BILL ANALYSIS �
SB 1058
Page 1
Date of Hearing: July 3, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 1058 (Lieu) - As Amended: May 1, 2012
SENATE VOTE : 31-5
SUBJECT : Victims of Corporate Fraud Compensation Fund
KEY ISSUES :
1)Should regulations promulgated by the Secretary of State for
the purpose of administering a fund for victims of corporate
fraud be codified?
2)Should the rules for seeking relief from the fund be modified
so as to streamline the process for recovering on valid claims
and increase the maximum amount of recovery?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
The Victims of Corporate Fraud Compensation Fund (Fund), which
is administered by the Secretary of State (SOS), provides a
measure of relief to persons who have been victims of corporate
fraud and won a judgment against a corporation, but who are
unable to collect the judgment from the corporation after
diligent efforts to do so. The Fund - which is funded by fees
on corporate filings - was created by the Legislature in 2002
amidst well-publicized examples of fraud, malfeasance and other
forms of corporate shenanigans. The rules governing the process
of filing claims, recovering restitution, and challenging
denials are promulgated by the SOS. This bill would effectively
codify those regulations as statutes within the Corporations
Code, but it would change some of those rules to facilitate
recovery on valid claims. According to the author, existing
regulations are burdensome and often lead to unnecessary delay
in payments of compensation and result in underutilization of
the Fund. Among other things this bill seeks to streamline the
deadlines for responding to claimant, including requiring the
SOS to render a final decision on the claim within 90 days of
receipt of a completed application. The bill would also
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increase the maximum amount that one claimant may recover for
any single judgment from $20,000 to $50,000. The bill passed
out of the Senate on a 31-5 vote and passed out of the Assembly
Committee on Banking and Finance on an 8-2 vote. There is no
registered opposition to this bill.
SUMMARY : Revises and recasts certain regulations promulgated by
the Secretary of State (SOS) for the purpose of administering
the Victims of Corporate Fraud Compensation Fund (Fund), and
codifies certain regulations and adds new statutory language to
facilitate the approval of valid claims for restitution from the
fund. Specifically, this bill :
1)Reestablishes the Fund and codifies (within the Corporations
Code) statutory requirements for the administration of the
Fund.
2)Provides that an aggrieved person who obtains a final judgment
in a court of competent jurisdiction against a corporation for
fraud, misrepresentation, or deceit, and who diligently
attempts 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.
3)Increases the maximum amount that any one claimant can recover
for any single judgment from the Fund from $20,000 to $50,000.
4)Specifies that a claimant must provide the SOS, at the time of
application, with certain documents, including: (a) a copy of
the final judgment for a finding of fraud, misrepresentation,
or deceit; and (b) a description of searches and inquiries
conducted by or on behalf of the 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.
5)Requires the claimant to make specific declarations, including
that he or she (a) is not a spouse or an immediate family
member of an employee, officer, director, managing agent, or
other specified person associated with the corporation; and
(b) does not have a pending claim, as specified, and has not
collected on the final judgment from any other fund.
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6)Requires the SOS to provide timely notice to the corporation
and claimant with respect to an application made and requires
the SOS to render a final written decision on the application
within 90 days after the completed application has been
received.
7)Provides that if 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, as
specified.
8)Permits 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 provides that the burden
is on the claimant to prove that the cause of action against
the corporation was for fraud, misrepresentation, or deceit,
as specified.
9)Makes it unlawful for 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.
10)Requires the SOS to notify the corporation that was found to
have committed fraud against the claimant that an application
for payment from the Fund has been made, and to notify the
corporation as to the method of contesting the claim on the
fund. Specifies, however, that if the corporation contests
the payment, the contest shall not be directed at issues and
facts that have already been established in the underlying
judgment. Permits the SOS to attempt to recover the amount
paid to a successful claimant from the corporation, as
specified.
EXISTING LAW :
1)Establishes the Fund within the State Treasury, authorizes the
SOS to administer the Fund, and directs the SOS to adopt
regulations regarding administration of the Fund and the
eligibility of victims to receive compensation from the Fund.
Provides that the Fund exists for the sole purpose of
providing restitution to the victims of a corporate fraud
(Corporations Code Section 1502.5).
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2)Raises money for the Fund by directing one-half of the $5
disclosure fee required to be paid by corporations when they
file their annual Statements of Information with the SOS
(Corporations Code Sections 1502 and 2117).
COMMENTS : In 2002, in response to scandals involving Enron and
other corporations, the Legislature created the Victims of
Corporate Fraud Compensation Fund in order to help innocent
victims of corporate fraud who had won judgments but were unable
to collect judgment, either because the corporation was
bankrupt, had disappeared, or was otherwise unable or unwilling
to pay up. The Fund was financed by a fee on corporate filings,
held in the State Treasury, and administered by and pursuant to
rules promulgated by the Secretary of State (SOS). In order to
collect money from the fund, the victim must have won a judgment
and been unable to collect from the corporation despite diligent
efforts to do so.
This bill seeks to improve this system and make it more likely
that valid claims will be compensated. The original legislation
creating the Fund gave the SOS responsibility for administering
the program and drafting the rules that govern the process from
initial application to final reward. This bill effectively
codifies that general regulatory structure, as developed by the
SOS, by placing it into its own Chapter in the Corporations
Code. However, in addition to codifying those rules, the bill
also seeks to improve upon them in various ways, with the end
goal of facilitating timely compensation of valid claims.
Specifically, the most important differences between the
provisions of this bill and existing SOS regulations are as
follows. This bill will:
Establish a new deadline of 90 days for a victim to
receive a determination;
Increase the recovery cap for a single applicant from
$20,000 to $50,000;
Restrict the ability of the fraudulent corporation to
contest payments or block appeals by prohibiting
consideration of issues and fact already established by the
judgment.
Narrow requests for documents when court determinations
or findings of fact would serve as a sufficient substitute
for such documents.
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Fund Appears to be Underutilized : Reports suggesting that the
Fund is severely underutilized lend support to the author's
effort to improve and facilitate the claim restitution process.
As reported by the Sacramento Bee as of early October of 2011,
the fund continues to collect money but apparently benefits
relatively few claimants. According the Bee, more than 700
valid applicants - i.e., those who have already won a judgment
from a court - have applied for restitution from the Fund. But
as of April of this year no more than 10 - and perhaps as few as
seven - claims have been paid out. Although it is not entirely
clear why this is so, the Bee concluded that one factor is an
overly burdensome and repetitious application process. For
example, claimants are often required to provide documentation
in support of a particular matter even where a court has already
issued findings on that matter. (Among other things, as noted
above, this bill would allow court findings to substitute for
some of these documentation requirements.) Whatever the
problem, it appears that even the Secretary of State - who is
charged with administering the program and promulgating rules -
"acknowledges the fund is not running as intended." In fact,
the Bee reported, the fund was so underused that in 2010
then-Governor Schwarzenegger and the Legislature borrowed $10
million from the fund to help balance the budget. (Sacramento
Bee April 11, 2012; see also Dan Morain, "Fraud Victims Fund is
a Travesty," Sacramento Bee October 9, 2011.)
ARGUMENTS IN SUPPORT : The author believes that the Fund is not
living up to its intended purposes. Whatever the cause, the
author believes that "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." Senate
Bill 1058, the author concludes, "restores the original intent
of the Victims of Corporate Fraud Compensation Fund," in large
part by streamlining the Fund's procedures" and thereby ensuring
"a timelier payout of restitution to victims."
Secretary of State Debra Bowen supports this bill because it
"clarifies the application process for the Victims of Corporate
Fraud Compensation Fund . . . administered by my office." By
streamlining the application process while at the same time
maintaining basic requirements, this bill "strikes a balance
between simplifying the process for victims, while maintaining
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the necessary safeguards to ensure that funds are not awarded to
people who are not actually victims of corporate fraud."
The Congress of California Seniors (CCS) argues that this bill
will "break the existing bureaucratic logjam" that prevents
victims from collecting the compensation to which they are
entitled. CCS especially supports the provisions to establish a
90-day deadline for determining eligibility, the increase in the
award cap to $50,000, the restrictions on the fraudulent
corporation's ability to contest payments or make appeals, and
ability to use court findings in lieu of burdensome document
requests.
REGISTERED SUPPORT / OPPOSITION :
Support
AFSCME
Congress of California Seniors
Los Angeles County District Attorney's Office
Secretary of State, Debra Bowen
Opposition
None on file
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334