BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 1058
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          SENATE THIRD READING
          SB 1058 (Lieu)
          As Amended  August 22, 2012
          Majority vote

           SENATE VOTE  :31-5  
           
           BANKING & FINANCE   8-2         JUDICIARY           8-2         
           
           ----------------------------------------------------------------- 
          |Ayes:|Eng, Achadjian, Fletcher, |Ayes:|Feuer, Atkins, Dickinson, |
          |     |Gatto, Roger Hernández,   |     |Gorell, Huber, Monning,   |
          |     |Lara, Perea, Torres       |     |Wieckowski,               |
          |     |                          |     |Bonnie Lowenthal          |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Harkey, Morrell           |Nays:|Wagner, Jones             |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           APPROPRIATIONS      12-5                                        
           
           -------------------------------- 
          |Ayes:|Gatto, Blumenfield,       |
          |     |Bradford, Charles         |
          |     |Calderon, Campos, Davis,  |
          |     |Fuentes, Hall, Hill,      |
          |     |Cedillo, Mitchell,        |
          |     |Solorio                   |
          |     |                          |
          |-----+--------------------------|
          |Nays:|Harkey, Donnelly,         |
          |     |Nielsen, Norby, Wagner    |
          |     |                          |
           -------------------------------- 
           SUMMARY  :  Revises and recasts the provisions governing 
          administration of the Victims of Corporate Fraud Compensation 
          Fund (the Fund) by the Secretary of State (SOS), by codifying 
          certain existing regulations promulgated by the SOS to 
          administer the Fund, codifying changes to other existing 
          regulations promulgated by the SOS, and adding new statutory 
          language to facilitate the approval of valid claims from the 
          Fund.  Specifically,  this bill  :   

          1)Reestablishes the Fund and codifies statutory requirements for 
            both the administration of the Fund and for the eligibility of 








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            victims to receive compensation from the Fund, under a new 
            Chapter 22.5 (commencing with Section 2280) of Division 1 of 
            Title 1 of the Corporations Code. 

          2)Provides that an aggrieved person who obtains a final judgment 
            in a court of competent jurisdiction, as specified, against a 
            corporation for fraud, misrepresentation, or deceit, made with 
            the intent to defraud, and who diligently attempted to recover 
            the judgment from the corporation, may file an application 
            with the SOS for payment from the Fund for the amount unpaid 
            on the judgment, as specified. 

          3)Increases the maximum amount that any one claimant could 
            recover for any single judgment that otherwise meets the 
            requirements for compensation from the Fund, from $20,000 to 
            $50,000.



          4)Provides various definitions for the purposes of the Fund, 
            including, among other things that: 

             a)   "Claimant" means an aggrieved person who resides in the 
               state at the time of the fraud and who submits an 
               application pursuant to this chapter;        

             b)   "Corporation" means a domestic corporation, as defined, 
               or a foreign corporation that is qualified to transact 
               business in California, as specified;

             c)   "Court of competent jurisdiction" is a superior court of 
               any state, or a United States district court or U.S. 
               bankruptcy court; and,

             d)   "Final judgment" is a judgment, arbitration award, or 
               criminal restitution order for which appeals have been 
               exhausted or for which the period for appeal has expired, 
               enforcement of which is not barred by the order of any 
               court or by any statutory provision, which has not been 
               nullified or rendered void by any court order or statutory 
               provision, or for which the claimant has not otherwise been 
               fully reimbursed.   

          5)Specifies the information and documentation required to be 
            provided in an application, and allows for other relevant 








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            documents as appropriate, including, among other things:

             a)   The claimant must provide the SOS with a copy of the 
               final judgment, underlying civil complaint and any 
               amendments thereto, for a finding of fraud, 
               misrepresentation, or deceit, made with the intent to 
               defraud, and may also provide other relevant documentation; 
               and, 

             b)   The claimant must provide the SOS with a description of 
               searches and inquiries conducted by or on behalf of the 
               claimant with respect to the corporation's assets liable to 
               be sold or applied to satisfaction of the judgment, except 
               that a court's determination or finding of the 
               corporation's insolvency or lack of assets to pay the 
               claimant shall be deemed to satisfy this requirement. 

          6)Requires the claimant to make specific declarations, including 
            among other things, that he or she: 

             a)   Is not a spouse or an immediate family member of an 
               employee, officer, director, managing agent, or other 
               principal of the corporation nor a personal representative 
               of the spouse or an immediate family member of an employee, 
               officer, director, managing agent, or other principal of 
               the corporation; however, being a spouse or immediate 
               family member does not alone preclude a claimant from 
               receiving an award;

             b)   Has complied with specified requirements; and, 

             c)   Does not have a pending claim and has not collected on 
               the final judgment from any other restitution fund, or if 
               the claimant has a pending claim or has collected from 
               another fund, include a description of the nature of the 
               pending claim and the recovery amounts from any restitution 
               fund.

          7)Provides certain timelines by which the SOS, claimant, and 
            corporation must provide specified responses, including, among 
            other things: 

             a)   The SOS must mail to the claimant an itemized list of 
               deficiencies, if any, of the claimant's application within 
               21 days if for a single claimant, or 40 days for multiple 








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               claimants; and, 

             b)   The SOS must render a decision on the application within 
               90 calendar days after receiving a completed application. 

          8)Requires the SOS to provide notice, as prescribed by the SOS, 
            to the corporation and claimant with respect to an application 
            made, for specified purposes, including, among other things: 

             a)   If after 30 calendar days the SOS has not received a 
               response to the latest list of deficiencies, the SOS shall 
               notify the claimant that unless the claimant responds to 
               the deficiencies within a specified period of time of not 
               less than 15 calendar days, that the application will be 
               denied; and,

             b)   Upon issuance of a proposed decision to award payment or 
               an offer to compromise, the claimant shall have 60 calendar 
               days from the date of service of the proposed award or 
               offer to compromise to accept the proposed award or offer 
               to compromise, and if the claimant fails to accept the 
               proposed award or offer to compromise within the specified 
               time, the application shall be deemed denied.

          9)Provides that if, at any time, the money deposited in the Fund 
            is insufficient to satisfy any duly authorized award or offer 
            of settlement, the SOS shall, when sufficient money has been 
            deposited in the Fund, satisfy the unpaid awards or offer of 
            settlement, in the order that the awards or offers of 
            settlement were originally filed, plus accumulated interest at 
            the rate set by the Federal Reserve Bank of San Francisco on 
            advances made to member banks, not to exceed 2% per year.

          10)Permits a claimant whose application for compensation from 
            the Fund is denied by the SOS to petition a court, as 
            specified, for de novo review of the merits of the application 
            based on the administrative record.  This bill provides that 
            the burden is on the claimant to prove that the cause of 
            action against the corporation was for fraud, 
            misrepresentation, or deceit, if final judgment in the 
            underlying action in favor of the petitioner was by default, 
            stipulation, consent or pursuant to Civil Procedure Code 
            Section 594, or if the action against the corporation was 
            defended by a trustee in bankruptcy.









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          11)Makes it unlawful for any person or the agent of any person 
            to file with the SOS any notice, statement, or other document 
            required under the provisions of this chapter that is false or 
            untrue or contains any willful, material misstatement of fact, 
            and specifies that such conduct shall constitute a public 
            offense punishable by imprisonment and fine, as specified. 

          12)Permits the SOS to attempt to recover the amount paid to a 
            successful claimant from the corporation and suspend that 
            corporation, as specified, and requires that any sums received 
            by the SOS pursuant to these provisions be deposited in the 
            State Treasury and credited to the Fund.

          13)Requires that the SOS adopt regulations in furtherance of the 
            administration of the Fund.

           EXISTING LAW  : 

          1)Establishes the Fund within the State Treasury, authorizes the 
            SOS to administer the Fund, and directs the SOS to adopt 
            regulations regarding administration of the Fund and the 
            eligibility of victims to receive compensation from the Fund.  
            Provides that the Fund exists for the sole purpose of 
            providing restitution to the victims of a corporate fraud 
            (Corporations Code (CORP) Section 1502.5).  Regulations 
            promulgated by the SOS to administer the Fund are contained in 
            Title 2, Division 7, Chapter 12, Sections 22500 et seq.

          2)Raises money for the Fund by directing one-half of the $5 
            disclosure fee required to be paid by corporations when they 
            file their annual Statements of Information with the SOS (CORP 
            Sections 1502 and 2117).

          3)Provides for the Real Estate Recovery Program (also known as 
            the Consumer Recovery Program within the Real Estate Fund; 
            Business and Professions Code Section 10470 et seq.), 
            administered by the Department of Real Estate for the purpose 
            of providing a fund of last resort to compensate persons who 
            are defrauded by real estate licensees.   The SOS's Office 
            used the Real Estate Recovery Program rules as a guide, when 
            developing regulations to administer the Fund.  

           FISCAL EFFECT  :  According to the Assembly Appropriations 
          Committee, likely costs for administration of this revised 
          program are in the $150,000 range, with costs to be borne by the 








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          Business Fees Fund.  Unknown costs to the trial courts because 
          of the potential for additional filings.  Costs could be in the 
          hundreds of thousands of dollars if there were appeals of SOS 
          denials of claims.  This bill creates a new cause of action if 
          the victim's application for restitution is denied by SOS.  SB 
          1058 also creates a new misdemeanor for anyone to file any 
          required information that is false or untrue.

           COMMENTS  :  This bill is based on an article authored by The 
          Sacramento Bee columnist Dan Morain on October 9, 2011, Fund 
          Victims Fund is a Travesty, profiling the challenges faced by 
          the approximately 500 victims of a corporate fraud perpetrated 
          by James Walker and his now-defunct Senior Care Advocates, Inc.  
          In his article, Morain detailed the nearly 18-month struggle of 
          victims scammed by James Walker and Senior Care Advocates to 
          obtain compensation from the SOS's Office through the Fund.  

          Subsequent to the Dan Morain article and the correspondence 
          between Mr. Redmond and the SOS, several legislative offices 
          contacted the SOS's office in an attempt to determine whether 
          the case summarized in the Bee article and detailed in the 
          lengthy correspondence between Mr. Redmond and the SOS's office 
          was an aberration, or was, instead, representative of a pattern 
          of over-protectiveness toward the Fund within the SOS's Office.  
          Findings from those inquiries are summarized immediately below.




           How Many Claimants Are Receiving Compensation From the Fund?  
           
          1)When first contacted, the SOS's Office indicated that, from 
            the Fund's inception through August 1, 2011, the SOS had 
            received 701 claims for restitution from the Fund.  

             Of these 701 claims, five claims were awarded, one claim was 
             settled during litigation, and one court appeal by a victim 
             resulted in a judgment confirming the SOS's settlement offer. 
              When summed, all seven of these claims resulted in a payout 
             from the Fund of $92,497. 

             Of the remaining claims, 102 did not qualify for payment, 
             because they did not meet the eligibility criteria 
             established by the SOS, 28 claims were withdrawn, three 
             claims were denied, and 561 claims (most related to Senior 








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             Care Advocates) were pending resolution.

          2)On October 14, 2011, the SOS's office responded to legislative 
            requests for a breakdown of the 102 claims which did not 
            qualify for payment, because they did not meet the eligibility 
            criteria established by the SOS's office in its regulations (a 
            number which grew to 103 by the date of the SOS's response).  
            The 103 claims were rejected for the following reasons:

              --------------------------------------------------------- 
             |                                              |Number of |
             |              Reason for Denial               |Applicatio|
             |                                              |ns Denied |
             |----------------------------------------------+----------|
             |The victims applied for compensation based on |          |
             |judgments that were not based on corporate    |    52    |
             |fraud                                         |          |
             |----------------------------------------------+----------|
             |A judgment was lacking, or the judgment was   |          |
             |not issued by a court in California           |    23    |
             |----------------------------------------------+----------|
             |Applications were based upon judgments        |          |
             |against entities that were not corporations   |    14    |
             |                                              |          |
             |----------------------------------------------+----------|
             |Applications were based on judgments that     |    5     |
             |were not final                                |          |
             |----------------------------------------------+----------|
             |Applicants demonstrated insufficient proof    |          |
             |regarding their attempts to collect from the  |          |
             |corporation and its corporate officers prior  |    4     |
             |to filing a claim with the Fund               |          |
             |----------------------------------------------+----------|
             |Applications were submitted more than 18      |          |
             |months following final judgment               |    3     |
             |----------------------------------------------+----------|
             |Applicant was not a party to the court        |    1     |
             |judgment                                      |          |
             |----------------------------------------------+----------|
             |Application was based on a judgment issued    |          |
             |prior to January 1, 2003                      |1         |
             |                                              |          |
              --------------------------------------------------------- 

          3)By March 28, 2012, the SOS's office had resolved a 








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            considerable number of its outstanding applications.  

             From the Fund's inception through March 28, 2012, a total of 
             225 claims have been approved or resulted in victims being 
             offered settlements (up from less than ten through August 1, 
             2011), and 25 claims are pending resolution (down from over 
             550 through August 1, 2011).  An additional 27 claims have 
             been deemed complete and are pending a decision.  118 claims 
             have been rejected, because the SOS's office found the 
             victims did not qualify for payment from the Fund (see 
             reasons cited immediately above).  294 claims have been 
             denied, because the applicants could not prove damages.  30 
             claims have been withdrawn.  

           How Much Money Is In The Fund?   The Fund collects approximately 
          $1.5 million per year, through the $2.50 annual disclosure fee 
          paid by corporations pursuant to the Fund's enabling 
          legislation.  At present, the Fund holds approximately $5 
          million.  Because the Fund went several years without making any 
          significant payments to victims, and thus built up a significant 
          reserve, it was raided in the 2010-11 fiscal year, to help 
          address General Fund shortfalls.  The Fund currently has an 
          outstanding $10 million loan to the General Fund, which is 
          required to be repaid, with interest, when it is needed to pay 
          claims out of the Fund.  From the Fund's inception to date, the 
          SOS's office has approved the payout of approximately $2.1 
          million in compensation to victims (most, as cited above, in the 
          last eight months).  


           Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081 


                                                                FN: 0005341