- Trump v. Deutsche Bank: Does the Credit Crisis Constitute a Force Majeure Event?
- March 23, 2009 | Authors: Stuart D. Kaplan; Martin Luskin; Philip R. Rosenfeldt; Samuel M. Walker
- Law Firms: Blank Rome LLP - New York Office; Blank Rome LLP - Philadelphia Office; Blank Rome LLP - New York Office; Blank Rome LLP - Philadelphia Office
The current financial crisis is certainly unprecedented, but does it constitute a “force majeure” event requiring the extension of maturity of a construction loan? The developer Donald Trump is arguing that it does.
“Force majeure” refers to a “superior force” that parties can neither anticipate nor control. Contracts commonly include force majeure provisions, which relieve a party from specified contractual obligations when such an extraordinary event prevents the party from fulfilling those obligations. Force majeure provisions often list examples of qualifying occurrences, and commonly include both natural occurrences (e.g., hurricanes, floods and earthquakes) and acts of people (e.g. strikes, riots and war).
In February 2005, Deutsche Bank Trust Company Americas, as lead lender, lent an entity wholly owned by Donald Trump $640,000,000 to finance construction and development of the Trump International Hotel and Tower in Chicago, slated to be a mixed-use hotel and condominium tower. On November 6, 2008—one day shy of the loan’s maturity date—Trump filed suit in Queens County against Deutsche Bank and other lenders arguing, inter alia, that the maturity date of the loan is extended until the cessation of the “force majeure” turmoil in the credit markets. Trump and Deutsche Bank announced on March 3, 2009 that they have suspended their lawsuits1, so we may never hear the court classify the credit crisis. But Trump’s claim itself is as unprecedented as the crisis.
The loan agreement among the parties provides for extension of the maturity date upon the occurrence of a force majeure event. Not only did Trump assert in his complaint that he is not required to pay the more than $334,000,000 of principal outstanding under the loan that otherwise would have been due on November 7, but he sought $3 Billion in damages arising out of Deutsche Bank’s and other defendants’ conduct.
In his complaint, Trump outlined various impediments—both from Deutsche Bank and from market conditions—to his repayment of the loan, implying that repayment in the midst of this crisis merits flexibility. Trump’s arguments included that (i) Deutsche Bank hindered his ability to close over $353,000,000 in existing sales contracts for hotel, residential and parking units, (ii) Deutsche Bank thwarted his mitigating attempt to purchase all of the unsold hotel units and commercial areas of the project by requiring unfairly high price terms, (iii) Deutsche Bank refused to allow the sales of unsold hotel units below the minimum price required by the construction loan agreement and (iv) Deutsche Bank’s sale of portions of the loan to other financial institutions, many of which are out of business or functionally insolvent, but whose consent is required to modify the construction loan agreement, damaged Trump and the Tower project.
Trump also sought to interpret the language of the construction loan agreement to save him from having to pay the loan on its fixed maturity date. Former Federal Reserve Chairman Alan Greenspan referred to the current crisis as a “once in a century credit tsunami.”2 But even the oracular Mr. Greenspan may not make the crisis a force majeure circumstance merely by his words. In fact, the defendants emphasized in their answer to Trump’s complaint that “‘[f]orce majeure provisions simply do not apply to the vicissitudes of the marketplace.’”3 Additionally, the defendants’ answer requested the imposition of sanctions against Trump for his frivolous claim for damages.
Deutsche Bank filed its own motion for summary judgment in lieu of complaint on November 26, 2008, suing Trump on his $40,000,000 personal guaranty of the construction loan. Deutsche Bank’s motion and its answer to Trump’s complaint cited articles from The Scotsman and The Financial Times in which Trump boasts that he and his organization are financially strong despite the current market downturn. By order dated January 15, 2009, the court consolidated Deutsche Bank’s action on the guaranty and Trump’s initial complaint into a single action pending in Queens County. The parties were scheduled to appear in court on March 11, 2009, and developers and lenders eagerly awaited the court’s classification of the financial crisis. To declare it a force majeure event would be an unprecedented boon to developers stalled by market conditions.
The parties have ninety days to negotiate a settlement4; during that time the remaining construction on the tower may be completed. Approximately 75% of the residential condominium units and approximately 67% of the hotel condominium units have been sold, and buyers continue to execute contracts.5 Trump anticipates that the project is going to continue to sell, and boasts that “we’re doing better than anybody else in Chicago.”6
- See Mary Ellen Podmolik, Donald Trump, Deutsche Bank reach truce over Chicago skyscraper’s finances, Chi. Trib., Mar. 4, 2009.
- See BBC News, “Financial Crisis ‘Like a Tsunami’,” available at http://news.bbc.co.uk/2/hi/business/7687101.stm
- Memorandum of Law In Support of the Deutsche Bank Participants’ Motion to Dismiss the Complaint Pursuant to CPLR 3211(A)(1) and CPLR 3211(A)(7) and in Support of Sanctions under N.Y.C.R.R.§ 130-1.1, quoting Innnomed Labs, LLC v. Alza Corp., No. 01 Civ. 2763, 2001 WL 406211, *2 (S.D.N.Y Apr. 19, 2001).
- Alex Frangos, Trump, Lenders Suspend Legal Row, Wall St. J., Mar. 4, 2009, at C8.
- Mary Ellen Podmolik, Donald Trump, Deutsche Bank reach truce over Chicago skyscraper’s finances, Chi. Trib., Mar. 4, 2009.