BILL ANALYSIS �
------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 1058|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
UNFINISHED BUSINESS
Bill No: SB 1058
Author: Lieu (D)
Amended: 8/22/12
Vote: 21
SENATE BANKING & FINANCIAL INST. COMM. : 6-0, 4/11/12
AYES: Vargas, Blakeslee, Evans, Kehoe, Liu, Padilla
NO VOTE RECORDED: Walters
SENATE JUDICIARY COMMITTEE : 5-0, 4/24/12
AYES: Evans, Harman, Blakeslee, Corbett, Leno
SENATE APPROPRIATIONS COMMITTEE : 5-2, 5/14/12
AYES: Kehoe, Alquist, Lieu, Price, Steinberg
NOES: Walters, Dutton
SENATE FLOOR : 31-5, 5/21/12
AYES: Alquist, Berryhill, Blakeslee, Calderon, Cannella,
Corbett, De Le�n, DeSaulnier, Emmerson, Evans, Fuller,
Hancock, Hernandez, Kehoe, Leno, Lieu, Liu, Lowenthal,
Negrete McLeod, Padilla, Pavley, Price, Rubio, Simitian,
Steinberg, Strickland, Vargas, Wolk, Wright, Wyland, Yee
NOES: Anderson, Dutton, Gaines, La Malfa, Walters
NO VOTE RECORDED: Correa, Harman, Huff, Runner
ASSEMBLY FLOOR : 60-19, 8/27/12 - See last page for vote
SUBJECT : Victims of Corporate Fraud Compensation Fund
SOURCE : Author
CONTINUED
SB 1058
Page
2
DIGEST : This bill 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.
Assembly Amendments clarify the definition of "court of
competent jurisdiction."
ANALYSIS :
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 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.
This bill:
CONTINUED
SB 1058
Page
3
1. Reestablishes the Fund and codifies statutory
requirements for 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:
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 U.S. 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
CONTINUED
SB 1058
Page
4
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:
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 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/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;
however, being a spouse or immediate family member
does not alone preclude a claimant from receiving an
award;
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
CONTINUED
SB 1058
Page
5
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:
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.
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:
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.
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
CONTINUED
SB 1058
Page
6
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 Section 594 of the Civil Procedure Code, 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 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.
Background
This bill is based on an article authored by Sacramento Bee
columnist Dan Morain on October 9, 2011, 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.
CONTINUED
SB 1058
Page
7
A review of the correspondence between Mr. Mark Redmond,
representing approximately 500 elderly victims of Senior
Care Advocates, and the SOS's Office, regarding the claims
submitted by Mr. Redmond on the seniors' behalf, reveals a
lengthy saga of frustrated communication. Following Mr.
Redmond's submission of initial applications on the
victims' behalf on
May 14th, 2010, the SOS's Office and Mr. Redmond exchanged
no fewer than ten letters back and forth regarding the
applications (the first dated June 4, 2010, and the most
recent dated August 29, 2011). In these letters, each of
which runs for several pages, the SOS's office details
deficiencies it observed in the victims' applications, and
Mr. Redmond, responding on behalf of the victims, attempts
to resolve these deficiencies by providing explanations and
additional documentation. The correspondence suggests that
there is significant room for improving the rules governing
the victims' application process, as well as the process by
which the SOS evaluates applications, deems them complete,
and disburses money from the Fund. Existing shortcomings
seem to have created procedural hurdles, which blocked
timely access to the Fund by the Senior Care Advocates
victims.
After reading 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
CONTINUED
SB 1058
Page
8
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.
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 were | 5 |
|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 | |
CONTINUED
SB 1058
Page
9
|-----------------------------------------------+----------|
|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 |
| | |
----------------------------------------------------------
3. By March 28, 2012, the SOS's office had resolved a
considerable 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).
CONTINUED
SB 1058
Page
10
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 8/28/12)
Secretary of State Debra Bowen
AFSCME
Congress of California Seniors
Los Angeles County District Attorney's Office
ASSEMBLY FLOOR : 60-19, 8/27/12
AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall,
Bill Berryhill, Block, Blumenfield, Bradford, Brownley,
Buchanan, Butler, Charles Calderon, Campos, Carter,
Cedillo, Chesbro, Cook, Davis, Dickinson, Eng, Feuer,
Fletcher, Fong, Fuentes, Furutani, Galgiani, Gatto,
Gordon, Gorell, Hall, Hayashi, Roger Hern�ndez, Hill,
Huber, Hueso, Huffman, Jeffries, Lara, Bonnie Lowenthal,
Ma, Mendoza, Mitchell, Monning, Nestande, Olsen, Pan,
Perea, V. Manuel P�rez, Portantino, Skinner, Smyth,
Solorio, Swanson, Torres, Wieckowski, Williams, Yamada,
John A. P�rez
NOES: Conway, Donnelly, Beth Gaines, Garrick, Grove,
Hagman, Halderman, Harkey, Jones, Knight, Logue, Mansoor,
Miller, Morrell, Nielsen, Norby, Silva, Valadao, Wagner
NO VOTE RECORDED: Bonilla
JJA:k 8/28/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
CONTINUED