Campaign Funds Seizure Decision Could Have Broader Implications

Campaign funds may not be as independent from the candidate as you think.
Last year, Georgia state Representative Jill Chambers faced a tough re-election campaign. Her electoral prospects became even worse when her business folded and her financial troubles forced a split with her husband. Two weeks before Election Day, she filed for Chapter 13 bankruptcy. Unsurprisingly, she was one of a handful of Georgia Republicans to lose in 2010.
During bankruptcy proceedings, Wachovia Bank (which is now owned by Wells Fargo) froze an account in Chambers’s name that contained $60,000 in campaign contributions. On May 9, a Georgia bankruptcy court upheld the freeze and directed the account’s funds to be delivered to Miami Circle LLC, the landlord of Chambers’s former business location, to whom she owed approximately $140,000.
“The law is rather clear here,” says Marc Hershovitz, the attorney representing Miami Circle, who was also general counsel to former Georgia Democratic Gov. Roy Barnes. “Politicians filing for bankruptcy doesn’t happen all the time. It is not a good election strategy.”
Hershovitz says that the “anti-alienation” provision of the bankruptcy code is at issue here, and that the provision requires all assets in a debtor’s name to be brought into a bankruptcy estate—including campaign funds. Had Chambers organized her campaign as a corporation, however, Hershovitz says that it would have been far more difficult to seize the funds.
In the case brief, Hershovitz regularly cited Denton v. U.S. Bankruptcy Trustee Seals, a case in which former Texas state Rep. Betty Denton encountered a similar situation. Like Chambers, Denton had filed for bankruptcy, had campaign funds in her name, and had not incorporated her campaign. In response, Michael Rethinger, Chambers’s lawyer, argued unsuccessfully that Georgia’s bankruptcy law differs from Texas’s enough for the court to reach a different verdict.
Cleta Mitchell, a campaign finance attorney for the Washington, D.C.–based firm Foley & Lardner LLP, is not surprised by the circumstances of this case and says she frequently encounters candidates who handle their campaign finances carelessly. “I’m always shocked by how people wouldn’t dream of opening a multimillion dollar business and not hire a lawyer, but people enter the political arena daily, set up accounts and committees, and run hundreds of thousands and even millions into accounts and don’t think they need a lawyer or an accountant,” she says.
Nonetheless, Mitchell takes issue with the judge’s decision in this case. “Yes, [Chambers’s campaign] should have been incorporated,” she says. “But I’m not sure how that would have impacted this case.” Mitchell argues that the process of opening a campaign account, registering a campaign committee as a political organization, and getting the identification necessary to start fundraising creates a de facto distinct campaign identity that is separate from the candidate as a person.
“A campaign is a separate legal entity,” she says. “It has a separate tax ID number. It files a different tax return. It is a whole different legal entity. I don’t know how just incorporating it would have made a difference in this case.”
Mitchell believes that Chambers did not have the resources to educate the court on the nature of campaign finances and that the judge made a decision based on the compelling nature of Hershovitz’s arguments. “Happens every day,” says Mitchell. “One side makes a bad argument, and the judge makes a bad decision.”
“With all due respect, it would have been a completely different situation [had Chambers incorporated],” contends Hershovitz. “There is no more fundamental difference than a corporation, which has a completely separate legal existence than its shareholders.”
Regardless of the validity of the Georgia court’s decision, J.J. Balaban, a principal consultant with the Democratic firm the Campaign Group, believes that it is unlikely that this issue will be repeated often enough to be instructive for political professionals.
“The implications are probably limited,” he says. “If you declare bankruptcy [while running for office], having your campaign funds taken by your creditors is only one of several of your problems.”Noah Rothman is the online editor at C&E. E-mail him at nrothman@campaignsandelections.com