Justice Andrea Hoch, Third District Court of Appeal. (Photo: Jason Doiy/ALM)

A California appellate court has ordered Gov. Jerry Brown to return about $330 million from the state’s general fund to a settlement fund created to help distressed homeowners in the wake of the foreclosure crisis.

The ruling is a win for litigators at Jenner & Block and their clients, three groups that assist low-income and minority homeowners—the National Asian American Coalition, COR Community Development Corp. and the National Hispanic Christian Leadership Conference.

The groups sued the governor and other state officials in 2014 claiming money that had come to the state as part of a massive $25 billion settlement with the nation’s five largest mortgage servicers had been illegally diverted to fill gaps in the state’s budget.

The state directly received about $410 million as part of the 2012 settlement. Then-California Attorney General Kamala Harris designated 90 percent of those proceeds to a special fund dedicated to several purposes, including enforcement efforts, direct assistance to affected homeowners, grant programs assisting housing counselors, and support for other housing-related legal aid agencies.

However, through actions by the Legislature and other members of the Brown administration, $292.7 million was transferred to the state’s general fund to offset debt payments for the state’s housing bonds. Another $38.4 million was transferred to pay for past expenditures by California’s Justice Department and Department of Housing & Community Development.

After a one-day trial in 2015, Sacramento County Superior Court Judge Timothy Frawley found that the funds had been “unlawfully diverted” to the general fund. Frawley, however, found that separation-of-powers considerations prevented him from issuing a writ of mandate requiring the funds be transferred. The judge asked the Legislature and the governor to “take whatever steps are necessary and appropriate to meet this obligation.”

The government instead appealed and got an even less friendly reception from the Third District Court of Appeal. The appellate court agreed with Frawley’s conclusion that the funds had been unlawfully redirected but disagreed with him on the possible remedy.

Third District Justice Andrea Hoch wrote Tuesday that there is “a sharp duty to comply with restrictions placed on the expenditure of public funds and a weighty public need for enforcement of such restrictions.”

“As we explain, because the unlawfully diverted funds are ‘in law still in the [settlement fund]‘” Hoch wrote, “separation of powers principles do not preclude this court from ordering the immediate return of these funds.”

H.D. Palmer, deputy director for External Affairs at the California Department of Finance, said Wednesday afternoon that the defendants are still reviewing their options and considering next steps.

Jenner & Block’s Neil Barofsky said he hopes that hearing “decisively” for the second time from a court that their defenses are invalid will convince the defendants to cease fighting. Said Barofsky, “It’s time for them to end this very long, very protracted and very expensive case and do what’s right for California taxpayers.”