BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1058| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ UNFINISHED BUSINESS Bill No: SB 1058 Author: Lieu (D) Amended: 8/22/12 Vote: 21 SENATE BANKING & FINANCIAL INST. COMM. : 6-0, 4/11/12 AYES: Vargas, Blakeslee, Evans, Kehoe, Liu, Padilla NO VOTE RECORDED: Walters SENATE JUDICIARY COMMITTEE : 5-0, 4/24/12 AYES: Evans, Harman, Blakeslee, Corbett, Leno SENATE APPROPRIATIONS COMMITTEE : 5-2, 5/14/12 AYES: Kehoe, Alquist, Lieu, Price, Steinberg NOES: Walters, Dutton SENATE FLOOR : 31-5, 5/21/12 AYES: Alquist, Berryhill, Blakeslee, Calderon, Cannella, Corbett, De León, DeSaulnier, Emmerson, Evans, Fuller, Hancock, Hernandez, Kehoe, Leno, Lieu, Liu, Lowenthal, Negrete McLeod, Padilla, Pavley, Price, Rubio, Simitian, Steinberg, Strickland, Vargas, Wolk, Wright, Wyland, Yee NOES: Anderson, Dutton, Gaines, La Malfa, Walters NO VOTE RECORDED: Correa, Harman, Huff, Runner ASSEMBLY FLOOR : 60-19, 8/27/12 - See last page for vote SUBJECT : Victims of Corporate Fraud Compensation Fund SOURCE : Author CONTINUED SB 1058 Page 2 DIGEST : This bill 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. Assembly Amendments clarify the definition of "court of competent jurisdiction." ANALYSIS : 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 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. This bill: CONTINUED SB 1058 Page 3 1. Reestablishes the Fund and codifies statutory requirements for both the administration of the Fund and for the eligibility of 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: 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; corporation means a domestic corporation, as defined, or a foreign corporation that is qualified to transact business in California, as specified; court of competent jurisdiction is a superior court of any state, or a United States district court or U.S. bankruptcy court; and "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 CONTINUED SB 1058 Page 4 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 documents as appropriate, including, among other things: 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 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/she: 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; has complied with specified requirements; and 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 CONTINUED SB 1058 Page 5 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: 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 claimants; and 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: 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 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 CONTINUED SB 1058 Page 6 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 Section 594 of the Civil Procedure Code, or if the action against the corporation was defended by a trustee in bankruptcy. 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. Background This bill is based on an article authored by Sacramento Bee columnist Dan Morain on October 9, 2011, 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. CONTINUED SB 1058 Page 7 A review of the correspondence between Mr. Mark Redmond, representing approximately 500 elderly victims of Senior Care Advocates, and the SOS's Office, regarding the claims submitted by Mr. Redmond on the seniors' behalf, reveals a lengthy saga of frustrated communication. Following Mr. Redmond's submission of initial applications on the victims' behalf on May 14th, 2010, the SOS's Office and Mr. Redmond exchanged no fewer than ten letters back and forth regarding the applications (the first dated June 4, 2010, and the most recent dated August 29, 2011). In these letters, each of which runs for several pages, the SOS's office details deficiencies it observed in the victims' applications, and Mr. Redmond, responding on behalf of the victims, attempts to resolve these deficiencies by providing explanations and additional documentation. The correspondence suggests that there is significant room for improving the rules governing the victims' application process, as well as the process by which the SOS evaluates applications, deems them complete, and disburses money from the Fund. Existing shortcomings seem to have created procedural hurdles, which blocked timely access to the Fund by the Senior Care Advocates victims. After reading 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 CONTINUED SB 1058 Page 8 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 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 were | 5 | |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 | | CONTINUED SB 1058 Page 9 |-----------------------------------------------+----------| |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 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). CONTINUED SB 1058 Page 10 FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: Yes SUPPORT : (Verified 8/28/12) Secretary of State Debra Bowen AFSCME Congress of California Seniors Los Angeles County District Attorney's Office ASSEMBLY FLOOR : 60-19, 8/27/12 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Cedillo, Chesbro, Cook, Davis, Dickinson, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, Galgiani, Gatto, Gordon, Gorell, Hall, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell, Monning, Nestande, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, Skinner, Smyth, Solorio, Swanson, Torres, Wieckowski, Williams, Yamada, John A. Pérez NOES: Conway, Donnelly, Beth Gaines, Garrick, Grove, Hagman, Halderman, Harkey, Jones, Knight, Logue, Mansoor, Miller, Morrell, Nielsen, Norby, Silva, Valadao, Wagner NO VOTE RECORDED: Bonilla JJA:k 8/28/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED