BILL ANALYSIS                                                                                                                                                                                                    



                             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










          AB 2759 (Levine)
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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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