Federal Election Commission Main Page
April 25, 1990
CERTIFIED MAIL
RETURN RECEIPT REQUESTED
ADVISORY OPINION 1989-2
Patricia K. Baker, Treasurer
Dave Baker for Congress
13722 Redhill Avenue, #41
Tustin, California 92680
Dear Ms. Baker:
This responds to your letter dated February 10, 1989,
supplemented by your letter of March 6, 1989, in which you
request an advisory opinion on behalf of Dave Baker for
Congress (the "Committee") concerning application of the
Federal Election Campaign Act of 1971, as amended, (the
"Act") and Commission regulations to the Committee's proposed
payments to a Committee creditor.
Your letters and Commission records reveal that the
Committee is the principal campaign committee of C. David
Baker, an unsuccessful candidate in the June 7, 1988,
Republican primary election in California's 40th
Congressional District. The Committee owes twelve creditors
a total of $78,867.1/ Your inquiry concerns one of these
creditors, Wilcox & Sons, a California corporation, to whom
the committee reportedly owes $10,643.50 for printing
services. Wilcox & Sons has filed a breach-of-contract
action against the Committee and against
__________________
1/ The Committee's Year-End Report for 1988 shows debts and
obligations of $183,946. This total, however, includes
$105,079 owed to Mr. Baker, the candidate, who lent the
Committee $11,000 and also paid $94,079 of the Committee's
debts. Your letter of February 10th states that Mr. Baker
has decided to recharacterize his $105,079 as a gift to the
Committee. This leaves the Committee with debts totalling
$78,867.
Mr. Baker individually in a California state court. The firm
seeks to recover the full $10,643.50 debt plus interest and
attorney fees.2/
The Committee's current bank balance is $5,719.76. You
assert that ";b=ecause of long and drawn out negative
publicity ;during the campaign= . . . the supporters are no
longer there." You further explain that no one would be
willing to buy or lease the Committee's one asset, its list
of contributors, because all Orange County Republicans use
the same lists. You therefore conclude that "at this time
there are no likely future fundraising possibilities."
Your request raises two questions. First, if the
breach-of-contract action by Wilcox & Sons proceeds to
judgment and the judgment goes against the Committee, do the
Act and Commission regulations preclude the Committee's using
all or most of its funds to pay the judgment? Second, if
Wilcox & Sons and the Committee agree to settle the debt for
less than $10,643.50, would the Act and Commission
regulations permit the settlement? Your underlying concern is
that, in view of the Committee's modest bank balance and its
inability to raise additional funds, any substantial payment
to Wilcox & Sons may be considered under the Act to be
unlawful discrimination in favor of one particular Committee
creditor.3/
The Commission has long held that State law governs
whether an alleged debt in fact exists, what the amount of a
debt is, and which persons or entities are responsible for
paying a debt. See, e.g., Advisory Opinion 1975-102 ("In
general, debt claims
_____________________
2/ According to the Committee's July 1988 Quarterly Report,
the Committee incurred its $10,643.50 debt to Wilcox & Sons
between May 19 and June 30, 1988. In June, Wilcox & Sons
billed the Committee for $5,000. The Committee failed to pay
the sum. In July, the firm billed the Committee again and
raised the "threat of a collection agency." In addition to
these bills, the Committee received "numerous phone calls"
from the creditor, who claimed that "the business will go
bankrupt if payment is not made." In February 1989, Wilcox &
Sons filed the breach-of-contract action for the total debt
of $10,643.50.
Your initial letter to the Commission asked whether the
Act would permit the Committee to pay the $5,000 bill. This
inquiry was later modified to take into account the
creditor's lawsuit.
3/ You state that the owners of Wilcox & Sons are neither
relatives nor business associates of C. David Baker, members
of his family, or members of his staff. You also state that
"we have not heard from any other creditor requesting payment
other than the initial billing that was received."
and liabilities are subject to relevant State law, and ;a
political committee's= 'responsibility' for satisfying the
obligations would have to be determined with reference to
those laws"). Therefore, the California court, applying
California law, is the proper forum for determining whether
the Committee breached its contract and, if it did, what
amount it owes Wilcox & Sons. The Act and Commission
regulations do not preclude the Committee's paying the
judgment rendered under State law, although this may require
the Committee to use all or most of its cash on hand.
Wilcox & Sons and the Committee may agree to a
settlement of the Committee's debt for less than $10,643.50--
or for less than the amount of any court judgment, even if
the judgment is for a different sum--provided that the
settlement meets the conditions set out at 11 CFR 114.10.
Under subsection (c) of that regulation, a corporation may
lawfully forgive a debt or settle a debt for less than the
full amount owed only if the corporate creditor has "treated
the outstanding debt in a commercially reasonable manner."
11 CFR 114.10(c). See also 11 CFR 100.7(a)(4). Cf. 2 U.S.C.
§441b(a) (prohibition of corporate contributions).
Subsection (c) explains that a settlement will be
considered "commercially reasonable" if three conditions are
met. First, the creditor made the initial extension of
credit in accordance with Commission regulations.4/ Second,
the debtor political committee or debtor candidate "has
undertaken all commercially reasonable efforts to satisfy the
outstanding debt." And, third, the creditor "has pursued its
remedies in a manner similar in intensity to that employed by
the corporation in pursuit of a non-political debtor."
11 CFR 114.10(c).
When a corporate creditor and a political debtor have
agreed upon a settlement, either or both parties to the
settlement must file a Statement of Settlement with the
Commission for the Commission to review. This document must
report the initial
_____________________
4/ 11 CFR 114.10(a) states in relevant part that a
"corporation may extend credit to a candidate, political
committee, or other person in connection with a Federal
election provided that the credit is extended in the ordinary
course of the corporation's business and the terms are
substantially similar to extensions of credit to nonpolitical
debtors which are of similar risk and size of obligation."
terms of the steps the debtor has taken to satisfy the debt,
and the remedies pursued by the creditor. 11 CFR
114.10(c).5/
The Act and Commission regulations do not prescribe the
priority of creditors' claims. So long as any settlement
that the Committee and Wilcox & Sons may reach satisfies the
Commission's debt settlement requirements, the Committee may
use all or a substantial portion of its funds for the
settlement.
This response constitutes an advisory opinion concerning
application of the Act or regulations prescribed by the
Commission to the specific transaction or activity set forth
in your request. See 2 U.S.C. §437f.
Yours truly,
(signed)
Danny L. McDonald
Chairman for the
Federal Election Commission
Enclosure (AO 1975-102 and FEC Revised Directive No. 3
(effective July 22, 1982))
_____________________
5/ Revised Commission Directive No. 3 (effective July 22, 1982)
explains debt settlement procedures. Under the Directive, an
agreement by a creditor and a political committee concerning
the amount of a disputed debt is not a "debt settlement"
provided that the political committee pays the amount agreed
to. Because your request indicates that the Baker Committee
does not dispute that it owes Wilcox & Sons $10,643.50,
Directive No. 3 will apply to any settlement that the Committee
reaches with Wilcox & Sons.