Newsom faces decision after appellate court orders the state to pay $331M

Will Gov. Gavin Newsom appeal a $331 million judgment in a case he inherited from Gov. Jerry Brown?

That's the question the new governor faces after the 3rd District Court of Appeal ordered -- for the second time -- the state to repay money taken from a national mortgage settlement. National Asian American Coalition et al. v. Brown et al., 2019 DJDAR 2842 (Cal. App. 3rd April 3, 2019).

Newsom faces a choice between two unappealing options: blow a hole in his first state budget, or keep fighting a case with diminishing legal options where his side has consistently lost.

Even if ultimately unsuccessful, the latter option could also help buy time to address the shortfall ahead of Newsom's scheduled release of his revised budget in May.

"We're in receipt of the ruling, and we're in the process of reviewing it to determine what the next steps may be," said H.D. Palmer, a spokesman for the governor's Department of Finance.

Rick L. Richmond, a partner with Jenner & Block LLP in Los Angeles, co-led the case for the plaintiffs.

"It is a thorough, well-reasoned opinion," Richmond said of the opinion issued Tuesday. "Given the history of the case, I absolutely cannot predict what they will do. My hope is Gavin Newsom will do the right thing."

The money is part of California's portion on the National Mortgage Special Deposit Fund, created by settlement in 2012 as a way for large mortgage servicers to compensate homeowners harmed during the mortgage crisis a decade ago.

Brown and the Legislature opted to use the money to help backfill the state's general fund, which faced a multi-billion-dollar shortfall at the time.

Plaintiffs led by the National Asian American Coalition sued to block the decision, winning a ruling from a Sacramento County judge in 2015. The 3rd District affirmed the ruling in July. Brown appealed to the state Supreme Court.

Then in September, as his final term was winding down, Brown signed a bill designed to excuse the state from repaying the money. SB 861 stated it was the Legislature's intention to use the money to backfill state coffers between 2011 and 2014.

This caused the state high court to vacate the earlier ruling and remand the case back to the appellate court.

But in a unanimous 39-page ruling on Tuesday, Justice Andrea Lynn Hoch dismissed the state's arguments, ordering the trial court to issue a writ of mandate instructing the court to repay the money.

Hoch wrote that while courts generally give a wide latitude to legislative intent, this was not the most important factor in the case.

"The Legislature may have believed the director of finance's proposed offsets were consistent with ... the NMS ... such a 'belief is not binding on a court,'" Hoch wrote, citing California School Boards Assn. v. California, (192 Cal.App.4th 788).

"Defendants' reading of the statute would effectively defeat the purpose of creating a special deposit fund to house the money," Hoch added.

She pointed out the language of the settlement itself, which stated the money was intended to "ameliorate the effects of the foreclosure crisis, to enhance law enforcement efforts to prevent and prosecute financial fraud."

Far from legitimizing Brown's actions, Hoch wrote, "an unconstitutional diversion by the Legislature ... makes for a more compelling case for ordering the money returned, not less."

The ruling also rejected some of the state's other arguments, in particular an attempt to deny standing to the plaintiffs. Hoch declined to decide whether they plaintiffs lacked standing due to their status as homeowners, finding they did have standing under a "well established public interest."