BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Adam B. Schiff, Chairman
1999-2000 Regular Session
SB 1162 S
Senator Burton B
As Amended April 12, 1999
Hearing Date: April 13, 1999 1
Family Code 1
GMO:jt 6
2
SUBJECT
Minors' Contracts
DESCRIPTION
This bill would overhaul what is commonly known as the
"Coogan Law". The bill would require that fifteen percent
(15% ) of all gross earnings of an unemancipated minor
under a contract for artistic or creative and other
services, as defined, be set aside in trust for the minor's
benefit. The bill would require the parent or guardian of
the minor to set up a fiduciary account into which the
minor's employer would deposit the 15% set-aside funds.
The funds would be invested in low-risk financial vehicles,
no withdrawal could be made from this trust account until
the minor turned eighteen, and the court would have
continuing jurisdiction over all approved contracts and
trust funds until the account is terminated.
The bill would make all earnings and accumulations of an
unemancipated minor from the type of contract described
above the minor's sole legal property and not subject to
any right to services and earnings otherwise granted to the
parent of a child.
(This analysis reflects author's amendments to be offered
to committee.)
BACKGROUND
(more)
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The Coogan Law was enacted in 1938 in response to child
star Jackie Coogan's plight. Even though he earned
millions as a child, Coogan was surprised to find out when
he reached adulthood that he was flat broke, because his
mother and stepfather spent all his money - legally.
Community property laws in California made all earnings of
individual members of a family the property of the family,
and a child had no control over his or her earnings. Thus,
the Coogan Law was passed in order to preserve a portion of
the minor's earnings for the minor's use when he or she
reaches the age of majority.
In the 60 years since it was enacted, the Coogan Law has
been found to be largely inadequate in protecting children
who work in the entertainment industry. The entertainment
business is very different today, and the earnings of
minors have soared to unbelievable amounts. Yet, there are
the sad stories of Shirley Temple, who ended up with only a
few thousand dollars and the deed to her dollhouse in the
backyard of her parents' Beverly Hills home; Macauly
Culkin, whose earnings supported his family until the court
wrested control over his earnings from his parents; Gary
Coleman, whose parents structured his Coogan money (the
set-aside) to pay themselves as managers of his pension
fund such that when the pension fund was finally dissolved
he had $220,000 and the parents' share was $770,000; and,
surely, there are many more child performers whose
earnings, though not in the multi-millions, are substantial
enough that their financial futures should be ensured, but
are greatly at risk under current law.
The sponsor of this bill states that over 95% of the money
earned by children in the entertainment industry is not
protected. Even under those contracts that are approved by
the court, and under the current set-aside requirements of
the law, the sequestered funds are not monitored. This
bill, it is hoped, would finally protect children in the
entertainment industry from exploitation by their own
parents or guardians.
CHANGES TO EXISTING LAW
Existing law protects contracts of employment for creative
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or artistic services from disaffirmance by a minor based on
that ground if the contract has been approved by the court.
This bill would expand the type of contracts protected from
disaffirmance by an unemancipated minor by court approval
of the contract, to include more current types of personal
services contracts in the entertainment and sports
industries.
Existing law gives the court authority to require that in
such contracts a portion of the minor's net earnings, not
exceeding one half, be set aside and preserved for the
benefit of the minor. Net earnings is defined as the total
sum received less taxes, reasonable sums for support,
maintenance, education and training, and business expenses
related to the employment, and attorney's fees in
connection with the contract or other business of the
minor.
This bill would provide that in those contracts approved by
the court, the court shall require that fifteen percent
(15%) of the unemancipated minor's gross earnings be set
aside by the minor's employer and preserved for the minor's
benefit in a trust fund or savings plan. The parent or
guardian would be required to set up the trust fund or
savings plan at a federally-insured or otherwise protected
financial institution, and the employer would be required
to deposit the 15% set-aside amount into that trust fund or
savings plan. The funds would be sequestered or blocked
until the minor reaches the age of 18, at which time the
funds could be withdrawn. The set-aside funds could only
be invested in no-risk or little-risk securities, bonds, or
mutual funds, for maximum protection, and the court would
maintain jurisdiction over the contract and the funds until
the trust fund account or savings plan is terminated, as
provided. The court approving the contract would have
continuing jurisdiction over the contract and the fiduciary
account.
The bill would treat contracts not submitted to the court
for approval, and contracts that were not approved by the
court, in the same manner, requiring the employer to
deposit into a fiduciary account for the benefit of the
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minor the designated 15% of the minor's gross earnings, and
providing the same protections in investment choices and
maintenance of the fiduciary account as accounts for
set-asides under contracts approved by the court.
Existing law states that a parent is entitled to the
services and earnings of an unemancipated minor child. The
earnings and accumulations of a spouse and the minor
children living with that spouse, while living separately
and apart from the other spouse, are deemed to be the
separate property of the spouse.
This bill would explicitly state that the services and
earnings of an unemancipated minor related to a contract
described in section 6750 (contract for artistic and
creative services, performance, services as a sports
player, as defined) shall remain the sole property of the
minor. Neither parent of such an unemancipated minor would
be entitled to his or her earnings and accumulations.
COMMENT
1. Stated need for the bill
The anecdotal evidence justifying this revision of the
Coogan Law is not lacking. Proponents even recount
stories of "stage parents" spending large sums of money
on oral surgery to correct teeth in 8 to 10 year olds,
even breast augmentation in 14-year old girls so they can
compete with 18-year old actresses, all the while looking
at the children's earning potential, and everything those
earnings could buy. While there are parents in the
entertainment industry who vigorously protect their
children and their children's financial future, they say,
the fact is that 95% of the money earned by children in
the entertainment industry is unprotected. Furthermore,
the up to 50% of "net earnings" which a court could
require to be set aside for the minor oftentimes would
leave the child with little to spend on his or her own
personal expenses.
2. The fifteen percent solution: set aside 15% of gross
earnings in trust, for all contracts
Under current law, up to 50% of the minor's net earnings
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could be set aside, by order of the court, for the
benefit of the minor. Net earnings is defined as what
would be left after payment of 1) taxes, 2) expenses for
the support, care, maintenance, education and training of
the minor, and 3) business expenses and attorney's fees
related to the contract.
This bill would require the unemancipated minor's
employer under these contracts, whether approved by the
court or not, to set aside 15% of the minor's gross
earnings and pay said sums directly into a trust fund or
savings plan for the benefit of the minor.
When asked whether the 15% set-aside would be sufficient,
or if it would benefit the minor to have a higher
set-aside, the sponsor of the bill unequivocally stated
that a higher figure would not work to the benefit of the
minor.
The sponsor of the bill states that multiple industry
studies on the issue of the appropriate set-aside figure
to use show that 30% of a minor's gross earnings would
always result in more than 50% of the net earnings.
These figures come from the fact that a "standard
contract" between an industry employer and the minor
requires the parent or guardian of the minor to sign an
affidavit that 30% of the gross earnings would not exceed
50% of the net.
As an example, if the minor pays 10% of the gross to the
agent, 15% to the manager, and 30% for taxes, this would
leave 45% of the gross as the net earnings. Fifty
percent (50%) of that is 22.5%, which is less than 30% of
the gross. There are two problems with this figure: 1)
if all of the 22.5% of the gross earnings is set aside,
that would leave only 22.5% for the minor's expenses,
business expenses and attorney's fees, which means the
minor would have very little to spend on his own needs at
the time he or she is earning the money; and 2) since the
"standard contract" with the minor requires the parent to
sign an affidavit that 30% of the gross earnings does not
exceed 50% of the net earnings, the parent is forced to
commit perjury by signing the affidavit in order to
ensure that the court approves the contract, which it
routinely does if this affidavit is attached. The
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results of their studies, the sponsor states, show that
30% of gross earnings for a set-aside is too much,
leaving the minor with little to spend for current
expenses, and that 15% is the more realistic figure for
the set-aside.
In reality, however, there is a 15% gap between 30% and
15% of gross earnings. Further, if managers are being
paid at the rate of 15% to 25%, as the sponsors state,
and most parents become the minor's managers, the
manager-parents could still end up having more put away
for themselves than the child by charging off their own
living and business expenses against the balance of the
minor's gross earnings (the portion not set aside).
SHOULD THE SET-ASIDE NUMBER INSTEAD BE ONE-HALF OF THE
GROSS EARNINGS REMAINING AFTER PAYMENT FOR THE AGENT
FEES, THE BUSINESS-RELATED ATTORNEY AND CPA FEES, TAXES,
AND SUPPORT AND EDUCATION EXPENSES OF THE MINOR, BUT NOT
LESS THAN FIFTEEN PERCENT OF GROSS EARNINGS, WHERE THE
MANAGER IS THE MINOR'S PARENT?
This would result, using the same example as above, in a
pot of 55% to 60% of the gross earnings. If the support
and maintenance expenses of the minor were pegged at 20%
of gross, that would leave 35% to 40% to divide evenly
between manager and the minor - 17.5% to 20% each. This
formula could give parent-managers the incentive to be
prudent and not waste the earnings after taxes and agent
fees, since they too would stand to earn more as managers
splitting the net earnings with the minor. And the
minimum of 15% would provide the intended protection.
Another problem regarding the 15% set-aside is raised by
the recording artists industry. The common practice in
that industry, they state, is to advance a sum of money
to the minor for the minor's use, all other expenses of
production being paid for by the employer. The minor's
contract would typically not pay out to the minor until
the recording product has reached the market and all
expenses have been paid. The solution to this type of
contract would be the same: since the sums advanced to
the minor would be deducted from the minor's gross
earnings when the product finally pays off, 15% of all
advances should be set aside in a trust fund.
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3. Contracts covered expanded
The type of contract currently covered by the protection
against disaffirmance through court approval of the
contract are those in which a minor renders creative or
artistic services.
This bill would define the types of artistic or creative
services covered to include, for example, stunt persons
and voice-over artists, as well as actors and actresses,
dancers, and even composers and designers.
The bill would expand the type of contract covered to
include the use of a minor's life story, voice
recordings, and sound recordings in any format now known
or later devised, among others.
Finally, the bill would also cover contracts for services
in a professional sport as a professional boxer, for
example, or wrestler, jockey, baseball player or
basketball player.
These changes demonstrate the broad range of
entertainment and sports activities where minors are
regularly employed today.
4. Funds to be deposited within 15 days
The bill would require the unemancipated minor's employer
to deposit the 15% set-aside earnings into the fiduciary
account within 15 days of receiving the court's order, if
the contract is approved by the court, or 15 days of
receiving from the fiduciary account trustee information
about the account, whichever is later.
Author's amendment would change the timing to 15 days of
either event, whichever is earlier . This change would
give the incentive to the parent or guardian of the minor
to open the account as soon as possible, even before the
contract is approved by the court, so that the employer
would not keep the minor's earnings longer than 15 days.
The deadline for depositing the set-aside funds into the
account is set in the bill, proponents state, to curtail
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incidents where Walt Disney Studios, for example,
withheld payment of a minor's set-aside funds for 10
months.
A similar amendment for set-aside funds from contracts
not approved by the court or not submitted to the court
for approval will be made.
5. Court to maintain continuing jurisdiction over the
fiduciary account
Under the bill, the court would have continuing
jurisdiction over the contract it approved and the trust
account for the set-aside funds, as well as extensions,
prolongations, or termination of the contract. The court
would have authority to amend or terminate the trust
fund, if necessary, after giving notice to all parties
and opportunity to be heard.
As to contracts not submitted for approval by the court,
or disapproved by the court, the court could, upon
petition of a party, order the trust fund amended or
terminated, after giving notice to all parties and the
opportunity to be heard. An amendment is offered to
allow a party to petition the court at this point, since
the contract would not have been in the court's
jurisdiction.
6. Trust account to be opened only at insured financial
institution and invested
in low-risk financial vehicles
To reduce the risk of loss of the funds in the trust
account, this bill would require that the trust funds be
deposited in a financial institution insured by the
Federal Deposit Insurance Corporation (FDIC), the
Securities Investor Protection Corporation (SIPC) or the
National Credit Union Share Insurance Fund (NCUSIF), and
that the funds be invested and reinvested in government
securities, certificates of deposit, bonds, and similar
low-risk investment vehicles.
Author's amendments would permit the trust funds to be
deposited in a first- class international bank (prime
bank) fiduciary account, if the minor-beneficiary is not
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a resident of the United States. The use of a prime bank
will ensure that the minor's trust funds are also
protected, as these banks are heavily regulated by
international banking regulations. This amendment would
allow more flexibility to the minor and the parents whose
regular residence is outside the U.S., where accounts in
non-US banks may not be protected by any
government-backed insurance.
7. Employer's obligation as to set-aside terminated upon
deposit of funds
The bill explicitly states that the employer's obligation
to monitor and account for the set-aside funds would
terminate once the funds are deposited into the fiduciary
account. This provision would apply to all contracts
with unemancipated minors of the type covered by Family
Code section 6750, whether approved by the court,
disapproved by the court, or not submitted to the court
for approval.
8. Funds are sequestered and blocked
Once 15% of the unemancipated minor's gross earnings are
sequestered, the funds would be deposited into the trust
account or savings plan opened for this purpose by the
minor's parent(s) or legal guardian. These funds would
be blocked, i.e., no withdrawal of funds could be made
until the minor turned eighteen, except upon order of the
court.
An amendment will allow for withdrawal of the funds by
the minor if the minor becomes emancipated.
9. Fiduciary duty of the parent or guardian for the 85% of
gross earnings left
The law of trusts imposes on the trustee of a fiduciary
account for a minor's 15% set-aside of gross earnings
well-established rules and restrictions for trustees.
The explicit restrictions and requirements relating to
the opening of the account, the deposit and blocking of
the funds, and the court's continuing jurisdiction over
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the account further ensure that the minor's set-aside
funds are adequately protected.
However, 85% of the minor's gross earnings would still be
under the control of the parent or guardian of the minor.
No restrictions, standards of care, or guidelines are
applicable to these funds. Thus, opportunities abound
for abuse, waste, concealment, embezzlement, and
inexplicable loss of the funds. No accounting would be
required of anyone.
Author's amendment would impose the same duties on the
parent-manager or on the parent (legal guardian) as
trustee of the 85% of the gross earnings of the
unemancipated minor. These duties would include payment
of all taxes due on the minor's gross earnings, including
taxes on the 15% set-aside trust funds.
10. Unemancipated minor's earnings to be his or her own
Current law states that a parent owns the right to a
minor's services and earnings, and that a minor's
earnings are the separate property of the minor's parent
who has custody of the minor, if the parents are
separated.
This bill would explicitly make a minor's earnings (from
a contract covered by Family Code section 6750) his or
her own, and not subject to the right of a parent. This
will, it is hoped by proponents, put a stop to the
parents' enslavement of these children in the
entertainment industry.
11. Other author's amendments and clean-up amendments
Other amendments are offered by the author to the
committee for clarification, consistency and accuracy.
Support: Motion Picture Association of America; Beverly
Hills Bar Association
Opposition: None Known
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HISTORY
Source: Screen Actors Guild
Related Pending Legislation: None Known
Prior Legislation: None Known
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