July 19, 2019

Jenner & Block obtained yet another victory on behalf of three groups that assist low-income and minority homeowners, bringing a long-running lawsuit to a close. 

On July 17, 2019, the California Supreme Court denied a petition from California’s governor and other state officials to review a Court of Appeal decision siding with the groups in ordering the transfer of more than $331 million from the State’s general fund to a settlement fund established to provide aid to financially distressed homeowners following the subprime mortgage crisis.

After California received these funds in 2012, then-Governor Jerry Brown diverted the money to instead plug holes in California’s budget, despite a federal judge’s consent order directing the use of the funds specifically to help struggling homeowners.

In 2014, the firm filed a lawsuit on behalf of the three groups challenging Governor Brown’s diversions of funds that had been designated to help homeowners from the National Mortgage Special Deposit Fund (NMSDF) to the State’s general fund.  In June 2015 after a one-day trial, the trial court agreed with the firm’s position, declaring “that $331,044,084 in offsets were unlawfully diverted from the NMSDF” and that California “is obligated to restore/return those funds to the NMSDF.”  However, the court believed that separation-of-powers considerations precluded the court from issuing a writ of mandate requiring the transfer of the funds back to the NMSDF and therefore simply enjoined California “to restore/return those funds to the NMSDF as soon as there is a sufficient appropriation ‘reasonably’ and ‘generally’ available for such purpose.”  The trial court ended its ruling by calling on the Legislature and the Governor to “take whatever steps are necessary and appropriate to meet this obligation.”

The State appealed.  Following oral argument in Sacramento, the three-judge appellate court delivered a full victory to the firm’s clients.  The appellate court not only agreed with the trial court’s ruling that the funds were unlawfully appropriated, but also went further than the trial court in ordering the full remedy the firm’s clients had requested.  The appellate court “remand[ed] the matter to the trial court with directions to issue a writ of mandate directing the immediate retransfer from the General Fund to the NMS Deposit Fund the sum of $331,044,084.”

After the Court of Appeal issued its July 2018 decision, Governor Brown appealed it to the California Supreme Court, which remanded the case back to the Court of Appeal in light of a new bill the governor signed into law in September 2018 aimed at circumventing the appellate decision and allowing the $331 million to be spent for general purposes and not in the aid of the struggling homeowners who were supposed to benefit from those funds.

In an April 2019 ruling, the Court of Appeal said that although it gave the new law “all due consideration,” it remained unpersuaded by the defendants’ arguments and confirmed the conclusions reached in the original opinion in support of its order directing the trial court to issue the writ.

Governor Gavin Newsom (as successor to former Governor Brown) and co-defendants Keely Bosler, who is the California Director of Finance, and California State Controller Betty Yee petitioned for a review from the state’s high court. In denying the review, the California Supreme Court made the Court of Appeal’s ruling final. Governor Newsom’s deputy finance director told the San Francisco Chronicle that the state will now prepare to comply with the court’s order.

The Jenner & Block team, led by Partner Neil M. Barofsky, included Partners Rick Richmond, Jessica Ring Amunson and Jeffrey A. Atteberry, and Associate Alexander M. Smith.