BILL ANALYSIS �
SB 1058
Page 1
SENATE THIRD READING
SB 1058 (Lieu)
As Amended May 1, 2012
Majority vote
SENATE VOTE :31-5
BANKING & FINANCE 8-2 JUDICIARY 8-2
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|Ayes:|Eng, Achadjian, Fletcher, |Ayes:|Feuer, Atkins, Dickinson, |
| |Gatto, Roger Hern�ndez, | |Gorell, Huber, Monning, |
| |Lara, Perea, Torres | |Wieckowski, |
| | | |Bonnie Lowenthal |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Harkey, Morrell |Nays:|Wagner, Jones |
| | | | |
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APPROPRIATIONS 12-5
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|Ayes:|Gatto, Blumenfield, |
| |Bradford, Charles |
| |Calderon, Campos, Davis, |
| |Fuentes, Hall, Hill, |
| |Cedillo, Mitchell, |
| |Solorio |
| | |
|-----+--------------------------|
|Nays:|Harkey, Donnelly, |
| |Nielsen, Norby, Wagner |
| | |
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SUMMARY : Revises and recasts the provisions governing
administration of the Victims of Corporate Fraud Compensation Fund
(the Fund) by the Secretary of State (SOS), by codifying certain
existing regulations promulgated by the SOS to administer the
Fund, codifying changes to other existing regulations promulgated
by the SOS, and adding new statutory language to facilitate the
approval of valid claims from the Fund. Specifically, this bill :
1)Reestablishes the Fund and codifies statutory requirements for
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both the administration of the Fund and for the eligibility of
victims to receive compensation from the Fund, under a new
Chapter 22.5 (commencing with Section 2280) of Division 1 of
Title 1 of the Corporations Code.
2)Provides 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.
3)Increases 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.
4)Provides various definitions for the purposes of the Fund,
including, among other things that:
a) "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;
b) "Corporation" means a domestic corporation, as defined, or
a foreign corporation that is qualified to transact business
in California, as specified;
c) "Court of competent jurisdiction" is a superior court of
any state, or a United States district court or U.S.
bankruptcy court; and,
d) "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.
5)Specifies the information and documentation required to be
provided in an application, and allows for other relevant
documents as appropriate, including, among other things:
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a) 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,
b) The claimant must provide the SOS with 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.
6)Requires the claimant to make specific declarations, including
among other things, that he or she:
a) 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; however, being a spouse or immediate family
member does not alone preclude a claimant from receiving an
award;
b) Has complied with specified requirements; and,
c) 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.
7)Provides certain timelines by which the SOS, claimant, and
corporation must provide specified responses, including, among
other things:
a) 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,
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b) The SOS must render a decision on the application within
90 calendar days after receiving a completed application.
8)Requires 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:
a) 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,
b) 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.
9)Provides 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 set
by the Federal Reserve Bank of San Francisco on advances made to
member banks, not to exceed 2% per year.
10)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, if
final judgment in the underlying action in favor of the
petitioner was by default, stipulation, consent or pursuant to
Civil Procedure Code Section 594, or if the action against the
corporation was defended by a trustee in bankruptcy.
11)Makes it unlawful for any person or the agent of any person to
file with the SOS any notice, statement, or other document
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required under the provisions of this chapter that is false or
untrue or contains any willful, material misstatement of fact,
and specifies that such conduct shall constitute a public
offense punishable by imprisonment and fine, as specified.
12)Permits the SOS to attempt to recover the amount paid to a
successful claimant from the corporation and suspend that
corporation, as specified, and requires that any sums received
by the SOS pursuant to these provisions be deposited in the
State Treasury and credited to the Fund.
13)Requires that the SOS adopt regulations in furtherance of the
administration of the Fund.
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 (CORP) Section 1502.5). Regulations promulgated by the SOS
to administer the Fund are contained in Title 2, Division 7,
Chapter 12, Sections 22500 et seq.
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 (CORP
Sections 1502 and 2117).
3)Provides for the Real Estate Recovery Program (also known as the
Consumer Recovery Program within the Real Estate Fund; Business
and Professions Code Section 10470 et seq.), administered by the
Department of Real Estate for the purpose of providing a fund of
last resort to compensate persons who are defrauded by real
estate licensees. The SOS's Office used the Real Estate
Recovery Program rules as a guide, when developing regulations
to administer the Fund.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, likely costs for administration of this revised program
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are in the $150,000 range, with costs to be borne by the Business
Fees Fund. Unknown costs to the trial courts because of the
potential for additional filings. Costs could be in the hundreds
of thousands of dollars if there were appeals of SOS denials of
claims. This bill creates a new cause of action if the victim's
application for restitution is denied by SOS. SB 1058 also
creates a new misdemeanor for anyone to file any required
information that is false or untrue.
COMMENTS : This bill is based on an article authored by The
Sacramento Bee columnist Dan Morain on October 9, 2011, Fund
Victims Fund is a Travesty, profiling the challenges faced by the
approximately 500 victims of a corporate fraud perpetrated by
James Walker and his now-defunct Senior Care Advocates, Inc. In
his article, Morain detailed the nearly 18-month struggle of
victims scammed by James Walker and Senior Care Advocates to
obtain compensation from the SOS's Office through the Fund.
Subsequent to the Dan Morain article and the correspondence
between Mr. Redmond and the SOS, several legislative offices
contacted the SOS's office in an attempt to determine whether the
case summarized in the Bee article and detailed in the lengthy
correspondence between Mr. Redmond and the SOS's office was an
aberration, or was, instead, representative of a pattern of
over-protectiveness toward the Fund within the SOS's Office.
Findings from those inquiries are summarized immediately below.
How Many Claimants Are Receiving Compensation From the Fund?
1)When first contacted, the SOS's Office indicated that, from the
Fund's inception through August 1, 2011, the SOS had received
701 claims for restitution from the Fund.
Of these 701 claims, five claims were awarded, one claim was
settled during litigation, and one court appeal by a victim
resulted in a judgment confirming the SOS's settlement offer.
When summed, all seven of these claims resulted in a payout
from the Fund of $92,497.
Of the remaining claims, 102 did not qualify for payment,
because they did not meet the eligibility criteria established
by the SOS, 28 claims were withdrawn, three claims were denied,
and 561 claims (most related to Senior Care Advocates) were
pending resolution.
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2)On October 14, 2011, the SOS's office responded to legislative
requests for a breakdown of the 102 claims which did not qualify
for payment, because they did not meet the eligibility criteria
established by the SOS's office in its regulations (a number
which grew to 103 by the date of the SOS's response). The 103
claims were rejected for the following reasons:
---------------------------------------------------------
| |Number of |
| Reason for Denial |Applicatio|
| |ns Denied |
|----------------------------------------------+----------|
|The victims applied for compensation based on | |
|judgments that were not based on corporate | 52 |
|fraud | |
|----------------------------------------------+----------|
|A judgment was lacking, or the judgment was | |
|not issued by a court in California | 23 |
|----------------------------------------------+----------|
|Applications were based upon judgments | |
|against entities that were not corporations | 14 |
| | |
|----------------------------------------------+----------|
|Applications were based on judgments that | 5 |
|were not final | |
|----------------------------------------------+----------|
|Applicants demonstrated insufficient proof | |
|regarding their attempts to collect from the | |
|corporation and its corporate officers prior | 4 |
|to filing a claim with the Fund | |
|----------------------------------------------+----------|
|Applications were submitted more than 18 | |
|months following final judgment | 3 |
|----------------------------------------------+----------|
|Applicant was not a party to the court | 1 |
|judgment | |
|----------------------------------------------+----------|
|Application was based on a judgment issued | |
|prior to January 1, 2003 |1 |
| | |
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3)By March 28, 2012, the SOS's office had resolved a considerable
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number of its outstanding applications.
From the Fund's inception through March 28, 2012, a total of
225 claims have been approved or resulted in victims being
offered settlements (up from less than ten through August 1,
2011), and 25 claims are pending resolution (down from over 550
through August 1, 2011). An additional 27 claims have been
deemed complete and are pending a decision. 118 claims have
been rejected, because the SOS's office found the victims did
not qualify for payment from the Fund (see reasons cited
immediately above). 294 claims have been denied, because the
applicants could not prove damages. 30 claims have been
withdrawn.
How Much Money Is In The Fund? The Fund collects approximately
$1.5 million per year, through the $2.50 annual disclosure fee
paid by corporations pursuant to the Fund's enabling legislation.
At present, the Fund holds approximately $5 million. Because the
Fund went several years without making any significant payments to
victims, and thus built up a significant reserve, it was raided in
the 2010-11 fiscal year, to help address General Fund shortfalls.
The Fund currently has an outstanding $10 million loan to the
General Fund, which is required to be repaid, with interest, when
it is needed to pay claims out of the Fund. From the Fund's
inception to date, the SOS's office has approved the payout of
approximately $2.1 million in compensation to victims (most, as
cited above, in the last eight months).
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0004964