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Nonpayments Don’t Spur FEC Penalties

The Federal Election Commission recently decided against penalizing a House Member who chose to keep his campaign cash rather than pay down significant debts, but campaign finance experts said the decision is unlikely to inspire a new wave of unpaid bills among Congressional candidates.

In a July decision released last month, the FEC voted against taking action over allegations that Rep. Dean Heller’s (R-Nev.) re-election committee violated campaign finance laws by accepting “excessive or prohibited contributions” from two Nevada-based vendors. The review focused on the Heller campaign’s decision to maintain a debt of more than $250,000 to the vendors over a two-year period, despite having sufficient funds to pay off the bills.

The FEC also reviewed whether the vendors made corporate contributions to Heller’s campaign in violation of the law, but it ultimately voted not to issue any sanctions.

Although the FEC regularly reviews incidents in which campaigns maintain debts to vendors, campaign finance experts said the Heller case is unusual because it involves a candidate with a healthy campaign bank account rather than an instance in which a candidate fails to win an election and can no longer raise sufficient funds.

“The FEC has dealt with a lot of these unpaid-debts-as-contributions cases, but they almost always involve a vendor owed money by a candidate who lost and can no longer realistically raise money to pay off the debt,” said Brett Kappel, an attorney at the firm Arent Fox. “The thing that makes this case different is that the candidate had enough money to pay off the debt but wanted to save his resources for his next campaign.”

According to a report issued in April by the FEC’s Office of General Counsel, Heller’s campaign reported cash-on-hand amounts from $492,000 to more than $1 million at various points between 2007 and 2009.

That report, which focused on the debt that Heller owed to November Inc. and Foundations Inc., noted that the Heller campaign acknowledged it had not used its funds to repay the vendors in full “because Representative Heller likely will need $1.6 million or more for his 2010 re-election efforts, and the campaign must balance the necessity of paying its debts with the financial requirements of the re-election campaign.”

Heller’s campaign also asserted that it placed “a higher priority” on debts owed to other vendors in the 2008 cycle because November Inc.’s co-owners worked for the National Republican Senatorial Committee during that time and the firm “was effectively dormant.”

While the FEC report went on to state that Heller’s explanation “appears to be in tension with the regulations’ requirements,” it found that November Inc. made “commercially reasonable” attempts to collect its debt, citing about $76,000 in payments that the firm received from Heller in the first three months of 2010.

The report likewise found that Foundations Inc., which Heller repaid in full in March 2009, had acted out of a “bonafide business relationship.”

“Because there is insufficient evidence, on balance, to establish that these vendors did not act in the ordinary course of business, we recommend that the Commission take no further action and close the file in this matter,” the report states.

In a July vote, the FEC accepted that recommendation, voting unanimously not to pursue either vendor and issuing a split decision not to pursue the Heller campaign.

Democratic Commissioner Ellen Weintraub cast the only vote in favor of sanctioning the Heller campaign, outlining her objections in a “statement of reasons” filed in August.

“In my view, a committee that has the funds to pay its debts to choose instead to extract an interest-free loan from a vendor in order to fund its campaign activities is not just in tension with the law and regulations, it violates them,” Weintraub wrote.

She added: “Given the choice, a committee would probably always choose to fund present campaign activities rather than use its funds to pay its past debts.”

Kappel suggested other campaigns could use the Heller case to test the boundaries of the law in the future.

“I think that Commissioner Weintraub may be correct that allowing vendors to let campaign debts go uncollected for years after the election may be the beginning of a very slippery slope, even if the commission’s decision in this particular case may have been reasonable,” Kappel said.

But Ken Gross, an attorney at Skadden, Arps, Slate, Meagher & Flom, suggested the decision will not necessarily create a ripple effect among campaigns, noting the five-year statute of limitations on campaign finance violations.

“If the current commission takes action or no action that is inconsistent with precedent or involves an interpretation of the law that has been generally understood to constitute a violation, it does not mean a different set of commissioners down the road may not take a different course and find a violation,” Gross said.

He added: “It has been generally understood that if you are sitting on a pile of cash and you don’t pay your creditors, you are not handling those creditors in a commercially reasonable fashion. There are extenuating circumstances in every case, but I don’t recall that focusing on an upcoming election has ever been considered one of those extenuating circumstances.”

Another individual familiar with campaign finance law noted that campaigns are also unlikely to incur unpaid bills because it could make it more difficult for a candidate to hire other vendors.

“Campaigns will typically try to go as far as they think they can get away with,” the individual acknowledged, but added, “The hazard is if you don’t pay your vendors, it’s hard to get anybody new.”

Heller’s campaign continued to owe debts totaling more than $58,000 to Autumn Productions, which is owned by November Inc., through June 30, according to his most recent campaign finance report.

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