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  
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          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.)    
                                                                      



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           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  
                                                                      



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            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.  

                                                                      



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          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  
                                                                      



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          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)

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