BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Joseph L. Dunn, Chair
2005-2006 Regular Session
AB 2440 A
Assembly Member Klehs B
As Amended June 26, 2006
Hearing Date: June 27, 2006 2
Civil Code 4
BCP 4
0
SUBJECT
Child Support Obligations: Joint Liability
DESCRIPTION
This bill would impose joint and several liability upon any
person or business entity that knowingly assists a child
support obligor who has an unpaid court-ordered child
support obligation to avoid, escape, or evade paying the
obligation. The liability would be for 10 times the value
of the assistance provided, such as 10 times the amount of
wages paid to the child support obligor but not reported,
but would not exceed the entire child support obligation
due.
The bill contains legislative findings and declarations
regarding the $19 billion in unpaid child support
obligations as of January 2006, the effect of a parent's
failure to pay child support obligations on the child's
living conditions, and the effect of such parent's failure
to pay child support obligations on the next generation of
Californians.
BACKGROUND
According to an Urban Institute study, in federal fiscal
year 2004 California ranked 51st out of 54 in the nation
(including U.S. territories) in its collection of current
child support. In that year, the state collected less than
(more)
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48 percent of the child support owed. The study, conducted
for the Department of Child Support Services to examine the
collectibility of child support arrears, also analyzed the
characteristics of California's child support debtors and
assessed their ability to pay court-ordered child support.
That report noted that child support debtors report lower
earnings than other California workers and noted four basic
reasons for that difference. Two of those reasons were
attributed to the "underground economy." The Urban
Institute report also noted that according to another study
on employer tax evasion in the Unemployment Insurance
program, in general, employers underreport taxable wages by
four percent. [Sorenson, Elaine. Examining Child Support
Arrears in California: The Collectibility Study; Urban
Institute, March 2003, citing Blakemore, Arthur E., Paul L.
Burgess, Stuart A. Low, and Robert D. St. Louis. Employer
Tax Evasion in the Unemployment Insurance Program; Journal
of Labor Economics 14(2):210-230.]
The California Employment Development Department reports
that based on recent Internal Revenue Service estimates,
the "underground economy" in California could be anywhere
between $60 billion to $140 billion.
The state's collection of child support focuses on
supporting parents' earnings in the legitimate economy.
Forty percent of the collections come from wage
garnishments, and 20 percent comes from intercepts of other
sources of income such as IRS and state tax refunds,
Workers' Compensation and disability insurance. According
to the author, as of January 2006, there was an estimated
$19 billion in unpaid child support obligations in
California. [See Legislative Findings and Declarations in
Section 1 of the bill.]
This bill intends to provide a means for the state to
collect unpaid child support obligations from obligors who
participate in the underground economy.
CHANGES TO EXISTING LAW
Existing law imposes liability on persons who intentionally
transfer assets in an attempt to avoid having to pay an
actual or potential money judgment. Existing law also
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imposes liability on those who conspire with the debtor or
potential debtor to accomplish such a fraudulent transfer
of assets.
This bill would impose joint and several liability on a
person or entity that knowingly assists a child support
obligor who has an unpaid child support obligation to
escape, evade, or avoid paying the court-ordered child
support obligation. The liability would be for 10 times
the value of the assistance provided, but not to exceed the
entire child support obligation due.
This bill would eliminate the joint and several liability
upon satisfaction of the unpaid support obligation.
This bill would enumerate the following actions as
constituting the acts of assisting a child support obligor
to escape, evade, or avoid payment of a court-ordered child
support obligation:
With actual knowledge of the child support obligation,
helping to hide or transfer assets of the child support
obligor;
Hiring the obligor as an employee and failing to timely
file a report of new employees to the Employment
Development Department, as required;
Engaging the obligor as an independent contractor service
provider and failing to file a timely report to the
Employment Development Department, as required; and
When engaged in a trade or business paying wages or other
forms of compensation (cash or barter or trade) for
services rendered by a child support obligor without
reporting to the Employment Development Department, as
required.
COMMENT
1. Need for the bill
According to the author:
The purpose of AB 2440 is to encourage individuals
and businesses to not engage in the underground
economy while getting thousands of children and
parents the child support money that these families
are owed?In California as of January 2006 there was
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an estimated $19 billion in unpaid child support
obligations. The failure to pay child support
obligations often subjects the child and the parent
to a life of poverty or substandard living
conditions, reduced access to medical care, and
diminished educational opportunities. The failure
of a parent to satisfy court-ordered or a
court-approved child support obligations depletes
California of one of its more valued resources: the
next generation of healthy and well-educated
California?
?The underground economy causes law abiding
business[es] to pay higher taxes and expenses, and
puts the employees of underground employers in
danger because their working conditions may not
meet legal standards and they might not be
receiving legally mandated wages and benefits.
Additionally, by not having their earnings
reported, parents who owe child support avoid
having to pay it, because it appears to the
government: they have no income from which they
could pay their child support [obligations].
2. Joint and several liability for "conspiracy" to help
child support obligor avoid obligation
This bill would impose a civil liability of 10 times the
value of assistance, in whatever form, an employer or
other business entity or person gives to the obligor to
assist him (or her) evade, escape, or avoid his or her
court-ordered child support obligation. The penalty
would be the joint and several liability of all such
persons, no matter to what degree each of them helped the
obligor escape payment of the obligation.
Thus, an obligor's friend who takes title to the
obligor's property for less than the value of the
property and the notary public who acknowledges the deed
transferring the property would be equally culpable under
the bill, if both knew that the obligor had unpaid child
support obligations and each of them knowingly helped the
obligor transfer his or her assets away.
The bill would require each of them to have actual
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knowledge of the obligation, and to commit the act
knowing that the assistance each is giving to the obligor
allows the obligor to not pay the obligation. They would
be jointly and severally liable, so that if one is
judgment proof, the other would have to pay the entire
liability of 10 times the value of assistance.
In the above situation, both the obligor's friend and
notary would be jointly and severally liable for 10 times
the value of assistance provided. Thus, if the friend
happens to be judgment proof, the notary will be liable
for the entire amount of liability. Considering the
disproportional penalty imposed in comparison to the
amount of assistance, it would seem fair to remove joint
and several liability, and reduce the penalty to 3X the
value of assistance.
While proposed Civil Code Sections 1714.4(a) and
1714.41(a) do cap the maximum liability imposed by the
bill to the total amount of the unpaid child support
obligation, the above individuals still may be subject to
significant penalties for minor actions.
3. Concerns about child support obligors being denied
employment due to their child support obligation
In addition to the above problems, AB 2440 would include
within the definition of knowingly assisting a child
support obligor, any employer who fails to timely report
new employees with the California New Employee Registry.
Additionally, anyone using the child support obligor as a
service provider would also fall under this bill's
provisions if they fail to file a timely report with the
Employment Development Department. While the author
points out that "the bill includes provisions excluding
those employers which hire day laborers, unless that
specific day labor is being paid $600 or more annually,"
these provisions do not address the problem described
below.
As a result of these potential penalties, 10 times the
value of assistance provided, employers may be hesitant
to hire someone that does have child support obligations.
Professor William S. Comanor, a Professor of Economics
at the University of California at Santa Barbara (UCSB),
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states that "where there are alternate employees in the
pool of applicants, the provisions of this bill would
directly reduce the prospects that an applicant with
support obligations would be selected for the position as
compared with applicants without such obligations."
Moreover, Professor Comanor states:
Current research supports the conclusion that a
major reason why child support obligations are
not paid is the lack of employment opportunities.
Non-custodial parents cannot pay what they do
not earn, so it is recognized that employment
prospects for these obligors are critical.
Thus, the provisions of this bill would potentially
reduce the job prospects available for child support
obligors, and lead to reduced support payments.
4. Lack of justification for a 10 times penalty
The background materials repeatedly reference the
"underground economy" where individuals work under the
table to avoid paying child support. Although that
economy does result in a loss of billions to the State of
California in tax revenue, along with the loss of an
unknown amount of child support funds, nothing
specifically ties that loss to a penalty 10 times the
value of any minimal assistance that may have been given.
As these employers already would be subject to civil and
criminal penalties for tax evasion, the severe penalty in
this bill would probably not deter their activities. The
more likely recipient of this penalty would be employers
who fail to timely register their employees, or
individuals who provide minimal assistance to the child
support obligor. In those cases, a penalty of 10 times
the assistance given would seem to be unfair.
Considering that the standard penalty in the codes is
treble damages, committee staff recommends reducing the
penalty to three times the value of assistance provided.
SHOULD NOT THE PENALTY BE REDUCED TO 3X?
5. Unintended consequences as a result of a third party
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paying off an individual's child support obligation -
incentives for obligors to deceive employers?
Under the provisions of this bill, any penalty collected
would be applied to satisfy the child support obligation.
From the perspective of the child support obligor, they
are able to force a third party to pay their obligation,
thus leaving them free and clear.
Considering that the penalty is ten times the amount of
assistance, a delinquent child support obligor could
extinguish their obligation upon the coercion or
deception of an individual, or business, to provide
assistance in the amount of one tenth of their
obligation. This potential gives the child support
obligor incentive to deceive their employer.
For example, a child support obligor could owe $20,000 in
back child support. In an effort to relieve their
financial burden, the obligor could attempt to find an
employer that fails to timely register their employees in
the California New Employee Registry. Many immigrant or
startup businesses could fall prey. That obligor could
then work for the employer, not report their status as a
delinquent child support obligor, receive $2000 in wages
that are "not reported," and then report the employer for
violation of the provisions of this bill. Accordingly,
the employer would be liable for 10 times the unreported
wages, or $20,000, the amount of the delinquent
obligation.
Although the bill would provide the child's caregiver
with back child support, it would create a loophole where
child support obligors can be relieved of their back
financial obligation. This appears to unfairly penalize
employers, which further justifies reducing the penalty
to three times the amount of wages not reported.
WOULD THIS JOINT AND SEVERAL LIABILITY PROVISION GIVE AN
INCENTIVE TO CHILD SUPPORT OBLIGORS TO DECEIVE EMPLOYERS?
6. Lack of clarity in joint and several liability
provision
AB 2440 would provide that any person or entity assisting
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a child support obligor is jointly and severally liable
for 10 times the value of the assistance provided. While
that indicates that a person would be jointly and
severally liable with other persons or entities that
provide assistance, it is unclear whether the obligor is
included in that liability.
Moreover, it is unclear why joint and several liability
should be imposed on these individuals. Absent that
provision, each individual would be subject to a penalty
for their own actions, and not those of their companions.
Although that individual may have sufficient assets, it
would seem unfair to force an individual to pay 10X the
value of assistance that was partially provided by
another individual. Accordingly, committee staff
recommends removal of the joint and several liability
provision, in addition to reducing the penalty to 3X the
amount value of assistance provided
SHOULD NOT THE JOINT AND SEVERAL LIABILITY PROVISIONS BE
REMOVED?
7. Inapplicability to financial institutions unless they
have actual knowledge of the support obligation
In response to concerns by financial institutions that
they would be held liable for transferring interests of
the child support obligor, recent amendments exempt
financial institutions unless they have "actual knowledge
of the child support obligation and, with that knowledge,
knowingly assist[] the obligor to escape, evade, or avoid
paying the child support obligation."
Support: American Federation of State, County, and
Municipal Employees (AFSCME), AFL-CIO; California
Labor Federation, AFL-CIO; National Center on Youth
Law (NCYL); Partnership for Responsible Parenting
Opposition: Family Law Section of the State Bar; one
individual
HISTORY
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Source: Author
Related Pending Legislation: None Known
Prior Legislation: None Known
Prior Vote: Asm. Jud. (Ayes 6, Noes 3)
Asm. Floor (Ayes 47, Noes 32)
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