A settlement struck in a lawsuit targeting the so-called "LLC loophole" in New York Election law yielded a $10,000 penalty and could pave the way to future state cases challenging limited liability company donations.
Because this one was settled out of court, however, it's unclear whether the strategy of the plaintiff, State Board of Elections Chief Enforcement Counsel Risa Sugarman, will ultimately hold up to legal scrutiny and curb donors' long-term use of a quirk in Election law. Still, legal experts said, the payment secured by Sugarman and the precedent of the settlement could act as a near-term deterrent to LLC giving.
The LLC loophole emerged from the 1996 State Board of Elections ruling that any single limited liability company should be treated as if it were an individual under Election law. The ruling has allowed LLCs to give $150,000 annually to campaigns, and enabled real estate developers, who frequently set up LLCs for individual properties for tax and legal purposes, to give multiple maximum donations to a candidate. Neither the State Legislature nor Board of Elections has closed the loophole.
The civil lawsuit quietly filed in July pitted Sugarman against little-known former Brooklyn Assembly candidate Shirley Patterson and her campaign treasurer, Renee Collymore. It challenged the idea that coordinated donations to Patterson's campaign made though various limited liability companies allegedly controlled by the same person count separately under donations limits. The suit contended that several donors exceeded the $4,100 donation limit for an individual in the race, and sought to dock the defendants tens of thousands of dollars.
In the settlement agreement, Patterson's campaign committee acknowledged it had taken donations that exceeded limits for individual donors and "knew, or should have known" that contributions from LLCs listed in Patterson's campaign disclosure filings were from "a source other than the entity."
Sugarman contends this violated a State Election law provision that campaign committees cannot "knowingly receive" or list in campaign finance records a contribution in "any name other than that of the person or persons by whom it is made."
Patterson and Collymore signed the settlement agreement in late August and Sugarman signed it Thursday. The $10,000 payment from the campaign committee, technically a forfeiture, is going to the State's coffers, not back to donors who allegedly exceeded contribution limits, Sugarman said. She declined to say whether the settlement set any precedent regarding the LLC loophole, but maintained one motive was to shed light on contributions through oddly named limited liability companies.
"Candidates who take money should know where it's coming from," Sugarman said. "They should know who the LLC is, not just that a donation is coming from 'LMNOP' LLC."
But requiring that candidates list donations under the name of the person behind an LLC, not just the LLC itself, would also have a profound impact on limited liability companies' spending in New York elections.
Election lawyer Laurence Laufer said the case would remind candidates that limited liability company and other corporate donations would be subject to legal scrutiny for possible "pass through" funding meant to circumvent contribution limits.
"Her case is a reminder that it's not so simple to take money through the LLC loophole," Laufer said. "Individuals and LLCs may have the same contribution limit under law, but they are subject to very different levels of scrutiny and risk. Although this settlement is not precedent, it should have a significant educational and deterrent effect."
Whether future candidates targeted by Sugarman in a similar manner would also settle their cases is another question, especially if they have deeper pockets than Patterson to pay legal bills. Patterson's campaign was viewed by legal experts as a fairly simple test case for Sugarman to probe the limits of the LLC loophole because of the small amounts of donations and because it ended just in May.
Sugarman's complaint contended prominent New York City developer Kevin Maloney controlled two limited liability companies that gave Patterson a total of $5,000, or $900 above the limit for individual in the Assembly race. The suit contended the LLCs actually had no legitimate separate existence from Maloney despite the fact the LLCs had been set up years ago and held real property, strongly suggesting they had actual business purposes. Sugarman's lawsuit never got to the discovery stage, at which more evidence that the LLCs were used to circumvent contribution limits could possibly have been collected.
Carone said he was prompted to agree to the settlement by other issues regarding over-the-limit donations to Patterson. He termed his clients "neophytes to the complicated world of election law" and emphasized the settlement was not an admission of civil or criminal liability.
The state's biggest political donor, the Long Island developer Glenwood Management, has routinely given multiple donations through LLCs listing the same Long Island address as Glenwood, including to Patterson, Gov. Andrew Cuomo and Attorney General Eric Schneiderman. But Sugarman did not name Glenwood as a party in the Patterson case.
After reviewing the settlement Tuesday, Election lawyer Sarah Steiner criticized Sugarman for never conducting discovery showing whether or not the LLC donations were legitimate. "It's sort of a success as a fishing expedition, but as an attack on the LLC loophole, it falls short," Steiner said. "I'm opposed to the LLC loophole, but while it's open and legal, you need to be very careful about the kind of speech you stifle."
Sugarman, who was appointed by the governor a year ago, has faced questions about her independence from the Cuomo administration. The suit would appear to bolster Sugarman's claims of independence. While she declined to say whether the settlement means she would now go after the state's biggest recipients of LLC donations, she vowed her enforcement unit would keep pressing cases. "We're not going to stop with this settlement," Sugarman said.
NYC Wins When Everyone Can Vote! Michael H. Drucker
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