California Ordered to Return $331 Million to Troubled Homeowners

California Capitol building.

SACRAMENTO, Calif. (CN) – In February 2012, with California still reeling from the Great Recession, then-state Attorney General Kamala Harris delivered a bit of good news to Gov. Jerry Brown: The nation’s largest mortgage banks had agreed to pay the state $410 million directly for their role in the subprime mortgage fiasco.

The news came in the midst of heated state budget negotiations and a nasty deficit born largely from the fiscal collapse.

While Harris recommended the Legislature spend the settlement on programs to help families victimized by the banks’ illegal lending practices, Brown and the Legislature had other plans: They funneled most of the money to plug holes in the budget and pay down old bond debt that was strangling California financially.

Negating the shifty maneuver engineered by one of California’s most experienced politicians on Tuesday – after nearly seven years – a state appeals court ordered the state to pull $331 million back from the general fund and use the money to pay for homeowner-assistance programs.

“Money was unlawfully diverted from a special fund in contravention of the purposes for which that special fund was established,” Justice Andrea Hoch wrote for the Third Appellate District panel.

The panel’s ruling is the latest in a battle between charitable groups that believe they should have received portions of the settlement, and the state which claims the money was spent legally.

Led by the National Asian American Coalition, the plaintiffs sued Brown in state court in 2014. A year later, a Sacramento judge sided with the charities and found the state wrongly siphoned money away from the so-called National Mortgage Special Deposit Fund.

However, the judge also cited separation of powers case law and said he ouldn’t order the state to return the money.

With both sides unhappy with the ruling, the case eventually made its way to the California Supreme Court.

Fearing another unfavorable ruling in the pending Supreme Court appeal, Brown and the Democrats passed a 2018 budget trailer bill that amended language in the 2012 bill pertaining to the deposit fund. The bill – which was voted on by many lawmakers who weren’t around in 2012 – codified that the $410 million spent over three fiscal years was used in a manner “consistent with legislative direction” for “purposes consistent with the national mortgage settlement.” More directly, lawmakers were OK with the state Department of Finance director deciding what to do with the $410 million haul.  

With the new law, the Supreme Court punted the matter back to the same appellate panel, which was not persuaded by the Legislature’s act of apparent revisionist history.

“We also agree with the trial court’s conclusion that defendants’ reading of the statute would ‘raise serious doubts about the legality of the statute, not only as to whether the Legislature may override a federal judgment, but also whether the Legislature constitutionally may delegate to an agency the authority to decide how millions of dollars of state funds shall be spent with virtually no guidance or direction from the Legislature,” Hoch wrote in the 39-page order.   

Plaintiff attorney Neil Barofsky, a partner at Jenner & Block, praised the panel’s ruling.

“We are pleased that the court of appeal remained unpersuaded by the defendants’ arguments and confirmed the conclusions reached in the original opinion. We hope Governor Newsom will break from his predecessor and stop wasting taxpayer dollars pursuing frivolous legal positions and instead do the right thing by following the court’s order and finally giving struggling California homeowners the help that they should have received nearly six years ago,” Barofsky said in a statement.

Since former Attorney General Harris chose not to fight the matter for Brown and the statewide officers named in the original suit, the state is represented by private counsel with Remcho, Johansen & Percel of Sacramento.

The fight for the disputed funds is likely not over since new Gov. Gavin Newsom can choose to appeal again to the state Supreme Court. Or he could comply and pull from the state’s coffers, considering his administration predicts a $21 billion budget surplus.

Longtime Department of Finance spokesman H.D. Palmer said in an email that the agency is “in the process of reviewing the order to determine what the next steps may be” and that he anticipates the state will continue with outside counsel if it appeals. 

Presiding Justice Vance Raye and Justice Harry Hull Jr. joined in Hoch’s opinion.

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