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 --