, to the extent PP wanted to enforce the contract against him because it would raise a Statute of Frauds problem (this is not a contract that can be performed within a year as the obligations are on-going), as the party to be charged didn’t sign the contract. (See also California Civ. Code § 1624). I don’t think any of this is controversial analysis.
 
The Trump-Stormy-Cohen Three-Way and Donald’s Performance Problem
 
The problem is that this is a 3-party contract.  It calls for EC to pay PP; PP to give DD releases and turn over certain materials to DD; and for DD to give PP releases.  
 
Notice that EC only contributes to the deal, but does not receive any benefit. Yes, there is language that indicates that EC and DD are on "one side" of the contract, and PP on the other, but I don’t think that really does anything—presumably DD would have been able to sue EC if EC had failed to perform.  Likewise, EC cannot provide PP the litigation releases she was supposed to get in the contract; only DD can provide them.  And PP can only give litigation releases to DD, as she has no claim against EC. I think it’s hard to run away from the fact that EC and DD are separate entities and that this is a 3-way contract, although I'll return to an agency law argument below.    
 
Here’s why that matters.  It seems that EC and PP both performed their legs of the contract. But David Dennison/Donald Trump has a “performance problem.”  There’s nothing that indicates that DD performed.  In this case performance (release of litigation claims) is not distinguishable from non-performance (retention of litigation claims).  The only way that DD/Trump could clearly provide those releases would be by executing the contract, but he didn’t.
 
So this forces us to answer the question of whether PP’s acceptance of EC’s component of the consideration is enough to bind her to a 3-way contract with both EC and DD? This is the question that I have not seen adequately addressed in existing commentary, perhaps because there isn't a clear answer from existing law.  
 
My own 2¢ are that we do not have enough here for a contract, but I emphasize that there really isn’t clear law on this. My thinking is that from PP’s perspective, the deal was a package—$130K plus litigation releases in exchange for her releases and compromising materials.  We know that she assented to a package deal, not to just one component of the deal, and that the assents were supposed to be a mutual exchange.  Her only revealed preference was for the package deal.  Her assent was conditioned upon the assent of both of the other parties, not just EC's assent. As it happened, she got EC’s assent and the $130k, but there is no indication that she ever got DD’s assent or the litigation releases from him.  Thus, I think Stormy has a quite plausible argument that there was never a contract formed because there wasn’t assent from all the parties.  Doctrinally I think this makes sense—if there is a to be a contract among A, B, and C, it would not be sufficient for just A & B to agree to the contract, even if they exchanged value, if the deal were dependent upon C's contributions; instead, C would have to assent for the deal to be effective.  
 
Ah, but what about the fact that Stormy took the $130k?  The fact that she took it doesn’t mean that there is a contract because we aren't in a two-party contract situation. But it also doesn’t mean that she gets to keep the money.  In theory, EC/Cohen could recover the $130k as unjust enrichment (provided that Stormy got back her compromising materials), but that’s an equitable claim, and EC/Cohen does not have clean hands in this contract given how it was engineered from the get-go to give Trump plausible deniability.  
 
 Could Cohen/EC Be Trump/DD’s Agent? 
 
A number of folks have argued that Cohen/EC is Trump’s agent. If so, then TeamDonald should probably win on the issue of whether there is a contract. (There’s still public policy issues, but that’s a separate question).  As a factual matter, that’s gotta be right.  But I think it is a loser of a legal argument for two reasons.  First, it isn’t clear on what grounds EC/Michael Cohen would be acting as DD’s agent.  There’s certainly no express authority (indeed, Cohen has disclaimed it), and any argument about implied authority or apparent authority isn’t going to prevail on a motion to dismiss, which means Stormy is going to get to discovery.  Second, and more importantly, if EC/Michael Cohen is acting as DD/Trump’s agent in the contract, then there’s a serious election law problem (and if Stormy's isn’t the only one around, but is part of a larger patterns, perhaps a RICO issue as well). Oh, and if there’s a criminal election law violation, that payment to Stormy would be either wire fraud or mail fraud. I don’t think TeamDonald wants to go anywhere near this argument.  
 
If You Receive, You’ve Gotta Give:  Silent Acceptance Through Section 69
 
Perhaps, though, there is an argument of acceptance by silence, appropriately discussed in Restatement (2d) section 69 (!):  Trump or his agent (meaning his attorney, not EC) received the compromising materials from Stormy and didn’t object and had reason to know of the expectation of compensation for them. In other words, no receiving without giving. One doesn’t see many section 69 cases (well, I suppose it depends what one watches), but maybe TeamDonald has an argument here, even though I’ve always thought acceptance by silence looks more like an estoppel type argument.  But for TeamTrump to prevail on a section 69 argument, DD would have to have known of the deal at hand, which is precisely what Trump denies, not least because if Trump knew about the deal, then it looks all the more as if EC/Cohen was acting as Trump's agent, creating a serious election law problem. So I would expect TeamDonald to avoid this argument as quite dangerous to them overall (if they even think of using it). 

Comments

No such problems in Texas where seemingly anything is possible. Arrange for a stormy encounter in Texas and be sure to add Texas choice of law, mandatory forum selection, and submit-to-jurisdiction clauses to the settlement paperwork, for good measure. Texas is great for arbitration too.

Why worry about mutual assent to an agreement (and enforceability) when you can get that done later?

The First COA in Houston recently held in a collection suit by one of the NCSLT Trusts (COA No. 01-17-00253-CV) that assent to (more expensive) credit terms can be backwards-imputed into a loan application even though the standard fine print stated that no loan was (yet) being offered, that the terms would be disclosed after the application has been reviewed, and that the student applicant would be accepting the terms to be offered by endorsing the loan disbursement check, assuming a loan would be offered at all. As is industry practice, the program lender reserved the right not to.

According to the fine print, the student applicant could reject the loan and the terms to be offered by returning either the disbursement check or an equivalent amount of money within a specified timeframe.

In the underlying collection suit, the Trust didn’t produce the cancelled check as evidence that the terms on the TIL disclosure statement were accepted (and that the loan was funded in the requested amount) even though they did so in a companion case that’s still pending on appeal in the same court.

So the COA accommodated the Trust’s evidentiary deficiency by holding that the student had consented when she signed the application, which was a week before the loan terms could have been known to her. Those loan terms were much worse (12%+ APR and 10%+ Origination Fee) than the pre-approval terms on Page 1 of the application (which stated the interest as a LIBOR margin, ca. 6pct).

From the opinion:

Foster argues that the evidence is insufficient to show a valid contract because, although the Credit Agreement contains a promise, the promise is qualified as follows: "I promise to pay to your order, upon the terms and conditions of this Credit Agreement, the principal sum of the Loan Amount Requested shown on the first page of the Credit Agreement, to the extent it is advanced to me or paid on my behalf. . . ." Foster asserts that her promise to pay is "contingent" upon the loan being approved and, because Chase had not yet acted on her application, there could not yet have been a meeting of the minds on the essential terms of the contract, including the amount of the loan and the cost-of-credit terms. She asserts that, although the terms do appear on the Note Disclosure Statement, it is dated May 31, 2007, which is one week after May 23, 2007, the date that the Credit Agreement was signed. She asserts that, although she did sign the Credit Agreement, this, without more, is insufficient to constitute a binding contract.

As discussed above, the Credit Agreement and Note Disclosure Statement, taken together, evidence the essential terms of the loan, including the amount of the loan, and Foster's assent to the terms. Foster's argument overlooks "well-established law that instruments pertaining to the same transaction may be read together to ascertain the parties' intent, even if the parties executed the instruments at different times and the instruments do not expressly refer to each other." Fort Worth Indep. Sch. Dist. v. City of Fort Worth, 22 S.W.3d 831, 840 (Tex. 2000). Courts may construe all the documents as if they were part of a single, unified instrument. Id.

[end quote]

So, meeting of the minds and mutual consent to terms is not necessary. Can be imposed by a Texas court after the fact if there is no evidence of assent by signature (here, on the back of the disbursement check).

The COA cited a case for the proposition that the contract must be accepted in the manner specified in the offer, but it did not apply it. Nor was there any evidence of a payment ever made. So no no assent by payment conduct either, as often argued in credit card debt cases, based on billing statements showing card use (charging) and payment activity.

And why worry about the statute of frauds?

Why should the missing signature not simply be imputed onto the dotted line or deemed to be there if a Texas court of appeals says so? Who says it has to be visible?

There are other creative Lone Star solutions to signature/assent-related problems: the 5thCOA in Dallas recently held that an attorney can avoid the statute of frauds applicable to contingent fees contracts by recovering on the unenforceable (alleged) oral agreement in quantum meruit instead. For a cool success bonus of $7,250,000 atop the 1 million the client has already forked over on regular bills for retainer-agreement-based work. See Shamoun & Norman v. Albert G. HILL, Jr., currently being mulled over by the Texas Supreme Court, after oral argument by a former chief on the Court on behalf of the attorney suing his client, an Texas oil tycoon heir.

Here are the links to the Google versions: https://scholar.google.com/scholar?scidkt=11079564153144136845&as_sdt=2&hl=en (judicial imposition of consent to (predatory) loan terms into previously-signed application in NCSLT student loan case).
https://scholar.google.com/scholar_case?case=18117088983636539442&hl=en&as_sdt=6,44 (Quantum meruit to get around the statute of frauds)

There is an SOL on unjust enrichment. If PP had been the Plaintiff then she might have faced claims that were otherwise time-barred (Texas has a statute that lifts the statute of limitations for counterclaims in certain circumstance for a brief period of time). But as a defendant she can simply assert SOL to unjust enrichment if the argument is that there is no contract. Curiously did she report it as income to the IRS? Was that anticipated by other parties to the arrangement?

Thanks for the belly laugh in last paragraph!

So, EC filed its motion to compel yesterday, to which DD joined (pdf linked in politico piece). We got a preview about what PP's opposition will look like in her motion (last week) for a jury trial pursuant to 9 U.S.C. § 4 (Avenatti must not read Credit Slips). Now we wait for PP's opposition to the motion to compel.

Today, PP filed a renewed motion for a jury trial pursuant to 9 U.S.C. § 4 (pdf is linked at various news sites and by on Avenatti via tweet). Interestingly, Avenatti did not also file a specific response in opposition to the motion to compel arbitration. I guess the renewed motion for a jury trial is a sufficient (or a sufficiently preemptive) response to the motion to compel arbitration? I'd still be worried that the court could rule on the motion to compel arbitration as unopposed, but that probably is only a worry in a case lacking such publicity. A decent analysis of Avenatti's renewed motion has been done in a Forbes piece. I was hoping for some analysis by Adam and/or other Credit Slip's contributors. By the way, did Adam quit the twitter?

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