BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 2426| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 2426 Author: Bradford (D) Amended: 6/29/10 in Senate Vote: 21 SENATE JUDICIARY COMMITTEE : 3-1, 6/22/10 AYES: Corbett, Hancock, Leno NOES: Harman NO VOTE RECORDED: Walters ASSEMBLY FLOOR : 76-0, 5/13/10 (Consent) - See last page for vote SUBJECT : Surrogacy facilitators SOURCE : Author DIGEST : This bill regulates nonattorney surrogacy facilitators by requiring them to direct a client to deposit all client funds into either an independent, bonded escrow account, as specified, or a trust account maintained by an attorney. This bill provides that those funds could only be disbursed by the attorney or escrow agent as provide in the agreements between the parties. ANALYSIS : 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 CONTINUED AB 2426 Page 2 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. (Family Code Section 7606.) 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 requires a nonattorney surrogacy facilitator to direct a client to deposit all client funds into either an independent, bonded escrow deposition maintained by a licensed independent bonded escrow company or a trust account maintained by an attorney. This bill provides 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 does 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 defines 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 specifies that for purposes of this bills provisions, 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. CONTINUED AB 2426 Page 3 This bill provides that a "nonattorney surrogacy facilitator" is a surrogacy facilitator who is not licensed to practice law in California. This bill specifies 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. 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 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, CONTINUED AB 2426 Page 4 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. Comments The author writes, "Over the past few years, there have been many incidences in 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 CONTINUED AB 2426 Page 5 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." FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No ASSEMBLY FLOOR : AYES: Adams, Ammiano, Anderson, Arambula, Bass, Beall, Bill Berryhill, Tom Berryhill, Blakeslee, Block, Blumenfield, Bradford, Brownley, Buchanan, Charles Calderon, Carter, Chesbro, Conway, Cook, Coto, Davis, De La Torre, De Leon, DeVore, Emmerson, Eng, Evans, Feuer, Fletcher, Fong, Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick, Gilmore, Hagman, Hall, Harkey, Hayashi, Hernandez, Hill, Huber, Huffman, Jeffries, Jones, Knight, Lieu, Logue, Bonnie Lowenthal, Ma, Mendoza, Miller, Monning, Nava, Nestande, Niello, Nielsen, V. Manuel Perez, Portantino, Ruskin, Salas, Saldana, Silva, Smyth, Solorio, Audra Strickland, Swanson, Torlakson, Torres, Torrico, Tran, Villines, Yamada, John A. Perez NO VOTE RECORDED: Caballero, Norby, Skinner, Vacancy RJG:do 6/30/10 Senate Floor Analyses SUPPORT/OPPOSITION: NONE RECEIVED CONTINUED AB 2426 Page 6 **** END **** CONTINUED