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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