BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 2759 (Levine) - Corporations: agents: victims of corporate fraud compensation fund ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: August 2, 2016 |Policy Vote: B. & F.I. 7 - 0, | | | JUD. 7 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: Yes | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 8, 2016 |Consultant: Jolie Onodera | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 2759 would extend the authority of victims of corporate fraud to pursue compensation from the Victims of Corporate Fraud Compensation Fund (VCFCF), administered by the Secretary of State (SOS), beyond claims against a corporation to include fraudulent acts committed by an agent of a corporation, as well as attorney's fees if ordered by a court in the final judgment, as specified. Fiscal Impact: Secretary of State : Potential increase in administrative costs, likely minor and absorbable (General Fund) to (1) revise and distribute forms and notices, (2) process a greater number of claims for reimbursement against agents of corporations, and, (3) enforce and collect repayments to the VCFCF for claims paid on individual restitution orders. AB 2759 (Levine) Page 1 of ? VCFCF payments : Potentially significant to major increase in future payments made from the VCFCF due to extending compensation eligibility to include claims against agents of corporations and the payment of attorney's fees. For every 10 to 20 claims paid at the $50,000 cap per claim, costs would be $0.5 million to $1 million (Special Fund*). The VCFCF is projected to receive revenues of $1.7 million in FY 2016-17, with an ending reserve balance of $12.4 million. Annual payments out of the VCFCF have been in the range of $1.5 million to $1.8 million. Staff notes the current level of fee revenues, in the absence of regular repayments to the VCFCF, will be insufficient to sustain future increases in payments from the VCFCF. Repayments to the SOS on claims paid from the VCFCF are rare, with no repayments provided over the last three years. Additionally, authorizing payment for attorney's fees, potentially retroactively, will place additional pressure on the VCFCF. Repeal of interest : Minor future reductions to VCFCF claim payment amounts that will no longer have interest applied to the outstanding award payment during the period that the VCFCF balance is insufficient to fully satisfy the award. To date, no interest has been assessed or paid on VCFCF payments. *Victims of Corporate Fraud Compensation Fund Background: Existing law establishes the Victims of Corporate Fraud Compensation Fund (VCFCF) within the State Treasury, which is administered by the SOS, for the sole purpose of providing restitution to the victims of corporate fraud. 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. (Corporations Code §§ 1502, 2117, 2280.) Existing law provides that, when an aggrieved person obtains a final court judgment 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 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 AB 2759 (Levine) Page 2 of ? punitive damages. (Corporations Code § 2282(a)-(c).) 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. (Corporations Code § 2289 (a).) Under existing law, if, at any time, the money deposited in the VCFCF is insufficient to satisfy any duly authorized award or offer of settlement, the SOS is required to, 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, not to exceed 2 percent per year. (Corporations Code § 2290.) This bill 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. Proposed Law: This bill would extend the authority of victims of corporate fraud to pursue compensation from the VCFCF beyond claims against a corporation to include fraudulent acts committed by an agent of a corporation. Specifically, this bill: Provides 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, as specified under existing law. This bill would also require further documentation, as follows: o if the final judgment is a criminal AB 2759 (Levine) Page 3 of ? restitution order, the claimant must provide the charging document and the restitution order; and, o 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. Expands what constitutes a final judgment to also include 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. Provides that nothing in the applicable section is to 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. Additionally provides that the Legislature finds and declares that this paragraph does not constitute a change in, but is declaratory of, existing law. Defines "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. Repeals a requirement for the state to pay interest on amounts awarded from the VCFCF, when money in the fund is insufficient to satisfy any duly authorized award or offer of settlement. Makes other clarifying or conforming changes to other provisions of the VCFCF statutes. Related AB 2759 (Levine) Page 4 of ? Legislation: SB 1058 (Lieu) Chapter 564/2012 revises and recasts the provisions governing administration of the VCFCF by the SOS, by codifying certain existing regulations promulgated by the SOS to administer the VCFCF, codifying changes to other existing regulations promulgated by the SOS, and adding new statutory language to facilitate the approval of valid claims from the VCFCF. AB 55 (Shelley) Chapter 1015/2002, among its numerous provisions, created the VCFCF within the State Treasury, for the sole purpose of providing restitution to the victims of corporate fraud who have been otherwise unable to collect on their judgment. Staff Comments: The SOS has indicated the provisions of this bill could significantly reduce restitution funds available to claimants victimized by corporate fraud by authorizing attorney's fees to be paid from the fund, placing additional pressure on funds intended to help provide relief to victims when corporate fraud occurs, potentially risking the sustainability of the fund. Fees collected from SOS-registered business entities to support the existing fund are insufficient to award court-approved restitution for the actual victims themselves. While there is insufficient information to accurately estimate the overall fiscal impact of authorizing payment for attorney's fees, the SOS notes that in recent cases involving the award of attorney's fees, the fees have increased the VCFCF award by an average of more than 400 percent. The addition of attorney fees will significantly accelerate the depletion of the fund resulting in inordinate delays in the distribution of funds to the victims. The SOS indicates that historically the VCFCF had not awarded attorney's fees (until the court decision Kelly Morris v. The Office of the Secretary of State of the State of California, Case No. 34-2014-80001900, judgment October 2015). The reference in the bill stating the payment of attorney's fees awarded by a court are declaratory of existing law may additionally invite claims for attorney's fees in previously awarded cases creating a significant unintended fiscal impact on the VCFCF. AB 2759 (Levine) Page 5 of ? -- END --