BILL ANALYSIS SENATE JUDICIARY COMMITTEE Senator Ellen M. Corbett, Chair 2009-2010 Regular Session AB 2426 (Bradford) As Amended May 10, 2010 Hearing Date: June 22, 2010 Fiscal: No Urgency: No SK:jd SUBJECT Surrogacy Facilitators DESCRIPTION This bill would regulate nonattorney surrogacy facilitators by requiring them to direct a client to deposit all client funds into either an independent, bonded escrow account or a trust account maintained by an attorney. Under the bill, those funds could only be disbursed by the attorney or escrow agent as provided in the agreements between the parties. BACKGROUND Under existing law, surrogacy facilitators are not licensed or regulated. Although there are very few statistics on surrogacy, the U.S. Centers for Disease Control and Prevention tracks births by gestational surrogates (where the surrogate is not biologically related to the child). From 2001 to 2006, the number of gestational surrogates doubled to 1,042, nationwide. Couples unable to have children on their own are increasingly turning to surrogate mothers. This increase in the use of surrogates has led to a growth in surrogate brokers who promise to match a couple with a surrogate mother. Prospective parents often pay large fees to surrogacy facilitators to help them in their desire to have a baby. These fees, which appear to range from $40,000 to more than $100,000, are intended to cover the facilitator's services in matching families and surrogates, as well as the surrogate's medical bills, prescriptions, and legal arrangements. Recent reports indicate that, unfortunately, some surrogacy (more) AB 2426 (Bradford) Page 2 of ? facilitators are engaged in surrogacy scams in which they collect funds from a client, but never pass along those payments to the surrogate, as promised. In one case, a company called SurroGenesis, based in Modesto, stopped making payments to surrogates and closed operations. The president of the company is alleged to have stolen as much as $2 million from clients. Some couples lost nearly $90,000 that they had put in an escrow account with an escrow company that was supposed to be safeguarding the clients' money. Instead, the president of SurroGenesis was listed as the registered agent for the escrow company, which was supposed to be independent and bonded. As a result, several pregnant surrogates did not receive payments to cover expenses or, in the case of one surrogate who was confined to bed rest, lost wages. That surrogate apparently received an eviction notice because of the financial situation. In another case, a Sacramento-area woman was charged with 19 counts of grand theft for stealing tens of thousands of dollars from hopeful parents. Under existing law, would-be parents and surrogates may be able to bring an action against a surrogacy facilitator engaged in a scam for fraud, breach of contract, misrepresentation, or similar causes of action. These actions may be limited, however, if the facilitator cannot be located or is judgment-proof. As a result, this bill focuses on the front end of the process, attempting to address this growing industry and guard against abuses by requiring nonattorney surrogacy facilitators to direct a client to deposit all client funds into either an independent, bonded escrow account or a trust account maintained by an attorney. Those funds cannot be accessed directly by a surrogacy facilitator, and instead may only be disbursed by the attorney or escrow agent as provided in the agreements between the parties. CHANGES TO EXISTING LAW Existing law does not license or regulate the practice of surrogacy facilitators. Existing law defines "assisted reproduction" as conception by any means other than sexual intercourse and "assisted reproduction agreement" as a written contract that includes a person who intends to be the legal parent of a child or children born through assisted reproduction and that defines the terms of the relationship between the parties to the contract. (Fam. Code Sec. 7606.) AB 2426 (Bradford) Page 3 of ? Existing Rules of Professional Conduct require attorneys to deposit client funds in a trust account for the client's benefit and keep the funds separate from the attorney's own funds. (California Rules of Professional Conduct, Rule 4-100.) This bill would require a nonattorney surrogacy facilitator to direct a client to deposit all client funds into either an independent, bonded escrow account or a trust account maintained by an attorney. This bill would provide that the funds deposited in the escrow or trust account may only be disbursed by the attorney or escrow agent as provided in the assisted reproduction agreement and fund management agreement. This bill would not apply to funds that are both: (1) paid directly to a medical doctor for medical services or a psychologist for psychological services; and (2) are not provided for in the fund management agreement. This bill would define a "surrogacy facilitator" as a person or organization that engages in advertising for the purpose of soliciting parties to an assisted reproduction agreement or acting as an intermediary between those parties. Surrogacy facilitator would also include a person or organization that charges a fee or other valuable consideration for services rendered regarding an assisted reproduction agreement. This bill would provide that a "nonattorney surrogacy facilitator" is a surrogacy facilitator who is not licensed to practice law in California. This bill would specify that "assisted reproduction agreement" has the same meaning as defined in Family Code Section 7606(b) and would define "fund management agreement" as the agreement between the intended parents and the surrogacy facilitator relating to the fee or other valuable consideration for services rendered by the surrogacy facilitator. COMMENT 1. Stated need for the bill The author writes: Over the past few years, there have been many incidences in AB 2426 (Bradford) Page 4 of ? which a surrogacy agency suddenly closes its doors and embezzles millions of dollars from their clients. Just last year, the Los Angeles Times reported that a Modesto-based surrogacy practitioner who suddenly and unexpectedly closed its doors, failed to account for more than $2 million in its customers' funds. When this type of embezzlement occurs, surrogates are left mid-pregnancy and some clients who have handed over their life's savings in pursuit of a genetically related child are left without recourse. It is important that agencies place unearned funds into an independent, bonded escrow account because in order for a company to be licensed as an escrow company in California, they have to prove they have five years of actual escrow experience, demonstrate a minimum level of financial strength (CA requires that the company have $50,000 in liquid assets), submit to a background check by the state, purchase one or more Bonds (to cover such things a misappropriation of trust funds), and go through an application process. Non-attorney facilitators should be allowed to use an attorney trust account to store client funds. . . . The accounts are regulated by the State, and the attorney is accountable to the State Bar for every penny held in trust. The attorney can be disciplined for the slightest oversight, including the suspension or loss of the attorney's license to practice law. The interest earned on the account goes to the State Bar in which they practice, so they are not gaining interest on the funds they hold, and there is no financial advantage to holding your funds for longer than necessary. The State Bar also mandates the type of bank in which the funds can be held, and the amount of insurance that must be provided by the bank. 2. Bill would restrict nonattorney surrogacy facilitators' access to client funds This bill would require a nonattorney surrogacy facilitator, as defined, to direct his or her client to deposit all client funds into a trust account maintained by an attorney or an independent bonded escrow account. The surrogacy facilitator would not be able to access the funds directly. Instead, client funds could be disbursed by the attorney or the escrow agent pursuant to the assisted reproduction agreement and the fund management agreement. AB 2426 (Bradford) Page 5 of ? This provision is intended to provide a measure of safekeeping by directing that client funds be deposited into either a bonded escrow account or a trust account maintained by an attorney and strictly restricting the use and disbursement of those funds. Because surrogacy facilitators would not be able to access the funds until they had been disbursed by the attorney or escrow agent as agreed upon, the author is hopeful that this bill will help to reduce incidences like those described above in which surrogates and intended parents were harmed. The SurroGenesis case, in particular, is especially troubling because the president of that company was also listed as the registered agent for the escrow company that held the funds of many of SurroGenesis' clients who were apparently referred to the escrow company by SurroGenesis. While the escrow company was supposed to be independent and bonded, it clearly was not truly "independent" from the surrogacy agency. In order to ensure that the escrow companies used by clients of surrogacy facilitators are truly separate from the facilitator, the author has agreed to amend the bill as follows: Suggested amendments : On page 2, line 26 after "depository" insert "maintained by a licensed, independent, bonded escrow company" On page 2, between lines 27 and 28, insert "(b) For purposes of this section, a nonattorney surrogacy facilitator may not have a financial interest in any escrow company holding client funds. A nonattorney surrogacy facilitator and any of its directors or employees shall not be an agent of any escrow company holding client funds. " On page 2, line 28, after "may" add "only" 3. Bill applies only to surrogacy facilitators who are not licensed attorneys This bill's requirement that a nonattorney surrogacy facilitator direct his or her client to deposit all client funds into a trust account maintained by an attorney or an independent bonded escrow account would not be imposed on licensed attorneys who are acting as surrogacy facilitators. Those attorneys must AB 2426 (Bradford) Page 6 of ? already comply with the strict requirements imposed under the Rules of Professional Conduct which require attorneys to deposit client funds in a trust account for the client's benefit and keep the funds separate from the attorney's own funds. Attorneys must also maintain complete records of all client funds and retain those records for at least five years after the distribution of the funds. Support : None Known Opposition : None Known HISTORY Source : Author Related Pending Legislation : None Known Prior Legislation : None Known Prior Vote : Assembly Judiciary Committee (Ayes 10, Noes 0) Assembly Floor (Ayes 76, Noes 0) **************