33 Cal. App. 5th 993
Cal. Ct. App. 5th2019Background
- California received ~$410 million under the National Mortgage Settlement (NMS); Attorney General Harris's Exhibit B-2 instructed use: 10% civil penalty to Unfair Competition Law Fund; 90% into a special deposit fund for foreclosure relief, monitoring/enforcement, housing counseling, grants, consumer protection, borrower relief, and related administration.
- Legislature enacted Gov. Code §12531 creating the National Mortgage Special Deposit Fund (NMSDF), continuously appropriated and to be allocated by the Department of Finance; §12531(e) allowed the Director of Finance to "allocate or otherwise use" NMSDF funds to offset General Fund expenditures in fiscal years 2011-12 through 2013-14, with an expenditure plan to the Joint Legislative Budget Committee 30 days prior (§12531(f)).
- The Director used roughly $350 million of the NMSDF to offset General Fund debt-service and other expenditures (housing bond debt service, DOJ and DFEH costs, etc.). Plaintiffs (community organizations) sued seeking return of the allegedly misapplied funds.
- Trial court held §12531 must be read to effectuate the NMS (including Exhibit B-2 instructions) and concluded $331,044,084 was unlawfully diverted because many offsets reimbursed the General Fund for past obligations rather than serving the special-fund purposes; it declined to order immediate retransfer because of separation-of-powers concerns and instead declared an obligation to restore when appropriation is available.
- Court of Appeal originally reversed that remedy ruling, directing immediate retransfer; Supreme Court granted review, remanded after the Legislature enacted SB 861 (ratifying the Director’s past allocations and declaring them consistent with §12531), and the Court of Appeal reaffirmed its original holdings: plaintiffs have public-interest standing; §12531 must be read to effectuate the NMS/Exhibit B-2; $331,044,084 was unlawfully diverted; and a writ ordering immediate retransfer is appropriate.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to seek mandamus to recover diverted NMSDF funds | Plaintiffs: public-interest exception permits mandamus without special interest because enforcement of statutory restrictions on public funds is a public right | Defendants: plaintiffs lack enforcement rights under the NMS and thus lack standing | Held: Plaintiffs have public-interest standing to seek mandamus to enforce §12531 restrictions |
| Proper interpretation of §12531—did it require consistency with NMS/AG instructions? | Plaintiffs: §12531 was enacted to effectuate the NMS and AG Harris’s Exhibit B-2 instructions, so distributions must match those purposes | Defendants: §12531(e)’s "notwithstanding any other law" gives Director broad discretion to offset any General Fund expenditures (subject only to legislative review) | Held: §12531 must be read to effectuate the NMS; offsets must be consistent with the AG’s Exhibit B-2 purposes; "notwithstanding" did not free funds from special-fund purpose constraints |
| Consistency of specific offsets (debt service and reimbursements) with NMS purposes | Plaintiffs: large offsets reimbursed the General Fund for past obligations and do not serve special-fund purposes (flow-through to borrower relief, counseling, enforcement) | Defendants: the Director’s plan and legislative awareness/inaction show the offsets were consistent with §12531 and NMS; SB 861 confirmed/ratified allocations | Held: Offsets that reimbursed the General Fund for past obligations (not paying current obligations that directly serve NMS purposes) were inconsistent; court invalidated $331,044,084 of transfers but sustained some transfers where funds paid current-year obligations tied to fund purposes |
| Appropriate remedy—can court order immediate retransfer despite separation-of-powers limits? | Plaintiffs: court can direct Executive officers to reverse unlawful transfers (return funds to special fund); this is not commanding a legislative appropriation | Defendants: separation of powers prevents courts from ordering transfers that effectively require legislative appropriation | Held: Court may order retransfer because unlawfully diverted special-fund moneys remain "in law" in the special fund (Daugherty); separation-of-powers does not bar directing executive officers to retransfer funds to the NMSDF |
Key Cases Cited
- Daugherty v. Riley, 1 Cal.2d 298 (Cal. 1934) (special-fund diversions are treated as loans and unlawfully diverted funds remain "in law" in the special fund; courts may order retransfer)
- Shaw v. People ex rel. Chiang, 175 Cal.App.4th 577 (Cal. Ct. App. 2009) (special-fund money may not be used to reimburse the General Fund for past obligations when fund purpose requires a present flow-through to the specified public purpose)
- Butt v. State of California, 4 Cal.4th 668 (Cal. 1992) (separation-of-powers limits court authority to commandeer appropriations earmarked for distinct legislative purposes)
- Western Security Bank v. Superior Court, 15 Cal.4th 232 (Cal. 1997) (legislative clarifications/amendments to statutory meaning are entitled to due consideration but are not binding on courts)
- Mandel v. Myers, 29 Cal.3d 531 (Cal. 1981) (circumstances in which courts may direct use of broad legislative appropriations to satisfy judicially imposed obligations)
- Carter v. California Dept. of Veterans Affairs, 38 Cal.4th 914 (Cal. 2006) (subsequent legislative clarification may be persuasive when it resolves ambiguity and responds promptly to judicial interpretations)
- California School Boards Assn. v. State, 192 Cal.App.4th 770 (Cal. Ct. App. 2011) (court retains final authority to interpret statutes and settlement terms despite legislative views)