Have We Been Trumped By Bankruptcy?

Written By Guest Author Larry Yumkas

Love him or hate him, Donald Trump compels people to form strong opinions about him.  As of this writing, polls show him continuing to enjoy a commanding lead over the narrowing field of candidates vying for the Republican nomination in advance of the 2016 U.S. presidential election.  Not surprisingly, some in the press and some of his rivals in seeking the nomination have raised Mr. Trump’s four corporate bankruptcies (Trump Taj Mahal in Atlantic City in 1991, Trump Plaza Hotel in Atlantic City in 1992, Trump Hotels and Casino Resorts in 2004 and Trump Entertainment Resorts in 2009), as either disqualifying reasons for him to run or to question his fitness for the Oval Office.  But is that criticism fair?

When the issue was raised at the first Republican debate in early August 2015, Mr. Trump promptly responded to such criticism by pointing out that in filing these bankruptcy cases, he was complying with U.S. law and was taking advantage of a system designed to help save businesses under financial stress as any smart business person would under the circumstances.  Mr. Trump’s response was clearly correct and shrewd, as it enabled him to divert attention from what may have been the better related questions that were not asked.  Nevertheless, it is important for Americans to understand what bankruptcy is and its place in the fabric of our commercial society so voters can understand whether a bankruptcy filing in one’s business or personal past should disqualify one from seeking our highest office.

The authority for Congress to pass uniform national bankruptcy laws is found in Article I of the U.S. Constitution.  Its placement at the beginning of our brilliant and time-tested founding legal document was no accident.  Our founding fathers understood that in order to sustain itself, it was a high priority for America to attract and keep entrepreneurs who were willing to leave their home countries and take risk to come to, or stay in, the U.S. in order to try to establish the country as a nation of commerce.   Just as it did then, starting and sustaining a business requires adequate capital, often in the form of loans where lenders secure repayment of a borrower’s debt with a lien on the borrower’s assets, which enables lenders to take or foreclose on those assets upon a payment default.  Lenders also often require personal guaranties of the entrepreneur to further protect them from the risk of nonpayment.  As you can imagine, providing lenders with these repayment protections gives them significant leverage over their borrowers and their borrowers’ owners.  Indeed, at the time of the drafting and ratification of the U.S. Constitution, much of the world threw defaulting borrowers into debtor’s prisons, which, no doubt, discouraged people from taking commercial risk, and, not surprisingly, prevented those that were imprisoned from being able to repay their debts by continuing in business.

Modern American bankruptcy law for individuals and for businesses alike provides a nation-wide system that gives troubled borrowers and those whose cash flow cannot meet their debt service obligations breathing room from, and leverage against, creditors.  This system of laws levels the playing field to promote commercially reasonable negotiations, reorganizations or debt discharges in a manner that is fairest to all parties and that allows honest borrowers and people and entities burdened by debts to emerge with a chance to continue in business or to receive a fresh start to try again.  Because it advances these fundamental goals, our current bankruptcy system exists for the same fundamental reasons it has existed since our Constitution was enacted.  For a capitalist economy, that’s a necessity. 

In all four of Mr. Trump’s corporate bankruptcies, his entities were permitted to reorganize and continue to exist after he made substantial concessions by giving up powers and ownership interests in those companies and, in some cases, valuable personal assets, to creditors. 

So, should Mr. Trump’s decision to file four corporate bankruptcy cases disqualify him from elective office?  In and of itself, no, because, in each instance, filing bankruptcy was perfectly legal and the smart thing to do.  But it is fair to ask, and the better question might have been, and still might be, to ask of Mr. Trump what his management role was in causing or allowing these four business to suffer the financial distress that led them to seek bankruptcy protection.  As a bankruptcy lawyer, that is the information I would like to know in assessing Donald Trump’s fitness to serve as President of the United States.

Guest author Larry Yumkas is the Managing Member of Yumkas, Vidmar Sweeney & Mulrenin, LLC.