Footing the Billary

Thanks to Bob and the other Credit Slips authors for having me back. I hope to post about several different things, some more topical than others. The first may be the most topical of all--the presidential campaign.

Now that Hillary has conceded the Democratic primary to Barack Obama, we are left with a question Credit Slips readers might care about: How will she pay off her campaign debt and—more interesting—what if she can’t?
According to filings with the U.S. Federal Election Commission (FEC), which governs these things, as of the end of May, Hillary’s campaign was about $20 million in the red.
Consider the following scenarios:

1. Hillary's Committee receives contributions sufficient to pay off the debt. This is probably the way the federal election law expects things to work. The problem is that individuals are limited to contributions of $2,300, and there is a long history of unsuccessful candidates—famously, John Glenn--who could not pay off their presidential campaign debts.

2. Hillary's Committee doesn’t receive contributions sufficient to pay off the debt, but Hillary picks up the tab. This is possible, and appears permissible under U.S. campaign finance law. But Hillary already “lent” her campaign $10 million. Why? We don’t know, but presumably so that she could repay herself in the event she was able to raise the money from others.

3. Hillary doesn’t pay off the debt and creditors don’t sue. As a general matter, we like the compromise and settlement of claims, and you might think that this would be as true of campaign debts as others. But in fact—for reasons that should be fairly clear on reflection—federal election law is uncomfortable with campaign creditors who forgive debts. The forgiveness might simply be a way around campaign contribution limits.

4. Hillary doesn’t pay off the debt, and creditors sue. Nothing stops creditors from suing an election campaign committee that doesn't pay its debts, and nothing prevents the committee from commencing a bankruptcy case. But an election committee doesn't generally have assets—unless it has avoidance actions under U.S. bankruptcy law or state law causes of action that might recover payments for redistribution to other creditors.
And this is where things get interesting.

Under McCain Feingold, the 2002 federal law that made important (if controversial) changes to U.S. campaign finance law, it appears that Hillary, as the candidate, has an incentive to pay herself first, before other creditors--even if her Committee is insolvent. Why? Because if she doesn’t do so before the conclusion of the Democratic primary (i.e., the Democratic Convention, in August), her repayment is apparently capped at $250,000 under the so-called "Millionaire's amendment." See 11 CFR 116.11(b) (The Millionaire's amendment is being challenged in the Supreme Court on other grounds).

So, it looks like campaign finance law puts a conventional understanding of priority on its head. Here, the “owner” or beneficiary of the Committee—the candidate—would get paid before other creditors. If her Committee were insolvent, and she repaid herself before August, and the Committee is then put into involuntary bankruptcy, can the bankruptcy trustee recover the repayment as a preferential transfer under Bankruptcy Code section 547? Is it akin to a dividend distribution while insolvent, which would be recoverable under state law? Or does McCain Feingold create some kind of defense to these or similar actions?

I’ve written about the uneasy fit between commercial law and campaign finance law, looking in particular at first-amendment (political speech) defenses to fraudulent conveyance actions by insolvent political donors. Jonathan C. Lipson, First Principles and Fair Consideration: The Developing Clash Between the First Amendment and the Constructive Fraudulent Conveyance Laws, 52 U. MIAMI L. REV. 247, 272–303 (1997). Although there is some case law on this, there’s not much. Which suggests that even though campaign committees are often deadbeats, the normal debtor-creditor dynamics—dunning, suit, compromise and/or bankruptcy—do not seem to apply. A recent commentator on NPR observed that "debt retirement is the hardest task in American politics."

So, here are the questions for readers of Credit Slips: What should Hillary and her campaign Committee do? What experiences have you had with campaign finance (or other politically-related) debt? Should we treat political debt differently from, say, home mortgages or commercial paper?