screenshot-2016-12-13-at-7-08-36-am

Did the GSA Properly Find Trump’s “Full Compliance” With the D.C. Hotel Lease?

by Andy Grewal — Friday, Mar. 24, 2017

Commentators have argued that the Trump Old Post Office LLC (Trump Hotel LLC) has violated its lease agreement with the General Services Administration (GSA) from the moment that Donald Trump took the Presidential oath. The lease agreement, which relates to the federally owned property through which the D.C. Trump Hotel operates its hospitality business, states that no elected official shall be “admitted to any share or part” of the lease or to “any benefit that may arise therefrom.”  See GSA Lease §37.19.* With an important exception, this restriction also extends to circumstances where the admittance occurs indirectly through the acquisition of an interest in a legal entity that is a party to the lease.

The GSA recently opined on whether Donald Trump’s assumption of office established a violation of §37.19 and concluded that it did not. Its short letter, authored by Kevin Terry, GSA Senior Realty Contracting Officer, does not spell out the relevant legal analysis. Rather, it states that the Trump Hotel LLC is in “full compliance” with §37.19 based on its review of the lease, discussions with Trump Hotel LLC representatives, and documents submitted by them. See GSA Letter, p.1 (Mar. 23, 2017).

Did the GSA get the §37.19 analysis right? It seems so, given the arguments that the Trump Hotel LLC lawyers made to support the GSA’s determination. They argue that §37.19, by its plain terms, refers to a prospective event — the subsequent admittance of an elected official to the lease agreement. Though Trump may have been deemed to be admitted to the lease through his indirect interests in Trump Hotel LLC, that admittance occurred at a time when he was a private person, not an elected official. Thus, no admittance of an elected official has occurred. See GSA Letter, Exhibit 1.B (Letter from Morgan Lewis to Mr. Kevin Terry) (Feb. 10, 2017).

This argument makes sense. Suppose, for example, that an existing co-ed university decided to convert to an institution dedicated to the education of only women, and that it announced “no men shall be admitted to the university.” Suppose further that many men were currently enrolled in the university as of the date of the announcement. Would the university have violated its new rule by virtue of the men’s current enrollment? Of course not. The university would not have “admitted” any male students — they were already enrolled.

Under similar reasoning, no elected official was “admitted” to the GSA lease, or was “admitted” to any benefit arising from it. The lease agreement could have broadly prohibited any elected official from enjoying any benefit under the lease, but it instead prohibits only the admittance of an elected official. Section 37.19 thus differs from a statute like 18 U.S.C. §431, which voids a contract between a member of Congress and the federal government whether he became an elected official “before or after” the contract was entered into. See also Politico (Dec. 3, 2017) (quoting a former senior GSA official’s interpretation of the lease: “The president-elect isn’t going to be ‘admitted’ to the lease, he’s already the tenant.”).

But it’s perhaps possible to read “admitted” in a different way, as a synonym for “permitted to enjoy.” Under this interpretation, the GSA lease flatly bars any elected official from being “permitted to enjoy any share or part of this Lease, or to enjoy any benefit that may arise therefrom.” And interpreted this way, the language would prohibit President Trump from enjoying any share or benefit, without regard to when he took office. The Trump Hotel LLC may have anticipated this in arguing that any contractual ambiguities over “admitted” must be interpreted against the drafter (here, the GSA). See Trump Hotel LLC Letter of Feb. 17, 2017, n.20.

In any event, the Trump Hotel LLC lawyers also present a second argument. They argue that even if Trump’s taking of office constituted an admittance, his absence of any direct participation in the lease means that §37.19 has not been breached.

Section 37.19 contemplates that if a party to the lease is a “publicly held corporation or other entity,” and an elected official acquires an interest in such an entity, no violation will arise if the lease operates “for the general benefit of such corporation or other entity,” rather than for the benefit of the elected official. The Trump Hotel LLC lawyers argue that the lease is in fact for the benefit of Trump Hotel LLC, and not a sham designed to benefit President Trump personally. Probably to bolster this alternative argument, the Trump Hotel LLC has amended its internal operating agreement such that no distributions will be made to any entity in which President Trump owns an interest. (Trump maintains no direct ownership in Trump Hotel LLC.) See GSA Letter, Exhibit 1.B (Letter from Morgan Lewis to Mr. Kevin Terry) (Feb. 17, 2017), and Exhibit 1.C (Letter from Morgan Lewis to Mr. Kevin Terry) (Mar. 20, 2017).  See also Contract With Corporation Partly Controlled by Congressman, 39 U.S. Op. Atty. Gen. 165, 1938 WL 1491 (May 19, 1938) (statutory prohibition regarding contracts between the federal government and public officials did not apply where a Congressman was the president of and owned 30% of the contracting entity).

The Trump Hotel LLC’s alternative “entity” argument may very well be correct, though it is not as strong as the admittance argument. The exception in §37.19 applies to interests acquired in a “publicly held corporation or other entity,” but it’s unclear whether the “other entity” can be an entity that, like Trump Hotel LLC, is not publicly traded. (That potential interpretation, as well as the alternative one, does some degree of violence to the contractual language.) Also, where an elected official owns a majority equity interest in an entity, it’s at least plausible to argue that any benefit provided to the entity is not “for the general benefit of such corporation or other entity,” but rather is a benefit provided for the elected official who owns a majority equity stake in that entity. Cf. 39 U.S. Op. Atty. Gen. 165, 171 (reserving on whether to respect a corporation established by a Congressman solely to avoid statutory contracting prohibitions). Last, the Trump Hotel LLC’s plan to prohibit current distributions to Trump does not foreclose the possibility that he has benefited from the lease agreement, where the otherwise undistributed amounts increase President Trump’s capital account and therefore increase his potential future distributions.

The Trump Hotel LLC lawyers cite some authorities in favor of their entity argument, not further discussed here, and the counterarguments presented here are not the only items relevant to the analysis. But it is fair to say that the entity argument raises some thorny issues, especially as compared to the stronger admittance argument.

Regardless, the GSA was apparently persuaded by Trump Hotel LLC’s arguments. It has issued Trump Hotel LLC an “estoppel certificate,” meaning that the entity can conclusively rely on the GSA’s §37.19 determination.

But this does not necessarily mean the controversy over the GSA lease has ended. A Washington, D.C. restaurant, Cork, has filed a lawsuit against Trump Hotel LLC and President Trump, and the lease may figure into that controversy. Cork’s complaint assumes and obliquely relies on a violation of §37.19, but that litigation is in an early stage, and Cork still has plenty of time to finesse its litigation approach to take into account the recent GSA letter. The GSA lease thus could remain relevant in that litigation, depending on how things go.

On the Congressional side, two representatives have expressed significant dismay over the GSA’s decision. They may themselves potentially make further inquiries, which could bring additional legislative attention to the GSA lease. Or, they may prod GSA officials to further investigate Mr. Terry’s decision on behalf of the agency, and an investigation into the propriety of his determinations would renew the focus on §37.19.

Also, whatever the legality of the GSA lease, critics have largely couched their complaints in terms of broad conflicts-of-interest questions or policy issues, not in terms of careful legal arguments. Thus, though the GSA seems to have relied on the proper interpretation of §37.19, or, at the very least, relied on a permissible interpretation, there remains the political issue of whether it is appropriate for President Trump to “sit on both sides of a transaction.” Consequently, we will probably continue to hear policy-based complaints about the Trump Hotel, even though the GSA found that §37.19 has not been violated.

Follow me on Twitter: @AndyGrewal

This post may be occasionally updated.

*The full text of §37.19 provides:

No member or delegate to Congress, or elected official of the Government of the United States or the Government of the District of Columbia, shall be admitted to any share or part of this Lease, or to any benefit that may arise therefrom; provided, however, that this provision shall not be construed as extending to any Person who may be a shareholder or other beneficial owner of any publicly held corporation or other entity, if this Lease is for the general benefit of such corporation or other entity.

 

This entry was tagged .

About Andy Grewal

Law Professor, University of Iowa

Cite As: Author Name, Title, Yale J. on Reg.: Notice & Comment (date), URL.

Leave a Reply

Your email address will not be published. Required fields are marked *