BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 2759 (Levine)
Version: June 16, 2016
Hearing Date: June 28, 2016
Fiscal: Yes
Urgency: No
RD
SUBJECT
Corporations: agents: victims of corporate fraud compensation
fund
DESCRIPTION
This bill would authorize victims of corporate fraud to pursue
compensation from the existing Victims of Corporate Fraud
Compensation Fund (VCFCF), administered by the Secretary of
State (SOS), for fraudulent acts committed by an agent of the
corporation (as opposed to the corporation, itself) for fraud,
misrepresentation, or deceit, with the intent to defraud, as
specified. For these purposes, "agent" would mean a person who
was: (1) an officer or director of the corporation, as
specified, at the time the fraudulent acts occurred; (2) named
in a final criminal restitution order in connection with the
fraudulent acts; and (3) acting in the person's capacity as the
corporation's officer or director when committing the fraudulent
acts.
If restitution is sought from the VCFCF based upon a criminal
restitution order and the defendant is an "agent," this bill
would add to the documentation that an applicant must provide to
the SOS. Furthermore, in any appeal of a denial of an
application that was based on a criminal restitution order
against an agent of a corporation, the petitioner would have the
burden of proving that the defendant named in the criminal
restitution order qualifies as an "agent," and an active
corporation would be permitted to appear in the action regarding
the sole issue of whether the defendant named in the criminal
restitution order qualifies as its "agent." Lastly, this bill
would specify that victims of corporate fraud may not recover
attorney's fees and would declare that this does not constitute
a change in, but is declaratory of, existing law.
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BACKGROUND
AB 55 (Shelley, Ch. 1015, Stats. 2002), was enacted as part of
the 2002 California Corporate Reform Package, a series of
measures designed to strengthen the state's corporate
accountability laws. The bill, among other things, created the
Victim of Corporate Fraud Compensation Fund (hereinafter
"VCFCF," or "fund") within the State Treasury, for the sole
purpose of providing restitution to the victims of corporate
fraud who have otherwise been unable to collect on their
judgment. The bill also set the Secretary of State (SOS) in
charge of administering the fund and adopting regulations
regarding the administration of the fund and eligibility of
victims to receive compensation. The Fund reportedly collects
approximately $1.7 million a year from the $2.50 it receives of
a $5 disclosure fee for statement filings by both out-of-state
and in-state corporations.
In October of 2011, a Sacramento Bee article highlighted that
the Fund was not doing what it was created to do-compensate
victims of corporate fraud. (Dan Morain, Fraud victims fund is a
travesty (Oct. 9, 2011).) The following year, in 2012, SB 1058
(Lieu, Ch. 564, Stats. 2012) was enacted to codify and
streamline much of the administration and requirements of this
program, while still allowing for the SOS to promulgate
regulations in furtherance of the statutory requirements. In
doing so, among other things, the bill established a 90 day
deadline for a victim to receive a determination on their
application, and increased the overall limit that may be
recovered by a claimant for a single judgment to $50,000 from
$20,000.
This bill now seeks to allow victims of corporate fraud to
pursue compensation from the VCFCF for fraudulent acts committed
by a corporation's officer or director, as specified.
This bill was heard in the Senate Banking & Financial
Institutions Committee on June 15, 2016, and passed out on a
vote of 7-0.
CHANGES TO EXISTING LAW
Existing law establishes the Victims of Corporate Fraud
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Compensation Fund (VCFCF or fund) within the State Treasury,
administered by the Secretary of State (SOS), for the sole
purpose of providing restitution to the victims of a corporate
fraud. (Corp. Code Section 2280). Existing law requires
foreign and domestic corporations to pay a $5 disclosure fee
when filing specified statements with the SOS, one-half of which
must be deposited into the VCFCF. (Corp. Code Secs. 1502,
2117.)
Existing law provides that, when an aggrieved person obtains a
final judgment, as defined, 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 may, upon the judgment becoming final and after
diligent collection efforts are made, file a specified
application with the SOS within 18 months after judgment has
become final, for payment from the compensation fund, as
specified, for the amount unpaid on the judgment which
represents the awarded actual and direct loss, any awarded
compensatory damages, and awarded costs to the claimant in the
final judgment, excluding punitive damages. (Corp. Code Sec.
2282(a)-(c).).
Existing law prescribes a series of rules that must be followed
by persons seeking to apply to the SOS seeking payment from the
fund and imposes a series of requirements on the SOS regarding
the steps he or she must take once an application for payment
from the fund is submitted; the timeframes within which he or
she must render a final written decision; and the steps that may
be taken by claimants whose applications for payment from the
fund are denied, and who wish to appeal those denials. (Corp.
Code Secs. 2281-2288).
Existing law caps the liability of the VCFCF at $50,000 per any
one claimant per single judgment finding fraud,
misrepresentation, or deceit, made with intent to defraud,
regardless of the number of persons aggrieved in an instance of
corporate fraud, or misrepresentation or deceit resulting in a
judgment qualified for recovery under the VCFCF, as specified,
or the number of judgments against a corporation. (Corp. Code
Sec. 2289(a).).
Existing law provides that, if, at any time, the money deposited
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in the VCFCF 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,
as specified, not to exceed 2 percent per year. (Corp. Code Sec.
2290.)
Existing law defines final judgment to mean 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, and for which the claimant has not otherwise been
fully reimbursed. Existing law provides certain examples of a
final judgment, including, in relevant part, a criminal
restitution order issued by a court of competent jurisdiction
against a corporation for fraud, misrepresentation, or deceit,
with the intent to defraud, pursuant to specified state and
federal law. An application for payment from the fund that is
based on a criminal restitution order must comply with specified
requirements. (Corp. Code Sec. 2281(f).)
This bill would expand the above example of a final judgment to
provide that a final judgment also includes a criminal
restitution order issued by a court of competent jurisdiction
against an agent of the corporation for fraud,
misrepresentation, or deceit, with the intent to defraud,
pursuant to specified state or federal law.
This bill would add authority for a victim of corporate fraud to
recover from the VCFCF based on a criminal restitution order
against an agent of the corporation, just as a victim of
corporate fraud could recover from the fund based on a final
judgment against a corporation. Specifically, this bill would
provide that, when an aggrieved person obtains a criminal
restitution order against an agent based upon the agent's fraud,
misrepresentation, or deceit, made with intent to defraud while
acting in the agent's capacity as the corporation's officer or
director, the aggrieved person may, upon the judgment becoming
final and after diligent collection efforts are made, file an
application with the SOS for payment from the compensation fund,
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as specified under existing law. This bill would also require
further documentation, as follows:
if the final judgment is a criminal restitution order, the
claimant must provide the charging document and the
restitution order; and,
if the defendant is an agent, the claimant must also provide
documentation showing the defendant named in the restitution
order is an agent as defined in this bill.
This bill would specify that nothing in the law above
authorizing victims of corporate fraud to seek recovery from the
fund based upon a final judgment or criminal restitution order
against a corporation or an agent of the corporation, as
specified, shall be interpreted to authorize the collection of
attorney's fees. This bill would specify that the Legislature
finds and declares that this prohibition against collection of
attorney's fees does not constitute a change in, but is
declaratory of, existing law.
This bill would provide that if the final judgment is a criminal
restitution order against an agent, the petitioner (in an appeal
upon denial of the claimant's application) shall have the burden
of proving that the defendant named in the criminal restitution
order qualifies as an agent as defined in this chapter. An
active corporation, that has submitted a response to the
application, as specified under existing law, may be permitted
by the court to appear in the action regarding the sole issue of
whether the defendant named in the criminal restitution order
qualifies as its agent, as defined.
This bill would define "agent" to mean a person who was an
officer or director of a domestic or foreign corporation, as
specified, at the time the fraudulent acts occurred, was named
in a final criminal restitution order in connection with the
fraudulent acts, and was acting in the person's capacity as the
corporation's officer or director when committing the fraudulent
acts. This bill would also define "judgment debtor" for the
purposes of these statutes.
This bill would repeal a requirement for the state to pay
interest on amounts awarded from the compensation fund, when
money in the fund is insufficient to satisfy any duly authorized
award or offer of settlement.
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This bill would make other clarifying or conforming changes to
other provisions of the VCFCF statutes.
COMMENT
1. Stated need for the bill
According to the author, "[c]urrently the Victims of Corporate
Fraud Compensation Fund only allows for payment to victims who
are victims of a corporation. This can be problematic given that
in most cases it is an individual as opposed to an actual
corporation that is charged and found guilty and ultimately
restitution is ordered from. AB 2759 opens up for compensation
from the [fund] to victims of an agent of a corporation as
defined by the bill. [ . . .]"
2. Bill would ensure that more victims of corporate fraud can
seek restitution from the Victims of Corporate Fraud
Compensation Fund
As discussed in the Background, California law establishes the
Victims of Corporate Fraud Compensation Fund (VCFCF) to provide
restitution to victims of corporate fraud who are unable to
recover against a corporation against which they have received a
final judgment in a court of competent jurisdiction (i.e. a
California state or federal court). Specifically, when an
aggrieved person obtains a final judgment, as defined, in a
court of competent jurisdiction against a corporation based upon
the corporation's fraud, misrepresentation, or deceit, made with
intent to defraud, California law authorizes the aggrieved
person, upon the judgment becoming final and after diligent
collection efforts are made, to file a specified application
with the Secretary of State (SOS) within 18 months after
judgment has become final, for payment from the VCFCF, for the
amount unpaid on the judgment which represents the awarded
actual and direct loss, any awarded compensatory damages, and
awarded costs to the claimant in the final judgment, excluding
punitive damages. (Corp. Code Sec. 2282(a)-(c).).
This bill would now authorize victims of corporate fraud who
have a final judgment against a corporate agent, but not the
corporation itself, to seek recovery against the VCFCF as well.
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First, this bill would expand existing law, to recognize that a
final judgment can include a criminal restitution order<1>
issued by a court of competent jurisdiction against not only a
corporation, but also against an agent of the corporation, for
fraud, misrepresentation, or deceit, with the intent to defraud,
pursuant to specified state or federal law. The bill would then
expressly authorize an aggrieved person who obtains a criminal
restitution order against an agent based upon the agent's fraud,
misrepresentation, or deceit, made with intent to defraud while
acting in the agent's capacity as the corporate officer or
director, to file an application with SOS for payment from the
compensation fund, upon the judgment becoming final and after
diligent collection efforts are made. The victim would have to
file the application in largely the same manner and form as a
victim who has a final judgment against the corporation, as well
as some additional documentation supporting their final judgment
against the agent, as discussed further below.
Under existing law, a victim of corporate fraud could
potentially seek to reach the personal assets of directors of
officers of a corporation by pursuing common law theories, such
as alter ego liability or by piercing the corporate veil. They
could also seek to recover against directors or officers for
their own tortious conduct. To this end, while directors or
officers do not incur personal liability for corporate torts
merely because of their official position unless they
participate in the wrong or authorize or direct that it be done,
they are liable for their own tortious acts on behalf of the
corporation. (5 Witkin Sum. Cal. Law Torts Sec. 33 (citations
omitted).) Indeed, a corporate officer or director may be
liable under the rules of tort and agency for their tortious
acts committed on behalf of the corporation, whether or not the
corporation is also liable. (15 Cal. Jur. Corporations Sec.
305.) A corporate officer or director is, in general,
personally liable for all torts that he or she authorizes or
directs or in which the officer or director participates
notwithstanding that he or she acted as an agent of the
corporation and not on his or her own behalf. Thus, one who
---------------------------
<1> A criminal restitution order is an order by a court, as part
of a sentence in a criminal case, ordering a defendant to
compensate the victim for losses suffered as a result of the
crime. All states have laws providing that convicted defendants
pay restitution to their victims.
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directs and participates in a corporate tort may be personally
liable for both compensatory and punitive damages even if he or
she derives no personal gain from the act. Additionally, the
rule that all persons participating in an intentional tort are
liable for the full amount of damages suffered applies to
intentional torts committed by those acting in their official
capacities as officers or directors of a corporation even though
the corporation is also liable. (Id.) Thus, to allow for
recovery where a criminal restitution order has been obtained
against an agent of a corporation, based upon the agent's fraud,
misrepresentation, or deceit, made with intent to defraud while
acting in the agent's capacity as the corporation's officer or
director, would appear to be consistent with the underlying
intent of the VCFCF, which allows for corporate fund victims to
obtain restitution from the fund if the final judgment were
against the corporation itself.
At the same time, this bill provides for reasonable measures to
ensure that the SOS receives adequate documentation from which
to make a determination to grant or deny an application. Under
the bill, to receive compensation from the fund based on a final
judgement that is a criminal restitution order and if the
defendant is an agent, the claimant would have to provide the
SOS with the charging document and the restitution order. If
the defendant is an agent, the applicant must also provide the
SOS documentation showing the defendant named in the restitution
order is an agent as defined in this bill to mean an officer or
director of a corporation at the time the fraudulent acts
occurred, who was named in a final criminal restitution order in
connection with the fraudulent acts, and who was acting in the
person's capacity as the corporation's officer or director when
committing the fraudulent acts. In doing so, the bill would,
again, arguably stay true to the underlying purpose of the Fund
being to help make whole as many victims of corporate fraud as
possible, while also providing for reasonable protections to
ensure that the SOS receives the documentation it needs to
approve or deny an application and that the VCFCF provides
restitution only where the misdeeds of the corporation are
essentially attributable to the director or officer.
3. Burden would be on the claimant to prove the defendant
named in a criminal restitution order qualifies as an agent
upon appeal of an application
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Under existing law, a claimant against whom the Secretary of
State (SOS) has rendered a decision denying an application may,
within six months after the mailing of the notice of the denial,
file a verified petition in superior court for an Order
Directing Payment Out of the Victims of Corporate Fraud
Compensation Fund based upon the grounds set forth in the
application to the SOS. (Corp. Code Sec. 2287(a).) In such an
action, existing law provides that the SOS may defend any action
on behalf of the fund and shall have recourse to all appropriate
means of defense and review, including examination of witnesses
and the right to relitigate any issues that are material and
relevant in the proceeding against the fund. However, the
claimant's judgment creates a rebuttable presumption of the
fraud, misrepresentation, or deceit by the corporation, which
presumption shall affect the burden of producing evidence.
(Corp. Code Sec. 2288(b).) That being said, if the civil
judgment, arbitration award, or criminal restitution order in
the underlying action on which the final judgment in favor of
the petitioner was, for example, by default, stipulation, or
consent, or if the action against the corporation was defended
by a trustee in bankruptcy, existing law shifts the burden onto
the petitioner to prove that the cause of action against the
corporation was for fraud, misrepresentation, or deceit. (Corp.
Code Sec. 2288(b)(2).)
This bill would now add that in an appeal, above, if the final
judgment is a criminal restitution order against an agent, the
claimant has the burden of proving that the defendant named in
the criminal restitution order qualifies as an agent as defined
by this bill to mean that the person was: (1) an officer or
director of a corporation at the time the fraudulent acts
occurred; (2) named in a final criminal restitution order in
connection with the fraudulent acts; and (3) acting in the
person's capacity as the corporation's officer or director when
committing the fraudulent acts. This bill would also grant the
court the ability to permit an active corporation, that has
submitted a response to the application as allowed under
existing law, to appear in the action regarding the sole issue
of whether the defendant named in the criminal restitution order
qualifies as its agent as defined in this bill. Arguably, these
issues would have to have been resolved by the court in the
first instance, for the victim to obtain the criminal
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restitution order against the director or officer to begin with,
in light of the fact that a corporate director or officer does
not incur personal liability for corporate torts merely because
of their official position, unless they participate in the wrong
or authorize or direct that it be done. (See Comment 3, above.)
4. Retroactive application of provision declaring attorney's
fees not included
In general, legislation is construed to be prospective unless
the Legislature specifically states that it should be applied
retroactively or is declaratory of existing law, as this bill
would do with respect to a provision on attorney's fees.
Specifically, this bill would provide that nothing in the law or
this bill authorizing victims of corporate fraud to seek
recovery from the fund based upon a final judgment or criminal
restitution order against a corporation or an agent of the
corporation, as specified, shall be interpreted to authorize the
collection of attorney's fees. At the same time, however, this
bill would also declare that this prohibition against collection
of attorney's fees does not constitute a change in, but is
declaratory of, existing law. Staff notes, however, that
existing law actually suggests that attorney's fees could
potentially be recovered, insofar as it authorizes an aggrieved
person to apply "for the amount unpaid on the judgment [up to
$50,000] 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." (See Corp.
Code Sec. 2282 and 2289.) Feasibly, a prevailing victim could
receive attorneys' fees as costs pursuant to Section 1021.5 of
the Code of Civil Procedure, which provides that upon motion, "a
court may award attorneys' fees to a successful party against
one or more opposing parties in any action which has resulted in
the enforcement of an important right affecting the public
interest if: (a) a significant benefit, whether pecuniary or
nonpecuniary, has been conferred on the general public or a
large class of persons, (b) the necessity and financial burden
of private enforcement, or of enforcement by one public entity
against another public entity, are such as to make the award
appropriate, and (c) such fees should not in the interest of
justice be paid out of the recovery, if any." (Code Civ. Proc.
Sec. 1021.5.)
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Staff notes that, indeed, it may be preferable to preserve
existing law so that parties can receive attorneys' fees where
they are awarded pursuant to Section 1021.5, though,
potentially, it could cause the VCFCF to deplete at a faster
rate. At the minimum, however, as a matter of public policy, it
is preferable to ensure that legislation apply prospectively, so
as not to change the outcome of ongoing cases in favor of one
party. In this case, while the bill would not change the
outcome of the underlying litigation, if a victim were to
attempt to recover the cost of their attorney fees from the fund
as well, this bill could make what might have been a successful
claim, unsuccessful if the application is made within 90 days of
January 1, 2017 (as the SOS has 90 days to render a decision on
an application). Accordingly, the following amendment is
suggested to amend the provision to accurately reflect existing
law:
Suggested amendment
On page 4, line 24-27, amend the bill to read:
(2) Nothing in this subdivision shall be interpreted to
authorize the collection of attorney's fees , unless they are
ordered by a court in the final judgment against a corporation
or a criminal restitution order against an agent . The
Legislature finds and declares that this paragraph does not
constitute a change in, but is declaratory of, existing law.
5. Bill strikes provision authorizing interest
When this Committee heard SB 1058 (Lieu, Ch. 564, Stats. 2012;
see Background), one of the issues was whether a claimant should
be owed interest on an original award, if the money deposited in
the Fund is insufficient to satisfy an approved award or offer
of settlement. The author of that bill, having in large part
modeled the bill's provisions after the Department of Real
Estate's (DRE) Consumer Recovery Account, which provided for
four percent interest under these same circumstances, originally
required that the SOS pay the claimant an additional four
percent interest per year, to be added to the original award or
offer once the Fund is replenished. At the time, the SOS
expressed concern that while the "DRE has the ability to
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transfer money from a related account and to administratively
raise licensing fees if the balance in the fund falls below a
certain level" and can therefore afford to provide a four
percent interest rate, the VCFCF would be unable to sustain such
accrual of interest. In contrast to the $2.50 per disclosure
fee paid into the VCFCF by any corporation filing its statement
with the SOS, the DRE could collect between $4 and $7 for their
fund, depending on the type of licensee paying the fee.
Ultimately, recognizing the following competing interests at
play, this Committee suggested a compromise whereby the claimant
could recover interest at the rate set by the Federal Reserve
Bank, as specified, at the time of the award or settlement
offer, not to exceed 2 percent per year:
With the underlying purpose of the Fund being to help make
whole as many victims of corporate fraud as possible, to a
reasonable degree, public policy would favor a lower interest
rate that is sustainable to the Fund. In other words, it
would be to the detriment of other victims to cause further
depletion of the Fund at a rate that outpaces the fees going
into the Fund. At the same time, once an award is made or
settlement is agreed upon to compensate a victim from the
Fund, a victim is arguably harmed further by not having the
award or settlement satisfied immediately. This is especially
the case when the victim has been defrauded out of their life
savings and the award or settlement is their only remaining
lifeline to recovery. (Sen. Judiciary Com. analysis of SB
1058 (2011-2012 Reg. Session) Apr. 24, 2012, p. 9.)
This bill would now strike the language allowing for the
claimant to recover interest in addition to their original
award, if the Fund was depleted at the time of their award.
Support : Crime Victims United of California; three individuals
Opposition : None Known
HISTORY
Source : Author
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Related Pending Legislation : None Known
Prior Legislation :
SB 1058 (Lieu, Ch. 564, Stats. 2012) See Background.
AB 55 (Shelley, Ch. 1015, Stats. 2002) See Background.
Prior Vote :
Senate Banking and Financial Institutions Committee (Ayes 7,
Noes 0)
Assembly Floor (Ayes 80, Noes 0)
Assembly Appropriations Committee (Ayes 20, Noes 0)
Assembly Banking and Finance Committee (Ayes 11, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
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