BILL ANALYSIS Ó AB 1624 Page 1 ASSEMBLY THIRD READING AB 1624 (Gatto) As Amended March 15, 2012 Majority vote JUDICIARY 8-0 ----------------------------------------------------------------- |Ayes:|Feuer, Wagner, Atkins, | | | | |Dickinson, Huber, Jones, | | | | |Monning, Wieckowski | | | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- SUMMARY : Clarifies that a person's ownership interest in a multi-party account is based on that person's net contribution to the account and makes corresponding changes relating to rights of survivorship with respect to withdrawn funds. Specifically, this bill : 1)Provides that, during the lifetime of all parties, a multi-party account belongs to the parties in proportion to the net contributions of each, unless there is clear and convincing evidence of a different intent. 2)Provides that withdrawal of funds from a multi-party account by one party eliminates the right of survivorship with respect to the funds withdrawn to the extent of the withdrawing party's net contribution to the account. 3)Specifies that, notwithstanding the above, if one party makes a withdrawal from the account and uses the funds withdrawn solely for the benefit of another party, and the benefitted party or its estate, heir, or agent subsequently seeks to recover a proportion of the amount withdrawn from the party that made the withdrawal, a court may, at its discretion and in the interest of justice, reduce the benefitted party's ownership interest in the amount withdrawn. 4)Clarifies that financial institutions have no responsibility to inquire into the source of deposited funds or the use of funds withdrawn from an account; to determine the net contribution of parties to an account; or, to limit withdrawals based on a party's net contribution to an account. AB 1624 Page 2 FISCAL EFFECT : None COMMENTS : This bill seeks to overturn Lee v. Yang (2003) 111 Cal. App. 4th 481, a decision that the author, supporters, and California Law Revision Commission believe overturned the long-standing interpretation of California's Multi-Party Accounts Law (CAMPAL). First enacted in 1990, CAMPAL regulates the ownership interests of parties to a joint account in a bank, credit union, or other financial institution. As a general rule, the ownership interest of non-married parties is based on their respective net contributions to the account, unless a written agreement or some other evidence indicates a different intent. (The ownership interests of married couples are additionally governed by community property principles and are not affected by this bill.) If the net contributions to the account cannot be determined, or if a different intent is not indicated, the parties to the account are generally assumed to have an equal interest in the account. Until 2003, it was generally assumed that a party retained a proportional ownership interest in any funds withdrawn by another party. However, in Lee v. Yang, a California appellate court held, by a very strict reading of the statute, that the ownership interest of the parties only applied to the "sums on deposit" - a phrase that is used in the relevant code section. To the court this meant that once funds were withdrawn - and no longer "sums on deposit" - they were no longer subject to the proportional interest rule. Who, then, did own the withdrawn funds? According to the court, the withdrawn funds are presumed to be a "gift" to the withdrawing party, and the other party no longer holds any ownership interest in those withdrawn funds. One need only look at the facts of Lee v. Yang to appreciate the inequities that such a ruling could create and to understand why the decision has led to demands that the Legislature overturn the ruling. Lee v. Yang involved a couple that had created joint bank accounts after they became engaged to be married, but before they actually wed. Prior to the planned wedding date, the relationship unraveled and the coupled decided to call off the wedding. In addition to backing out of the wedding, however, Janet Yang took the liberty to withdraw money from the couple's three joint bank accounts. Holden Lee sued Yang (for "conversion" among other things), his primary contention being AB 1624 Page 3 that he owned a portion of the funds that Yang had unilaterally withdrawn from the bank accounts. (Lee v. Yang (2003) 111 Cal. App. 4th 481, 484-486.) The trial court (applying Civil Code Section 683 on joint tenancies instead of applying CAMPAL) concluded that because the account was a joint tenancy each party had a right to withdraw the funds. According to the trial court, Lee had failed to establish that there was any agreement restricting Janet Yang from withdrawing the funds. Although the Court of Appeal held that the trial court had erred in applying Civil Code Section 683 instead of CAMPAL, it nonetheless affirmed the trial court's holding that Lee retained no ownership interest in the withdrawn funds and therefore had no grounds to recover. (Id. at 486-489.) The court based its decision on a very literal reading for Probate Code Section 5301 of CAMPAL. That section states that "Ýa]n account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sums on deposit , unless there is clear and convincing evidence of a different intent." ÝEmphasis added.] The court held that the statute's "rule of proportional ownership" was "not relevant to the power of a party to withdraw funds from an account." Any limitation on the power to withdraw funds, the court reasoned, would be determined "by terms of the account in question." In the absence of terms to the contrary, Yang, as a signatory to the account, was free to withdraw funds without Lee's permission. Having determined Yang's right to withdraw the funds, the court then turned to the question of whether Lee could seek reimbursement based on his net contributions to the account. The Court concluded that he could not, because the proportionate ownership rule, based on net contributions, only applies to the "sums on deposit" - that is, the balance in the account at any given time. Conceding that the statute "is not clear on this point," the court nonetheless found that the proportionate ownership rule "does not articulate a rule of ownership as to funds withdrawn by a party." Citing a parallel rule in federal gift tax regulations, the Court concluded that withdrawal from an account effectively makes a "gift" to the withdrawing party, and the depositing party no longer has any claim to it. (Id. at 490-491.) For the majority, therefore, the effect of the withdrawal is to vest ownership in the withdrawing party, while severing any ownership interest by the other party to the account. The dissenting opinion in Lee v. Yang agreed with the majority AB 1624 Page 4 insofar as CAMPAL was the appropriate statute to apply, but disagreed with the majority's interpretation of that statute. First, the dissent noted that Yang's contractual right to withdraw funds did not give her a property right to take and keep Lee's proportion of the funds. Property rights in the funds were determined not by the contractual right to withdraw, the dissent argued, but by a party's net contribution to the account. The dissent rejected the applicability of the federal gift tax provision, and instead cited the comments to the Uniform Probate Code - upon which the California law is based - as to the effect of withdrawal: "Presumably, overwithdrawal leaves the party making the excessive withdrawal liable to the beneficial owner as a debtor or trustee. Of course evidence of intention by one to make a gift to the other of any sums withdrawn by the other in excess of his ownership should be effective." (Id. at 498, quoting Recommendation Relating to Non-Probate Transfers, 15 Cal. Law Revision Com. Rep. at pp. 1642-1643; italics added by the dissent.) According to the dissent, this comment not only anticipates that a party making an excessive withdrawal would be liable to another party for its proportional interest, but it also suggests, contrary to the majority, that a withdrawal is not a "gift" unless there is evidence of such an intention. The dissent concluded by noting a likely consequence of the majority view: "A joint tenancy account holder with an urgent need for cash, or merely harboring a vengeful motive, can wipe out an entire account with impunity unless the owner of the funds can prove that there had been a prior, enforceable agreement restricting the power of the withdrawal or the use of the funds." (Id. at 500-501.) When initially enacted, the CAMPAL provisions were largely based upon the recommendations of the California Law Revision Commission (CLRC). (See Recommendation Relating to Non-probate Transfers, 16 Cal. L. Revision Com. Reports 129 (1982); see also Recommendations Relating to Multiple-Party Accounts in Financial Institutions, 20 Cal. L. Revision Com. Reports 95 (1990).) Persuaded that the dissenting opinion in Lee v. Yang more accurately captured the intent of CAMPAL than did the majority opinion, CLRC issued a June 2004 report that recommended reversing the rule of Lee v. Yang by making "clear that ownership of funds withdrawn from a joint account is based on the proportionate contributions of the parties to the account." This could be done, the report noted, by striking from Section 5301 of Probate Code the clause "sums on deposit," which the AB 1624 Page 5 majority in Lee v. Yang had so heavily relied upon for its conclusion that the proportional ownership rule only applied to the balance that remained in the account, and not to any funds that had been withdrawn. The CLRC also recommended clarification of the existing rule that withdrawal of funds from a joint account cuts off the right of survivorship in the amounts withdrawn, but only "to the extent of the Ýwithdrawing] party's net contribution to the account." In other words, since a non-withdrawing party retains a proportional ownership interest in withdrawn funds, the withdrawing party can only cut off survivorship rights to the extent of the withdrawing party's proportional interest in the withdrawn funds. (See Ownership of Amounts Withdrawn from Joint Account, 34 Cal. L. Revision Com. Reports 199 (2004).) The first bill attempting to enact the CLRC recommendations was introduced as AB 69 (Harman) in 2005. That bill passed unanimously both out of the Assembly Judiciary Committee and off the Assembly Floor, but it was never heard by the Senate Judiciary Committee. Last year's SB 273 (Harman) tracked the CLRC recommended language exactly, but that bill also was never heard by the Senate Judiciary Committee. The concerns about SB 273 reportedly concerned the potential impact of reversing Lee v. Yang, especially in situations where one party signs on to a joint account in order to spend money for the benefit of the other party to the account. In particular, the most troubling scenario apparently involved a friend or relative who becomes a signatory to a joint account in order to spend money on behalf of an elderly person who no longer has the capacity to manage his or her money. A friend who innocently and in good faith withdraws and spends money on the other party's behalf, but who does not keep meticulous records or receipts, could potentially be liable to the heirs or estate of the elderly person for the withdrawn funds. The author and supporters of this bill concede this possibility and admit that under the rule of Lee v. Yang the innocent friend would be protected, since the elderly person (and thus the elderly person's heirs or estate) would have no ownership interest in the withdrawn funds. However, Lee v. Yang resolved the problem only by creating the equally inequitable situation that would allow one party to a joint account to unilaterally deplete the account and leave the other party with no recourse. Moreover, in the scenario raised in response to last year's bill, the elderly person who relies upon another to withdraw and spend money on his or her behalf also needs AB 1624 Page 6 protection. Under Lee v. Yang, the elderly person would have no legal interest, and therefore no legal means of recovering the withdrawn funds unless he or she could make a case under the state's elder financial abuse laws. Under the rule proposed by this bill, the elderly person would retain an ownership interest in the withdrawn funds equal to the amount of his or her contribution, unless the withdrawing party could convince a court that the funds had been spent to benefit the elderly person. As introduced, this bill was identical to last year's SB 273. However, in order to address the concerns noted above raised about last year's bill, the author amended the bill to offer some protection to the innocent friend or family member who signs on to a joint account in order to spend money to benefit another party to the account. Specifically, the amendment now in the bill provides that "if one party makes a withdrawal from the account and uses the funds withdrawn solely for the benefit of another party, and the benefitted party or its estate, heir, or agent subsequently seeks to recover a proportion of the amount withdrawn from the party that made the withdrawal, a court may, at its discretion and in the interest of justice, reduce the benefitted party's ownership interest in the amount withdrawn." This amendment appears to address the concerns raised earlier while at the same time preserving the assumption that the non-withdrawing party retains a proportional interest in the withdrawn funds. Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334 FN: 0003164