BILL ANALYSIS Ó
AB 2759
Page 1
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:
AB 2759
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Support
None on file
Opposition
None on file
Analysis Prepared by:Alison Merrilees / JUD. / (916) 319-2334