Nat'l Asian Am. Coal. v. Newsom, C079835

• Decision Date: 02 April 2019
• Docket Number: C079835
• Citation: 33 Cal.App.5th 993,245 Cal.Rptr.3d 527
• Court: California Court of Appeals Court of Appeals
• Parties: NATIONAL ASIAN AMERICAN COALITION et al., Plaintiffs and Appellants, v. Gavin C. NEWSOM, as Governor, etc., et al., Defendants and Appellants.

33 Cal.App.5th 993

245 Cal.Rptr.3d 527

NATIONAL ASIAN AMERICAN COALITION et al., Plaintiffs and Appellants,

v.Gavin C. NEWSOM, as Governor, etc., et al., Defendants and Appellants.

C079835

Court of Appeal, Third District, California.

Filed April 2, 2019

REMCHO, JOHANSEN & PERCEL, Robin B. Johansen, Sacramento, and Margaret R. Prinzing, Oakland, for Gavin C. Newsom, as Governor, and Keely Bosler, Director of Finance; Office of the State Controller, Richard J. Chivaro, Ronald V. Placet and David I. Brownfield for Betty T. Yee, Controller, Defendants and Appellants.

Jenner & Block, Rick Richmond, Los Angeles, L. David Russell, Jeffrey A. Atteberry, Los Angeles, Alexander M. Smith, Los Angeles, Neil M. Barofsky (admitted pro hac vice), Jessica Ring Amunson (admitted pro hac vice), Ava U. McAlpin (to apply pro hac vice) and Robert L. Gnaizda, San Francisco, for Plaintiffs and Appellants.

OPINION ON TRANSFER

HOCH, J.

This appeal arises out of the subprime mortgage crisis, a nationwide banking emergency that began in 2007 with the collapse of a housing financing bubble created in large part by an increase in housing speculation and subprime lending practices. This crisis led to a deep recession in the United States and around the globe. California was hit particularly hard. While the recession ended in mid-2009, at least as a definitional matter, persistent high unemployment continued throughout 2012, along with the continuing decline in home values, increase in foreclosures and personal bankruptcies, and the concomitant decrease in state revenue.

In March 2012, the federal government and the attorneys general of 49 states and the District of Columbia (every state except Oklahoma) brought suit in federal court against the nation’s five largest mortgage servicers, i.e., Ally (formerly GMAC), Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo (collectively, Bank defendants), alleging a number of violations of federal law. The case was resolved by settlement agreement (the National Mortgage Settlement or NMS), the terms of which the federal court formally entered as consent judgments in April 2012. In addition to setting comprehensive new mortgage servicing standards and providing more than $20 billion in financial relief for homeowners damaged by the mortgage crisis, the NMS also provided for about $2.5 billion to be paid to the states directly, "which sum shall be distributed in the manner and for the purposes specified in Exhibit B" to the agreement. Exhibit B states that "[e]ach State Attorney General shall designate the uses of the funds" and requires, "[t]o the extent practicable, such funds shall be used for purposes intended 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 Bank defendants]."

California’s share of this $2.5 billion direct payment was about $410 million. In Exhibit B-2 to the NMS, former Attorney General Kamala Harris provided fairly detailed instructions as to how these funds should be used. We describe these instructions later in the opinion.

After the consent judgments were entered, the Legislature enacted Government Code 1

section 12531, creating a special deposit fund in the treasury (the National Mortgage Special Deposit Fund) where 90 percent of the $410 million amount would be deposited.² ( § 12531, subds. (b), (d).) The Legislature provided, "all moneys in the [National Mortgage Special Deposit Fund] are hereby continuously appropriated, and shall be allocated by the Department of Finance" (id ., subd. (b)), and further provided: "Notwithstanding any other law, the Director of Finance may allocate or otherwise use the funds in the National Mortgage Special Deposit Fund to offset General Fund expenditures in the 2011-12, 2012-13, and 2013-14 fiscal years." (Id ., subd. (e).) While the Legislature did not specify which General Fund expenditures may be offset using the National Mortgage Special Deposit Fund, subdivision (f) required the Department of Finance to "submit an expenditure plan to the Joint Legislative Budget Committee detailing the proposed use of the moneys in the National Mortgage Special Deposit Fund" at least "30 days prior to allocating moneys pursuant to subdivision (e)." (Id ., subd. (f).)

Pursuant to this procedure, the director of finance received approval for various expenditures from the National Mortgage Special Deposit Fund "to offset General Fund costs of programs that support public protection, consumer fraud enforcement and litigation, and housing related programs" during the specified fiscal years. We set forth the details of these expenditures later in the opinion. For present purposes, we note they nearly exhausted the National Mortgage Special Deposit Fund.

In March 2014, the National Asian American Coalition, COR Community Development Corporation, and the National Hispanic Christian Leadership Conference filed a petition for writ of mandate and complaint for declaratory and injunctive relief against the Governor, the director of finance, and the controller, seeking the immediate return of approximately $350 million they alleged was unlawfully diverted from the National Mortgage Special Deposit Fund to the General Fund in contravention of both section 12531 and the federal consent judgments.³

The trial court concluded section 12531 was intended to effectuate the terms of the federal consent judgments, which required compliance with the instructions provided by former Attorney General Harris in Exhibit B-2 to the National Mortgage Settlement designating the permissible uses of the $410 million direct payment. Rejecting defendants’ contention subdivision (e) of that section permitted the director of finance to use the National Mortgage Special Deposit Fund to offset General Fund expenditures regardless of whether such offsets were consistent with these instructions, the trial court reasoned such a 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." Turning to the question of whether the particular offsets were consistent with the former Attorney General’s instructions, the trial court concluded $331,044,084 was unlawfully appropriated from the National Mortgage Special Deposit Fund for purposes inconsistent with these instructions. Nevertheless, pointing out that it lacked the constitutional authority to order the Legislature to appropriate funds, the trial court declared an obligation to restore the unlawfully diverted funds and ordered such restoration "as soon as there is a sufficient appropriation ‘reasonably’ and ‘generally’ available for such purpose."

These appeals followed. Defendants contend: (1) plaintiffs lack standing to seek a writ of mandate directing the National Mortgage Special Deposit Fund to be reimbursed for the challenged expenditures; (2) section 12531 does not restrict the director of finance’s ability to use the National Mortgage Special Deposit Fund to offset General Fund expenditures, aside from requiring Legislative approval of such offsets; (3) the Legislature possessed absolute authority to approve the challenged expenditures regardless of whether they were consistent with the federal consent judgments; and (4) even if section 12531 required consistency with the federal consent judgments, the challenged expenditures were consistent with both the purposes of the direct payment set forth in Exhibit B to the National Mortgage Settlement and the former Attorney General’s instructions set forth in Exhibit B-2. Plaintiffs dispute each of these contentions and, in their appeal, contend: (1) the amount unlawfully diverted from the National Mortgage Special Deposit Fund was actually $350 million; and (2) the trial court erred in concluding separation of powers principles prevented it from ordering the immediate restoration of the unlawfully diverted funds.

On July 10, 2018, we issued an opinion concluding plaintiffs have public interest standing to seek the requested writ of mandate. We also concluded, 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, and over $331 million was unlawfully appropriated from the National Mortgage Special Deposit Fund for purposes inconsistent with the NMS. We parted ways with the trial court, however, on the issue of remedy. As we explained, because the unlawfully diverted funds are "in law still in the [National Mortgage Special Deposit Fund]" ( Daugherty v. Riley (1934) 1 Cal.2d 298, 312, 34 P.2d 1005 ) ( Daugherty ), separation of powers principles do not preclude this court from ordering the immediate return of these funds. We accordingly reversed the judgment in part and remanded the matter to the trial court with directions to issue a writ of mandate directing the immediate retransfer from the General Fund to the National Mortgage Special Deposit Fund the sum of $331,044,084.

After we issued our original opinion in this case, defendants petitioned our Supreme Court for review. While that petition was pending, the Legislature passed and the Governor signed into law Senate Bill No. 861 (2017 – 2018 Reg. Sess.) (Stats. 2018, ch. 331 (SB 861)), amending section 12531 to add subdivision (h), the text of which we provide in its entirety later in this opinion. For present purposes, we note SB 861 states in uncodified section 2: "It is the intent of the Legislature in [adding subdiv...