Assembly Standing Committee on Banking and Finance

Collecting art and creating original content. Many organizations leading the way in developing Web3 platforms are now decentralized, which allows users to vote on governance decisions using what are called crypto tokens. Tech experts forecast that within the next decade, blockchain technology, also referred to as Web3, will be essential to most tech companies, and will be integrated into almost all industries. But because of a lack of--there we go--a lack of legal clarity and opaque U.S. regulations, many new DAOs are increasingly incorporating offshore.

Other states like Utah, Wyoming and Vermont have created legal frameworks for DAOs in an attempt to entice blockchain-based companies to bring their tech businesses out of California. One of the most important things that we can do here in our state to ensure that the next generation of new companies still view California as a place to come and innovate and build new businesses is ensure that our laws keep up with the times. AB 1221 creates a legal framework to regulate tax and form DAOs in California and sends a strong signal that California intends to stay at the forefront of the innovation economy.

This bill makes changes to the state's corporations code by updating the California Unincorporated Association Law to include technology-enabled DAOs, blockchain networks and smart contract protocols. Allowing DAOs to incorporate in California, pay taxes, and operate within proper legal parameters will ensure better protections for Californians participating in crypto and Web3 economy while encouraging the formation of legitimate businesses and enterprises. Here to testify with me in support today are Steven Stenzler and David Kerr, who are technical experts from A16Z, who is one of the country's leading venture capital firms investing in emerging technologies.

Good afternoon, Mr. Chair and Members. My name is Steven Stenzler with Brownstein on behalf of the sponsor, A16Z. They are proud to sponsor Assembly Bill 1229, which will create a category within the existing California unincorporated nonprofit association statute that's appropriate for decentralized operations of blockchain networks and smart contract protocols. Many states are enthusiastic about supporting decentralization and are actively looking to implement legal entity forms that support the development of Web3.

Unfortunately, many legal entity structures are fundamentally incompatible with DAOs, decentralized autonomous organizations, primarily because they're predicated on centralized governance. However, even appropriate structures like California's existing UNA law do not provide enough certainty for those statutes to be used by DAOs absent additional state guidance. As a result of these challenges, states are missing out on the opportunity to shape the development of the future of the Internet.

AB 1229 will create a category within the existing California UNA statutes for decentralized nonprofit associations or DNAs, which allows for more targeted statutory requirements and clarity in application. Even though DAOs are widely referenced in describing the need for this law and the intent behind it, the DNA is written as technologically agnostic to accommodate potential changes in technology that could produce new types of organizations in the future. Providing regulatory clarity in this space will send a strong signal that California intends to stay at the forefront of the innovation economy. For these reasons, A16Z is proud to sponsor this legislation.

Thank you. Next.

Hi, my name is David Kerr. Is this one on?

It should be.

Okay. My name is David Kerr. I am a consultant in the space. I'm the head of research for the DAO Research Collective. I have my own consulting company called Cowrie. I'm a member of the World Economic Forum's Commission on DAOs, and I'm also a consultant who works closely with A16Z on the publication of technical memorandum in the field of entity structuring. So their general counsel, Miles Jennings and I have written a series of paper on unincorporated nonprofit associations generally and legal existence and entity structure in the United States, which in many ways is really a summary of taxation.

And so the purpose of kind of this hearing, and to provide questions or to answer questions in related to the California provisions are to explain how the existing California law is being honored and how the proposed language follows very closely to the 2004 and 2005 legislation that followed a California Law Review Commission's report on how an unincorporated nonprofit association should become California law.

How it should be presented, how it was presented, decisions that were made compared to possibly adopting the Uniform Act, which California did not do. And so this bill is written very much in line with the particular style and intent of California's unincorporated nonprofit association laws.

Thank you very much for that testimony. And now I would like to turn to any other witnesses in support that are in the hearing room. Please state your name, organization and position.

Mr. Chairman, Members, RJ Cervantes, on behalf of the Crypto Council for Innovation in support. Thank you.

Good afternoon. Larissa Cespedes here on behalf of the Blockchain Advocacy Coalition in support.

Seeing no other witnesses in support, we will now move to witnesses in opposition. No registered opposition. Any opposition in the room? Seeing no opposition. We will go to the Committee for questions or comments.

Could you clarify what amendments you have accepted?

No amendments.

No, there were no amendments.

Okay, question number two. You said this bill, proposed law, would be the rules of organization, bylaws, rules of procedure have all been--mirror existing law. So is there anything that does not mirror existing law?

Yes, there was an additional language put around 'venue' to clarify how 'venue' could be treated in a situation to a DNA, the type of organization who would use this. There's also a consideration of amendment for jurisdictional requirements for not necessarily having a physical office, which is an existing and solved issue related to existing California UNA law. But there was a consideration that possibly an amendment into place would provide more clarity on that point. There's also an amendment where we would like to change one of the definitions for just--a small change to one of the additions--the definitions that we had provided, and that's the existing amended possibilities for right now.

I see. And could you clarify what the voting requirements would be?

Within the organization?

Yes.

At a baseline, it would revert to 50% and normal quorum. Now, what it does do, is the law provides for the governing principles to be met through algorithmic decision making and smart contracts. And so what that essentially means is that the members of these organizations would be able to perform their votes through the blockchain utilizing this technology, and that would be an acceptable form of vote.

I see.

And so, as long as those votes follow the rules--and at that point, the governing principles can be written by contract by what the members want it to be. So there's a great deal of flexibility--so the default would be the 50% quorum, or it would be the quorum and the 51%. But obviously, they can contract to whatever they want governance to be, and that those past governing proposals would also be part of the governing principles for the organizations.

Okay. Thank you very much.

Assembly Member Bauer-Kahan.

Hi. So I guess I'll start with the DAOs, which I hear what you say about us ensuring continued innovation in California and the ability for folks to operate here, which we should always be trying to do, but never at the expense of good governance, I think. So I guess I want to start by asking you to respond to what was raised in the analysis regarding--I mean, the federal government's really coming down on these, right?

There are, I'm sure, many good actors in the space, but not all, right? So given that the ability to continue to operate in this way, that allows anonymity--and I understand the blockchain and how much transparency there is in that framework, if you will, or in the blockchain--I guess will you address that? I'm concerned about that.

Yeah. I would characterize the federal government's enforcement actions to be against crypto generally, and very few have been against the DAOs themselves. The only one I can really think of that's DAO specific would be the Ooki DAO, the BYX CFTC case that's coming down through California right now over the entity form being an unincorporated association, which is not to say that there's not obviously, issues with the treatment of crypto, the federal government and all of these things.

At the end of the day, organizations are able to form around a variety of purposes. And a DAO--I think you had asked to kind of an answer in response to the report's criticism of DAOs. I think one of the things that's really important to realize is that DAO is not a term of arc and can mean any number of organizations.

This bill is written very specifically for the technological intersection between protocol operations that exist on the blockchain, but it's not limited to the blockchain, and laws that were written well before that technology existed. And so I wouldn't necessarily classify this as a limiting form of legal treatment in these organizations.

The point of all of that is to say this law exists for very narrowly carved out existing law to provide a path for entity structure, for a form of technology that would be beneficial to California, to the US, to have it be part of our tax code and give it clarity in what its entity form should be.

So I guess, I mean, it's interesting because the other witness was talking about how it's broad to deal with innovation in the future, which I concur with. I think the bill is incredibly broad. My concern, to be frank with you, is actually that it's not as narrowly written as you just described, but I can imagine a ton of people who are now LLCS. And to be clear, when we allow entities to form, right. We allow people to form entities to protect them from liability.

That is what these entities do fundamentally. We also allow, in the law, mostly case law, for piercing of the corporate veil, right? We allow for situations where you've created an entity to protect yourself from liability, but the entity is false, right? It really is the liability should fall on the individuals. And we do that, and the courts have done that because we want to make sure that there is proper liability.

So I guess my concern here is that I think this is incredibly broad, and I think it will allow for individuals to be anonymous and to allow for entities where you don't know who those individuals are, that are part of these decentralized nonprofit associations, that, to be frank, can be anyone who's over 100 members, and they can be making a profit as long as they distribute that profit. I mean, that seems boundless. They have to use--it does say you have to use blockchain or other distributed ledger technology.

But I don't know that I think that's an incredibly limiting factor in how this would all work. And I think there's serious concern on my part that that anonymity could lead to, in the first, most direct instance, tax fraud. We don't know who it is that's getting these profits because it's all anonymous, but I guess we know that they're out there because of the blockchain.

And then beyond that, just the ability to ensure liability is correctly appropriated. And so I see what you're trying to do in the DAO instance, but I think creating this entire exception in the nonprofit context, again, where you can have profits as long as you distribute them, is concerning to me. I mean, I do think that it could lead to some people using this mechanism in order to hide themselves from liability.

Well, yes, and as you describe it, that would be fairly terrifying. But luckily, that's not quite how it's designed. When you mentioned the distribution of profits, it actually puts a limitation on being able to distribute profits and income to members. And so what that does is it takes away a percentage of earnings based off of ownership share. It removes all of that. And so it doesn't have the ability to relay profits in the way that you're talking about because it's much more narrow than the existing nonprofit UNA under California law, in that it does put a prohibition on having distributions of profits and income.

That is not how I read it. I mean, you can still make profits as long as you distribute them. Isn't that what it says? I can't find the language, exactly, but that was my understanding.

So it's antiquated language. And so you can be a nonprofit and have for profit, which means you can make money.

Right.

And that's how you'd find yourself in having a situation where you'd be paying tax as you have earnings and you pay tax on those earnings, but you are prohibited from distributing those on a pro rata share to your membership. And so it doesn't operate as a proxy for stock is more or less what we're-

Right, but you can still distribute them.

Well, sure, but what's nice about distributing is you can distribute them for compensation, right? So if someone were to perform a service above $600, we're filing for 8832 elections. So this will be taxed to C Corp, and we'll be required to file the W-8, W-1099 reporting for any transaction above $600. So what this law gets you is compliance with the harm that you're afraid that it does not. This will allow us to have 1099 reporting for the-

On the entity's part, but not on the individual's part.

The individuals who receive compensation or any value above it from it, the entity provides that information for those individuals-

With their names?

That's what's done. I mean, that's the requirement by the law. So yes. If you're looking for the practical of how that gets the operations of that, we can get into that. There's a lot of third party service providers that provide an opportunity to have AML and KYC checks done online.

So in order to receive compensation from these entity forms, they have to fill out the information. And it does not necessarily get provided to the entity itself, but it's coordinated with the entity. There's a mailing of 1099 at year end. There's an estimation of payments for W-8 withholding. And so all of this is done for numerous organizations that exist currently.

So how would the taxes work, whether it be for the corporation or an individual? Is there like a tax shelter here?

No. The entity would pay C Corp. We would elect for 8832 election and it would pay 21% on corporate federal rate for earnings, less expenses. And then there would also be a characterization of the state tax obligations for a filing of state tax forms. This is to bring the entity forms forward into the light and have them pay tax. The solution at hand is to address the fear of what this law isn't.

Got it. You want to go further?

Yeah, because I guess I'm just--I mean, my understanding of why we need this is because they can't fall under current law, right? The way that DAOs want to operate--and this isn't a criticism--in that the actual 100 people who get together and create these DAOs want to have anonymity, right? I mean, that is my understanding. Am I getting that wrong? I'm trying to understand DAOs. DAOs are new to me. I understand liability a lot ...

I mean if we're talking about anonymity, I think one of the things that we should probably reverse is when we're dealing with the blockchain, that transaction goes online. So if we also provided who that transaction pertained to, it'd be like being inside someone's bank account and having access to everything.

Right.

And so one of the areas that we're looking for as a step forward in how we effectively and incredibly legislate on this issue is what laws and regulations are important for keeping harm from occurring. This law provides a path to make sure that the tax is being accounted for and paid, that the informational reporting is being paid, or that the informational reporting is being made. That there's not the money laundering concerns or the anonymity. What's left at that point is the members of the organization.

Well, members lists are not a requirement for California UNAs currently. They're not a requirement for California nonprofit associations currently. And this would be the area of law that's added. So it would be atypical and somewhat hard to justify for why this law would have to give a member listing report.

But you just said that for every single person who receives, if there is profit, and profit is distributed--and again, not on a shareholders type style, but to all of the however many people you have--then there would be 1099s filed with how much they received.

Yes.

So then they would no longer be anonymous, presumably to the government.

To the government, yeah. But being a member is not necessarily the same as getting compensation, right? Not every member is going to receive compensation from one of these organizations. So you wouldn't have reporting requirements if you were simply a member who is voting not receiving compensation.

Right. That's fair.

Yeah. So that's the group that gets to remain anonymous. That's who's left after meeting all of its other responsibilities.

Got it. Okay. So that deals with the tax fraud concern, I think, although again, not a tax expert. But I guess what I'm trying to understand is this notion of, as I said, are we creating a way in which we're allowing individuals, and I understand all the transactions are on the blockchain. But that these groups are forming. There's this entity doing business of some sort. And now we don't know who those individuals are. And if there is a liability question, we can't even try to pierce the corporate veil because we don't know who those folks are. I guess that's the question I have.

Well, even California, without looking into the 1099 availability, let's take that off the table. Then we still have filing requirements for the service of process. And there's certainly an argument to be made that one of these organizations would be required to have file UA-100 requiring service of process. So the service of process owner would know who at least two of the members are. So there'd be a disclosure on that front. So it's not a completely unknown group of individuals.

And then also the entity form would be known, so they would have to come forward to participate in the cause of action, to participate in the complaint, they would have to have a vote of the governing principles and authorized administrator to appear.

But wouldn't the vote happen via blockchain? I thought that's what you said, that all those votes in answer in response to Assembly Member Dixon, you were saying the votes could all happen through the blockchain.

Yeah, but blockchain doesn't necessarily mean anonymous. It would still be, "This person's going to be our representative." Well, that person comes forward as their-

Oh, yes, for the one person, yes. Sorry, I thought you meant all of them in order to vote.

Yeah. And, I mean, I take your point, right. But it's an existence of limited liability for any organization that doesn't have member listings. So I would say, yes, we're in that group. But I think the more apt comparison would be, is it better for that organization to exist in the United States under existing and acceptable U.S. laws, or have it be external to the United States? Because the organization is going to continue to function and exist. There's a path towards compliance here.

There's a path towards responsible youth. There's a path towards following informational reporting and all of the things necessary. The alternative is just not doing that. And so I say it's a marked improvement over leaving these in the Cayman Islands, leaving them entity lists and leaving them in the hands of foreign jurisdictions to regulate.

Yes. And I just want to make sure we have more ability to regulate them than, say, the Caymans. So that's what I'm trying to focus on, for example. You know, I know what the author is trying to do here, and I respect what the author is trying to do here. And so I'm going to support the bill today, but I do think the bill needs some work to try to get significant more clarity and tightening around who this will apply to. I mean, I think right now, as I read it, it's incredibly broad and leaves open just opportunity that I don't think we may want to be there. And we can provide opportunity for good actors while also closing the doors for bad.

What kind of organization would form out of this? Can you give a concrete example?

Yeah, we're mostly looking at the group of people that surrounds a protocol DAO. So protocol is a collection of smart contracts that operates a function, and around that is the voting, the governance and potentially control of a treasury. So that's where the value point comes from. What we're really talking about here is the members of that group, the people. That's what the organization forms around. And so that for the purposes of this bill, is what we consider to be a DAO. There's debate on that concept generally, but it's the organization of people.

So that would be an association who's directing the development of that protocol, improving it potentially, steering funds, making hiring of contractors, doing the 1099 reporting to make the protocol better, and spending that money in a way, and following the tax reporting around sending that money to improve the overall chances of that protocol working, continuing to work. And so really it's almost like a trust. It's a group of people who work around the protocol whose job is to improve it, to make it function better. And they vote collectively, they vote communally to effectuate that purpose.

Thank you very much. Are there any other--Assembly Member Wilson.

Thank you. And follow up to that. The analysis notes that 1% of token holders of the 10 major DAOs control 90% of the voting power. So how do we ensure that a small number of people do not exercise significant control over the direction of these organizations?

And before you answer that, a quorum is like gold to a chairperson and a Committee. And we do have a quorum. So we're going to establish a quorum. Chief consultant, will you call roll?

Grayson. Here. Chen. Bauer-Kahan. Here. Cervantes. Dixon. Here. Mike Fong. Here. Gabriel. Petrie-Norris. Soria. Here. Waldron. Wicks. Wilson. Here.

So we do have a quorum. And you now can answer.

It probably doesn't matter because it's a large ratio. I would probably contest the exact specifics of that figure. I think it's probably lower. But the point still stands, right? If you have a lot of people who are in power and control it, then is it really fair? Is it really decentralized? All of those things. There's a couple of answers to that question. It's the funny thing about any new technology, you get a quick question and then a very long answer. It's in three parts answer.

So I'll try to keep it a little more high level than that. Ultimately, the technology is essentially open source, and so it can be forked and it can have another version of it that operates independent of any malicious interest or atypical interests or out of proportion interest. That's something that the technology is capable of doing.

So if there was an un-outsized influence on the overall governance of any one of these protocols, they would have the option of going forward, running the same program, developing a new community around it and proceeding forward. So that's a really exciting thing for the users of this technology never being under the yoke of oppression when it comes to being forced to stay inside of an institution that's not working or properly respecting their value or function. And so that's one of the exciting things.

The other one is--and this is an answer that gets thrown around a little too much. But I want to give credit to it because it's--that it's new, that right now it's developing. There's been a lot of investment, and the technology behind it is not as robust. And so right now, the disproportion that you're talking about is the investors capture of value and control while we're building out this technology with the expectation being as the technology exists for longer, those ratios would fall to a much more manageable and acceptable appearing percentage.

Okay, thank you. And then given you talked about it being new--sorry, was that-

Please.

That it's new technology, all of this is new, and it's dynamic and changing. And so we know that the federal regulators and courts have not really weighed in on the existence of the DAO's part. Where do you see that landing as you go forward?

Well, entity forms--so the concern that we have is that these entity forms, these DAOs, without any other legal entity selection, are going to be a general partnership. That's the expectation. And so the unincorporated association, the California version of it, and the nonprofit version are different sides of the same coin. The general partnership is the four partnership version. The unincorporated nonprofit association is the nonprofit version.

And so I would say given how the cases that have been brought forward and the concerns that have been made, I think we're clear we're in the right place, that the general partnerships and unincorporated associations is the appropriate place to look at these entity forms.

All right, thank you.

Any other questions from Committee? Comments? Seeing none. Assembly Member, would you like to close?

Yes, and thank you, Mr. Chair, and thank you for those great questions. Every time we discuss this issue, I learn a lot, and there's clearly a lot more that needs to be done to dig further into this. This bill will also go to judiciary, and we will also have the opportunity to address some of the questions that were brought up by the Members. Ultimately, we know that this is an area where there's a tremendous opportunity for innovation for our state.

We want to make sure that we have the opportunity to welcome that innovation, but also to regulate, to bring these things out of the shadows and provide those types of entities that allow us to do the taxation and the oversight and the regulation at the same time as we welcome them in our state. I do think there's a huge potential for DAOs. And so with that, I ask for your aye vote and appreciate the Chair and the Committee for your leadership and your great insight that will help us as we move forward.

I have a motion from Assembly Member Wilson, second from Bauer-Kahan. With that, thank you very much. And chief consultant, please call the roll.

The motion is do pass and refer to GCR Committee. Grayson. Aye. Chen. Bauer-Kahan. Aye. Cervantes. Aye. Dixon. No. Mike Fong. Aye. Gabriel. Aye. Petrie-Norris. Soria. Aye. Waldron. Wicks. Wilson. Aye.

The bill has seven votes. It gets out. We will hold it open for absent Members. Thank you so much. I do want to address the consent calendar. Do I have a--so I have a very excited Committee group here--Assembly Member Bauer-Kahan motioned and second by Assembly Member Wilson. Chief consultant, please call.

On the consent calendar, AB 1296. The motion is do pass to Appropriations. Grayson. Aye. Chen. Bauer-Kahan. Aye. Cervantes. Aye. Dixon. Aye. Mike Fong. Aye. Gabriel. Aye. Petrie-Norris. Soria. Aye. Waldron. Wicks. Wilson. Aye.

Consent calendar has eight. File item 6, AB 1296. It gets out, we will hold the roll open for absent Members. I am going to go ahead and go to Assembly Member Alvarez, file item number 3, if that's okay, since you're on Committee. And so, Assembly Member Alvarez, out of courtesy, please come.

Thank you. I appreciate the opportunity. Thank you, Mr. Gabriel, for allowing me to jump ahead a little bit. I come to you with AB 1247. Actually an idea that I had last, when I was here for the end of last legislative session, and that was partly addressed by the Federal Government with the Emergency Savings Account Act under the Budget Act of last year. However, I think that that piece of federal legislation may still fall short in trying to address the issue of emergency savings.

And so that's why I'm here with you today to talk about AB 1247. A recent study conducted by the Federal Reserve said that almost half of Americans would struggle to come up with $400 to help cover an emergency expense. The same study found that six out of 10 households experience at least one financial emergency every year. And it should come no surprise that black and Hispanic adults, as well as adults with lower income, are disproportionately facing these challenges every single year.

These emergencies include medical bills, if someone gets hurt, a water leak, car breaking down, or something else that needs immediate fixing that people don't have access to cash to be able to address. As families and individuals are recuperating from disasters that the pandemic had on them, the state would be wise in analyzing how we can assist them during times of emergency with an emergency expense.

AB 1247 creates the Emergency Savings Account Commission that will conduct an in depth analysis on the prevalence of individuals who do not have access to sufficient funds when faced with financial emergencies. The Commission will look into causes of the problems, solutions for fixing those problems, and if the state can play any role in those solutions.

My staff has met with the Department of Financial Protection and Innovation to identify potential members of the commission and receive feedback to clarify questions that the analysis will capture. Members, it is crucial that we start looking into emergency savings as an issue for our residents, and I hope that this bill will be the first step along that road. Thank you very much for the opportunity. I look forward to your questions.

Thank you so very much. And we are looking for support. Simply state your name, organization, and position. Seeing none. No registered opposition. Are there any members in the audience in opposition? Seeing none, we will bring it back to Committee. Okay, we do have a motion and a second. So no comments, no questions. You get off really easy. I'm sorry. I stalled way too long.

Dang it. We were almost there.

All right. My opinion is I think your concept is good. I just don't know where, how far you're going to go when you say, to prevent or mitigate the impact of unplanned financial emergencies. What happens after this study?

Well, hopefully, the study will come up with a better understanding of the state of Californians in particular and where they are as it relates to emergency savings. As I stated earlier, there are some federal or nationwide studies that demonstrate that half of people cannot even come up with $400. And so the idea is, are there mechanisms? Are there tools, are there vehicles, savings accounts, other mechanisms where we can incentivize individuals from saving and encouraging to save so that if that emergency does occur, they have somewhere to go.

I think that's highly laudable. It's ironic. There's some other bills, I don't know if it was in this Committee, just to require courses in financial literacy, and they were not supported. So I think that's a companion issue, is the financial literacy and to help people prepare for emergencies that impact their lives. I think that's quite laudable. I just. Kind of ironic to me that financial literacy isn't a component. Would you consider financial literacy, or do you see that part of this discussion?

I think that would be part of this discussion, and the commission could come up with findings that identify that as a potential recommendation. And I agree with you that financial literacy is really critical, especially for young people, and great to have them in high school or in college, but the commission would be the one that provides those recommendations on what potential next steps would be.

Very good. Thank you.

Thank you.

Assembly Member, can we count that as your closing statement, or would you like to...

Thank you very much. I request your aye vote.

Thank you so very much. With that, Chief Clerk, please call the roll.

AB 1247, the motion is do pass and refer to the Appropriations Committee. [Roll Call]

This bill has eight votes. It gets out, we will keep the roll open for absent Members.

Thank you, Mr. Chair. Thank you, Members.

And again, extending courtesy from Assemblymember Gabriel, who is on the committee, we will go to file item number five, or, I'm sorry, file item number four. Assemblymember Kalra AB 1414, item number four. The recommendation is do pass, as amended, to apply to the bill's provisions to consumer debt incurred on or after January 12024 and to incorporate amendments already approved by Judiciary Committee. A description of those amendments is in the committee analysis. Assemblymember Kalra whenever you're ready, you may begin.

Thank you. Thank you, Mr. Chair, and members. I want to start by thanking the chair and the committee staff for working with my office, and I'll accept the aforementioned committee amendments. AB 1414 would protect consumers against predatory debt collection lawsuits by requiring debt collectors, debt buyers and original creditors to produce and sue on a contract for consumer debt on consumer debt cases rather than common counts.

The COVID-19 pandemic has certainly exacerbated financial hardships for Low income families, leading to missed bill payments and increased chances of exposure to debt collectors and debt buyers. Debt buyers are collection agencies who purchase past due debts from creditors, sometimes for pennies on the dollar, who oftentimes attempt to collect the debt under outdated causes of action like open book accounts. These pleadings, also known as common counts, are subject to lesser evidence standards and have helped collectors evade modern consumer protection laws in tens of thousands of cases.

According to the Center for Responsible Lending, attorneys represent defendants in only 2% of debt cases, with two thirds of all cases resulting in default judgments that can garnish wages or seize bank accounts. AB 1414 simply ensures the contract that gave rise to the consumer debt claim is produced and sued on in court if a contract was not entered into. Individuals can sue on an open book account so long as they provide records of all debit and credit transactions that made up the alleged balance.

This bill will close an exploitative loophole that has only driven people further into poverty and holds debt collectors, debt buyers and original creditors to the same evidentiary standards as every other business. We look forward to continuing to work with the opposition, and here to testify in support is Elizabeth Gonzalez, supervising staff attorney at Public Counsel, and Desirée Nguyen Orth, director of the Consumer Justice Practice at East Bay Community Law Center. Thank you.

Good afternoon, chair Members. My name is Elizabeth Gonzalez and I'm an attorney with public counsel. Working with low income consumers and victims of predatory debt collection practices, I see firsthand the harm of so called common counts. AB 1414 is a common sense step to stop lawsuits against debtors on claims that they do not understand and that are not based on the contract that they actually entered into. Common counts allow judgments against the most vulnerable without the assistance of legal services organizations,

elderly clients see liens being placed on their homes, reducing the little generational wealth they have to pass down. Other clients can't pay their rent because their bank accounts have been levied. In just the last month, public counsel faced several debt collection cases brought on common counts. One was dismissed after we filed the motion to compel production of documents that the plaintiff refused to provide, probably because they never had the documents.

In another, a disabled defendant believes bankruptcy is her only option, as she has almost no way of getting to the courthouse for her trial and is unable to understand the common counts claims enough to defend herself. Tens of thousands of these claims are filed against Californians each year, and for those not able to obtain legal representation, the results are horrific. The use of common counts is confusing by design. Today's hearing require detailed legal analysis and experts to explain common counts.

How can we expect nonenglish speakers, seniors and other vulnerable defendants, including veterans, to understand and agree to these archaic claims? The opposition puts forth several misstatements in its position. Common counts should not be used when a contract exists. Common counts are new agreements being forced on debtors without their knowledge. This is not equitable. The best way to protect consumers would be for this bill to apply immediately to all pending lawsuits.

The proposed amendments make the bill prospective represent a major and very difficult compromise for the author and the co sponsors. The proposed amendments may leave consumers vulnerable for years, but we believe this bill will eventually help low income debtors have a better chance at economic security by putting the same burden of proof on debt collectors as any other business bringing a lawsuit. Because even with the amendments, this bill will, in the long run significantly help hundreds of thousands of Californians.

We respectfully ask for your aye vote. Thank you.

Next.

Good afternoon. Chair and Members of the Committee, I am Desirée Nguyen Orth, director of the Consumer Justice Practice at East Bay Community Law Center, clinician of UC Berkeley Law, and a newly appointed member of the Debt Collection Advisory Committee to the DFPI. With over a decade practicing debt defense, I have seen countless cases based on these archaic causes of action, many times even in cases with original creditors who have the original contract.

This is because, as even AB 1414's opponents concede, common counts make declaration cases easier to win without proving the merits of the claim. They make it easier to obtain judgments because debt collectors don't have to produce a contract on which the alleged debts are based. The opposition has asserted that they only keep contracts for two years, but nothing is keeping them from retaining the relevant contracts for a longer time.

And if for any reason they don't have the contract, then they, like any other business, should not sue. Further, some common counts are based on principles that are antithetical to basic contract tenants, such as interpreting silence to be assent. The opposition is using small individual business owners, such as gardeners and others who may not have entered into a written contract for their services, as a shield to defend their use of these unfair causes of action.

However, this bill would not affect those businesses, as AB 1414 only applies when a written contract is entered into with consumers. The opposition also worries about how this bill will affect the debt collection industry as a whole. However, the reach of this bill is far more narrow than the critics claim. This bill will not take away anyone's right to collect a debt. It does not change the way a debt collector may engage with consumers before litigation.

A consumer Financial Protection Bureau 2016 study found that many debt collection companies are able to successfully collect on a debt without ever filing a lawsuit. To be clear, a consumer may still be called, texted, emailed or written to within the federal law. The only change is that if a lawsuit is filed on a debt based on a contract, the contract must be the basis for the claim. This is the same burden placed on all other businesses. AB 1414 is about leveling the playing field.

Thank you for your consideration. I respectfully request your aye vote.

Thank you so much for your testimony. And now we will go to the room for others that are in support. Simply state your name, organization and position. Thank you.

Good afternoon, Chair and members Danielle Kando-Kaiser on behalf of the co sponsors of this bill, California Low Income Consumer Coalition, a statewide coalition of over a dozen legal aid providers who are all in support. Thank you.

Thank you so much. Any others in support in the room? Seeing none, we will now turn to opposition and if registered opposition can please come up.

Good afternoon, Mr. Chair and Members Melanie Cuevas with the California...

Please speak... There you go.

Is this better?

Yes, much better.

Good afternoon, Mr. Chair and Members. Melanie Cuevas with the California Bankers Association in respectful opposition. Unfortunately, we believe that this is a sledgehammer approach. It eliminates the use of a common count proceeding, forcing plaintiffs to instead pursue the much more onerous breach of contract, which has an entirely different burden of proof. In a common count case, a plaintiff may present an account stated or a bill, and the burden of proof is a preponderance of the evidence. An implied promise to pay must be proved.

So these cover also verbal agreements. AB 1414 would force a contract to be produced in perpetuity, perhaps even 20 or more years after the initial agreement. Federal law sets the standard for record keeping, and this measure completely ignores the realities on how long an original creditor must store an original contract. Requiring an original contract will also be detrimental to small businesses like gardeners, hurting both small business owners as well as the communities that they serve.

But again, it's not only the compliance issues associated with the record keeping. This measure requires an entirely different burden of proof. It is unclear to us why the common count standard, which is derived from English law and has been around for centuries, is now too low. If this measure were about accuracy and documentation, we are open to getting an understanding of the specific nuances and working on language to address gaps in standards and in procedures.

It's also worth noting that the proponents point to 118 cases over a five year period from 2012 to 2017, data that are 10 years old. Members, the Fair Debt Buying Practices Act went into effect for debt buyers in 2014 and more recently for debt collectors as well. Further proponents indicate that out of these 118 cases, 46 did have sufficient documentation, but the data does not detail the cases where the documentation was insufficient. What exactly was missed? Were they licensed? Are they following current law?

This is a tiny and incomplete sampling to justify a sledgehammer change. Outlawing common counts and forcing creditors to instead use a breach of contract does not improve accuracy, it just makes collecting legitimate debts much harder. We respectfully ask for your no vote.

Thank you, Mr. Chairman, Members of the Committee. Cliff Berg on behalf of the California Association of Collectors. We are in respectful opposition to this measure. This measure would appear to make it impossible to collect on consumer debt. Particularly, we are concerned about what are known as open book accounts, which the proponents did not mention in their testimony. This bill is anti-consumer in its essence because it would have the effect of driving hundreds of thousands of California small businesses to change the way they do business.

You heard proponents talk about the need to sue on contracts. That's great, except hundreds of thousands of small businesses in California don't have contracts. This bill, in essence, limits the ability to bring an action on an open a book account. An open book account is what is used by your dentist, by your dry cleaners, by your landscaper, by your pool person, by your gardener. All of these small businesses in California send statements of account.

By requiring a contract and trying to force a change in the business model of hundreds of thousands of small businesses, it's going to make it impossible for those businesses to, in essence, ensure that they can collect on the amount owed. The end result of that for consumers, frankly, is going to limit the availability of credit. So you will see signs in office that say payment due at time services rendered. How does that help the consumer?

What will happen is consumers will use high interest credit cards to pay for the services because they can no longer access credit. Common counts have been used forever in California. The problem that we seem to be trying to address with this bill is the fact that the proponents believe that common counts have less documentation requirements in court than suing on a contract.

However, we negotiated a bill with Senator Mark Leno and the California Attorney General to enhance documentation requirements for debt buyers. That was extended to debt collectors under a bill by Senator Wieckowski. The proper approach to dealing with this problem would be to extend those requirements to common counts, not to eliminate the use of common counts in California. This is a meat ax approach to a narrow problem that could be addressed and worked through if the proponents had talked to the stakeholders before putting forward this bill. Respectfully urge your no vote on this measure.

Thank you for your testimony. Now, we will turn to opposition in the room. Simply state your name, organization and position. Thank you.

Good afternoon, Chair and Members. Naomi Padron on behalf of the California Credit Union League, in opposition.

Good afternoon, Chair and Members. Lindsay Gullahorn on behalf of the California Community Banking Network, respectfully opposed.

Mr. Chair and Members, Joe Devine with Platinum Advisors on behalf of the Receivables Management Association, in opposition.

Good afternoon, everyone. Robert Moutrie, California Chamber of Commerce, also in opposition.

Mr. Chair and Members, Mike Belote for the California Creditors Bar Association, in opposition.

Any others in opposition? Seeing none. We will bring this back to the Committee for questions and comments. Assembly Member Petrie-Norris.

Hello. All right. I came in midway through your presentation, and I'm trying to quickly come up to speed on the bill and some of the issues that are being debated here. And I guess I'd just first like to clarify, because some of the concerns raised by the opposition, particularly in terms of the impact that this would have on our neighborhood dentists, the gardener, et cetera, I think do raise concerns for me. So I have two questions. Is that accurate?

Would the dentists now have to have a contract in place before they would actually be legally able to pursue a claim? And then second, I believe the opposition sort of framed it as an uncertainty about why the common count standard is insufficient. So I guess if you could address those two questions. And then lastly is the suggestion that the opposition witness proposed something that would address your concerns without perhaps some of the unintended consequences that have been raised.

Thank you. Through the Chair. Thank you, Assembly Member. If the claims were accurate, I would be concerned, too. But is this simply not true. On open book accounts, you can still sue with records of all debits and credits if a contract wasn't entered into in the first place. So your neighborhood dentist, your gardener, all those accounts that aren't the traditional ones, you sign some big contract ahead of time.

As long as they have the bookkeeping to show what the debts are, they can still absolutely use those open book accounts. Really, the opposition is talking. What the opposition, although they're mentioning small businesses, is really the debt buyers and debt collectors. And there's no reason why there should be no contract produced like every other business would have to show in order to collect debt. They don't want to have to necessarily show that contract.

But for consumers, I think knowing what that contract is and having to sue on it, I think is relevant. This is not about the mom and pop local neighborhood business, which still under this legislation, would have the ability to use open book accounts to pursue debts owed to them. And there were some other follow up questions.

Yes, hi, can you all hear me? Okay? I think there's also a little bit of misunderstanding of what common counts are. So an open book account is one...

Speaking to the microphone. Thank you.

An open book account is a common count. An account stated is a common count. So all of these claims are lumped together as common counts. Assembly Member Kalra is correct that this bill does not require anyone to have a contract if they didn't have one to begin with. So if the gardener, my gardener, we don't have a contract. So I pay him every month. If I didn't pay him and he wanted to collect against me, there wouldn't be a contract.

He can sue me on an open book account. He can sue me for goods and services provided that were not paid for. Nothing in this bill is prohibiting that. The other question was about how will this affect these small businesses? That dentist office. See my answer above. If the dentist never entered into a contract with their patient, they can continue to sue on an open book account. They would just need to show an open book, meaning every single credit, every single debit, every single transaction.

That's what an open book account is. The question in terms of why now? If common counts have been used forever, why now? Backing up, and I'm sorry, I'm a lawyer in the room, common counts are equitable claims, right? So that's something that you have if you don't have a legal remedy at law. When you have a contract, you have a remedy at law. You don't have to go after an equitable claim. So why have they been used? Because debt collectors have been able to do it.

Because there aren't enough of me's and there aren't enough of Desiree's to go into every court case and say, this is a breach of contract, they need to show the contract. This is where the defaults are coming from. The opposition in what they provided to counsel, indicates that every single lawsuit is reviewed by every single clerk, by every single judge. That's simply not true. These defaults are entered with a stamp and a piece of paper.

The idea that these equitable claims should be used because someone has lost or destroyed or manipulated a contract is just contrary to basic agreements and meeting of the minds and the requirement that things should be understood and agreed to before someone is sued on it. I think I answered your questions.

Yes. But I would love to just then hear if the opposition could clarify, because what I just heard is that the concerns you raised are dealt with through another mechanism so that our neighborhood dentist, gardner, et cetera, would actually have a remedy.

Yeah, we respectfully disagree with the proponents. We believe that the bill as introduced clearly prohibited bringing the common count on an open book account. The amendments that were taken in Judiciary, which are not in the bill, tried to address it by, and you heard the word when she testified, all.

All. So, the language that they added, which is not in the bill, requires the dentist bringing the open book account to have all the debits and credits going back, the way we read it, forever on the account, which is the problem. It creates an impossible and ambiguous standard. We're happy to work with them if they would clarify the law, if that's what their intent is. But the bill, as we read it, still creates a significant obstacle because it requires all records.

All right. We'll maintain decorum. Assembly Member Petrie-Norris, did that answer your question from opposition?

Yes, it did. And I guess my request from the author is either tell me you already have, or are you willing to work with opposition to ensure that we do not have an impossible and ambiguous standard that would result in unintended consequences for, as I said, the folks who are running our neighborhood, small businesses, who need to believe that they're going to get paid and have an ability to make. A claim if they can't?

Well, yeah, absolutely. In fact, I've even had a conversation with the Chair about that, making sure that that's not the intention. And in fact, if you look at page seven of the staff analysis in number eight, under the amendments, there were some amendments that were supposed to be entered into during Judiciary Committee that were not, but is now in the latest version of bill that I think does help to further define a book account, but absolutely more than willing to continue to work on that if the Committee sees it necessary to do so.

Thank you very much.

Thank you.

Assembly Member Bauer-Kahan.

And if I may, I think the opposition reworded the question, which is why there was a disagreement. She's not saying that you can bring a common count on an open book, which is what you were saying. She's saying you can still have an open book account and you can bring a lawsuit under the new mechanism. Yeah, she would agree with you. She's getting rid of the common count on open book. She's getting rid of a common count.

So I think you actually both agree about the fact that open book still exists. You're just disagreeing on the mechanism. So I just wanted to say that because that was a frustrating back and forth. Because I think there's no question that open book still exists in this bill. And I agree with you, Mr. Kalra. But I will say, I guess I have two points of confusion.

One was, Ms. Cuevas, you said that you would have to keep these documents for 25 years, but you would know the statute of limitations is four years, so you'd have to bring one of these claims within four years. So 25 years from now, I just feel like, I guess I'm confused by that notion that one would have to keep the documents for 25 years given the statute of limitations.

Yeah, it's the word "all" which has been referenced several times in this conversation. So like I said, federal law governs how long we have to keep those contracts. The word "all" in here, we interpret that as something different, I think, than the proponents do. The word "all" is concerning to us.

So I mean, my guess, Mr. Kalra, given what I think your intent is here, your intent is not for them to have to hold on to contracts in perpetuity. And given the statute of limitations, I don't think that makes any sense. So I would imagine four years. I mean, now it's 25 months, as I read, and the federal law requires 25 months. Is that what, I can't remember what the analysis said, but there's some requirement to hold documents now.

Yes, it might be extended to the statute of limitations, which is four years, but I assume you can work something out to ensure that they're not holding in perpetuity. That seems unnecessary and not necessary under the bill, given that there's a statute of limitations. So I will say hopefully you'll work on that because that seemed like something that's easily resolvable.

And then I guess part of what, I am inclined to support this bill because I don't really quite understand why the opposition is arguing that there should be a lower standard. I mean, that's really fundamentally the debate here, right? The author is asking for the regular standard to apply to these contract disputes, and the opposition is arguing that the status quo, which is a lower standard, should apply. I understand the argument for a higher standard. I think you guys laid that out pretty well.

As someone who used to volunteer for EBCLC, I think that they have the best of intentions at heart when here talking for their clients. So can you guys explain to me why that lower standard is necessary?

We're not arguing for a lower standard. We are arguing for a different approach to satisfying the concerns regarding additional documentation. So as I mentioned earlier, we passed a Leno bill, the Fair Debt Buyers Act, which was intended to increase documentation standards for suits brought by debt buyers or collection agencies.

It seems to us that extending those same requirements to common counts rather than eliminating the common counts would have the same net effect, but would avoid elimination of the common counts which have been part of California law forever. You know, the reason you have higher standards on the written, arguably, is because you have statutes on the book that require them and you could extend those statutes to the common counts rather than eliminating the common counts.

But I think you guys want to eliminate the common counts. Yes. Okay. So I think they want to eliminate the common counts.

I think they want to eliminate common counts because it has less evidentiary standards or documents, right?

Yes, that's what I'm saying is I think you think there should be a lower standard.

No, we think we should have the same standard...

You think the standard today should apply which is a lower standard than the one they're arguing for.

And what I still don't understand is why you think a lower standard should apply.

Right.

But we don't want a lower standard. We're happy to agree to more documentation standards. We just don't think you should eliminate common counts because people don't have written contracts. And so requiring you to bring an account on an action on a written contract when they don't exist just doesn't make any sense.

So I don't think that they're saying you have to bring an action on a written contract. I think they've already said that you bring an action on an open book account, which I agree with. They want to get rid of the common count because it requires a lower burden.

They would like if somebody is coming after you on a contract, be it an open book or a written contract or a verbal contract, there's all sorts of kinds of contracts, as we all know, that you have to go into court and you have to prove that under contract law. That's what I understand is the intent of the bill. You want the common count to stay.

Now, I understand that the lower... wWat I think is happening here is the debt collectors benefit from not having to meet that burden. But Californians are suffering because that burden isn't met. Right. People in poverty are having to pay debts without any reasonable burden put onto the person trying to get their debt, which is what they're saying. So I guess that's, at the end of the day, the fight that is happening here is what is the proper burden of proof for someone trying to collect on a debt?

And I don't think that there's any, and I have not heard a rational reason why these types of debt collection should have a lower burden than if I got into a contract dispute with Ms. Wilson. I would have to go into court on a breach of contract claim and show the level of evidence that Mr. Kalra is asking for. So I guess consistency would support this. But I guess I've gotten the answers that I'm going to get. Thank you.

I am now substituting for the Chair. Are there any other questions at the Committee? I have a question just to sort through the lawyer talk, which has been very helpful. But at the end of the day, we do want to help. Clearly the small business people, gardeners, dentists, whatever they are, flower people, whatever, to avoid having to go to court to settle a dispute on an agreement of amount owed. So is these proponents saying that what are they called common counts should be dispensed with, you're saying that they would still exist.

So my agreement with my gardener and the amount owed, and if I missed a payment, for some reason, he doesn't need to take me to court. If I miss a payment to him of amount I owe to him, does he have recourse to get that money back?

Yeah, Madam Vice Chair. I mean, look, at the end of the day, if someone refuses to pay you for something, ultimately the recourse is going to court.

Of course.

But the idea of this is that they wouldn't have to produce a contract that never existed. They can use their open books, which they can use their debit, saying, I did this service, I was owed this much. They didn't pay for it. That's the evidence they can go to court with.

I think ultimately, the common count concept was really meant in those kinds of scenarios. When you had your neighborhood grocery store, they had a ledger. If you have your gardener, that comes in that scenario where a lot of folks have. That is the concept that really led to the idea of common counts, not debt collectors buying contracts, buying up debt, and coming after you. And that is not the concept under which common counts were created.

We're still going to allow for those small businesses to continue to pursue the debts owed to them without having to show a contract by just showing the ledger of what is owed and what services were provided.

Okay. And I just want to ask the woman who spoke in opposition, was it you who mentioned that there were very few cases of this? 100 in some cases, over a long period of time? What kinds of cases?

That is what the proponents are citing. So the proponents cite 118. Sorry. The proponents cite 118 cases over a five year period, many of which happened before Fair Debt Collection went into effect, which is our concern. And this probably dovetails a little bit into Assembly Member Bauer-Kahan's concerns as well. I think that a lot of our concern is because we don't understand what the issues are with common count now in order to necessitate such a drastic change.

To my colleague's point, evidentiary standards, we're happy to talk about adding more documentation to a common count. I don't think we understand that 118 cases necessitate a change of an elimination.

That's kind of where I was going. So it's only been 118 cases that are just disputes between a small grocery store and their customers.

I think there are 118 cases that she's referring to are the examples of abuse. Not all the cases out there that have been brought in. And just to clarify, debt collectors are not debt buyers. The term seems to be used interchangeably by some people here. The debt collector is representing the original creditor, which may indeed be a small business. A debt buyer buys debt, debt collectors don't. My clients are third party assignees who are standing in for the original creditor and collecting behalf of the original.

For someone to pay their bills.

Yeah, exactly. Make sure that they're getting paid for goods and services. So I mean, there's two sides to the consumer argument, which is there's like the consumer who owes the debt and protecting their rights, but the debt collector is representing the small business who didn't get paid for goods or services.

Okay. All right. Thank you very much. Back to you.

Thank you very much. So as you're talking and discussing, you say one thing and all I see is head shaking. No, on the other side. And then when you say something, I see temperature rising on this side. I'm assuming that there have been some conversations between the author and opposition where you've been able to get together and work out some dialogue.

I think much of the conversations actually happened and very grateful to both Judiciary and your Committee staff as well, through Committee staff with some of the opposition concerns raised through Committee staff. But we're more than willing to continue the conversations, especially in terms of definitions.

I understand it's important to make sure the definitions are very clear so we don't have the unintended consequences of impacts on local neighborhoods and individual small businesses to collect their debts. The bottom line, more than willing to continue to work with Committee staff opposition for further clarification as necessary.

I appreciate that. Are there any other questions? Assembly Member Wilson.

Can you clarify for me, and when you gave the definition of the difference between a debt buyer and debt collection, and the debt collector is standing in proxy basically for the person who, the original creditor. What type of documentation is required, whether through best practices or through law, are they required to give you in order to stand in to collect that debt?

So California has extensive laws on debt collection. We have something called the Robbins-Rosenthal Act, which regulates it. And then you have the federal Fair Debt Buyers Act. So it requires you to contact the consumer. It goes through a whole process of what you have to send them, and then it establishes, like the right of the consumer. If they dispute the debt, you have to stop collection entirely. So it's a very detailed and laid out process in the law.

And then the concern the Legislature had and the Attorney General had was that debt buyers were dealing with older debt and the consumer might not recognize the debt as being their debt. So that's why we passed the Leno bill to enhance the documentation requirements for debt buyers in particular. So happy to share that with you at some point. I don't have all the details, but it's a very extensive list of documents that have to be presided, as well as a process that you have to go through.

Thank you for explaining the process part. I just wanted to make sure I understood that as a debt collector, not a debt buyer, just on the debt collection side, when you're taking that debt. I just want to make sure I understood what information you were getting from the creditor. The original creditor.

Yeah. You're representing the original creditor. And so they give you whether it's a contract or whether it is a receipt and account statements, et cetera, et cetera, et cetera.

Okay. And then you're using that on what has been referred to the lower standard of the common count.

I mean, theoretically. I would not assume that every debt collection action that goes to court is based upon a common count. It could be based upon a contract. And I think it's important for people to understand that debt collectors, for example, in California, have hundreds of thousands of clients with hundreds and hundreds of thousands of accounts. So a retailer a bank. You're not, like, getting Cliff Berg's account or Lori Wilson's account. You're getting the whole bundle from Macy's or the whole bundle.

And so of those, a very small fraction ever go to lawsuit. I mean, what I've been told by the industry is something like 2% go to a lawsuit because the main goal is to contact the consumer, work out a payment plan, and get the debt paid through some kind of agreement not to go to court because going to court is very expensive. Debt collectors, also in California, as third party assignees, are barred from small claims court. So you have to hire a lawyer, you have to pay filing fees. You have to go to court.

Understood. Thank you.

Briefly. So, under a common count proceeding, which is the issue at hand here, if a collector were to pursue that, there's many instances where the collector presents a bill. So a statement of the account. So, for example, a credit card statement rather than the original contract because that is an implied agreement to pay. And then that collector would have to back it up by a preponderance of the evidence and prove.

Okay, letter at a time. Then one, just if you indulge me for a moment to the author. One of the examples that we're using was a dentist. And I know when I go to my dentist, every time I receive services, I have to actually sign for them and say, I agree that, yeah, you can do this service and whatever. Does that not constitute a contract or is that...

Quite possibly. The opposition mentioned dentists, so I just want to say that if there was a scenario where I think a gardener is probably a more appropriate scenario, but bottom line is local business, small business that may not be in a contract.

That doing these actual signing every time you get some type of service?

Yeah, I think nowadays with the way the healthcare industry is, it probably is a very extensive contract. But there's plenty of other examples of businesses locally where there isn't necessarily. Gardner, I think is a pretty common one.

Or someone who does your hair or something.

Exactly.

Okay.

Cool, ma'am. Any other questions or comments? Seeing none. Mr. Kalra, I do appreciate your passion to protect consumers and for the work that you're trying to accomplish and your intention through this bill. I've heard the stories through staff and I do have an understanding as far as where some reform may be needed.

I also have listened to testimony today as well as heard both sides talking with and through the Committee staff, and understand that in some cases it sounds like you're talking similarly, but there is definitions or clarity. I understand that small business is not your target, that mom and pops, and that open book isn't something that you're necessarily going after.

So as you're moving forward, I would really encourage that the two parties get together and really try to work out the language and hammer out clarity so that we're not saying one thing on one side of the table and shaking heads no on the other side and at least come to an agreement to disagree. Yeah, we all agree that that's this or that. So with that, I do understand the frustration and confusion on the opposition side. That resonates with me a lot. And so that is the context for the Committee's amendment request that we're making. And I believe I heard you say you're accepting amendments.

That's correct.

All right, so with that, the bill continues to move forward. My staff and I are open to further conversations about how to fine tune the proposal or otherwise ensure a smooth transition. So with that, do I have a motion and a second? We do. Okay, with that, Chief Clerk, please call the roll.

AB 1414, the motion is do pass as amended. [Roll Call]

That bill gets out with seven votes. We'll keep the roll open for absent Members. Thank you so very much. And now we have the illustrious Committee Member, Assembly Member Gabriel. Please come, Assembly Member Gabriel. I am going to step out to another Committee. I will hand it over to Vice Chair and be back as soon as possible.

Okay, the next Bill. AB 5554. Assemblymember Gabriel.

Thank you, Madam Chair and members. And I want to just begin by saying this is a minor clarifying bill that is simply meant to clarify the laws around standing for a society's protection of cruelty to animals. It is a bipartisan bill that would make clear that they have standing to file specified civil actions to enjoin behavior impacting animals, to enforce civil protection laws. And so that is very much limited to injunctive relief.

And the idea here is really to avoid wasting time and court resources and private resources on collateral litigation around standing. Just to clarify those issues, and I wanted to make clear, as I had a conversation with the chair, this bill is in no way meant to impact production agriculture in the State of California. These issues have really come up, mostly in the context of litigation involving puppy mills, and there has been a lot of collateral litigation in that case about whether or not SPCAs have standing.

This would just clarify that. So, again, the production agriculture is not at all the target of this bill. I think my family is among the largest consumers of chicken fingers and hot dogs in the State of California. So we want that to continue. We simply want to make sure that there isn't a lot of wasted time and energy on collateral litigation around standing issues, and that folks at SPCAs can go after those who are harming our animals and committing cruelty against animals.

And just to be clear, this bill does nothing to change the rights or remedies around the substantive law around animal cruelty. It is simply purely clarifying the procedure. And so with that, I have with me today to testify and support Christopher Berry, a managing attorney for our sponsor, the Animal Legal Defense Fund, and would respectfully request your aye vote yes.

Please proceed.

Thank you, and good afternoon, Chair and members of the committee. My name is Christopher Berry. I'm a managing attorney at the Animal Legal Defense Fund, where I've worked for 12 years, participating in, and now managing litigation on behalf of animals in this state. So under California corporations code 1400, the law at issue here, this is a law that was passed over 100 years ago, and it gives SPCAs the authority to proffer a complaint for the violation of any law relating to or affecting animals.

And while the intent of the legislation is to authorize spcas to file complaints to effectively remedy and prevent cruelty to animals. It hasn't consistently worked that way in practice, and I can tell you from my personal experience that defendants will use this old and archaic language of the law to create procedural hurdles, delay the litigation, and try to escape an accountability about whether the animals are being illegally treated. So there are two recent cases that illustrate the value of this provision. One.

The first one is Louvie Kenny. This involves an operation where sellers are serially arranging the sale of puppies on Craigslist to unsuspecting families. These families met sellers in parking lots and paid thousands of dollars to add a puppy to their families. But as soon as they brought the puppies home, the puppies exhibited symptoms like diarrhea, vomiting, and lethargy.

And they quickly discovered that the puppies were sold deathly ill with diseases like giardia and parvovirus, which are contracted in contaminated environments, severe, often fatal, and very difficult and expensive to treat. The families fought hard to keep the puppies alive. But in the end, in this lawsuit involving six puppies directly, only one puppy survived. Dozens of dogs were found at the seller's property in unsanitary conditions. They dyed the puppies golden brown in order to pass them off as specialty golden doodle breeds.

They sold the dogs underage before their immune systems had properly developed, fabricated vaccination records, and used apps to create burner phones to evade responsibility. Despite the awareness by traditional government law enforcement agencies, the operation continued for years. And it was only when a civil lawsuit was filed that included a claim to prevent cruelty under Section 10404 at issue here that a court entered a preliminary injunction to stop the future sales under this scheme.

And just to briefly mention the second case that I had talked about as well. That case, KRU SPCAV Anthony, involves hoarding dozens of dogs in unsanitary conditions. Animal control reports and eyewitness testimony over the course of several years documented, quote, "the smell of urine and feces so strong I could smell it across the street where I parked my truck." Quote, "it smells heavily of urine and feces, and also, quote, the exceptionally strong smell of feces at the property."

They documented at times about 20 and at one point at least 50 dogs documented by animal control reports. And although citations and warnings were occasionally issued, action to definitively shut down the legal operation was not pursued by the traditional government law enforcement due to limited resources. A civil action brought by an SPCA resulted in a permanent injunction entered in that case, protecting dogs in squalid conditions. So, just to finish with a couple of points here.

Now, opponents contend that the bill will lead to frivolous lawsuits brought to harass agricultural interests. But this bill is just a clarification of what existing law already allows, and there are numerous safeguards against abuse of the legal system, and really no evidence that the legal system is being or will be used in an improper way. And I also want to emphasize that this is not a bill especially targeting agriculture.

It is legal to raise and kill animals for food in California, and that will continue to be true after the passage of this legislation. Animal cruelty is a high bar, requiring someone to abuse or neglect an animal with malice or intent in order to be violating that law. So the proposed language here at AB 554 simply provides an important clarification that SPCAs do, in fact, have standing to obtain an injunction to prevent animal cruelty.

This will save countless time, prevent the delay of cruelty prevention efforts, which can be delayed for years when procedural issues like this become a focus. So thank you for your consideration of this important measure, and I respectfully ask for your aye vote.

I appreciate your comments and clarification because there are all kinds of concerns that dairy cows and eggs and rodeos. How would rodeo animals be affected by this bill? Animals, I guess. Bulls and horses. Pardon me. I jumped the gun here. Let's go to other speakers who are here to speak in support, please. Thank you.

Good afternoon. Nickolaus Sackett for Social Compassion in Legislation in support.

Any other speakers in support, please come forward. How about speakers in opposition, please come forward.

Thank you. Good afternoon, chair and Members. My name is Kirk Wilbur. I'm with the California Cattlemen's Association, and we are respectfully opposed to AB 554, which would create a new civil cause of action for SPCAs to sue for alleged violations of animal protection laws.

Animal health and well being is of the utmost importance to California's cattle ranchers, who work very closely with veterinarians, undertake continuing education in order to always be on the cutting edge of animal welfare within the State of California, despite California having the highest animal welfare standards in the nation. However, there exists individuals and groups within the State of California who simply believe that animal agriculture itself constitutes abuse. Some of these groups go to extreme lengths to disrupt ranching activity.

Some will steal animals off of farms and ranches under the euphemism of open rescue. For these groups, there is simply no standard of care that my ranchers can adopt which will satisfy them. Assembly Bill 554 would empower these ill intentioned groups to inflict irreparable reputational and financial harm upon ranchers utilizing even the highest standards of care. That is because of the particularly low bar with which an organization can qualify as an SPCA under California law.

Specifically, any group of 20 individuals within the State of California, 20 citizens, can incorporate as an SPCA simply by referencing corporations code Section 1400 in their articles of incorporation. That is an incredibly Low bar today, SPCAs can proffer a complaint in a criminal court, but ultimately, it is up to a prosecutor to vet whether there is in fact a violation of substantive law, whether there is sufficient evidence to prosecute that violation, and whether filing that case is justified.

AB 554 removes this unbiased evaluation, allowing any 20 individuals within the State of California, no matter how ill intentioned and ill willed, to directly file warrantless or harassing lawsuits against ranchers and other animal caretakers in civil courts. At a minimum, we believe that this bill should be significantly narrowed to apply to abuse directed at typical pet animals, including puppy mills.

As we have understood and appreciate the author clarifying is the intent of this bill, rather than enabling harassment against animal agriculture and other stewards of animals, as we believe the language would currently allow. To be clear, we strongly abhor any animal abuse, and we believe that those individuals who practice animal abuse or cruelty to animals should be prosecuted to the full extent of the law in criminal courts.

But because AB 554, we believe, is ripe for abuse in the civil courts, we must oppose it, and we urge your no vote. Thank you.

Thank you. Please make your comments.

Thanks, Madam Chair, Taylor Roschen, on behalf of the Western Fairs Association. And I promise I did not. If you look around, you see all the fair posters up. I did not select this room for this hearing for this. But we'd like to echo the comments of my colleague, Mr. Wilbur. California is home to 74 fairgrounds, District Ag Associations, citrus fruit fairs, and county fairs. All are which in all of your districts.

And those fairgrounds offer entertainment and community events, education, including STEM education and youth leadership activity, many of which involve animals. They also serve as important evacuation hubs during emergency events for both residents and for animals. So, absolutely contrary to the examples provided on companion animals by the sponsor, which is abhorrent, fares abide by the strictest animal welfare and handling procedures in the state. And while it may not be the author's intent, as he articulated today, protests and public demonstrations, to Mr. Wilbur's point, are amazingly disruptive.

And we're concerned that the provisions of the bill around offering civil claim authority and injunctive relief could prove very challenging if an action is brought, even a specious action against a fair for animal handling after three terrible fair years with limited to no attendance, enabling a party to potentially halt a fair or dedicate resource, or fair. Having to dedicate resources to defend themselves against a specious claim would be incredibly calamitous financially for a fair and would potentially degrade opportunities for those small rural communities.

That depends on those fairgrounds for every reason I mentioned. And so we look forward to working with the author and the sponsors to make sure we appreciate his commitment today to not include livestock and animal producing, food producing animals. And for these reasons, at this time, we respectfully request a no vote.

Thank you. Let's bring it up to the committee. Any comments from committee members? Oh, opposition jumping too far ahead. Please come forward.

Madam Chair and members, Jason Bryant, on behalf of Western United Dairies. We're in opposition. Thank you.

Good afternoon. Katie Little with California Farm Bureau, in opposition.

Madam Chair, and members, Brian Rees, on behalf of the California Poultry Federation, regretfully here, in opposition to the bill in its current form.

Good afternoon. Erin Norwood, on behalf of Safari West. Excuse me. In opposition.

Chair and Members Tricia Geringer, with Agricultural Council of California, respectfully opposed.

Thank you Madam Chair and members. Annalee Akin, on behalf of California Grade and Feed Association and the Pacific Egg and Poultry Association, opposed.

Madam Chair and members, Joe Devine with Platinum Advisors, on behalf of Professional Bull Riders and the Professional Rodeo Cowboys Association, respectful opposition.

Any other comments? In opposition. Seeing none. We'll come to the committee. Assemblywoman Wilson.

Thank you. Can you clarify for me in regard to the civil versus criminal aspect of it, because specifically, as it relates to those from, like the Cattlemen's Association, all the different groups that related to AG saying that now that would open up from the civil, is it currently right now in law? Outside of the clarification, is it both civil and criminal, or is it only criminal current today?

So first, thank you for the question. I think that just to know we're very ego to get to a place where there's no opposition on this one, everybody agrees. I think part of the difference is there's a little bit of maybe difference of opinion about what current law says. So our view is that this bill just clarifies current law, that there can be civil enforcement.

And I think what supports that is the Judiciary Committee analysis, which made, I think, very, very clear in this bill passed out of Judiciary Committee with unanimous bipartisan support, with both Republicans and Democrats asking to add on that. That was the current State of the law. That's reflected in the committee analysis from this committee, that is civil as well.

I think the referral of this bill also backs that up, because under the interpretation that's offered by the opposition, we would be in Public Safety Committee, we wouldn't be in Judiciary Committee, and we wouldn't be in this committee. I asked them to prepare a legal memo for me. I looked it over. I tried to understand the plain language of the statute says any law. So I think we're struggling to understand a little bit why they believe the current state of the law is as it is.

But everyone who has taken an independent look at this, and our own look at this as well, has come down on the conclusion that this is simply clarifying existing law.

And has there been ledge council opinion on it.

So deferring to the advice of our in house counsel.

Never mind. I already know the answer to that. I guess you could say it.

I would just say we had an initial conversation that gives me great, great confidence.

Understood. Understood. I got that same advice.

I was going to get in a lot of trouble.

And to the opposition. It's your belief that this clarification, as they're stating it, and I know you might disagree on whether it's clarifying or not, but this clarification would increase liability for you as it relates to individuals who would then weaponize the law, who are opposed to just your business practice in general, even though your business practice complies with the law?

Yes. Would you mind if I answer first that issue of whether there is currently a civil cause of action. We don't believe there is currently a civil cause of action. Again, Section 10404 permits either an SPCA or a humane officer to bring these cases. We note that in the portion of the corporations code dealing specifically with how you qualify a humane officer, it cross references specifically bringing suits in compliance with the code of criminal procedure.

There is no equivalent citation in the laws currently to civil procedure. I don't want to get too much into the precedent, the legal precedent and the codes. What I will simply say is, if this were in fact a clarification of existing law, there would be no need for the bill if this was settled law.

Anytime there is a demur or a motion to dismiss a case against a group like ALDF, they could simply cite in their response to that binding precedent that demonstrates they have standing to sue in civil courts. That binding precedent doesn't exist. And that is why we are here today.

I don't want to get too bogged down into what is or is not current law, because obviously you all may change what current law is, but I just want to put a button on the fact we don't believe you can currently bring a civil suit under Section 1404. To your question to us about whether or not this would increase litigation in the civil courts against animal agriculture interests, we absolutely believe that to be the case.

There are groups out there who will use every weapon in the toolbox to try to eliminate animal agriculture from the landscape in California. As I mentioned, there's folks that do open rescue. If there is an avenue for those folks to have civil standing in the courts, they will begin bringing lawsuits against my members who are small family operators. Now, those lawsuits, there will be damages the moment the suit is filed, because a lot of these groups are very big pr groups. They're very big fundraising groups.

So they will be publicizing these lawsuits even if they are meritless. We do believe frivolous lawsuits will be brought if this bill is passed. But I think one thing that we shouldn't lose here, there may be lawsuits that are not strictly frivolous, but that a prosecutor would not bring under the current penal codes. So, for example, what constitutes cruelty to an animal, that is not explicitly defined in the penal codes. That is a question for the trier of fact.

Now, if we're talking about roping a calf, if we're talking about putting a cow in a squeeze chute for the purposes of safeguarding those animals while we're treating them medically, I don't think most prosecutors would find that to be animal abuse. But to a group that is anti animal agriculture.

They can make a claim in civil court that that is animal abuse that is going to harm our members the moment that lawsuit is filed and it's going to force them to defend that suit in the civil courts.

I'm good. Thank you.

All right. Any other committee comments? Yes.

Thank you, Madam Chair. I want to thank the author for bringing this forward, but also the opposition for expressing the concerns. I represent a district that is heavily agriculture and our families depend obviously on these jobs. And so I'd like to figure out, because I think that, as you mentioned in the previous committee, you had bipartisan support.

But I think that it is important that we are crystal clear about what the real intent is behind the legislation. And so I think that if the sponsor is saying that that is true, that we figure out how the language can be reflected in that way. I want to be able to support this.

But I also do want to make sure that we don't enter into this sphere where we have litigation, additional litigation that was not intended given the sponsors claim that this is just simply to clarify and I don't know, I guess didn't understand the comment on also the Ledge Council providing clarification. I'm new here, so I'd like to kind of get your.

It's just a question of privilege.

Okay.

That's the issue there, if I might. I super appreciate the comments. And I think again, we're going to continue to engage in conversations through opposition. I think we all want to get to the same place. This should be a bill that is an easy bill that should be on consent with everybody agreeing that cruelty against animals and puppy mills are things that are reprehensible and not something that we should tolerate here in the State of California.

I do want to make a couple points on the frivolous lawsuit piece, if I might. First of all, I think that there is a much lower likelihood of that happening because again, the only relief that available here is injunctive relief. There's no money damages.

So for the incentive for people to bring a lawsuit, I mean, I think we often have debates about private rights of action and frivolous lawsuits listing in the cases where there's money damages, where there's big potential paydays for attorneys and for plaintiffs, none of that is available in this case. The only kind of relief that could be achieved is injunctive relief. The second thing here, which I would hope would give the opposition some confidence, there's actually a lower bar in many other states. Right?

So they're talking about how easy it is for people to organize an SBCA. There are states out there like Oregon and North Carolina where any citizen can bring a lawsuit. So if what they are saying is true, that it's going to open up the floodgates to frivolous litigation you would have seen in North Carolina and Oregon, tons and tons and tons of suits.

Now you have a state like, you know, with a strong tradition of farming and ranching and rodeos and everything else that has not been subject to that. So I understand, I guess maybe in theory, this fear of activists out there, but there are states out there that have a lower bar than what this bill would propose that have not been subject to that. And I think that should put everybody at ease.

So, I guess, is there a commitment to work on clarifying language to make sure that the opposition comes to either a position of neutrality or in support? I think I want to be able to be supportive because I do support the intent. I just want to make sure that I don't end up supporting something with unintended consequences that will impact my district. And so for me today, I will stay off.

But I really want to see this before it comes back to the floor where I have an opportunity to support the true intent of the bill 100%.

And I appreciate that. And I think we've already offered some language to try to address their concerns. We will continue to have those conversations with them. What we don't want to do is have this bill actually change existing law in a way which rolls back protections for animals and would make it easier for people who are running puppy mills to evade justice and make it easier for people who are abusing domestic pets to evade justice. So I think we've had conversations.

I've personally read legal memos that they've handed me. We're going to continue to have those conversations. I absolutely think we can get to a place, but that's going to require some additional conversation.

So to the opposition, are you guys willing to work to make sure that we get to a place where, again, we don't roll back protections to go after the puppy meals, but we ensure that we also don't have some of the unintended consequences that you guys speak about?

Yes, certainly. Now, part of that comes down to our fundamental disagreement about what current law is and whether that would be rolled back by amendments that we have offered, for instance. But I will say that we have offered up amendments to the author's office. We've been in discussions about this bill. We did author, for instance, a legal memo I am fully willing to continue discussions with the author's office on amendments. I know those in our coalition are likewise willing to do so.

So we're happy to try to come to an agreement to the extent we can, but so far, we simply haven't gotten there.

Any other committee comments? A couple of things. We are going to keep this portion of the hearing open until Assemblymember Grayson returns, because he wants to participate in the discussion. So we might as well just keep talking for a few minutes before we take a vote. I don't know when he'll be returning. He's taking a vote in another committee, so hopefully it will be shortly. But I do have a question. I was going to say I'll ask another question. Go for it.

My question is, I think there's unanimity that we all are opposed to puppy mills. And if that's your. oh, here's Mr. Grayson now. We're still going, Mr. Grayson, so you can ask your question. Isn't there a way that you can put guardrails around this language to exclude agriculture or recognize existing law rodeos, and also to prevent some organization of 20 people to suddenly become an SPCA organization under current law? Can you put some guardrails around this?

That really would make us all comfortable that we're only going out because I sit on the Judiciary Committee, and the discussion there was all about puppy mills. And so the agricultural issue has just recently surfaced, I guess, with further analysis of the potential issues related to the bill. So what can you do to assure all of us?

I think what I expressed before, we are 100% committed to continuing those conversations to try to understand how we might put folks at ease again. I think we've made it very clear about what we're trying to do, and we hope that we will eventually get to a place where everybody feels comfortable with this. Where we're struggling is that we have yet to find a source, other than the opposition that supports their read of existing law. And that's where the challenge is.

Every independent entity that has looked at this bill has interpreted existing law in the exact same way that we have. Every committee, the Rules Committee, the plain language of the statute, case law, all of that supports our interpretation. And so we want to continue to work with them and find a way to come to some agreement. But I think there needs to be a little more conversation to make that happen.

Well, I agree with your intent. However, you can't predict what any other organization is going to do and find a way to thread this very narrowly.

And that's why I cited the example of all these other states. Right. There are many other states that currently have in law the same standard here that we're advocating. And then there are actually states, as I mentioned, like North Carolina and like Oregon, that actually any individual, not even an SPCA, any individual. And we have not seen sort of what the opposition fears, which is this deluge of activist lawsuits that are going to put people out of business.

If the Legislature in the State of North Carolina felt comfortable with a standard that's even more, even a lower bar than what we have, I think that should give us confidence that we're on the right track here.

I will turn it back to the chair.

Thank you, Assembly Member. Thank you, Assemblymember Dixon. And my apologies, Assemblymember Gabriel. I missed your presentation and the testimony of the opposition. However, it's my understanding that you are very open to continuing to work with opposition, trying to find clarity, even if it means trying to find third party or ledge counsel or whatever, to come to an agreement of what the term really means or what the bill is really doing.

Because I know that production ag was not your target, and we just need that commitment to know that in your bill, you'll help make that so that it's clear that it's not your target.

Correct. And yes, I mentioned in my opening how much my kids like chicken fingers and hot dogs, and they are absolutely not our targets. So we will work with them.

I would hope at some point you elevate your children up to a.

I got a lot of them. It's rough.

Another level. A lot of children.

A lot of children. Okay.

This is digressing, really.

Okay. Yes. We don't want to miss Assemblymember Petrie-Norris, please take your liberty.

Well, and I, too, apologies was out for the bulk of the discussion, but it does seem like there continues to be, I guess, a disagreement around whether or not this is clarifying authority or, in fact, establishing a new arena of authority. So what is the plan to resolve that? So I think the good news is if intentions are aligned, then it's easier to craft a legislative solution that addresses potential concerns. And it sounds like intentions are, in fact, aligned.

So what is the game plan to resolve that disagreement of perception and make policy adjustments to ensure that what's in the letter, the law, reflects the intention?

Yeah, I think it's a great question. I mean, I think probably without jumping ahead of ourselves, a little bit of creative lawyering and thinking about legislative language that we might include, that could put some folks at ease and I have a few thoughts about how that might be done and eager to have that conversation with the opposition. As I mentioned, we really want to make it clear that this is just clarifying of his existing law.

Again, the root of the issue here is because it's 100 and something year old statute, and it's awkwardly drafted. And you saw this explained very, very clearly in the Judiciary Committee analysis, which said, this is a non controversial bill that is clarifying a 100 plus year old statute. People who were running puppy mills were able to take advantage of that awkward legislative language to create all these procedural loopholes that folks who are trying to shut down puppy mills had to jump through.

And that was just creating a lot of extra time and expense and putting animals at risk during the course of that litigation. And so the idea here is just to clarify that.

So as long as we can get to that point, and as long as we don't feel like we're actually rolling back animal protection law, I don't want to roll back the substantive protections that are out there, that allows the folks who do this good work to go after puppy mills and those who abuse animals and are committing cruelty against household pets. As long as we can get to that place, I think we can find a way to move forward.

And I think it just requires a little bit more conversation. Again, not glossing over the fact that right now there's a little bit of a different read about what existing law is, but I actually have some ideas about how we might be able to get there.

Thank you.

And I'm very committed to having those conversations and trying to get there, because, again, I think this should be a bill that everybody should feel good about and everybody should feel comfortable supporting.

Thank you.

Suffice.

All right. With that, Assembly Member, would you like to close?

Yes.

Appreciate the conversation and the questions. Respectfully request for your aye vote.

Thank you very much. Chief Clerk. Oh, we do need a motion. I thought we had one already. We need a motion and a second. So motioned by Assemblymember Bauer-Kahan, seconded by Assemblymember Fong. Now that we do have a motion and a second, Chief Clerk, please call roll.

AB 554. The motion is due. Pass. [Roll Call]

That has eight votes. It gets out, we'll keep roll open for absent members.

Thank you.

Oh, yeah, that's right.

Last Bill.

All right, the next bill in the file is AB 39, file item number 5. The recommendation is do pass, as amended, to the Appropriations Committee. Chairman Grayson, when you are ready, please begin with your opening statement.

Thank you Madam Chair and Members of the Committee. I am pleased to present to you Assembly Bill 39, which will help create a safer and more sustainable cryptocurrency market for California consumers and business. First, I accept the Committee's amendments that are detailed in the analysis produced by Committee staff. This Committee has heard plenty of testimony in recent months about the harm caused by an under-regulated crypto market. We held an oversight hearing in February to hear what California is doing to regulate crypto.

And one big takeaway from that hearing is that we need to do more. We need to give DFPI the tools it needs to promote responsible innovation in the crypto industry. AB 39 will give DFPI those tools. This bill will help individual investors and the companies hoping to grow their operations here in California. And AB 39 also is similar to last year's AB 2269. However, there are key differences that make the program easier for both DFPI and crypto companies.

These changes strengthen the proposal without compromising its consumer protections. For example, a company with a valid New York license can receive a conditional license here in California, which will help prevent delays for companies seeking licensure. I look forward to continue working with stakeholders as the bill moves through the legislative process, as it hopefully gets out of this Committee. So with that, I would like to introduce Robert Herrell, who is testifying on behalf of Consumer Federation of California, and Desiree Nguyen Orth, who is also speaking on behalf of East Bay Community Law Center.

Very good. Please proceed.

Thank you, Madam Chair and Members. Robert Herrell, executive director of the Consumer Federation of California. We're the sponsors of this measure. Many of you on this Committee have seen this measure before. I know there's a couple or three new Members on the Committee, so I'll be very brief, since it's the last bill and I can read a room. So what has changed? So last year, the Assembly Member authored AB 2269. It was unfortunately vetoed by the Governor. That bill passed the Assembly 71-0.

So it had broad bipartisan support. We're talking about a licensing regime here. Consumers are being ripped off. There was an oversight hearing that many of you attended where we talked specifically about crypto, and I shared some stories that actually came from the East Bay Community Law Center, that you're going to hear a little bit about what is happening to consumers. So you need rules of the road, you need basic protections. What's happened since the bill got vetoed last year? FTX collapsed.

That was a major player in the industry. And Mr. Bankman-Fried is awaiting trial and under house arrest, and it sounds like many of the other top executives at the committee have flipped and are cooperating with the investigation. Silvergate Bank has shut down. That was a very crypto-heavy bank, separate and distinct from Silicon Valley Bank, which I know was the subject of another hearing of this Committee. The author talked about the changes to the bill.

They're overwhelmingly talking about workability, the ability for DFPI to get this going in an expedited fashion in a way that properly protects consumers. Licensing is very important here. We license all kinds of activities. As I've mentioned to this Committee before, this absolutely is an area where licensing and basic rules of the road should happen. The reality is that, unfortunately, due to the governor's veto, other states are now passing us by. Illinois, for example, is quite close, perhaps in the next month or two, to enacting something that's essentially based on last year's bill. And so California is going to fall behind if we don't pick up the pace here. Now is the time. This is the year. Urge an aye vote.

Good afternoon, Chair and Members of the Committee. I am Desiree Nguyen Orth, still director of the consumer justice practice at East Bay Community Law Center. Over the last two years, we have seen more people calling for help related to bad investments. In today's volatile market and rising inflation, it takes very little to gain investors. I'd like to briefly share the experience of people who fell victim to crypto investments. The first was a 78 year old, widowed Filipina retired nurse.

For a month, under the belief that the client was speaking with a celebrity of whom she is a fan, the retired nurse was convinced to invest in a currency using hot trades. She was told that if she invested $100,000, she would get $1 million in 10 days. She invested $58,000, the extent of her personal retirement savings, and borrowed $42,000 from friends. After checking the account daily, when the account hit $1 million, she tried to collect her balance.

She was asked to pay several different fees as a stall tactic, amounting to a total of $12,500. Still, despite paying these fees, she was never able to get her money out. The second is a permanently disabled, 52 year old white European male who invested in crypto using tradex.com, trade1960.com and Coinbase. The investment began after following an unlicensed trader on Instagram.

This person contacted the man after he followed her and she offered to manage his investment, claiming that she could make him $100,000 on his $38,000 investment. The person knew that something went wrong when he received a text message from Coinbase about an error. He reached out to the consumer protection agencies like the British Island Commission Agency.

He filed a report with the FBI making a complaint with the SEC, where he learned that tradex.com and trade1960.com were not registered businesses in the United States, nor holders of an investment business license. And he filed complaints with the FTC and Better Business Bureau. These people are not uneducated, get-rich-quick schemers. These are normal people trying to create a financial security the same way prominent and wealthy people do. Give them a viable place to turn. I respectfully urge your aye vote.

Thank you very much. We'll go to those who are in support of this. Please come forward.

Jason Lane, California Bankers Association, in support of the bill.

Danielle Kando-Kaiser, on behalf of the California Low Income Consumer Coalition, in support.

Supreme Paquado, on behalf of Chamber of Progress in support.

Good afternoon. Naomi Padron, on behalf of the California Credit Union League, in support.

Good afternoon. Cameron Demetre, on behalf of Dapper Labs and Sorare in a support, if amended position. Thank you for your work with us.

Chair and Members, RJ Cervantes here on behalf of the Crypto Council for Innovation. We're in an oppose, unless amended position. But I want to stress that we've been having some very positive conversations with Mr. Grayson and really enthusiastic about the work he's done here, so thank you.

Jaime Minor, on behalf of the Blockchain Advocacy Coalition. Also, just have appreciated working with the author over the fall and look forward to continuing to do so on some remaining concerns. But you know, we think we'll be able to get there. Thank you.

Thank you. Are there any other comments in support? Now we'll move on to witnesses in opposition. Please come forward. Seeing none. To the Committee, let's bring it forward to the Committee. Comments? A motion? Second. Okay. Wait. You're the original motion. And you're the second. Okay. And you have a comment. Please proceed.

It's okay. We had two motions and 2 seconds. Lots of movement on your bill. I just wanted to thank the chair for his work on this. We had that hearing earlier that focused on this issue, and I think really hit home the importance of this to Californians. And I think your continued vigilance on this and effort to make it happen is really laudable, and I hope that this time it makes it into law.

Thank you so much.

Very good. Any other comments from the Committee Members? No? I just have a comment. Thank you for doing this bill, and I am in support of it, because we did have that informational discussion a month or so ago. Do you anticipate--is this the first of several issues to address with regard to the crypto issue and FX? Will we be seeing more? Is this really going to take care of the problem, or what do you see going forward? Just curiously.

I don't know if this is the answer that's going to fix everything.

No.

However, we will see more as innovation continues. But that's why we do what we do here, to be able to try to create a net in which we can catch most, and then we'll continue to move forward, work with those that are reaching out to our office. We continue to have a very open mind and open conversation.

Very good. I think that you're doing a great job. All right, secretary, please call the roll.

AB 39. The motion is do pass as amended.

I didn't ask for your final comments.

I'm good.

All right.

Gabriel's got to get out of here.

So, the motion is do pass as amended, and re-referred to the Appropriations Committee. Grayson. Aye. Chen. Bauer-Kahan. Aye. Cervantes. Aye. Dixon. Aye. Mike Fong. Aye. Gabriel. Aye. Petrie-Norris. Aye. Soria. Aye. Waldron. Aye. Wicks. Aye. Wilson. Aye.

All right, and the vote is unanimous. Very good. We will hold it open. Are there any absent Members we're still waiting for? Okay. All right, that's true. And now you're back.

So, chief consultant, let's go through all of the bills, starting with item number 1, AB 554, Gabriel.

AB 554, the motion is do pass. Chen. Wicks. Aye. File item-

Do we want to call it?

Yeah. That bill gets out.

That bill is out.

AB 1229, Haney. The motion is do pass and refer to the Judiciary Committee. Chen. Petrie-Norris. Aye. Waldron. Aye. Wicks. Aye.

AB 1229 is out. And item number 3, AB 1247.

AB 1247. The motion is do pass and refer to the Appropriations Committee. Chen. Petrie-Norris. Aye. Waldron. Aye. Wicks. Aye.

And that bill is out. And item number 4. Right?

AB 1414, Kalra. The motion is do pass as amended. Chen. Cervantes. Aye. Waldron. Not voting. Wicks. Aye.

That bill is out of Committee. And item number 5, AB 39.

Oh, we got that.

We're good on that. That bill is out. And consent.

AB 1296 on the consent calendar, the motion is do pass to the Committee on Appropriations. Chen. Petrie-Norris. Aye. Waldron. Aye. Wicks. Aye.

So we have completed our agenda for today's hearing. I think we've covered all the roll, so roll is closed. And now with that, Assembly Banking and Finance Committee is adjourned. Thank you very much.