Wednesday, July 11, 2018
Court of Appeal:
$331 Million Was Unlawfully Diverted to General Fund
Superior Court Ordered to Issue a Writ Requiring Return of Moneys to Special Fund Set Up to Remediate Harms Caused by Shoddy Practices in Mortgage Industry
By a MetNews Staff Writer
The Third District Court of Appeal yesterday directed the Sacramento Superior Court to order Gov. Jerry Brown and other officials to effect the return of $331 million which was unlawfully diverted to the state’s general fund from a special fund set up to ameliorate harms caused by improprieties in the servicing of mortgages and stave such practices in the future.
Sacramento Superior Court Judge Timothy M. Frawley on June 15, 2015, issued a declaration that the funds had been unlawfully transferred and must be returned “as soon as there is sufficient appropriation ‘reasonably’ and ‘generally’ available for such purpose.” He shied away from issuing a writ ordering the immediate return of the moneys, however, citing the separation of powers doctrine and the inability of the judiciary to appropriate funds.
Justice Andrea L. Hoch wrote the opinion reversing Frawley’s denial of the writ.
“[M]oney was unlawfully diverted from a special fund in contravention of the purposes for which that special fund was established,” she declared, saying that writ relief is appropriate to have the funds put back where they belong.
The controversy stems from an action brought in March 2012, during the mortgage/foreclosure crisis, by the federal government and the attorneys general of every state other than Oklahoma, along with the District of Columbia, in U.S. District Court for the District of Columbia. The defendants were Bank of America Corporation, J.P. Morgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc. (formerly GMAC).
The complaint alleged violations of state and federal law involving “misconduct related to their origination and servicing of single family residential mortgages” including “improper mortgages, premature and unauthorized foreclosures, violation of service members and other homeowners rights and protections, the use of false and deceptive affidavits and other documents, and the waste and abuse of taxpayer funds.”
Consent judgments were entered pursuant to a $25 billion National Mortgage Settlement (“NMS”) in April 2012, with as much as $18 billion benefitting California homeowners who were victims of the improper practices. The NMS provided that $2.5 billion would go directly to the states, going to the states.
About $410 million was routed to California. It was provided in the NMS that state attorneys general would give instructions as to distribution of funds—which then-California Attorney General (now U.S. Sen.) Kamala Harris did.
The moneys were to be used by states, so far as practical, “to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud, or unfair or deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct” of the defendants.
The California Legislature enacted Government Code §12531, effective June 27, 2012, to create a special deposit fund in which 90 percent of the $410 million amount would be placed. It was provided that some of the money could be used “to offset General Fund expenditures in the 2011-12, 2012-13, and 2013-14 fiscal years.”
Nearly all of the funds were applied to the budget deficit. This, Frawley concluded, was in derogation of the terms of the consent judgments.
Both Sides Appeal
The plaintiffs—the National Asian American Coalition, COR Community Development Corporation, and the National Hispanic Christian Leadership Conference—appealed from denial of a writ, and defendants Brown, Director of Finance Michael Cohen, and Controller Betty T. Yee appealed from the declaratory judgment.
The defendants insisted the nonprofit groups had no standing and that, in any event, the funds had been properly utilized.
“We conclude plaintiffs have public interest standing to seek the requested writ of mandate. We also conclude, as did the trial court, section 12531 was intended by our Legislature to effectuate the terms of the National Mortgage Settlement, including the former Attorney General’s instructions regarding the proper uses of the money. The trial court also correctly concluded over $331 million was unlawfully appropriated from the NMS Deposit Fund for purposes inconsistent with the NMS. Where we part ways with the trial court is the issue of remedy.”
Transfer, Not Appropriation
The jurist went on to say:
“Plaintiffs do not dispute that directing an appropriation would violate the separation of powers. Instead, they argue: ‘The legal violations at issue in this case lie not in a failure to appropriate the requisite funds, but in a series of executive orders, issued by the Defendant Director of Finance to the Defendant Controller, that unlawfully transferred the funds that had already been appropriated. Accordingly, the appropriate remedial order would simply direct Defendants to rescind those transfers—or, equivalently, to transfer equal sums back from the General Fund to the [NMS] Deposit Fund.’ We agree.”
She said Frawley was not being asked by the plaintiffs to appropriate funds but, rather, to “order money used for a purpose contrary to the appropriation” be “returned to the special fund from which it was unlawfully diverted.”
The case is National Asian American Coalition v. Brown, C079835.
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