Matter of People of the State of N.Y. by Eric T. Schneiderman v. Trump Entrepreneur Initiative LLCMatter of People of the State of N.Y. by Eric T. Schneiderman v. Trump Entrepreneur Initiative LLC
In the Matter of THE PEOPLE OF THE STATE OF NEW YORK, by ERIC T. SCHNEIDERMAN, as Attorney General of the State of New York, Appellant-Respondent, v THE TRUMP ENTREPRENEUR INITIATIVE LLC, Formerly Known as TRUMP UNIVERSITY LLC, et al., Respondents-Appellants. [26 NYS3d 66]—
The New York State Attorney General brings this proceeding against Donald J. Trump individually and against several business entities bearing his name: The Trump Entrepreneur Initiative LLC, DJT Entrepreneur Member LLC, DJT Entrepreneur Managing Member LLC, The Trump Organization, Inc., Trump Organization LLC, (collectively, the Trump respondents). Trump is the Chief Executive Officer of The Trump Organization, Inc. and Trump Organization LLC. He was also the chairman of Trump University, later known as Trump Entrepreneur Initiative LLC (TEI).
In 2004, Trump, along with respondent Michael Sexton and a nonparty individual, incorporated Trump University LLC as a New York limited liability company. Trump University purported, by way of seminars and mentoring programs, to instruct small business owners and individual entrepreneurs in real estate investing.
By letter dated May 27, 2005, the New York State Department of Education (SED) notified Donald Trump individually, Sexton, 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. Likewise, SED notified these respondents that Trump University was also violating the Education Law because it lacked a license to offer student instruction or training in New York State. SED stated, however, that 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. In June 2005,
However, the Attorney General alleges, Trump University failed to abide by any of these conditions. To the contrary, it is alleged that, despite Sexton‘s assurances to the Attorney General, SED learned in 2009 through newspaper advertisements and a student complaint to the New York State Attorney General that Trump University was continuing to provide live programming and instruction in New York without obtaining proper licensing or moving its operations out of New York. In March 2010, SED sent Trump University another letter demanding that it cease using the word “University” in its name. In May 2010, five years after SED had informed respondents that they were obliged to drop the word “University,” Trump University filed a certificate of amendment to its Articles of Organization, thus formally changing its name to TEI.
In August and September 2010, SED once again informed TEI that the company needed a license to operate, which it still did not have despite having been notified in 2005 that its failure to obtain a license violated New York State law. On October 7, 2010, Sexton informed SED that TEI had ceased operations.
In early 2011, the Attorney General commenced an investigation into for-profit universities and trade schools operating in New York, and in May 2011, issued TEI a subpoena seeking information pertaining to its business practices.
In August 2013, the Attorney General commenced this special proceeding under
According to the Attorney General‘s affirmation, respondents represented in advertising that real estate experts handpicked by Trump himself would teach his strategies and techniques for real estate investing, and that these strategies would lead to success. One advertisement offered a free workshop and
However, the Attorney General averred, Trump did not handpick the instructors; indeed, only one of the live event speakers for Trump University had even ever met Donald Trump. Nonetheless, some students purchased seminars on the basis of their belief that Trump had approved each instructor. 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.” Similarly, the Attorney General stated, Donald Trump never participated in the creation of any instructional content and never reviewed any curricula. The Attorney General further maintained 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.
What is more, according to the Attorney General, the free seminars were merely an instrument through which instructors would induce students to enroll in increasingly expensive seminars, starting with a three-day $1,495 seminar. The Attorney General averred that although Trump University speakers represented that the three-day 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. Instructors at the three-day seminars are also alleged to have engaged in a bait-and-switch by urging 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.”
On the basis of these allegations, the Attorney General interposed causes of action for fraud under
Respondents moved to dismiss the petition, arguing, among other things, that the first cause of action under
In its January 2014 order, the court dismissed the fourth cause of action (the
Respondents then filed verified answers and the Trump
By order entered October 15, 2014, the IAS court denied respondents’ motion for an order converting the special proceeding to a plenary action. Further, the IAS court granted respondents’ motion to dismiss the first cause of action, the fraud claim under
Before reaching the issue of whether a fraud claim under
“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.” Moreover, the provision defines “fraud” as “any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions” (
id. ).
On appeal to this Court, neither party raised or briefed the issue of whether the Attorney General could bring a standalone action under section 63 (12), and, as noted, the IAS court had not dismissed the claim on that basis. Nonetheless, in a memorandum decision, we found that the IAS court had properly dismissed that claim, stating that the section “does not create independent claims, but merely authorizes the Attorney General to seek injunctive and other relief on notice prescribed by the statute in cases involving persistent fraud or illegality” (People v Charles Schwab & Co., Inc., 109 AD3d at 449, citing State of New York v Cortelle Corp., 38 NY2d 83, 86 [1975]).
Although the holding of Charles Schwab purported to be based on the Court of Appeals’ ruling in Cortelle, Cortelle does not, in fact, hold that the Attorney General cannot bring a standalone cause of action for fraud under
In Cortelle, the Attorney General, alleging that the defendants had engaged in fraudulent loan practices, sought restitution for defrauded persons and an injunction against certain practices under section 63 (12), among other remedies. The trial court found that the action was one to recover upon a “liability, penalty or forfeiture created or imposed by statute” and therefore was subject to
The disagreement over Cortelle‘s holding apparently arises from the Court of Appeals’ statement that the statute “only provided standing in the Attorney General to seek redress and additional remedies for recognized wrongs which pre-existed the statute[ ].” However, in using this language, the Court of Appeals did not suggest that the Attorney General had no power to commence a standalone action under
The Court answered the question in the negative, finding that in fact, the allegations of the Attorney General‘s section 63 (12) cause of action amounted essentially to a common-law claim of promissory fraud—a cause of action that had certainly existed before section 63 (12) was implemented. Framing the issue in this light, the Court found that the Attorney General sought redress for a wrong that had long been actionable under the common law; thus, the cause of action did not depend on a new liability “created or imposed by statute” within the meaning of
To be sure, Cortelle does not directly address whether section 63 (12) provides for an independent cause of action under the broad definition of fraud. Other New York courts addressing that issue, however, do give us guidance as to how we should proceed here. New York courts have generally allowed for independent causes of action for fraud under section 63 (12) (see e.g. People v Greenberg, 21 NY3d 439 [2013], affg 95 AD3d 474 [1st Dept 2012] [in a case involving claims for violation of
Likewise, before Schwab, other decisions from this Court have allowed for independent causes of action for fraud under section 63 (12) (see People v Wells Fargo Ins. Servs., Inc., 62 AD3d 404 [1st Dept 2009], affd 16 NY3d 166 [2011] [dismissing cause of action for fraud under
Further, one decision from this Court has held that fraud under section 63 (12) may be established without proof of scienter or reliance (People v American Motor Club, 179 AD2d 277, 283 [1st Dept 1992], appeal dismissed 80 NY2d 893 [1992] [reinstating a section 63 (12) claim “as a cause of action,” where the AG had pleaded facts amounting to fraud under that provision, as under the statute, “scienter is not required and false promises are sufficient“]). This case, which concluded that fraud under section 63 (12) may be established without proof of scienter or reliance, further indicates that the Attorney General may rely on section 63 (12) for a cause of action and need not limit itself to claims for common-law fraud only.
Thus, Charles Schwab does not comport with prevailing authority, and in fact, acts to limit the power that the Attorney General has long been exercising under section 63 (12). And even apart from prevailing authority, the language of the statute itself appears to authorize a cause of action; like similar statutes that authorize causes of action, section 63 (12) defines the fraudulent conduct that it prohibits, authorizes the Attorney General to commence an action or proceeding to foreclose that conduct, and specifies the relief, including equitable relief, that the Attorney General may seek. Indeed, the
As one jurist has observed, “[T]here is no requirement that a patent judicial mistake be allowed to ‘age’ before it may be corrected” (Doerr v Goldsmith, 25 NY3d 1114, 1154 [2015] [Fahey, J., dissenting]). Hence, we hold that the Attorney General is, in fact, authorized to bring a cause of action for fraud under
Turning now to the statute of limitations issue, we find, for the reasons already stated, that the fraud claim under section 63 (12) is not subject to the three-year statute of limitations imposed by
Nevertheless, petitioner is not entitled to summary determi- nation
Contrary to respondents’ arguments, the IAS court correctly dismissed the seven affirmative defenses at issue. This conclusion holds particularly true because the court should have considered the allegations of post-May 31, 2010 conduct included in petitioner‘s reply submission (see Matter of Kennelly v Mobius Realty Holdings LLC, 33 AD3d 380, 381-382 [1st Dept 2006]; State of New York v Metz, 241 AD2d 192, 198-199 [1st Dept 1998]).
Finally, the IAS court correctly denied respondents’ motion to convert the special proceeding into a plenary action, and the court‘s discovery rulings were well within its broad discretionary power to control the special proceeding.
Concur—Mazzarelli, J.P., Renwick, Saxe and Moskowitz, JJ.