Amended in Senate August 15, 2016

Amended in Senate August 2, 2016

Amended in Senate June 16, 2016

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 Sections 2281, 2282, 2282.1, 2286, 2288, 2289, 2290, 2293.1, and 2294 of the Corporations Code, relating to fraud, and making an appropriation therefor.

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 criminal restitution order against an agent, as defined, of a corporation based upon those same circumstances. The bill would also make conforming changes. By allowing for additional payments to be made from the Victims of Corporate Fraud Compensation Fund, this bill would make an appropriation.

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.

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.

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.

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

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.

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

Vote: majority. Appropriation: yes. Fiscal committee: yes. State-mandated local program: yes.

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

P2    1

SECTION 1.  

Section 2281 of the Corporations Code is
2amended to read:

3

2281.  

As used in this chapter:

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, was named in a final criminal restitution
7order in connection with the fraudulent acts, and was acting in the
8person’s capacity as the corporation’s officer or director when
9committing the fraudulent acts.

P3    1(b) “Application” means a request for payment from the fund
2submitted to the Secretary of State pursuant to this chapter.

3(c) “Claimant” means an aggrieved person who resides in the
4state at the time of the fraud and who submits an application
5pursuant to this chapter.

6(d) “Complaint,” for the purpose of an application based on a
7criminal restitution order, means the facts of the underlying
8transaction or transactions upon which the criminal restitution
9order is based.

10(e) “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.

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

15(g) “Final judgment” means a judgment, arbitration award, or
16criminal restitution order for which appeals have been exhausted
17or for which the period for appeal has expired, enforcement of
18which is not barred by the order of any court or by any statutory
19provision, which has not been nullified or rendered void by any
20court order or statutory provision, and for which the claimant has
21not otherwise been fully reimbursed. The following are examples
22of final judgments:

23(1) A civil judgment that has been entered against a corporation
24for fraud, misrepresentation, or deceit, with the intent to defraud,
25and includes findings of facts and conclusions of law.

26(2) If the matter was submitted to arbitration, a copy of the
27arbitration decision and any other documentation supporting the
28arbitration award. An arbitration award against a corporation for
29conduct constituting fraud, misrepresentation, or deceit, with the
30intent to defraud, that includes findings of fact and conclusions of
31law rendered in accordance with the rules established by the
32American Arbitration Association or another recognized arbitration
33body, and in accordance with Sections 1280 to 1294.2, inclusive,
34of the Code of Civil Procedure where applicable, and where the
35arbitration award has been confirmed and reduced to judgment
36pursuant to Section 1287.4 of the Code of Civil Procedure.

37(3) A criminal restitution order issued by a court of competent
38jurisdiction against a corporation, or an agent of the corporation,
39for fraud, misrepresentation, or deceit, with the intent to defraud,
40pursuant to subdivision (f) of Section 1202.4 of the Penal Code or
P4    1Section 3663 of Title 18 of the United States Code. An application
2for payment from the fund that is based on a criminal restitution
3order shall comply with all of the requirements of this chapter.

4(h) “Fund” means the Victims of Corporate Fraud Compensation
5Fund created by Section 2280.

6(i) “Judgment debtor” means a corporation or agent against
7which a judgment, arbitration award, or criminal restitution order
8has been entered for conduct constituting intentional fraud.

9

SEC. 2.  

Section 2282 of the Corporations Code is amended to
10read:

11

2282.  

(a) (1) When an aggrieved person obtains a final
12judgment in a court of competent jurisdiction against a corporation
13based upon the corporation’s fraud, misrepresentation, or deceit,
14made with intent to defraud, or obtains a criminal restitution order
15against an agent based upon the agent's fraud, misrepresentation,
16or deceit, made with intent to defraud while acting in the agent’s
17capacity as the corporation’s officer or director, the aggrieved
18person may, upon the judgment becoming final and after diligent
19collection efforts are made, file an application with the Secretary
20of State for payment from the fund, within the limitations specified
21in Section 2289, for the amount unpaid on the judgment that
22represents the awarded actual and direct loss, any awarded
23compensatory damages, and awarded costs to the claimant in the
24final judgment, excluding punitive damages.

25(2) Nothing in this subdivision shall be interpreted to authorize
26the collection of attorney’s fees, unless they are ordered by a court
27in the final judgment against a corporation or a criminal restitution
28order against an agent.begin delete The Legislature finds and declares that this
29paragraph does not constitute a change in, but is declaratory of,
30existing law.end delete

31(b) The application shall be delivered in person or by certified
32mail to the Secretary of State not later than 18 months after the
33judgment has become final.

34(c) The application shall be made on a form prescribed by the
35Secretary of State and shall include each of the following:

36(1) The name and address of the claimant.

37(2) If the claimant is represented by an attorney for the
38application, the name, business address, and telephone number of
39the attorney. If the claimant is not represented by an attorney for
P5    1the application, a telephone number where the claimant can be
2reached during regular business hours shall be included.

3(3) The name and address of the corporation and the agent, if
4any.

5(4) The identification of the final judgment, the amount of the
6claim that remains unreimbursed from any source, and an
7explanation of the claim’s computation.

8(5) A copy of a final judgment and a copy of the civil complaint
9and any amendments thereto upon which the judgment finding
10fraud, misrepresentation, or deceit, made with the intent to defraud,
11was made shall be deemed to satisfy compliance with the
12requirements prescribed in this paragraph. The claimant may also
13provide any additional documentation that he or she believes may
14help the Secretary of State in evaluating the application, including,
15but not limited to, evidence submitted to the court in the underlying
16judgment or a detailed narrative statement of facts in explanation
17of the allegations of the complaint upon which the underlying
18judgment is based.

19(6) If the final judgment is a criminal restitution order, the
20claimant shall provide the charging document and the restitution
21order, and if the defendant is an agent, documentation showing
22the defendant named in the restitution order is an agent as defined
23in this chapter.

24(7) A description of searches and inquiries conducted by or on
25behalf of the claimant with respect to the judgment debtor’s assets
26liable to be sold or applied to satisfaction of the judgment. A
27court’s determination or finding of the judgment debtor’s
28insolvency or lack of assets to pay the claimant shall be deemed
29to satisfy the requirements prescribed in this paragraph.

30(8) Each of the following representations by the claimant:

31(A) That the claimant is not a spouse, registered domestic
32partner, or an immediate family member of an employee, officer,
33director, managing agent, or other principal of the corporation nor
34a personal representative of the spouse or an immediate family
35member of an employee, officer, director, managing agent, or other
36principal of the corporation.

37(B) That the claimant has complied with all of the requirements
38of this section.

P6    1(C) That the judgment underlying the claim meets the
2requirements of subdivisions (a) and (b) of Section 2282, including
3all of the following:

4(i) That the judgment was for fraud, misrepresentation, or deceit
5by the corporation or the agent of the corporation, with the intent
6to defraud.

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

8(iii) That the underlying judgment and debt have not been
9discharged in bankruptcy, or the underlying judgment is statutorily
10nondischargeable, or, in the case of a bankruptcy proceeding that
11is open at or after the time of the filing of the application, that the
12judgment and debt have been declared to be nondischargeable by
13the judge or stipulated as nondischargeable by the parties in the
14proceeding and that the claimant has been granted permission by
15the bankruptcy court to proceed with collection or otherwise
16proceed with the claimant’s claims against the judgment debtor or
17debtors.

18(D) That the claimant does not have a pending claim and has
19not collected on the final judgment from any other restitution fund.
20If the claimant has a pending claim or has collected from another
21fund, a description of the nature of the pending claim and the
22recovery amounts from any restitution fund.

23(d) (1)  Except as provided in paragraphs (2), (3), and (4) the
24Secretary of State shall not condition an award of payment from
25the fund upon a claimant providing any additional information or
26documents other than those prescribed in subdivision (c).

27(2) If the final judgment in favor of the claimant was by default,
28stipulated, a consent judgment, or pursuant to Section 594 of the
29Code of Civil Procedure or if the action against the corporation or
30its agent was defended by a trustee in bankruptcy, the Secretary
31of State may request additional documents and information from
32the claimant to determine whether the claim is valid.

33(3) If the final judgment does not expressly set forth the amount
34of damages that were awarded for actual loss and compensatory
35damages that are payable from the fund pursuant to Section 2289,
36the Secretary of State may ask the claimant to provide copies of
37documentation pertaining to the amount of the actual and direct
38loss and the awarded compensatory damages or both of those
39findings. For purposes of this section, “sufficient proof of money
40damages” may include any of the following: copies of bank account
P7    1statements showing or confirming particular transactions, copies
2of the front and back of checks made payable to the corporation
3that have been negotiated, credit card statements showing or
4confirming particular transactions, or similar documentation
5demonstrating financial loss directly resulting from the fraudulent
6acts by the corporation or its agent and the amount of compensatory
7damages awarded by the court.

8(4) If there is no court determination or finding of the insolvency
9of the judgment debtor or lack of assets to pay the claimant, the
10Secretary of State may request additional information and
11documentation from the claimant to determine what assets, if any,
12are available to satisfy the final judgment.

13(e) The Secretary of State shall include with the application
14 form a notice to the claimant of his or her obligation to protect the
15underlying judgment from discharge in bankruptcy, to be appended
16to the application.

17(f) If a claimant is a spouse, registered domestic partner, or an
18immediate family member of an employee, officer, director,
19managing agent, or other principal of the corporation, or is a
20personal representative of the spouse, registered domestic partner,
21or an immediate family member of an employee, officer, director,
22managing agent, or other principal of the corporation, the claimant
23shall not be precluded for that reason alone from receiving an
24award where the claimant can otherwise meet the requirements of
25this section.

26

SEC. 3.  

Section 2282.1 of the Corporations Code is amended
27to read:

28

2282.1.  

(a) The Secretary of State shall provide notice to the
29corporation and all agents named in the application that a claimant
30has submitted an application for payment from the fund and shall
31also provide within that notice, as prescribed by the Secretary of
32State, the method to contest the payment from the fund.

33(b) The notice to the corporation shall be provided by certified
34mail addressed to the corporation’s last designated agent for service
35of process of record with the Secretary of State and notice shall
36be deemed complete five calendar days after the notice is mailed.

37(c) If the corporation or its agent wishes to contest payment of
38an application by the Secretary of State, the corporation or agent
39shall mail or deliver a written response addressed to the Secretary
40of State within 30 calendar days of the notice of the application,
P8    1and shall mail or deliver a copy of the response to the claimant.
2The written response of the corporation or agent shall not be
3directed to issues and facts conclusively established by the
4underlying judgment. If the corporation fails to mail or deliver a
5timely response, the corporation shall have waived the
6corporation’s right to present objections to payment of the
7application, and shall not thereafter be entitled to notice of any
8action taken or proposed to be taken by the Secretary of State with
9respect to the application.

10

SEC. 4.  

Section 2286 of the Corporations Code is amended to
11read:

12

2286.  

 The Secretary of State shall give notice, as prescribed
13by the Secretary of State, to the corporation and all agents named
14in the application that the Secretary of State has made a decision
15to award funds to the claimant and shall provide a copy of the
16decision to the corporation and all agents named in the application.

17

SEC. 5.  

Section 2288 of the Corporations Code is amended to
18read:

19

2288.  

(a) Whenever the court proceeds upon a petition under
20Section 2287, it shall order payment out of the fund only upon a
21determination that the aggrieved party has a valid cause of action
22within the purview of Section 2282, and has complied with Section
232287.

24(b) (1) The Secretary of State may defend any action on behalf
25of the fund and shall have recourse to all appropriate means of
26defense and review, including examination of witnesses and the
27right to relitigate any issues that are material and relevant in the
28proceeding against the fund. The claimant’s judgment shall create
29a rebuttable presumption of the fraud, misrepresentation, or deceit
30by the corporation, which presumption shall affect the burden of
31producing evidence.

32(2) If the civil judgment, arbitration award, or criminal
33restitution order in the underlying action on which the final
34judgment in favor of the petitioner was by default, stipulation,
35consent, or pursuant to Section 594 of the Code of Civil Procedure,
36or if the action against the corporation or its agent was defended
37by a trustee in bankruptcy, the petitioner shall have the burden of
38proving that the cause of action against the corporation or its agent
39was for fraud, misrepresentation, or deceit.

P9    1(c) If the final judgment is a criminal restitution order against
2an agent, the petitioner shall have the burden of proving that the
3defendant named in the criminal restitution order qualifies as an
4agent as defined in this chapter. An active corporation, that has
5submitted a response to the application pursuant to Section 2282.2,
6may be permitted by the court to appear in the action regarding
7the sole issue of whether the defendant named in the criminal
8restitution order qualifies as its agent as defined in this chapter.

9(d) The Secretary of State may move the court at any time to
10dismiss the petition when it appears there are no triable issues and
11the petition is without merit. The motion may be supported by
12affidavit of any person or persons having knowledge of the facts,
13and may be made on the basis that the petition, and the judgment
14referred to therein, does not form the basis for a meritorious
15recovery claim within the purview of Section 2282; provided,
16however, the Secretary of State shall give written notice at least
1710 calendar days before hearing on the motion to the claimant.

18

SEC. 6.  

Section 2289 of the Corporations Code is amended to
19read:

20

2289.  

(a) Notwithstanding any other provision of this chapter
21and regardless of the number of persons aggrieved in an instance
22of corporate fraud, or misrepresentation or deceit resulting in a
23judgment meeting the requirements of Section 2282, or the number
24of judgments against a corporation or its agent, the liability of the
25fund shall not exceed fifty thousand dollars ($50,000) for any one
26claimant per single judgment finding fraud, misrepresentation, or
27deceit, made with the intent to defraud.

28(b) When multiple corporations or their agents are involved in
29the same event or series of events that are the basis of the
30claimant’s final judgment and the conduct of two or more of the
31corporations or their agents results in a judgment meeting the
32requirements of Section 2282, the claimant may seek recovery
33from the fund based on the judgment against any one of the
34corporations or their agents, subject to the limitations of subdivision
35(a).

36(c) When multiple claimants are involved in a corporate fraud,
37or in misrepresentation or deceit by a corporation or its agents,
38resulting in a judgment meeting the requirements of Section 2282,
39each claimant may seek recovery from the fund individually,
40 subject to the limitations of subdivision (a).

P10   1(d) Claimants who are spouses, registered domestic partners,
2or persons other than natural persons, that have obtained an eligible
3final judgment shall be considered one claimant.

4

SEC. 7.  

Section 2290 of the Corporations Code is amended to
5read:

6

2290.  

If, at any time, the money deposited in the fund is
7insufficient to satisfy any duly authorized award or offer of
8settlement, the Secretary of State shall, when sufficient money has
9been deposited in the fund, satisfy the unpaid awards or offer of
10settlement, in the order that the awards or offers of settlement were
11originally filed.

12

SEC. 8.  

Section 2293.1 of the Corporations Code is amended
13to read:

14

2293.1.  

If the Secretary of State pays from the fund any amount
15in settlement of a claim or toward satisfaction of a final judgment
16against a corporation or its agent, the corporation or its agent shall
17be required to pay to the fund the amount paid plus interest at the
18prevailing legal rate applicable to a judgment rendered in any court
19of this state, within 30 calendar days of the date that the Secretary
20of State provided notice of the payment of the award or
21compromise. If the corporation or its agent fails to make the
22required payment to the fund within the required time, the
23corporation shall be suspended until the payment is made. A
24discharge in bankruptcy shall not relieve a corporation or its agent
25from the penalties and disabilities provided in this chapter.

26

SEC. 9.  

Section 2294 of the Corporations Code is amended to
27read:

28

2294.  

The Secretary of State shall not make any award to a
29claimant from the fund if the claimant has received payment from
30any other restitution funds or for the portions of the judgment that
31the claimant has collected from the corporation or its agent or any
32other defendant in the underlying judgment.

33

SEC. 10.  

No reimbursement is required by this act pursuant to
34Section 6 of Article XIII B of the California Constitution because
35the only costs that may be incurred by a local agency or school
36district will be incurred because this act creates a new crime or
37infraction, eliminates a crime or infraction, or changes the penalty
38for a crime or infraction, within the meaning of Section 17556 of
39the Government Code, or changes the definition of a crime within
P11   1the meaning of Section 6 of Article XIII B of the California
2Constitution.



O

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