Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
Oct. 31 — “I’m the king of debt,” Donald J. Trump said in a May 4 CNN interview.
He said it again in an interview aired June 22 on CBS This Morning: “I’m the king of debt. I’m great with debt. Nobody knows debt better than me. I’ve made a fortune by using debt. And if things don’t work out I renegotiate the debt.”
Trump has made clear that he frequently used the U.S. Bankruptcy Code as a business tool—primarily Chapter 11, which allows companies (or individuals) to enjoy protections from creditors while they seek to reorganize their debt or liquidate pursuant to a court-approved plan.
This is not to suggest that Trump didn’t sometimes benefit from the bankruptcy filings. “He did well personally,” Professor Jonathan Lipson of Temple University–Beasley School of Law, Philadelphia, told Bloomberg BNA Oct. 24. For example, after one case “he managed to trade a $1.5 million CEO salary for a $2 million chairman fee,” he said.
As for the companies, their success in bankruptcy depends on how you measure it. “If you believe the goal of bankruptcy is to emerge with a serviceable level of debt, then the bankruptcies were probably not successful,” Lipson, who has studied and written about the Trump bankruptcies, said.
“He certainly used bankruptcy law fairly aggressively,” Professor Stephen Lubben of Seton Hall Law School, Newark, N.J., told Bloomberg BNA Oct. 24. From the companies’ perspective, one “might wonder how effective the bankruptcy cases were considering how they had to keep going back in,” Lubben said. Lubben is a contributing author to Bloomberg Law: Bankruptcy Treatise.
Creditors also saw mixed results. Unsecured creditors were paid in full in the 2004 bankruptcy case involving Trump’s Atlantic City properties but received less than a cent on the dollar in the 2009 Chapter 11 involving the same hotel-casinos.
But it may not be the economic outcomes that best define the legacy of the Trump bankruptcies.
Instead, they also illustrate Trump’s evolution from the owner of recognizable hotels and casinos in Atlantic City, to the primary caretaker of the Trump brand.
With the Atlantic City properties, Trump appears “to move away from being a real estate investor to a licensing firm,” Lubben told Bloomberg BNA. “He is looking more like a marketing guru than a real estate guru,” he said.
The Trump campaign didn’t respond to requests for comment on Trump’s business bankruptcies.
While Trump has often emphasized that he has never filed a personal bankruptcy, there have been six bankruptcies for Trump-owned businesses filed since 1991, not including a 2014 bankruptcy for Trump Entertainment Resorts, Inc., a company over which Trump had no management or control at the time of filing (he owned a 5 percent stake in the company at that time).
These Trump companies owned hotel-casino properties in Atlantic City (with the exception of the famous Plaza Hotel in New York, which filed for bankruptcy in 1992 and was later sold in 1995). The hotel-casino properties would be transformed by Chapter 11 three times.
In 1991 and 1992, the entities owning the Trump Plaza, Trump’s Castle (later to be known as the Trump Marina) and Trump Taj Mahal filed separate Chapter 11 cases. After those bankruptcy cases, the properties were consolidated and went through Chapter 11 again in 2004 and 2009.
They ultimately went into bankruptcy again in 2014, albeit this time without a Trump behind the wheel.
“I have used the laws of this country, ... the [bankruptcy] chapter laws, to do a great job for my company, for myself, for my employees, for my family, et cetera,” Trump said at the first Republican Presidential Debate on Aug. 6, 2015.
Bloomberg BNA takes a look at these Trump properties and their journeys through bankruptcy. The vast majority of media attention on Trump’s bankruptcies focuses on the hotel-casino resorts in Atlantic City and ignores the case of perhaps his most famous—certainly the most historically significant—hotel, The Plaza Hotel in Manhattan.
Trump put the jewel of his real estate collection—the historic Plaza Hotel in Manhattan—into Chapter 11 in 1992.
He purchased the hotel in 1988 for around $407 million, according to the New York Times. Trump admitted at the time that his purchase of the iconic hotel was not a great business decision.
He was eager to own a piece of New York history.
“I haven’t purchased a building, I have purchased a masterpiece—the Mona Lisa,” Trump wrote in a full page ad published Sept. 12, 1988, in New York magazine.
“For the first time in my life, I have knowingly made a deal which was not economic—for I can never justify the price I paid, no matter how successful The Plaza becomes,” he wrote.
Although the hotel was profitable, it had trouble servicing its immense debt.
In November 1992, Plaza Operating Partners, the entity holding the Plaza, filed a Chapter 11 case in Manhattan, submitting a “pre-packaged” plan of reorganization. “Pre-packs,” as they are sometimes called, refer to Chapter 11 cases that are filed after the debtor and key creditors have already worked out an agreeable arrangement for restructuring the bankruptcy estate’s major debt.
Ultimately, the hotel’s creditors agreed to more favorable terms on more than $550 million in debt.
The property was later sold in 1995.
The remaining Trump bankruptcies involved his casino properties in Atlantic City—the Trump Taj Mahal, the Trump Plaza Hotel and Casino, and Trump’s Castle. Each casino filed separately for bankruptcy in 1991 and 1992.
The Trump Taj Mahal had been in operation for approximately one year before filing bankruptcy. Trump Plaza and Trump’s Castle, which had opened in 1984 and 1985, respectively, filed for bankruptcy in 1992.
A March 1997 SEC filing by Trump Atlantic City Associates (an affiliate of Trump Entertainment Resorts) refers to “liquidity problems,” attributed to “an overall deterioration in the Atlantic City Market” and “economic recession in the Northeast.” Notably, court records for the 1991 and 1992 bankruptcy cases are not maintained by the courts and are not readily available to review directly.
After all three properties emerged from bankruptcy, the casinos were later united under the publicly held company Trump Hotels and Casino Resorts Inc. (THCR). Trump owned 49 percent of this company when it filed its Chapter 11 in 2004.
THCR was formed as a Delaware corporation in March 1995, according to the court-approved disclosure statement filed in the bankruptcy court on Feb. 13, 2005.
THCR (and its affiliates) owned and operated the Trump Taj Mahal, the Trump Plaza and the Trump Marina, as well as two other casino assets, but they weren’t achieving desired performance and revenue results in the years leading to the 2004 filing, the disclosure statement explains.
Trump, the debtor’s major secured noteholders, and a “Special Committee” consisting of directors (other than Trump) negotiated a restructuring of the company’s debt. These parties entered into a Restructuring Support Agreement (RSA), essentially a precursor to a negotiated reorganization plan, the U.S. Bankruptcy Court for the District of New Jersey wrote in an Aug. 4, 2008 opinion.
The negotiated agreement focused on how to adjust the debt and who would own what in the entity that would emerge from the bankruptcy to hold the hotel-casinos. Because unsecured creditors would be paid in full, no official committee of unsecured creditors (common in large bankruptcy cases) would be formed by the Office of the U.S. Trustee, the court said. (The U.S. Trustee is a branch of the Department of Justice overseeing bankruptcy matters and appointed bankruptcy trustees.)
However, over the objection of the debtor and the secured creditors, the U.S. Trustee created an “Official Committee of Equity Security Holders.” Members of this committee consisted of shareholders in the debtor companies, other than Trump and the members of the Special Committee.
Rather than rubber-stamp the apparently consensual plan, the Equity Committee objected to what it considered a “sweetheart deal” in favor of Trump, the court said.
Under the originally proposed plan, non-insider shareholders would hold equity in the new company emerging from bankruptcy, worth less than $300,000.
As part of this plan, Trump had agreed to “infuse” the company with $55 million in cash, 25 percent of his interest in Miss Universe LP, and an Atlantic City boardwalk property known as the World’s Fair site, the court said.
The Equity Committee’s counsel, Stutman, Treister & Glatt (a now defunct bankruptcy boutique firm in Los Angeles) made significant discoveries regarding the secured debt and unencumbered assets, including a trademark license agreement with Trump that was worth between $50 and $80 million, the court said.
Based on these discoveries, the Committee filed an objection to the proposed plan.
The objections apparently had merit, because “a mere two days after the Equity Committee’s objection to confirmation [of the plan] was filed,” the debtor, the Special Committee, the secured creditors and Trump agreed to a new arrangement, featuring a “dramatic change in the treatment of the public non-insider shareholders,” the court said.
Under the new agreement, the non-insider shareholders would retain their new shares and warrants, but they also were to receive significant other recoveries. These included a cash distribution of $17.5 million and the proceeds from the sale of the World’s Fair site (contributed by Trump as part of the plan), which sold for $25.15 million, the court said.
Ultimately, as a result of the Committee’s objection, public non-insider shareholders ended up sharing distributions from a pool of around $40 million, rather than receiving only $300,000 of equity in the new company, as originally proposed.‘Exceptional Result’
The court awarded Stutman, Treister and Glatt all their earned fees, plus a bonus of more than $293,000, based on the firm’s “exceptional result, exceeding the reasonable expectations of the parties.”
THCR emerged from bankruptcy on May 20, 2005, recapitalized and renamed as Trump Entertainment Resorts, Inc. (TER). Although Trump’s stock ownership interest had been reduced from 47 to 29 percent, he remained the company’s largest individual stockholder and chairman of the board.
Senior creditors received $1.25 billion in notes issued by the reorganized debtor, but as revealed in the 2009 bankruptcy case, the debtor ultimately defaulted on these debts.
As for Trump, he lost his position as Chief Executive Officer, with its $1.5 million salary, but he was authorized a $2 million annual fee to serve as chairman, with possible bonus compensation as well, according to a Form 10-K filed March 31, 2005 by Trump Atlantic City Associates.
Trump Entertainment Resorts and its three Atlantic City Casinos once again entered Chapter 11 on Feb. 17, 2009.
The bankruptcy was precipitated by increased competition from new casinos in Atlantic City and the licensing of slot machines and casinos in neighboring mid-Atlantic states. Local smoking bans were also cited as factors affecting the debtor’s performance and leading to the economic downturn for Atlantic City casinos in general, according to the debtor’s disclosure statement.
The debtors defaulted on the interest payments due on their restructured debt (the $1.25 billion issued to senior creditors in the 2004 bankruptcy as “Second Lien Notes"). In the days leading up to the bankruptcy, negotiations with these junior secured lenders broke down, and Trump resigned from the board. He later abandoned his limited partnership interest in the entity owning the Casino properties. Trading was suspended on TER’s stock, which was eventually delisted.
Where the 2004 bankruptcy case was resolved by agreement of the parties, the 2009 case was hotly contested and featured competing plans of reorganization—one proposed by senior secured lenders, dominated by billionaire Carl Icahn, and the other proposed by the debtor, with the support of Trump and an Ad Hoc Committee representing the junior secured lenders (those owning the Second Lien Notes).
Bankruptcy Judge Judith Wizmur found both plans to be “confirmable,” but an “overwhelming majority” of creditors voted in favor of the debtor’s and Ad Hoc Committee’s plan, which was a factor the court found compelling. Ultimately, it was the Trump-backed debtor-committee plan that was confirmed.
The confirmed plan was to “allow the debtors to shed approximately $1.4 billion in secured debt, to pay the First Lien Lenders in full, and to offer to creditors the opportunity to participate in the upside potential of the debtors,” the court said in an April 12, 2010 opinion on confirmation.
The junior secured lenders, represented by the Ad Hoc Committee, wound up with 70 percent equity in the new company, which they purchased for $225 million through a stock offering. Certain members of that committee received a 20 percent stake as consideration for backstopping the stock sale (ensuring new capital of at least the $225 million).
The Second Lien Notes were canceled, and a pro-rata distribution of 5 percent of the company’s new stock was provided to the junior secured lenders holding those notes.
General unsecured creditors recovered $.0078 per dollar for their allowed claims, according to the Form 10-K filed March 31, 2011, by Trump Entertainment Resorts, Inc. for the fiscal year ended Dec. 31, 2010.
Those junior secured lenders and general unsecured creditors who were not eligible or who elected not to participate in the stock offering received a cash distribution of only $.0012 per dollar for their allowed claims.
The stockholders of the old debtor received nothing.
Trump, who had morphed from an apparent casino tycoon into a reality-television star, was found by the court to have a brand name “worth millions of dollars to the debtors.” Trump’s reality TV show, The Apprentice, had premiered in January 2004, frequently featuring and promoting Trump products.
For the continued use of the Trump brand name, the bankruptcy plan incorporated a settlement with Trump (and related entities), in which Trump and his daughter Ivanka agreed to a licensing agreement. TER valued its trademarks following the reorganization at $8.7 million, although it didn’t specifically allocate the entire sum to the Trump licensing agreement.
Trump entered into a service agreement as well. In exchange, Trump received 5 percent of the new company’s stock, along with warrants to purchase up to an additional 5 percent.
In essence, Trump lost all his claims against and equity in the old company. He acquired 5 percent of the equity in the newly reorganized debtor, with the right to acquire more, by licensing the Trump brand for the hoped-for benefit of the reorganized debtors.
Notwithstanding the power of the Trump brand, five years later the casinos again filed for bankruptcy.
TER and its subsidiaries filed yet another Chapter 11 case on Sept. 9, 2014, once again sending the Taj Mahal and Plaza into bankruptcy (the Marina hotel and casino was sold in 2011). By this time there was no Trump management or control of the companies. Trump owned 5 percent of the debtor at the time, the same percentage bestowed on him in the 2009 bankruptcy.
The bankruptcy petitions were filed in the U.S. Bankruptcy Court for the District of Delaware, and within the week, the Trump Plaza Hotel and Casino closed.
Carl Icahn was the sole holder of TER’s senior secured debt. On Feb. 26, 2016, when the debtor emerged from bankruptcy, the existing pre-petition senior secured debt was extinguished and converted into 100 percent of TER’s common stock. Icahn became the sole owner after the reorganization.
Eight months later, on Oct. 10, 2016, the Trump Taj Mahal ceased operations. The hotel and casino once known as Trump’s Marina is now a Golden Nugget, owned by Landry’s, Inc. All that remains of Trump’s other Atlantic City casinos are shuttered, dark properties.
With assistance from Diane Davis in Washington.
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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