Does The Victims Of Corporate Fraud Compensation Fund Deny Due Process?

by Allen Matkins

In notorious defiance of the California Constitution, the legislature in 2002 established the Victims of Corporate Fraud Compensation Fund. See Victims of Corporate Fraud. The purpose of the fund is to provide ”restitution to the victims of a corporate fraud”.

Several years later, Sacramento Bee reporter Dan Morain wrote a devastating article on the fund: Fraud Victims Fund is a Travesty. He ended his story with

Here’s what should happen: Bowen [California's Secretary of State] should seek the repeal of the 2002 law, cease collecting the money, and refund it to people who paid it.

Unfortunately, that is not what happened. Senator Ted W. Lieu introduced a bill, SB 1058, aimed at mending, rather than ending, the fund. On September 25, 2012, Governor Jerry Brown signed SB 1058 into law. Regrettably, SB 1058 added significant new problems to a very troubled program. See A Bad Bill Becomes Law When There Is More Interest In Enacting A Fix Than Fixing the Problem.

In the meantime, the Secretary of State’s office had proposed amendments to the regulations governing the fund. See California And Nevada Secretaries Of State Propose Rule Changes. This effort was eclipsed by the the enactment of SB 1058. As a result, the Secretary of State completely rewrote its proposed regulations. The comment period on those proposed changes ended on November 26, 2012. See Notice of Modifications to Text of Proposed Regulations.

Under SB 1058, a person who obtains a final judgment against a corporation based upon the corporation’s fraud, misrepresentation, or deceit, made with intent to defraud, may after “diligent collection efforts” submit a claim to the Secretary of State for payment from the fund. Cal. Corp. Code § 2282. The Secretary of State is required to give notice to the corporation (which may contest granting of the application for payment). Cal. Corp. Code § 2282.1 The Secretary of State may deny or grant the application or may enter into a compromise with the claimant to pay less in settlement than the full amount of the claim. Cal. Corp. Code § 2284. The legislation expressly authorizes only the judicial review of a denial of a claim. Cal. Corp. Code § 2287. If the Secretary of State grants the application, she is subrogated to the claimant’s rights. Cal. Corp. Code § 2293.

As drafted, these procedures deny due process to both the claimant and the corporation. Article I, section 7(a) of the California Constitution states that “[a] person may not be deprived of life, liberty, or property without due process of law . . .”. These words are familiar to anyone who has read the U.S. Constitution, but they don’t mean quite the same thing. Under the California Constitution, “a claimant need not establish a property or liberty interest as a prerequisite to invoking due proocess protection . . . Focused rather on an individual’s liberty interest to be free from arbitrary adjudicative procedures . . . procedural due process under the California Constitution is ‘much more inclusive’ and protects a broader range of interests than the federal Constitution.” Ryan v. Calif. Interscholastic Federation – San Diego Section, 94 Cal. App. 4th 1048, 1069 (2001).

When the Secretary of State makes a determination, she is acting in a quasi-judicial capacity to determine valuable property rights. However, neither the claimant nor the corporation have any statutory right to either a pre or post decisional hearing before the Secretary of State. Whenever an agency hearing is required by the federal or state constitutions or statute, an evidentiary hearing for determination of facts is required for formulation or issuance of a decision. Cal. Gov’t Code § 11410.10. The agency’s procedures, moreover, must be conducted at least in accordance with Chapter 4.5 of the Administrative Procedure Act, including the Administrative Adjudication “Bill of Rights”. Cal. Gov’t. Code §§ 11425.10 – 11425.60.

Another glaring problem with the statute is the one-sided nature of judicial review – only the claimant is given the right even though the legislature clearly recognized that the corporation has an interest in the determination.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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