Governor Arnold Schwarzenegger just signed into law AB 2426 which will significantly impact how surrogate agencies can handle client trust funds. Under the new law, non-attorney surrogacy facilitators must deposit client funds into either:

1) an independent, bonded escrow depository maintained by a licensed, independent, bonded escrow company; or
2) a trust account maintained by an attorney.

I am a bit unclear as to whether the funds have to be in California State Bar monitored attorney-client trust account or simply an account designated as a “trust account” in the name of an attorney where the interest is not paid to the State Bar. It is kind of surprising to me that this was not specified and that the funds were required to be placed in a State Bar monitored account.

Further, while I believe this new law is a promising start given the financial scandals we have documented on this Blog, I cannot help but cynically think that the true beneficiaries of this new statute will be law firms and not Intended Parents and their Surrogates. Admittedly I have not given much thought to this yet, but it occurs to me that in a number of the documented scandals involving misappropriation of agency funds, the deposited monies were placed in allegedly independent, bonded escrow accounts. It was only learned after the fact that the licensed, bonded “escrow company” were anything but. For agencies that have no moral compass or compunction about violating the laws, this provision, while well-intended, will give a false sense of security to Intended Parents.

Secondly, this bill will likely increase the cost of the entire process as attorneys and escrow companies will start charging for this service that was usually incorporated into an agency’s fee. So unless there is going to be a corresponding decrease in the fees charged by agencies, then this will be another expense to be borne by Intended Parents.

Thirdly, this statute does nothing to address the conflict of interest that exists when the attorney holding the trust funds is also serving as the attorney for the parties to the surrogacy contact and owning and operating the surrogacy agency. Interestingly, §7961 requires that the escrow company be independent, but not the attorney.

Finally, given the number of financial, ethical and criminal scandals involving attorneys in this field, I do not feel terribly confident that this bill will remedy what ails this industry. I would have been much more sanguine about this legislation if it had mandatory auditing provisions, agency licensing and some actual teeth when it comes to enforcement.

Here is the text of what will soon become California Family Code §§7960,7961:

AB 2426, Bradford. Surrogacy facilitators.

Existing law defines “assisted reproduction” as conception by any
means other than sexual intercourse, and “assisted reproduction
agreement” as a written contract that includes a person who intends
to be the legal parent of a child or children born through assisted
reproduction and that defines the terms of the relationship between
the parties to the contract.

This bill would regulate the practice of surrogacy facilitators,
as defined, and would require a nonattorney surrogacy facilitator to
direct his or her client to deposit client funds in an independent,
bonded escrow account or a trust account maintained by an attorney,
subject to specified withdrawal requirements.

THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

SECTION 1. Part 7 (commencing with Section 7960) is added to
Division 12 of the Family Code, to read:

PART 7. SURROGACY FACILITATORS

7960. For purposes of this part, the following terms have the
following meanings:

(a) “Surrogacy facilitator” means a person or organization that
engages in either of the following activities:

(1) Advertising for the purpose of soliciting parties to an
assisted reproduction agreement or acting as an intermediary between
the parties to an assisted reproduction agreement.

(2) Charging a fee or other valuable consideration for services
rendered relating to an assisted reproduction agreement.
(b) “Nonattorney surrogacy facilitator” means a surrogacy
practitioner who is not an attorney in good standing licensed to
practice law in this state.
(c) “Assisted reproduction agreement” has the same meaning as
defined in subdivision (b) of Section 7606.
(d) “Fund management agreement” means the agreement between the
intended parents and the surrogacy facilitator relating to the fee or
other valuable consideration for services rendered or that will be
rendered by the surrogacy facilitator.

7961. (a) A nonattorney surrogacy facilitator shall direct the
client to deposit all client funds into either of the following:

(1) An independent, bonded escrow depository maintained by a
licensed, independent, bonded escrow company.

(2) A trust account maintained by an attorney.

(b) For purposes of this section, a nonattorney surrogacy
facilitator may not have a financial interest in any escrow company
holding client funds. A nonattorney surrogacy facilitator and any of
its directors or employees shall not be an agent of any escrow
company holding client funds.
(c) Client funds may only be disbursed by the attorney or escrow
agent as set forth in the assisted reproduction agreement and fund
management agreement.
(d) This section shall not apply to funds that are both of the
following:
(1) Not provided for in the fund management agreement.

(2) Paid directly to a medical doctor for medical services or a
psychologist for psychological services.