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A Trump Bankruptcy?

posted by Adam Levitin

Will Donald Trump file for bankruptcy? It's certainly a possibility as Trump struggles to come up with a supersedeas bond for staying the NY Attorney General's civil fraud judgment against him while he takes an appeal.

I don’t know the strength of Trump’s possible arguments for an appeal, but the legal arguments might be beside the point. If Trump wins the election, the entire dynamic of the litigation changes. Is the New York Attorney General really going to enforce a judgment against the President-elect, particularly one who is likely to be vengeful once in office? Maybe, given that we will likely be facing an period of extended lawfare, but the calculus for enforcement or settlement shifts in Trump’s favor if he wins election. That means that Trump’s best move might be trying to run the clock until Election Day:  7 months and 17 days.  And maybe not even that long. The optics of pursuing the collection on the eve of the bankruptcy will make it look very political and might generate sympathy for Trump. So Trump might only need to run the clock, say, 6 months. That’s where bankruptcy comes in.

Delay, Delay, Delay

The primary attraction of bankruptcy for Trump would be delay. The key mechanism for delay from bankruptcy would be the "automatic stay" that automatically goes into effect with a bankruptcy filing. The stay stops almost all efforts to collect against an entity that has filed for bankruptcy. That means a bankruptcy would stop entire appeal clock and vitiate the need for any entity that has filed for bankruptcy to post a bond. Instead, the NY Attorney General would have to try to collect against the entities that have filed through the bankruptcy process. Trump would use Chapter 11, which isn’t a super fast process.

The default setting in Chapter 11 is that there is a “debtor in possession,” meaning that the debtor retains control over its assets (subject to some restrictions), and the debtor is initially the only party with authority to file a Chapter 11 plan for the first four months (this period can be shortened or lengthened, but there’s little reason to think it would be shortened, and it is often lengthened). So, Trump could easily sit in Chapter 11 for four months without even proposing a plan, and perhaps for much longer, and then just seek to dismiss the case if he wins the election (there is no automatic right of dismissal, however). The NY Attorney General has some possible countermoves—seeking to dismiss the case for not being filed in good faith, to convert it to a Chapter 7 liquidation with an independent trustee, or to have an independent trustee appointed for Chapter 11, but all of those moves would be hard fought by Trump and it could easily take a few months to resolve them. Consider, for example, that it took the NY Attorney General four months to get the NRA’s bankruptcy dismissed for bad faith filing, and the NRA wasn’t trying to slow walk things, whereas Trump’s legal team would be doing everything possible to run the clock.

Now, the automatic stay only extends to entities that have actually filed for bankruptcy. It does not cover any non-debtor affiliate of a debtor. This is important because the NY judgment is against both Trump individually and certain Trump entities, including the Trump Organization, Inc., the Trump Organization LLC, and the Donald J. Trump Revocable Trust on a joint and several basis.

The “joint” part of the liability means that the NY Attorney General can seek to enforce the full judgment against any of the defendants individually. It’s the NY Attorney General’s choice which defendant(s) to pursue first. (The “several” part of the judgment means that any defendant that pays can then seek to recover an appropriate share from the other defendants, but that’s not the NY Attorney General’s problem.) That means that if the Trump Organization, Inc., were to file for bankruptcy, Donald Trump personally would still face liability for the full amount of the judgment. So in order to take advantage of bankruptcy, Donald Trump and his various entities would all have to file for bankruptcy; otherwise the judgment could be enforced in full against the non-bankrupt parties.

A complication is that one of the defendant entities is the Donald J. Trump Revocable Trust, which is likely ineligible to file for bankruptcy because it might not be a “person” for purposes of bankruptcy law. Bankruptcy law defines “person” as including a “corporation.” (So Mitt Romney was right—corporations are people too, my friend!) And “corporation” is in turn defined as including a “business trust,” which, by implication, excludes non-business trusts (and these terms are undefined). 

I don’t know the details of the Donald J. Trump Revocable Trust, but there’s certainly the possibility that it isn’t a business trust and therefore isn’t a “corporation” and therefore isn’t a “person” for bankruptcy law purposes, rendering it ineligible for bankruptcy relief.  (Yes, I recognize that the Bankruptcy Code’s definition of “person” uses the word “includes,” so perhaps a non-business trust could still be a person, even if it is not a corporation….)

It’s hard to know how much the trust's eligibility for bankruptcy matters without knowing what assets sit within which entity.  If the trust only has minimal assets, then it won’t matter if it cannot file for bankruptcy.  But if the trust has serious assets, then eligibility really matters and bankruptcy won't help Trump very much. It seems that Trump transferred most of his business empire to the trust before assuming the presidency in 2017. If the assets are still there, then this could be a real obstacle to a bankruptcy strategy. Of course, Trump could always have the trust file for bankruptcy and leave it to the NY Attorney General to object to its eligibility, which would have to be resolved with a trial, which would of course itself engender some delay. Or, given that it's a revocable trust, he could simply revoke the trust prior to filing for bankruptcy. Maybe such a revocation would be a fraudulent transfer, but it would take a long time for that action to get brought and be fully litigated, and very unlikely to happen before November.

Critically, the value of bankruptcy for Trump has nothing to do with the usual goal of a bankruptcy, namely a “discharge” of debts, meaning that any debts that aren’t paid under a Chapter 11 plan are unenforceable. Trump is (supposedly) solvent, so all creditors should be paid in full in order for a Chapter 11 plan to be confirmable. But I don’t think Trump has any interest in confirming a plan at this point (that may be different if he loses the election). Instead, bankruptcy's main value for Trump is as a litigation tactic, which raises the question of whether a bankruptcy filing would be in good faith. The New York Attorney General might challenge the good faith of a filing, but that would have to be litigated, which would run the clock; Trump might be just fine with that.

But remember that the delay benefit for Trump would be primarily a gamble on his winning in November. What if he loses? If he does, bankruptcy might still have some value to him. He'll still owe the NY civil fraud judgment, but with Chapter 11 he could either (1) seek to have a limited lifting of the automatic stay to allow his appeal to be heard or (2) try to confirm a plan that would pay off the judgment...but over time, enabling him to avoid a fire sale of properties.

The Trump defendants’ solvency also means that there’s no Purdue Pharma issue about non-debtors trying to piggyback on the debtor's discharge in exchange for a plan contribution. Instead, the only possible piggyback here would be non-debtors trying to get the bankruptcy court to stay collection actions against them because of their connection with a debtor entity. That’s something that happens often enough if there is such a nexus between the debtor and non-debtor entities that a suit against the non-debtor is effectively a suit against the debtor and threatens to deplete the debtor’s assets, but I don't see the facts to support that here. The usual fact pattern involves shared insurance policies or absolute rights of indemnity from the debtor to the non-debtor. I am not aware of any such facts would tie the various Trump entities together. 

The Downsides of Bankruptcy

Bankruptcy might buy Trump the delay he wants, but it has some features that are unappealing. First and foremost is the political messaging risk.  I doubt that Trump will lose (or win) any votes with a bankruptcy filing; everyone who will vote already knows everything they need to know about Trump. Trump isn’t likely to lose support because of a bankruptcy filing—he’ll have some ability to message this as both persecution and an example of him using the legal system to his advantage. Still, he might not like getting branded with the tag of bankrupt given that part of his image is about his wealth; the fact that he’d have to undergo credit counseling before filing for bankruptcy himself would be a particularly humiliating bit.

Second, bankruptcy requires that the debtor make public disclosures of assets and liabilities.  It’s a fishbowl and that could be awkward as Trump might not have the assets he claims and his liabilities will be an open book. Of course, the New York trial has already made most of his finances public, so this might not be much of a factor. Moreover, the financial disclosures do not need to be made with the bankruptcy filing.  A debtor has 14 days to file those disclosures by default, but that time limit is often extended by the court.

Third, Trump risks losing control over his assets and entities in a bankruptcy.  Trump or his entities would file for Chapter 11, where the default setting is a “debtor in possession,” meaning that he would maintain control, but creditors could move for appointment of a trustee or conversion of the case to Chapter 7 (with an automatic trustee appointment).  Appointment of a trustee is a real risk given that fraud and dishonesty by the debtor’s management are grounds for such an appointment. But a trustee would only control the assets in the bankruptcy, and if it’s a solvent case where all creditors get paid in full, then Trump will regain control of his assets after the bankruptcy.

Fourth, a bankruptcy would force Trump to deal with not just the New York Attorney General, but with all of his other creditors. Bankruptcy telescopes all claims against a debtor to the present, regardless of whether an obligation is in default. Even debts that aren’t due for years are treated as presently due in a bankruptcy. That means that Trump would have to deal with all the various loans made to and guaranties made by his various defendant entities. And because there are likely cross-guaranties made entities that are not defendants in the NY action, it might pull in other Trump entities. The danger with such a situation is that things could readily get out of control, although I suspect that any prudent financial institution creditor will be very careful in how it deals with a possible president-elect; hardball’s a risky strategy here.

Fifth, Trump will have to pay his bankruptcy professionals (and with a solvent case, it’s his money at stake). They won’t be cheap. There’s probably a Trump premium for fees; I suspect top tier firms will be reluctant to deal with him, both out of political and payment concerns. Does Trump have the liquidity necessary or would he require DIP financing? No idea.

Trump will have to weigh all of these concerns against the benefits of delay that would accrue if he wins the election and against the non-bankruptcy alternative described below.

The Non-Bankruptcy Alternative

If Trump doesn't file for bankruptcy, I cannot see a route by which he can stop the New York Attorney General from proceeding with enforcement of the judgment. That means that the NY Attorney General would have to first get an execution order from the court. Once the NY Attorney General has that order, the NY Attorney General can direct the sheriff to levy on Trump's property in New York, meaning seizing it if it is moveable property or having the property deemed to be held in trust for the sheriff if not. The sheriff would then conduct a public auction of the property after first advertising the sale for at least six days. The NY Attorney General would get the sale proceeds minus the sheriff's minimal fee. For property in New York this could all happen fairly fast and certainly faster than 7 months.

For property not located in NY (think Mar-a-Lago), the NY Attorney General would need to "domesticate" the NY judgment in that jurisdiction. How that works will depend on the jurisdiction. Here's a summary of the process in Florida, which is likely the critical state for domestication given that Trump is now claiming that all of his formerly New York entities are Florida-based. I don't know if the entities really are now all in Florida, but from Trump's perspective it hardly matters. It will require further litigation to resolve the matter (discovery, a hearing, a possible appeal on that issue), and that will take time. And if Trump prevails about the entities being in Florida, then there will be more time on domesticating the judgment. 

This is what I think is the most likely move for Trump:  try to delay things in the state court system(s) as long as possible and only actually pull the trigger on a bankruptcy filing once the NY Attorney General actually manages to levy on a property. Trump might be able to get a couple months of delay from the state court system and then he'd only need around 4 months or so out of the bankruptcy system. That's a completely achievable goal.  

Even if the NY Attorney General proceeds with collection on the judgment Trump would still be allowed to continue with the appeal of the judgment, and if he were successful in overturning or reducing the judgment, the NY Attorney General would have to make restitution to him. (I'm not sure what happens with appreciation/depreciation or interest.) So, Trump would still get to appeal, but the NY Attorney General might force the sale of some of his marquee properties.

Who Owns What?

That brings me to another interesting angle: what assets are held by what Trump entity? It seems that the Donald J. Trump Revocable Trust holds most of the assets, but that those assets might not be held directly, but might be in subsidiaries owned by the trust. 

Curiously, Trump’s 2018 statement of financial condition claims that Mar-a-Lago is owned by wholly-owned LLC based on a 1995 sale by Trump. I’m not sure that’s entirely true. A search for the Palm Beach County, Florida, real estate records shows a 1995 warranty deed from Trump to Mar-a-Lago Club, Inc., but then there’s a 2002 quit claim deed where Mar-a-Lago Club, LLC (a successor to Mar-a-Lago Club, Inc.) reconveys what appears to be part of the property to Trump. I haven't been able to see the actual page in the plat book, so I'm not sure how big this reconveyed area is, but it looks as if a part of the Mar-a-Lago land is now held directly by Trump. That arrangement that baffles me. There’s only one good reason I can think of to hold Florida real estate directly, and that is Florida’s infamous unlimited homestead exemption, but that only applies to properties of no more than ½ acre if in a municipality. Perhaps Trump carved out a little homestead from Mar-a-Lago (which is in total something like 17 acres). If it did it right, his little piece of it could substantially limit the value of the remainder. In any event, the real irony here is that Trump could have completely shielded Mar-a-Lago from his creditors with one simple move:  holding it jointly with Melania as tenancy by the entirety. He didn't do that. I'll leave that one without comment. 

Where Would Trump File?

Bankruptcy cognoscenti understand that venue is 9/10ths of the game in bankruptcy:  pick a favorable venue and you’re likely to prevail in a case, particularly when you can pick your own judge. (The recent Federal Judicial Conference policy on random case assignment within a district does not apply to bankruptcy…although it really should.) So forum shopping and judge-picking is the order of the day.

Trump isn’t going to want to file in the Southern District of New York or in Delaware—while they are favored locations for corporate bankruptcy filings, they’re going to be perceived as too “blue” for what he wants to do. Instead, I’d predict a filing in the Southern District of Florida. As a Florida resident, a SDFL venue would be appropriate for Trump, and his various entities could bootstrap their cases into the district once he’s filed.

The SDFL bankruptcy court’s local rules provide that his case would be blindly assigned to one of the judges sitting in the West Palm Beach division of the court based on the chapter of the case. There are three judges sitting there now (including the Chief Judge), but one is a senior judge on recall, and he might not be getting Chapter 11 cases. I don’t know any of the judges, but there might not even be three eligible judges in the division given conflicts (it’s possible to deliberately conflict out a judge by retaining a law firm that employs a judge’s spouse or child). Of course, Trump could move to withdraw the reference to the bankruptcy court and have the case handled by a district court judge (perhaps even one he appointed). I’ve never heard of a debtor moving to withdraw the reference, but it’s certainly possible, and if he wanted to add in further delay, that would be one way to do it.

Of course, there’s really nothing stopping Trump from renting a PO Box in a district of his choice and filing his case there. I can recommend a nice one in the Woodlands, Texas. It might result in a venue fight, but that’s further delay, which again could suit him just fine. But it’s hard to judge-pick bankruptcy judges based on political allegiance; bankruptcy judges aren’t Article III judges; they aren’t appointed by a President with advice and consent of the Senate, but are instead appointed by the Circuit Courts of Appeal. So there’s no obvious judge Trump would want as far as I know, but maybe a search of political donations would indicate otherwise. (At the very least, I can think of a prominent bankruptcy judge whose daughter was a Trump administration official…)  

Wherever the case ends up, I pity the judge who lands it. The NY civil fraud trial showed the difficulty a judge can face when Trump is in the court room, and with the prospect of Trump winning the election, do you want to be the judge who ends up on his bad side? I know judges are not supposed to take such things into consideration, but judges are people.

Likewise, if Trump files for bankruptcy, it's going to make things awkward for the US Trustee because all of a sudden the Biden Department of Justice will be involved in the bankruptcy. Even if the US Trustee is acting totally reasonably, its actions will inevitably risk being tarred as political. In short, a Trump bankruptcy will something very, very uncomfortable for the US bankruptcy system. It's not something the system has ever previously experienced, and I just don't know how it will handle such a politically charged case. 

Bottom Line

If Trump decides that he’d like to try to run the clock, then bankruptcy is likely going to be the best way to do so.  It’s not costless to him, but it’s quite possible, although hardly guaranteed, that he can run the clock several months, long enough to get to the point that the looming election or an electorate victory changes the dynamics of the litigation.  Will he do it? I have no idea, but if he does it’s going to be a very interesting time in the bankruptcy world. 

Comments

This is a superb and thoughtful and comprehensive analysis, including the discussion of forum selection alternatives! However, Florida is the obvious choice. Probably NDFL Fort Pierce Division, where now pends his indictment on the classified documents-related charges.

The former Trump official you're referencing, though, is now a senior editor at Dispatch Media, where she is mistaken for a Trump supporter by exactly no one at all. I commend you to any episode at random of the podcast she hosts with David French of the NYT, "Advisory Opinions." https://thedispatch.com/author/sarah-isgur/

I think he's going to find the upsides of being debtor-in-possession irresistible compared to the alternative. It's Pennzoil v Texaco deja vu all over again; I was astonished to see Trump relying on the Second Circuit's reversed and vacated with instructions to remand-and-dismiss opinion in his filing with the Appellate Division.

I'm curious what impact filing would have on his relationships with his lawyers, civil and criminal. Aren't they at risk for preference clawbacks for everything he's paid them during the 90 days before filing?

And who's going to handle DIP financing? And represent the debtors?

(FWIW, I was at Weil's Houston office from 1988-1991. When I saw that on your own CV, I thought: Yup, this is just the run-down they'd produce. Kudos again.)

Apologies for the string comments.

You're doubtless familiar with this story, but on the off chance you haven't seen it, I commend to you this NYT story regarding Weil's representation of Citibank as Trump's largest creditor in the liquidation of his first empire (Plaza, Trump Air).

https://www.nytimes.com/2016/01/17/business/what-donald-trumps-plaza-deal-reveals-about-his-white-house-bid.html

You may get some traffic, Prof. Levitin, from TheDispatch.com, as I've linked this post in comments there with my highest recommendation.

You make an excellent point about the AG already having access, through the litigation which led to the judgment, to Trump's financial records, including those maintained by nonparty witnesses outside his control. Just as that means he would have less to lose in terms of privacy than the typical Chapter 11 debtor, though, it also means the NYS-AG's office ought to know, very precisely, what all his and his companies' income streams are, what their near-term obligations are, what the assets are, and how they're held — information that a typical judgment creditor might never get, short of a liquidation, but certainly wouldn't have available already. Plus there's the court-ordered monitor, former SDNY District Judge Barbara Jones, whose earlier report so irked Trump, and who presumably can point the NYS-AG to the pegs from which hang the keys to the kingdom.

This unique advantage to his largest and most urgent creditor makes me think he can't risk letting the State begin any sort of judgment execution actions, period, and will file before close of business Monday unless the Appellate Division materially helps him out. By filing now he does indeed lose the opportunity for another photo opportunity comparable to his mug shot. But the State is already firmly committed in public to aggressive enforcement, and he's going to fundraise off the event, not just the temporary optics of one levy.

Thank you again for your investment in writing and publishing this post, the sophistication level of which is an order of magnitude higher than I'm reading in the national media. I'm finding, and appreciating, additional nuance with each re-reading.

Beldar - Fort Pierce is in the SDFL (it is about 70 miles north of Palm Beach). If the other Donald's attorneys have drawn down retainers that mitigates any preference issue and he may not need DIP financing.

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