BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:  April 5, 2016


                           ASSEMBLY COMMITTEE ON JUDICIARY


                                  Mark Stone, Chair


          AB 2759  
          (Levine) - As Introduced February 19, 2016


          SUBJECT:  CORPORATIONS: AGENTS: VICTIMS OF CORPORATE FRAUD  
          COMPENSATION FUND


          KEY ISSUE:  SHOULD An individual who is a victim of corporate  
          fraud and who wins a judgment against a corporate officer, but  
          is unable to collect the judgment from the officer after  
          diligent efforts to do so, BE SPECIFICALLY AUTHORIZED to collect  
          damages from the Fund as a similarly situated victim of  
          corporate fraud with a judgment against a corporation would be  
          able to do?


                                      SYNOPSIS


          The Victims of Corporate Fraud Compensation Fund (Fund), which  
          is administered by the Secretary of State (SOS), provides a  
          measure of relief to persons who have been victims of corporate  
          fraud and won a judgment against a corporation, but who are  
          unable to collect the judgment from the corporation after  
          diligent efforts to do so.  The Fund - which is funded by fees  
          on corporate filings - was created by the Legislature in 2002  
          amidst well-publicized examples of fraud, malfeasance and other  
          forms of corporate shenanigans.  The rules governing the process  
          of filing claims, recovering restitution, and challenging  








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          denials are promulgated by the SOS.  In 2012, the SOS regulation  
          were effectively codified by SB 1058 (Chapter 564, Statutes of  
          2012), which also modified some rules to facilitate recovery on  
          valid claims.  Among other things SB 1058 streamlined the  
          deadlines for responding to a claimant, including requiring the  
          SOS to render a final decision on the claim within 90 days of  
          receipt of a completed application.  SB 1058 also increased the  
          maximum amount that one claimant may recover for any single  
          judgment from $20,000 to $50,000.  


          This bill allows an individual who is a victim of corporate  
          fraud and who wins a judgment against a corporate officer, but  
          is unable to collect the judgment from the officer after  
          diligent efforts to do so, to collect damages from the Fund as a  
          similarly situated victim of corporate fraud with a judgment  
          against a corporation would be able to do.  This proposed change  
          in the law is based upon the reality that few victims of  
          corporate fraud are able to obtain judgments against  
          corporations, and that there are few claims made against the  
          Fund.  As a result, the Fund is not adequately serving its  
          intended purpose.  This bill would allow more victims of  
          corporate fraud to access the funds for which they are intended.  
           This author-sponsored has no support or opposition on file.


          SUMMARY:  Seeks to compensate victims of corporate fraud  
          committed by corporate officers.  Specifically, this bill allows  
          an individual who is a victim of corporate fraud and who wins a  
          judgment against a corporate officer, but is unable to collect  
          the judgment from the officer after diligent efforts to do so,  
          to collect damages from the Fund as a similarly situated victim  
          of corporate fraud with a judgment against a corporation would  
          be able to do.



          EXISTING LAW:  









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           1) Establishes the Victims of Corporate Fraud Compensation Fund  
             (Fund) in the State Treasury, administered by the Secretary  
             of State for the sole purpose of providing restitution to the  
             victims of a corporate fraud.  (Corporations Code Section  
             2280.  All further statutory references are to this code,  
             unless otherwise indicated.)


           2) Requires the Secretary of State to adopt regulations in  
             furtherance of the administration of the Fund.  (Ibid.)


           3) Allows an aggrieved person who obtains a final judgment in a  
             court of competent jurisdiction against a corporation based  
             upon the corporation's fraud, misrepresentation, or deceit,  
             made with intent to defraud, the aggrieved person to, upon  
             the judgment becoming final and after diligent collection  
             efforts are made, file an application with the Secretary of  
             State for payment from the Fund.  (Section 2282 (a).)


           4) Limits the amount of recovery by a person described in 3),  
             above, to the amount unpaid on the judgment that represents  
             the awarded actual and direct loss, any awarded compensatory  
             damages, and awarded costs to the claimant in the final  
             judgment, excluding punitive damages.  (Section 2282 (a).)


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


          FISCAL EFFECT:  As currently in print this bill is keyed fiscal.


          COMMENTS:  In 2002, in response to well-publicized scandals  








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          involving Enron and other corporations, the Legislature created  
          the Victims of Corporate Fraud Compensation Fund.  (See AB 55  
          (Shelley (Chap. 1015, Stats. of 2002).)  The purpose was to help  
          innocent victims of corporate fraud who had won judgments but  
          were unable to collect judgment, either because the corporation  
          was bankrupt, had disappeared, or was otherwise unable or  
          unwilling to pay up.  The Fund was financed by a fee on  
          corporate filings, held in the State Treasury, and administered  
          by and pursuant to rules promulgated by the Secretary of State  
          (SOS).  In order to collect money from the fund, the victim must  
          have won a judgment and been unable to collect from the  
          corporation despite diligent efforts to do so.   


          In 2012, the Legislature updated and revised the law regarding  
          the Fund, codifying the SOS regulations in SB 1058 (Chapter 564,  
          Statutes of 2012).  SB 1058 also sought to improve the claim  
          process to make it more likely that valid claims would be  
          compensated.  Among other things, SB 1058 established a new  
          deadline of 90 days for a victim to receive a determination;  
          increased the recovery cap for a single applicant from $20,000  
          to $50,000; and restricted the ability of the fraudulent  
          corporation to contest payments or block appeals by prohibiting  
          consideration of issues and fact already established by the  
          judgment. 


          One of the justifications for enacting SB 1058 was the fact that  
          the Fund was underutilized.  According to the Committee's  
          analysis of SB 1058: 


               Reports suggesting that the Fund is severely underutilized  
               lend support to the author's effort to improve and  
               facilitate the claim restitution process.  As reported by  
               the Sacramento Bee as of early October of 2011, the fund  
               continues to collect money but apparently benefits  
               relatively few claimants.  According the Bee, more than 700  
               valid applicants - i.e., those who have already won a  








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               judgment from a court - have applied for restitution from  
               the Fund.  But as of April of this year no more than 10 -  
               and perhaps as few as seven - claims have been paid out.   
               Although it is not entirely clear why this is so, the Bee  
               concluded that one factor is an overly burdensome and  
               repetitious application process.  


          It was believed, at the time when SB 1058 was pending, that the  
          Fund would be utilized more frequently if there were fewer  
          procedural obstacles for victims of corporate fraud to access  
          the Fund.  According to this Committee's analysis of SB 1058:


               [T]he Secretary of State - who is charged with  
               administering the program and promulgating rules -  
               'acknowledges the fund is not running as intended.'  In  
               fact, the Bee reported, the fund was so underused that in  
               2010 then-Governor Schwarzenegger and the Legislature  
               borrowed $10 million from the fund to help balance the  
               budget.  (Sacramento Bee April 11, 2012; see also Dan  
               Morain, "Fraud Victims Fund is a Travesty," Sacramento Bee  
               October 9, 2011.)


          Current Condition of the Fund.  According to the Secretary of  
          State's Office, the Victims of Corporate Fraud Compensation Fund  
          had a balance of approximately $11,900,000 as of January 2016.   
          According to information provided by the author: 


               The Victims of Corporate Fraud Compensation Fund has not  
               received any applications based upon a criminal restitution  
               order against AGA Financial Inc.  However, the Victims of  
               Corporate Fraud Compensation Fund has received numerous  
               claims based upon four criminal restitution orders naming  
               James Koenig and Asset Real Estate and Investment Company  
               in a related criminal proceeding.  The first three criminal  
               restitution orders named victims who testified at trial.   








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               Administrative review has been completed for all of the  
               submitted Applications based upon the first three  
               restitution orders and the Victims of Corporate Fraud  
               Compensation Fund has paid out more than $1.1 million  
               dollars to victims named in the three orders.


                The court issued its fourth restitution order, on June 24,  
               2015, naming victims who had not testified at trial.  The  
               Victims of Corporate Fraud Compensation Fund received  
               nearly 300 claims based upon the June 24, 2015 criminal  
               restitution order.  Unfortunately, James Koenig has filed a  
               Notice of Appeal with respect to the June 24, 2015 criminal  
               restitution order which is still pending.  California  
               Corporations Code sections 2281(f) and 2282(a) preclude the  
               payment of claims while an appeal is pending.  Therefore,  
               the Victims of Corporate Fraud Fund is statutorily  
               precluded from awarding applications based upon the June  
               24, 2015 criminal restitution order until the appeal has  
               run its course.


          Statement of the Author.  According to the author:  


                We know that there are victims of corporate fraud that are  
               unable to access the victims of corporate fraud  
               compensation fund.  That is because to access the fund an  
               individual must have been a victim of a corporation that  
               has been convicted.  Very rarely are corporations charged  
               with crimes almost always it is an individual who is  
               charged with a crime.  AB 2759 will correct this problem  
               and allow many individuals who should have access to the  
               fund access.


          Three Theories for Holding Agents and Officers Liable for  
          Unlawful Acts: 1) "Tortious Act by Officer."  Directors and  
          officers of a corporation are liable to the corporation (and to  








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          third party victims, including stockholders) "for losses  
          resulting from their malfeasance, misfeasance, or their failure  
          or neglect to discharge the duties imposed by their offices."   
          (15 Cal. Jur. (3d ed. 2012) Corporations, sec. 302, p. 478.)




          2) "Piercing the Corporate Veil."  A corporation is a legal  
          entity distinct from its owners that provides legal protection  
          to its owners and officers from personal liability for its  
          obligations.  However, there are some circumstances when courts  
          will hold that the shareholders, officers, and directors are  
          personally liable for corporate obligations because the  
          corporation is abusing its privilege of conducting business in  
          the corporate form.  In those circumstances, the protective  
          "veil" of the corporation is pierced, resulting in personal  
          liability to directors and officers.  In order to pierce the  
          corporate veil, the following two requirements generally must be  
          satisfied: 




               (1) that there be such unity of interest and ownership that  
               the separate personalities of the corporation and the  
               individual no longer exist and (2) that, if the acts are  
               treated as those of the corporation alone, an inequitable  
               result will follow. (Automotriz del Golfo de California S.  
               A. de C. v. v. Resnick (1957) 47 Cal.2d 792, 796 [306 P.2d  
               1].)




          3) "Responsible Corporate Officer Doctrine."  The responsible  
          corporate officer doctrine was developed by the United States  
          Supreme Court to hold corporate officers in responsible  
          positions of authority personally liable for violating strict  








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          liability statutes protecting the public welfare. (Hustis &  
          Gotanda, The Responsible Corporate Officer: Designated Felon or  
          Legal Fiction? (1994) 25 Loy. U. Chi. L.J. 169, 176.)  It is a  
          common law theory of liability separate from piercing the  
          corporate veil or imposing personal liability for direct  
          participation in tortious conduct.  In United States v.  
          Dotterweich (1943) 320 U.S. 277, the Supreme Court addressed  
          whether the president/general manager of a corporation, as well  
          as the corporation itself, could be liable under the Federal  
          Food, Drug, and Cosmetic Act (21 U.S.C.  301 et seq.; the Act),  
          which imposed criminal liability on "[a]ny person" who shipped  
          adulterated or misbranded drugs in interstate commerce.   
          (Dotterweich, supra, 320 U.S. at p. 278.)  The Court focused on  
          two facts: (1) The Act was public welfare legislation; and (2)  
          the Act imposed strict liability for a violation.  (Id., at pp.  
          280-281.) 




          In United States v. Park (1975) 421 U.S. 658, 832, the Supreme  
          Court further defined the scope of the responsible corporate  
          officer doctrine.  In that case, the chief executive officer of  
          a national corporation was found liable under the Federal Food,  
          Drug, and Cosmetic Act for unsafe storage of food that was  
          contaminated by rodents.  Finding he was liable, the Court  
          enunciated the following standard for corporate officer  
          liability under the Act: 




               [T]he Government establishes a prima facie case when it  
               introduces evidence sufficient to warrant a finding by the  
               trier of the facts that the defendant had, by reason of his  
               position in the corporation, responsibility and authority  
               either to prevent in the first instance, or promptly to  
               correct, the violation complained of, and that he failed to  
               do so. The failure thus to fulfill the duty imposed by the  








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               interaction of the corporate agent's authority and the  
               statute furnishes a sufficient causal link. The  
               considerations which prompted the imposition of this duty,  
               and the scope of the duty, provide the measure of  
               culpability.  (Park, supra, 421 U.S. at p. 660.)




          In the years following Dotterweich and Park, lower federal  
          courts have applied the responsible corporate officer doctrine  
          to other federal statutes, including the Clean Water Act (U.S.  
          v. Iverson (9th Cir. 1998) 162 F.3d 1015, 1024) and the Resource  
          Conservation and Recovery Act of 1976 (United States v. Johnson  
          & Towers, Inc. (3d Cir. 1984) 741 F.2d 662, 666-667).   
          Similarly, state courts have applied the doctrine to state  
          statutes, including California's Hazardous Waste Control Act  
          (People v. Matthews (1992) 7 Cal.App.4th 1052, 1057-1062)  
          (People v. Roscoe (2008) 169 Cal.App.4th 829, 835-837).)




          Access to the Victims of Corporate Fraud Compensation Fund.  If  
          a plaintiff successfully obtained a judgment against an officer  
          of a corporation based upon any of the above theories - the  
          tortious act by the officer him or herself; the act of the  
          officer on behalf of the corporation; or the act of the officer  
          violated the "Responsible Corporate Officer Doctrine,"- the  
          plaintiff's theory of liability would be based upon misdeeds of  
          the corporation that are attributable to the officer (and vice  
          versa).  It therefore seems reasonable to provide such a  
          plaintiff with the same remedies available to a plaintiff who  
          obtains a judgment against the corporation itself.


          REGISTERED SUPPORT / OPPOSITION:










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          Support


          None on file




          Opposition


          None on file




          Analysis Prepared by:Alison Merrilees / JUD. / (916) 319-2334