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

A California appellate court has nixed the state legislature’s efforts to work around a prior ruling forcing the state to return about $330 million from its general fund to a settlement fund created to help distressed homeowners in the wake of the foreclosure crisis.

The Third District Court of Appeal last year found the legislature had unlawfully redirected funds from California’s dedicated portion of a massive $25 billion federal settlement reached in 2012 with the nation’s five largest mortgage servicers. While the state’s appeal of the Third District’s order to return the funds was pending at the California Supreme Court, the legislature passed a bill last year declaring that its prior actions and those of the state’s finance department ”were made for purposes consistent with the national mortgage settlement.”

In the wake of the new legislation, the state Supreme Court transferred the case back to the Court of Appeal for consideration in light of the new law. Upon transfer, Third District Justice Andrea Hoch, who wrote the court’s prior opinion, stood by her prior legal reasoning, even in light of the legislature’s subsequent action.

“While, as defendants argue, the legislature may have believed the director of finance’s proposed offsets complied with the purposes for which the National Mortgage Special Deposit Fund was created, it is the judicial branch that has the constitutional authority to interpret statutes,” she wrote. “We have determined, as did the trial court, the challenged offsets reimbursing the General Fund for past obligations did not comport with these purposes.”

H.D. Palmer, deputy director for external affairs at the California Department of Finance, said Tuesday afternoon that the state defendants “are in receipt of the ruling and have begun in the process of reviewing it.”

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

Jenner’s Rick Richmond said in a phone interview Tuesday afternoon that his clients’ arguments on the latest appeal were bolstered by the fact that the legislature that passed the recent legislation has nearly no holdover members from the group that took action immediately after the settlement. Richmond said though the court gave “due consideration” to the legislature’s interpretation of the law, it ultimately “remained as firm as ever that its interpretation of what the law said and what the law meant was correct.”

“If you ask me, the key takeaways are the same as they were last time: No man is above the law and it is for the courts, in the final analysis, to say what the law is and interpret the law,” Richmond said.

The state received about $410 million as part of the underlying settlement with GMAC, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo. Then-California Attorney General Kamala Harris designated 90 percent of the settlement’s proceeds to a special fund dedicated to providing services and direct assistance to distressed homeowners. Harris and the state’s Justice Department subsequently declined to defend the actions taken by the legislature and other state officials. State defendants, which now include Gov. Gavin Newsom and Director of Finance Keely Bosler, have been represented in the case by Robin Johansen and Margaret Prinzing of Remcho Johansen & Purcell.

Jenner’s Richmond said Tuesday that given that the new governor is now operating with a budget surplus, he hopes the state will agree to replenish the settlement fund. However, he added: “Given the twists and turns that have taken place in this case, nothing would surprise me.”