BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 1058 (Lieu)
As Amended April 17, 2012
Hearing Date: April 24, 2012
Fiscal: Yes
Urgency: No
RD:rm
SUBJECT
Victims of Corporate Fraud Compensation Fund
DESCRIPTION
Existing law creates the Victims of Corporate Fraud Compensation
Fund and requires that the Secretary of State (SOS) adopt
regulations regarding the administration of the Fund and the
eligibility of victims to receive compensation from the Fund.
This bill would codify the process and requirements for an
aggrieved person who obtained a final judgment in a court of
competent jurisdiction, as specified, against a corporation for
fraud and who diligently attempted to recover the judgment from
the corporation, to file an application with the SOS for payment
from the Fund for the amount unpaid on the judgment for up to
$50,000 with respect to any one claimant per any single
judgment, as specified. The bill would allow a claimant whose
application for compensation from the Fund is denied by the SOS
to petition a court, as specified. This bill would make it a
public offense punishable by imprisonment and fine, as
specified, to provide any specified information to the SOS that
is false or untrue or contains any willful, material
misstatement of fact. This bill would also allow the SOS to
recover money paid to a successful claimant from the corporation
and to suspend the corporation, as specified. Additionally, the
bill would allow the SOS to prescribe regulations in furtherance
of statutory requirements.
This bill would only apply to those applications filed on or
after January 1, 2013.
(more)
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(This analysis reflects author's amendments to be offered in
Committee.)
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. The bill also set the SOS in charge of administering the
Fund and adopting regulations regarding the administration of
the Fund and eligibility of victims to receive compensation.
In October of 2011, a Sacramento Bee article highlighted that
this Fund was not doing what it was created to do-compensate
victims of corporate fraud. (Dan Morain, Fraud victims fund is a
travesty,
�October 9, 2011].)
In the near decade since its creation, over $14 million has been
collected, and approximately 770 claims have been made to
receive compensation from the Fund. Documentation from the SOS
reports that the Fund collects approximately $1.5 million a year
from the $2.50 it receives of a $5 fee for statement filings by
both out-of-state and in-state corporations. As part of the
2010-2011 state budget, the Legislature and Governor borrowed
$10 million from the Fund which must be repaid with interest
when the need arises to pay claims out of the Fund. Including
that $10 million (which has not yet been repaid), as of April 4,
2012, the total amount in the Fund was $14,961,469. The
remaining claims likely to be paid this fiscal year reportedly
total $2.6 million. Existing regulations limit awards at
$20,000-thus, if a claimant has an outstanding judgment for
$40,000, assuming his or her application is approved, he or she
can only be awarded up to $20,000. Under these conditions, the
average claim paid thus far is $11,535.
The VCFCF is administered by regulations that were adopted prior
to the current SOS taking office and that were originally
modeled on the Department of Real Estate's (DRE) Real Estate
Recovery Program, which is a fund of last resort for victims of
fraud committed by real estate licensees. (Bus. & Prof. Code
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Sec. 10470 et seq.). This bill was introduced to address the
problems with the current regulations, and new regulations were
submitted to the Office of Administrative Law by the SOS on
April 3, 2012. Both again appear modeled substantially on the
updated DRE statutory provisions, with modifications as
appropriate for this Fund.
This bill would codify 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, the bill increases the overall limit
that may be recovered by a claimant for a single judgment to
$50,000 from $20,000. The bill, among other things, also would
specify the types of documentation and information that has to
be provided to the SOS in making a claim for compensation,
provides for general notice requirements, allows a claimant to
petition a court upon denial of their application by the SOS,
allows the SOS to attempt to get reimbursement from the
corporation and suspend a corporation, as specified, and allows
the SOS to make regulations in furtherance of the statutory
requirements. The bill would not apply to applications filed
with the SOS prior to January 1, 2013.
CHANGES TO EXISTING LAW
Existing law establishes the Victims of Corporate Fraud
Compensation Fund in the State Treasury and requires it to be
administered by the SOS. Existing law requires that the SOS
adopt regulations regarding the administration of the Fund and
the eligibility of victims to receive compensation from the
Fund, and specifies that the money in the Fund shall be used for
the sole purpose of providing restitution to the victims of a
corporate fraud. (Corp. Code Sec. 1502.5; see SOS regulations,
Cal. Code Regs., tit.2, div. 7, ch.12, Sec. 22500.).)
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 , the Corporations Code, defines person to include a
corporation as well as a natural person. (Corp. Code Sec. 18.)
This bill would reestablish the VCFCF and would codify statutory
requirements for both the administration of the Fund and for the
eligibility of victims to receive compensation from the Fund,
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under a new Chapter 22.5 (commencing with Section 2280) of
Division 1 of Title 1 of the Corporations Code.
This bill would provide that an aggrieved person who obtains a
final judgment in a court of competent jurisdiction, as
specified, against a corporation for fraud, misrepresentation,
or deceit, made with the intent to defraud, and who diligently
attempted to recover the judgment from the corporation, may file
an application with the SOS for payment from the Fund for the
amount unpaid on the judgment, as specified.
This bill would increase the maximum amount that any one
claimant could recover for any single judgment that otherwise
meets the requirements for compensation from the Fund, from
$20,000 to $50,000.
This bill would provide various definitions for the purposes of
the VCFCF, including, among other things that:
claimant means an aggrieved person who resides in the state at
the time of the fraud and who submits an application pursuant
to this chapter;
corporation means a domestic corporation, as defined, or a
foreign corporation that is qualified to transact business in
California, as specified;
court of competent jurisdiction is a superior court of any
state, or a United States district court or United States
bankruptcy court; and
"final judgment" is 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, or for which the
claimant has not otherwise been fully reimbursed.
This bill would also specify the information and documentation
required to be provided in an application, and allow for other
relevant documents as appropriate, including, among other
things:
the claimant must provide the SOS with a copy of the final
judgment, underlying civil complaint and any amendments
thereto, for a finding of fraud, misrepresentation, or deceit,
made with the intent to defraud, and may also provide other
relevant documentation; and
the claimant must provide the SOS with a description of
searches and inquiries conducted by or on behalf of the
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claimant with respect to the corporation's assets liable to be
sold or applied to satisfaction of the judgment, except that a
court's determination or finding of the corporation's
insolvency or lack of assets to pay the claimant shall be
deemed to satisfy this requirement.
This bill would require the claimant to make specific
declarations, including among other things, that he or she:
is not a spouse or an immediate family member of an employee,
officer, director, managing agent, or other principal of the
corporation nor a personal representative, of the spouse or an
immediate family member of an employee, officer, director,
managing agent, or other principal of the corporation;
has complied with specified requirements; and
does not have a pending claim and has not collected on the
final judgment from any other restitution fund, or if the
claimant has a pending claim or has collected from another
fund, include a description of the nature of the pending claim
and the recovery amounts from any restitution fund.
This bill would provide certain timelines by which the SOS,
claimant, and corporation must provide specified responses,
including, among other things:
the SOS must mail to the claimant an itemized list of
deficiencies, if any, of the claimant's application within 21
days if for a single claimant, or 40 days for multiple
claimants; and
the SOS must render a decision on the application within 90
calendar days after receiving a completed application.
This bill would require the SOS to provide notice, as prescribed
by the SOS, to the corporation and claimant with respect to an
application made, for specified purposes, including, among other
things:
if after 30 calendar days the SOS has not received a response
to the latest list of deficiencies, the SOS shall notify the
claimant that unless the claimant responds to the deficiencies
within a specified period of time of not less than 15 calendar
days, that the application will be denied; and
upon issuance of a proposed decision to award payment or an
offer to compromise, the claimant shall have 60 calendar days
from the date of service of the proposed award or offer to
compromise to accept the proposed award or offer to
compromise, and if the claimant fails to accept the proposed
award or offer to compromise within the specified time, the
application shall be deemed denied.
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This bill would provide that if, at any time, the money
deposited in the Fund 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 at the rate of 4 percent per year.
This bill would permit a claimant whose application for
compensation from the Fund is denied by the SOS to petition a
court, as specified, for de novo review of the merits of the
application based on the administrative record. This bill would,
among other things, provide that the burden is on the claimant
to prove that the cause of action against the corporation was
for fraud, misrepresentation, or deceit, if final judgment in
the underlying action in favor of the petitioner was by default,
stipulation, consent or pursuant to Section 594 of the Code of
Civil Procedure, or if the action against the corporation was
defended by a trustee in bankruptcy.
This bill would make it unlawful for any person or the agent of
any person to file with the SOS any notice, statement, or other
document required under the provisions of this chapter that is
false or untrue or contains any willful, material misstatement
of fact. This bill would specify that such conduct shall
constitute a public offense punishable by imprisonment and fine,
as specified.
This bill would permit the SOS to attempt to recover the amount
paid to a successful claimant from the corporation and suspend
that corporation, as specified. This bill would require that
any sums received by the SOS pursuant to these provisions be
deposited in the State Treasury and credited to the Fund.
This bill would require that the SOS adopt regulations in
furtherance of the administration of the VCFCF.
COMMENT
1. Stated need for the bill
According to the author:
During the horrendous display of corporate malfeasance of
Enron, WorldCom, Tyco and others, the California Legislature
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in 2002 enacted a group of reforms known as the California
Corporate Reform Package. The Victims of the Corporate Fraud
Compensation Fund (Fund) was created to protect restitution
recovery for victims of corporate fraud as a last resort.
To qualify for restitution from the Fund, the victim must have
been unable to collect on their court judgment or criminal
restitution order against a California corporation. The court
judgment or criminal restitution order must not be more than
18 months old and be based on a corporation's fraud,
misrepresentation, or deceit, made with the intent to defraud.
The victim is eligible to recover the actual out-of-pocket
losses up to $20,000 from the Fund.
The Fund is funded through a $2.50 fee on annual corporate
disclosure documents administered by the Secretary of State.
About $1.5 million per year is generated by these disclosure
fees to provide victims with restitution. Since its
inception, the Fund has collected at least $14.5 million and
as of January 1, 2012 the Fund has paid out only seven
victims' claims worth $112,496,60. Meanwhile the Fund has
received 713 claims for request of payment. Thus, the Fund
has distributed less than of 1 percent of its total funds in
the first eight years of operation.
As of January 30, 2012, the Fund has about $4.98 million
available for victims. As part of the 2010-11 state budget,
the Legislature and the Governor borrowed $10 million from the
Fund as a loan to be repaid with interest, when the need
arises to pay claims out of the Fund. Ultimately, the Fund's
regulations are so burdensome that they require the Secretary
of State's staff to re-litigate cases where the corporations
have already been held liable by a court for corporate fraud
against the victims. This often delays payments of
compensation and only continues to victimize the exact people
whom the Fund was created to benefit. Additionally, the
numerous and onerous requests cause most victims to seek out
an attorney just to file for compensation. This is evident
when over 30 claims were withdrawn by the victims and another
3 were nonresponsive.
Streamlining the Fund's procedures will ensure a timelier
payout of restitution to victims. . . . SB 1058 takes the
overall structure of the Fund, as established currently in
regulations, and removes those portions that are unnecessary
or burdensome to launch a newly constructed Victims of
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Corporate Fraud Compensation Fund in statute.
2. Summary of most recent amendments and author's amendments
The most recent amendments to the bill reflect considerable
discussions between the author and the SOS, to strike a balance
between codifying the necessary elements of an application to
receive compensation from the Fund and allowing for regulations
to be promulgated as needed to execute those statutory
requirements, while also protecting against fraudulent claims
made against the Fund. These amendments were made to address,
among other things:
issues of documentation (to prevent re-litigation of issues
and burdensome or unclear requirements for claimants who are
not necessarily represented by counsel, while providing the
SOS the information it needs to ensure the underlying judgment
was for fraud and determine the amount and breakdown of the
unfulfilled portion of the judgment);
"burden flipping" for specified types of judgments (requiring
that a claimant show fraud, misrepresentation or deceit was
perpetrated against them, when the final judgment is not the
result of a fully litigated claim, but default, stipulated,
consent, or bankruptcy judgment instead);
recoverable damages (whether only out of pocket damages should
be considered, or other damages as well);
"double dipping" (by a claimant who has filed the same
judgment with different restitution funds provided for by the
government);
suspension authority (giving the SOS the authority to suspend
a corporation from doing business in California once an award
has been made, and providing for related notice requirements);
necessary notice requirements (to determine when notice is
required and by whom); and
timeframes for responses (to balance the interests of the
claimants against the interests related to expedient review of
applications and preservation of staff and Fund resources when
a claimant is unresponsive).
The author's amendments would make both technical and clarifying
amendments to better achieve many of the goals and objectives
that were the concern of prior amendments, remove redundancies,
and streamline requirements to make them easier to understand by
victims.
As described further below, there are two issues that remain
unresolved: (1) the types of judgments upon which a valid claim
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may be made to receive compensation from this Fund, and (2) the
interest rate, if any, that is appropriate to accrue when the
Fund has depleted and approved awards or settlements of offers
remain unsatisfied.
3. Out-of-state judgments
This bill currently provides that a "court of competent
jurisdiction" is a superior court of any state, or a U.S
district court, or U.S. bankruptcy court. Only judgments from
these courts may be used as the basis of an application for
compensation from the Fund. The SOS has indicated that it
prefers that superior courts should be limited to those in the
State of California. Section 10471(a) of the Business and
Professions Code, for the purposes of the DRE recovery Fund,
provides that court of competent jurisdiction includes the
federal courts, but does not include the courts of another
state.
The SOS writes:
�A requirement that a judgment issued by any court - not just
a California court - is sufficient to qualify a claimant to
receive an award from the Fund] will increase the number and
complexity of claims filed against the Fund exponentially.
Under DRE's Consumer Recovery Fund, DRE limits the judgments
to California judgments, as do the current and proposed
regulations governing the VCFCF. Furthermore, the DRE
licenses brokers and agents to do business in California. By
contrast, the �SOS] office merely accepts the registration of
a corporation (California based) or foreign corporation
(non-California based) without any licensing requirement.
Equally important, under the DRE statutes and regulations, it
is easier to determine that the fraud occurred in California -
regardless of where the court judgment was received - because
any judgment has to involve the proposed sale or purchase of a
piece of property in California. Under SB 1058, it will be
very difficult, if not impossible, to determine where the
fraud took place - the only required connection to California
is that the corporation is registered in the state and that at
the time of the fraud the claimant was a resident of
California. It does not mean the fraud took place in
California or that the claimant is a resident of California
when applying to the Fund.
Because the purpose of this Fund is to assist victims of
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corporate fraud in the State of California, limiting the
recovery from this Fund to those victims who not only resided in
California at the time of the fraud, but can also present a
final judgment from a court that sits in this state and applied
the laws of this state appears justified. Limiting the
judgments that can be used to obtain recovery from this Fund as
such would better ensure that the underlying fraudulent act took
place in California by a domestic corporation or a foreign
corporation that reached into this state in committing the
fraudulent act.
Moreover, it would likely be unsustainable to allow for the use
of final judgments from any court across the nation to obtain
compensation from a fund with a relatively limited source of
funding. Public policy supports preserving funds for those
victims in California who were defrauded by a California
corporation or by a foreign corporation that reached into the
state to defraud Californians. The following amendment would
achieve this goal.
Suggested amendment:
On page 7, strike lines 4 - 6 and insert "(e) "Court of
competent jurisdiction" means a state or federal court
situated in California and applying California law."
4. Interest rate accrual
The bill currently provides that if, at any time, the money
deposited in the Fund is insufficient to satisfy an approved
award or offer of settlement, the SOS must then pay the claimant
an additional four percent interest per year added to the
original award, or offer once the Fund is replenished. Because
the bill also requires that the SOS satisfy the unpaid awards or
offer of settlement in the order that the awards or offers of
settlement were originally filed, later awards or offers of
settlement cannot be paid until earlier claims and offers have
been satisfied.
The author of this bill has in large part modeled the bill's
provisions after the Department of Real Estate's (DRE) Consumer
Recovery Account, which currently provides for four percent
interest under these same circumstances. The office of the SOS
raised the concern that while that the "DRE has the ability to
transfer money from a related account and to administratively
raise licensing fees if the balance in the fund falls below a
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certain level" and can therefore afford to provide a four
percent interest rate, the VCFCF would be unable to sustain such
accrual of interest. Committee staff also notes that the
amounts that the DRE can collect for their fund is currently set
at $4 and $7, depending on the type of licensee paying the fee,
whereas the SOS only receives $2.50 per disclosure fee paid by a
corporation at the time that the corporation files its statement
with the SOS. (See Bus. & Prof. Code Sec. 10470.)
The SOS also writes, "�i]t's important to understand that the
sole reason a claimant's approved claim won't be paid under the
proposed regulations and under this bill is because there is no
money in the fund. Therefore, the money is not sitting in an
account earning interest for the fund at the expense of the
claimant. Furthermore, even if that were the case, setting a 4%
interest rate in statute when the State Treasurer's Pooled Money
Investment Account interest rate - the rate that state funds
earn interest at - is 0.383% will likely reduce the ability to
pay the claims of future victims in a timely fashion."
Arguably, however, where a decision has been made that a
claimant has met the requirements to receive compensation from
the VCFCF, and the VCFCF does not have sufficient funds to
satisfy the award or offer of settlement, the provision of some
interest does appear appropriate. This is especially the case
where existing law would otherwise permit a judgment rendered in
this state to accrue interest at the rate of not more than 10
percent per annum, or in the alternative, allow for the rate to
be variable and based upon interest rates charged by federal
agencies or economic indicators, or both. In the absence of a
rate set by the Legislature, the rate is to be seven percent.
(Cal. Const. art. 15, Sec. 1.) Under Section 685.010 of the
Code of Civil Procedure, the Legislature requires that interest
accrue at the rate of 10 percent per annum on the principal
amount of a money judgment that remains unsatisfied.
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
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been defrauded out of their life savings and the award or
settlement is their only remaining lifeline to recovery.
In order to achieve a balance between competing interests and
concerns, as stated above, the following amendment is suggested.
Suggested amendment:
On page 16, line 13, strike "4 percent per year" and insert
"at the rate set by the Federal Reserve Bank of San Francisco
on advances made to member banks under Sections 13 and 13a of
the Federal Reserve Act, at time of the award or settlement
offer, not to exceed 2 percent per year."
5. Declarations regarding spouses and immediate family members
This bill, in its current form, would provide that the claimant
must make specific declarations in his or her application,
including among other things, that he or she is not a spouse or
an immediate family member of an employee, officer, director,
managing agent, or other principal of the corporation, nor a
personal representative of the spouse or an immediate family
member of an employee, officer, director, managing agent, or
other principal of the corporation.
Committee staff notes that the situation could feasibly arise
where an elderly mother or father is targeted for fraud by an
adult child who falls under this description, thereby rendering
the victim unable to be compensated by the Fund upon making this
declaration. Presumably, the concern addressed by this
declaration is that there could potentially have been collusion
between the "victim" and the corporation where such
relationships exist. However, whether or not there was
collusion or actual fraud in these scenarios should be an issue
determined by a court in an underlying judgment (assuming that
the judgment is a result of a fully litigated case and not a
default judgment where the corporation does not show up to
court). Thus, where full litigation of the issues results in a
finding that the claimant was, in fact, defrauded, compensation
from the Fund would arguably be appropriate even where such a
relationship exists between the claimant and the corporation.
Where the judgment is not the result of a fully litigated claim,
but the claimant can otherwise demonstrate that he or she was
the victim of fraud, misrepresentation, or deceit, with the
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intent to defraud, the existence of the relationship should also
not preclude an award for an otherwise valid application. The
following amendment addresses this concern.
Suggested amendment:
On page 10, after line 23, insert "(e) If a claimant is a
spouse or an immediate family member of an employee, officer,
director, managing director or other principal of the
corporation, or is a personal representative of the spouse or
an immediate family member of an employee, officer, director,
managing agent, or other principal of the corporation, the
claimant shall not be precluded for that reason alone from
receiving an award where the claimant can otherwise meet the
requirements of this section."
On page 10, line 24, strike "(e)" and insert "(f)"
Support : None Known
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation : AB 55 (Shelley, Ch. 1015, Stats. 2002), See
Background.
Prior Vote : Senate Banking and Financial Institutions Committee
(Ayes 6, Noes 0)
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