In the ongoing $250 million civil lawsuit filed against Donald Trump, his sons and certain Trump organizations in New York, the former President has claimed that language included in financial statements defendants provided to financial institutions warned that the information might be “worthless” such that they could not be legally responsible for any misrepresentations or inaccuracies.
The clauses reportedly state:
“Assets are stated at their estimated current values and liabilities at their estimated current amounts using various valuation methods. Such valuation methods include, but are not limited to, the use of appraisals, capitalization of anticipated earnings, recent sales and offers, and estimates of current values as determined by Mr. Trump in conjunction with his associates and, in some instances, outside professionals. Considerable judgment is necessary to interpret market data and develop the related estimates of current value. Accordingly, the estimates presented herein are not necessarily indicative of the amount that could be realized upon the disposition of the assets or payment of the related liabilities. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated current value amounts.”
In his decision granting partial summary judgment against the defendants on one of the causes of action (for persistent violations of Section 63(12) of New York’s Executive Law) entered on September 26, 2023, Judge Engoron ruled that “the ‘worthless clause’ does not say what defendants say it says, does not rise to the level of an enforceable disclaimer, and cannot be used to insulate fraud as to facts peculiarly within defendants’ knowledge, even vis-à-vis sophisticated recipients.” He stated that “a defendant may not rely on a disclaimer for misrepresentation of facts peculiarly within the defendant’s knowledge” — and that “defendants’ reliance on these ‘worthless’ disclaimers is worthless.”
A copy of the decision and order can be found here: trump-ny-fraud-ruling – DocumentCloud.
During his subsequent trial testimony, Trump stated, “I think that the statements of financial conditions were very good, were actually somewhat conservative, and they were totally protected, and so was I, by the disclaimer clause.”
Alluding to his prior decision on summary judgment with respect to the disclaimer clause, Judge Engoron told Trump to “read about my opinion – for the first time, I guess.”
David’s Dicta: It should not bear repeating, but an applicant is expected to provide honest and accurate disclosures in any financial statement, knowing that the reader is likely to rely on the information being provided for the purposes of extending credit to the applicant or to induce the reader to do business with the applicant. Knowingly provided false information constitutes fraud and is often an event of default under loan document. The individual or agent for the enterprise signing the financial statement is accepting responsibility for the representations. As evidenced by the Trump trial, it is insufficient to wash one’s hands of liability for falsehoods or mistakes in a financial statement by delegating it to a third party or one’s accountant. In short, do not be cavalier in how you approach financial statements. If you are not personally preparing it but intend to sign in your individual capacity or as an officer of a business, you should inquire about the facts underlying the disclosures and the methods of valuation being employed by any professionals assisting you. At the end of the day, you will be responsible for the financial statement. Finally, some loan documents will require an applicant to notify the lender of material changes to assets or liabilities.