Amended in Assembly May 27, 2016

California Legislature—2015–16 Regular Session

Assembly BillNo. 2759


Introduced by Assembly Member Levine

February 19, 2016


An act to amend Sectionsbegin insert 2281,end insert 2282, 2282.1, 2286, 2288, 2289,begin insert 2290,end insert 2293.1, and 2294 of the Corporations Code, relating to fraudbegin insert and making an appropriation thereforend insert.

LEGISLATIVE COUNSEL’S DIGEST

AB 2759, as amended, Levine. Corporations: agents: victims of corporate fraud compensation fund.

Existing law establishes the Victims of Corporate Fraud Compensation Fund, a continuously appropriated fund, within the State Treasury administered by the Secretary of State, the sole purpose of which is to provide restitution to victims of corporate fraud. Existing law provides that an aggrieved person who obtains a final judgment, as specified, against a corporation based upon the corporation’s fraud, misrepresentation, or deceit, made with intent to defraud, may file an application with the Secretary of State for payment from the fund for the amount unpaid on the judgment that represents the awarded actual and direct loss to the claimant in the final judgment.

This bill would additionally apply those provisions if an aggrieved person obtains a final judgment against anbegin delete agentend deletebegin insert agent, as defined,end insert of a corporation based upon those same circumstances. The bill would also make conforming changes.begin insert By allowing for additional payments to be made from the Victims of Corporate Fraud Compensation Fund, this bill would make an appropriation.end insert

begin insert

Existing law requires the application filed with the Secretary of State to include specified information and documentation, and imposes criminal penalties for the filing of any documents that are false or untrue or contain any willful, material misstatements of fact.

end insert
begin insert

This bill would require, if the final judgment is a criminal restitution order, the claimant to provide the charging document and the restitution order, and if the defendant is an agent, documentation showing the defendant named in the restitution order is an agent as defined in this bill. By expanding the scope of a crime, this bill would impose a state-mandated local program.

end insert
begin insert

Existing law requires, if, at any time, the money deposited in the Victims of Corporate Fraud Compensation Fund is insufficient to satisfy any duly authorized award or offer of settlement, the Secretary of State to, when sufficient money has been deposited in the fund, satisfy the unpaid award or offer of settlement, plus specified accumulated interest.

end insert
begin insert

This bill would eliminate the requirement to pay that specified accumulated interest.

end insert
begin insert

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

end insert
begin insert

This bill would provide that no reimbursement is required by this act for a specified reason.

end insert

Vote: majority. Appropriation: begin deleteno end deletebegin insertyesend insert. Fiscal committee: yes. State-mandated local program: begin deleteno end deletebegin insertyesend insert.

The people of the State of California do enact as follows:

P2    1begin insert

begin insertSECTION 1.end insert  

end insert

begin insertSection 2281 of the end insertbegin insertCorporations Codeend insertbegin insert is amended
2to read:end insert

3

2281.  

As used in this chapter:

begin insert

4
(a) “Agent” means a person who was an officer or director of
5a corporation, as defined in subdivision (e), at the time the
6fraudulent acts occurred and was acting in the person’s capacity
7as the corporation’s officer or director when committing the
8fraudulent acts.

end insert
begin delete

9(a)

end delete

10begin insert(b)end insert “Application” means a request for payment from the fund
11submitted to the Secretary of State pursuant to this chapter.

begin delete

12(b)

end delete

P3    1begin insert(c)end insert “Claimant” means an aggrieved person who resides in the
2state at the time of the fraud and who submits an application
3pursuant to this chapter.

begin delete

4(c)

end delete

5begin insert(d)end insert “Complaint,” for the purpose of an application based on a
6criminal restitution order, means the facts of the underlying
7transaction or transactions upon which the criminal restitution
8order is based.

begin delete

9(d)

end delete

10begin insert(e)end insert “Corporation” means a domestic corporation as defined by
11Section 162 or 2509 or a foreign corporation that is qualified to
12transact business in California pursuant to Section 2105.

begin delete

13(e)

end delete

14begin insert(f)end insert “Court of competent jurisdiction” means a state or federal
15court situated in California.

begin delete

16(f)

end delete

17begin insert(g)end insert “Final judgment” means a judgment, arbitration award, or
18criminal restitution order for which appeals have been exhausted
19or for which the period for appeal has expired, enforcement of
20which is not barred by the order of any court or by any statutory
21provision, which has not been nullified or rendered void by any
22court order or statutory provision, and for which the claimant has
23not otherwise been fully reimbursed. The following are examples
24of final judgments:

25(1) A civil judgment that has been entered against a corporation
26for fraud, misrepresentation, or deceit, with the intent to defraud,
27and includes findings of facts and conclusions of law.

28(2) If the matter was submitted to arbitration, a copy of the
29arbitration decision and any other documentation supporting the
30arbitration award. An arbitration award against a corporation for
31conduct constituting fraud, misrepresentation, or deceit, with the
32intent to defraud, that includes findings of fact and conclusions of
33law rendered in accordance with the rules established by the
34American Arbitration Association or another recognized arbitration
35body, and in accordance with Sections 1280 to 1294.2, inclusive,
36of the Code of Civil Procedure where applicable, and where the
37arbitration award has been confirmed and reduced to judgment
38pursuant to Section 1287.4 of the Code of Civil Procedure.

39(3) A criminal restitution order issued by a court of competent
40jurisdiction against abegin delete corporationend deletebegin insert corporation, or an agent of the
P4    1corporation,end insert
for fraud, misrepresentation, or deceit, with the intent
2to defraud, pursuant to subdivision (f) of Section 1202.4 of the
3Penal Code or Section 3663 of Title 18 of the United States Code.
4An application for payment from the fund that is based on a
5criminal restitution order shall comply with all of the requirements
6of this chapter.

begin delete

7(g)

end delete

8begin insert(h)end insert “Fund” means the Victims of Corporate Fraud Compensation
9Fund created by Section 2280.

begin insert

10
(i) “Judgment debtor” means a corporation or agent against
11which a judgment, arbitration award, or criminal restitution order
12has been entered for conduct constituting intentional fraud.

end insert
13

begin deleteSECTION 1.end delete
14
begin insertSEC. 2.end insert  

Section 2282 of the Corporations Code is amended to
15read:

16

2282.  

(a) begin insert(1)end insertbegin insertend insertWhen an aggrieved person obtains a final
17judgment in a court of competent jurisdiction against a corporation
18begin delete or an agent of a corporationend delete based upon the corporation’sbegin delete or the
19agent’send delete
fraud, misrepresentation, or deceit, made with intent to
20defraud,begin insert or obtains a criminal restitution order against an agent
21based upon the agent's fraud, misrepresentation, or deceit, made
22with intent to defraud while acting in the agent’s capacity as the
23corporation’s officer or director,end insert
the aggrieved person may, upon
24the judgment becoming final and after diligent collection efforts
25are made, file an application with the Secretary of State for
26payment from the fund, within the limitations specified in Section
272289, for the amount unpaid on the judgment that represents the
28awarded actual and direct loss, any awarded compensatory
29damages, and awarded costs to the claimant in the final judgment,
30excluding punitive damages.

begin insert

31
(2) Nothing in this subdivision shall be interpreted to authorize
32the collection of attorney’s fees. The Legislature finds and declares
33that this paragraph does not constitute a change in, but is
34declaratory of, existing law.

end insert

35(b) The application shall be delivered in person or by certified
36mail to the Secretary of State not later than 18 months after the
37judgment has become final.

38(c) The application shall be made on a form prescribed by the
39Secretary of State and shall include each of the following:

40(1) The name and address of the claimant.

P5    1(2) If the claimant is represented by an attorney for the
2application, the name, business address, and telephone number of
3the attorney. If the claimant is not represented by an attorney for
4the application, a telephone number where the claimant can be
5reached during regular business hours shall be included.

6(3) The name and address of the corporationbegin delete or the agent of the
7corporation. end delete
begin insert and the agent, if any.end insert

8(4) The identification of the final judgment, the amount of the
9claim that remains unreimbursed from any source, and an
10explanation of the claim’s computation.

11(5) A copy of a final judgment and a copy of the civil complaint
12and any amendments thereto upon which the judgment finding
13fraud, misrepresentation, or deceit, made with the intent to defraud,
14was made shall be deemed to satisfy compliance with the
15requirements prescribed in this paragraph. The claimant may also
16provide any additional documentation that he or she believes may
17help the Secretary of State in evaluating the application, including,
18but not limited to, evidence submitted to the court in the underlying
19judgment or a detailed narrative statement of facts in explanation
20of the allegations of the complaint upon which the underlying
21judgment is based.

begin insert

22
(6) If the final judgment is a criminal restitution order, the
23claimant shall provide the charging document and the restitution
24order, and if the defendant is an agent, documentation showing
25the defendant named in the restitution order is an agent as defined
26in this chapter.

end insert
begin delete

27(6)

end delete

28begin insert(7)end insert A description of searches and inquiries conducted by or on
29behalf of the claimant with respect to thebegin delete corporation’s or agent’send delete
30begin insert judgment debtor’s end insert assets liable to be sold or applied to satisfaction
31of the judgment. A court’s determination or finding of the
32begin delete corporation’s or agent’send deletebegin insert judgment debtor’s end insert insolvency or lack of
33assets to pay the claimant shall be deemed to satisfy the
34requirements prescribed in this paragraph.

begin delete

35(7)

end delete

36begin insert(8)end insert Each of the following representations by the claimant:

37(A) That the claimant is not abegin delete spouseend deletebegin insert spouse, registered domestic
38partner,end insert
or an immediate family member of an employee, officer,
39director, managing agent, or other principal of the corporation nor
40a personal representative of the spouse or an immediate family
P6    1member of an employee, officer, director, managing agent, or other
2principal of the corporation.

3(B) That the claimant has complied with all of the requirements
4of this section.

5(C) That the judgment underlying the claim meets the
6requirements of subdivisions (a) and (b) of Section 2282, including
7all of the following:

8(i) That the judgment was for fraud, misrepresentation, or deceit
9by the corporation or the agent of the corporation, with the intent
10to defraud.

11(ii) That the judgment is unpaid in part or in whole.

12(iii) That the underlying judgment and debt have not been
13discharged in bankruptcy, or the underlying judgment is statutorily
14nondischargeable, or, in the case of a bankruptcy proceeding that
15is open at or after the time of the filing of the application, that the
16judgment and debt have been declared to be nondischargeable by
17the judge or stipulated as nondischargeable by the parties in the
18proceeding and that the claimant has been granted permission by
19the bankruptcy court to proceed with collection or otherwise
20proceed with the claimant’s claims against the begin delete corporation or its
21agent.end delete
begin insert judgment debtor or debtors.end insert

22(D) That the claimant does not have a pending claim and has
23not collected on the final judgment from any other restitution fund.
24If the claimant has a pending claim or has collected from another
25fund, a description of the nature of the pending claim and the
26recovery amounts from any restitution fund.

27(d) (1)  Except as provided in paragraphs (2), (3), and (4) the
28Secretary of State shall not condition an award of payment from
29the fund upon a claimant providing any additional information or
30documents other than those prescribed in subdivision (c).

31(2) If the final judgment in favor of the claimant was by default,
32stipulated, a consent judgment, or pursuant to Section 594 of the
33Code of Civil Procedure or if the action against the corporation or
34its agent was defended by a trustee in bankruptcy, the Secretary
35of State may request additional documents and information from
36the claimant to determine whether the claim is valid.

37(3) If the final judgment does not expressly set forth the amount
38of damages that were awarded for actual loss and compensatory
39damages that are payable from the fund pursuant to Section 2289,
40the Secretary of State may ask the claimant to provide copies of
P7    1documentation pertaining to the amount of the actual and direct
2loss and the awarded compensatory damages or both of those
3findings. For purposes of this section, “sufficient proof of money
4damages” may include any of the following: copies of bank account
5statements showing or confirming particular transactions, copies
6of the front and back of checks made payable to the corporation
7that have been negotiated, credit card statements showing or
8confirming particular transactions, or similar documentation
9demonstrating financial loss directly resulting from the fraudulent
10acts by the corporation or its agent and the amount of compensatory
11damages awarded by the court.

12(4) If there is no court determination or finding of the insolvency
13of thebegin delete corporation or its agentend deletebegin insert judgment debtorend insert or lack of assets to
14pay the claimant, the Secretary of State may request additional
15 information and documentation from the claimant to determine
16what assets, ifbegin delete anyend deletebegin insert any,end insert are available to satisfy the final judgment.

17(e) The Secretary of State shall include with the application
18 form a notice to the claimant of his or her obligation to protect the
19underlying judgment from discharge in bankruptcy, to be appended
20to the application.

21(f) If a claimant is abegin delete spouseend deletebegin insert spouse, registered domestic partner,end insert
22 or an immediate family member of an employee, officer, director,
23managing agent, or other principal of the corporation, or is a
24personal representative of thebegin delete spouseend deletebegin insert spouse, registered domestic
25partner,end insert
or an immediate family member of an employee, officer,
26director, managing agent, or other principal of the corporation, the
27claimant shall not be precluded for that reason alone from receiving
28an award where the claimant can otherwise meet the requirements
29of this section.

30

begin deleteSEC. 2.end delete
31
begin insertSEC. 3.end insert  

Section 2282.1 of the Corporations Code is amended
32to read:

33

2282.1.  

(a) The Secretary of State shall provide notice to the
34corporationbegin delete or its agentend deletebegin insert and all agents named in the applicationend insert
35 that a claimant has submitted an application for payment from the
36fund and shall also provide within that notice, as prescribed by the
37Secretary of State, the method to contest the payment from the
38fund.

39(b) The noticebegin insert to the corporationend insert shall be provided by certified
40mail addressed to the corporation’s last designated agent for service
P8    1of process of record with the Secretary of State and notice shall
2be deemed complete five calendar days after the notice is mailed.

3(c) If the corporation or its agent wishes to contest payment of
4an application by the Secretary of State, the corporation or agent
5shall mail or deliver a written response addressed to the Secretary
6of State within 30 calendar days of the notice of the application,
7and shall mail or deliver a copy of the response to the claimant.
8The written response of the corporation or agent shall not be
9directed to issues and facts conclusively established by the
10underlying judgment. If the corporation fails to mail or deliver a
11timely response, the corporation shall have waived the
12corporation’s right to present objections to payment of the
13application, and shall not thereafter be entitled to notice of any
14action taken or proposed to be taken by the Secretary of State with
15respect to the application.

16

begin deleteSEC. 3.end delete
17
begin insertSEC. 4.end insert  

Section 2286 of the Corporations Code is amended to
18read:

19

2286.  

 The Secretary of State shall give notice, as prescribed
20by the Secretary of State, to the corporationbegin delete or its agentend deletebegin insert and all
21agents named in the applicationend insert
that the Secretary of State has
22made a decision to award funds to the claimant and shall provide
23a copy of the decision to the corporationbegin delete or its agent. end deletebegin insert and all agents
24named in the application.end insert

25

begin deleteSEC. 4.end delete
26
begin insertSEC. 5.end insert  

Section 2288 of the Corporations Code is amended to
27read:

28

2288.  

(a) Whenever the court proceeds upon a petition under
29Section 2287, it shall order payment out of the fund only upon a
30determination that the aggrieved party has a valid cause of action
31within the purview of Section 2282, and has complied with Section
322287.

33(b) (1) The Secretary of State may defend any action on behalf
34of the fund and shall have recourse to all appropriate means of
35defense and review, including examination of witnesses and the
36right to relitigate any issues that are material and relevant in the
37proceeding against the fund. The claimant’s judgment shall create
38a rebuttable presumption of the fraud, misrepresentation, or deceit
39by the corporation, which presumption shall affect the burden of
40producing evidence.

P9    1(2) If the civil judgment, arbitration award, or criminal
2restitution order in the underlying action on which the final
3judgment in favor of the petitioner was by default, stipulation,
4consent or pursuant to Section 594 of the Code of Civil Procedure,
5or if the action against the corporation or its agent was defended
6by a trustee in bankruptcy, the petitioner shall have the burden of
7proving that the cause of action against the corporation or its agent
8was for fraud, misrepresentation, or deceit.

begin insert

9
(c) If the final judgment is a criminal restitution order against
10an agent, the petitioner shall have the burden of proving that the
11defendant named in the criminal restitution order qualifies as an
12agent as defined in this chapter. An active corporation, that has
13submitted a response to the application pursuant to Section 2282.2,
14may be permitted by the court to appear in the action regarding
15the sole issue of whether the defendant named in the criminal
16restitution order qualifies as its agent as defined in this chapter.

end insert
begin delete

17(c)

end delete

18begin insert(d)end insert The Secretary of State may move the court at any time to
19dismiss the petition when it appears there are no triable issues and
20the petition is without merit. The motion may be supported by
21affidavit of any person or persons having knowledge of the facts,
22and may be made on the basis that the petition, and the judgment
23referred to therein, does not form the basis for a meritorious
24recovery claim within the purview of Section 2282; provided,
25however, the Secretary of State shall give written notice at least
2610 calendar days before hearing on the motion to the claimant.

27

begin deleteSEC. 5.end delete
28
begin insertSEC. 6.end insert  

Section 2289 of the Corporations Code is amended to
29read:

30

2289.  

(a) Notwithstanding any other provision of this chapter
31and regardless of the number of persons aggrieved in an instance
32of corporate fraud, or misrepresentation or deceit resulting in a
33judgment meeting the requirements of Section 2282, or the number
34of judgments against a corporation or its agent, the liability of the
35fund shall not exceed fifty thousand dollars ($50,000) for any one
36claimant per single judgment finding fraud, misrepresentation, or
37deceit, made with the intent to defraud.

38(b) When multiple corporations orbegin delete itsend deletebegin insert theirend insert agents are involved
39in the same event or series of events that are the basis of the
40claimant’s final judgment and the conduct of two or more of the
P10   1corporations or its agents results in a judgment meeting the
2requirements of Section 2282, the claimant may seek recovery
3from the fund based on the judgment against any one of the
4corporations orbegin delete itsend deletebegin insert theirend insert agents, subject to the limitations of
5subdivision (a).

6(c) When multiple claimants are involved in a corporate fraud,
7or in misrepresentation or deceit by a corporation or its agents,
8resulting in a judgment meeting the requirements of Section 2282,
9each claimant may seek recovery from the fund individually,
10 subject to the limitations of subdivision (a).

11(d) Claimants who are spouses, registered domestic partners,
12or persons other than natural persons, that have obtained an eligible
13final judgment shall be considered one claimant.

14begin insert

begin insertSEC. 7.end insert  

end insert

begin insertSection 2290 of the end insertbegin insertCorporations Codeend insertbegin insert is amended to
15read:end insert

16

2290.  

If, at any time, the money deposited in the fund is
17insufficient to satisfy any duly authorized award or offer of
18settlement, the Secretary of State shall, when sufficient money has
19been deposited in the fund, satisfy the unpaid awards or offer of
20settlement, in the order that the awards or offers of settlement were
21originally begin delete filed, plus accumulated interest at the rate set by the
22Federal Reserve Bank of San Francisco on advances made to
23member banks under Sections 13 and 13a of the Federal Reserve
24Act, at the time of the award or settlement offer, not to exceed 2
25percent per year.end delete
begin insert filed.end insert

26

begin deleteSEC. 6.end delete
27
begin insertSEC. 8.end insert  

Section 2293.1 of the Corporations Code is amended
28to read:

29

2293.1.  

If the Secretary of State pays from the fund any amount
30in settlement of a claim or toward satisfaction of a final judgment
31against a corporation or its agent, the corporation or its agent shall
32be required to pay to the fund the amount paid plus interest at the
33prevailing legal rate applicable to a judgment rendered in any court
34of this state, within 30 calendar days of the date that the Secretary
35of State provided notice of the payment of the award or
36compromise. If the corporation or its agent fails to make the
37required payment to the fund within the required time, the
38corporation shall be suspended until the payment is made. A
39discharge in bankruptcy shall not relieve a corporation or its agent
40from the penalties and disabilities provided in this chapter.

P11   1

begin deleteSEC. 7.end delete
2
begin insertSEC. 9.end insert  

Section 2294 of the Corporations Code is amended to
3read:

4

2294.  

The Secretary of State shall not make any award to a
5claimant from the fund if the claimant has received payment from
6any other restitution funds or for the portions of the judgment that
7the claimant has collected from the corporation or its agent or any
8other defendant in the underlying judgment.

9begin insert

begin insertSEC. 10.end insert  

end insert
begin insert

No reimbursement is required by this act pursuant
10to Section 6 of Article XIII B of the California Constitution because
11the only costs that may be incurred by a local agency or school
12district will be incurred because this act creates a new crime or
13infraction, eliminates a crime or infraction, or changes the penalty
14for a crime or infraction, within the meaning of Section 17556 of
15the Government Code, or changes the definition of a crime within
16the meaning of Section 6 of Article XIII B of the California
17Constitution.

end insert


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