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Arizona Homeowners File Suit Against State for Foreclosure Fraud Settlement Fund Raid

The response to the foreclosure fraud settlement fund raid in multiple states, now up close to a billion dollars, has been shockingly muted. No progressive group or housing-focused organization has done much more than grumble about the fact that money intended to go to homeowners is being diverted into state budgets all over the country.

But one state is trying to fight back. In Arizona, a group of homeowners have filed a lawsuit against state Attorney General Thomas Horne and State Treasurer Doug Ducey, arguing that the $50 million the state will skim off the settlement payout for the General Fund (out of a total of $97.7 million) violates the settlement agreement. Here’s the meat of the complaint:

4. On May 1, 2012, the Arizona Legislature passed a general appropriations bill, SB 1523. Governor Brewer signed SB 1523 on May 7, 2012. In SB 1523, the legislature directed the Attorney General to place $50 million of the Settlement Funds, more than half of the funds that are to be deposited into Court Ordered Trust Fund, into the state’s general fund.

5. If this transfer occurs, the Settlement Funds in the Court Ordered Trust Fund will not be used for the designated purposes and distressed Arizona homeowners will not receive the assistance they need to be able to stay in their homes and avoid foreclosure.

6. Plaintiffs seek declaratory and injunctive relief to enjoin Defendants from taking any action to transfer the Settlement Funds from the Court Ordered Trust Fund into the state’s general fund and from using the Court Ordered Trust Fund for purposes not designated int he Consent Judgments.

Two homeowners, Joseph Morones and Elvira Hernandez, are the plaintiffs in the case. It will hinge on the language in the settlement regarding the hard-dollar fund. That language says:

i. Each State Attorney General shall designate the uses of the funds set forth in the attached Exhibit B-1. To 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 and deceptive acts or practices and to compensate the States for costs resulting from the alleged unlawful conduct of the defendants. Such permissable purposes for allocation of the funds include, but are not limited to, supplementing the amounts paid to state homeowners under the Borrower Payment Fund, funding for housing counselors, state and local foreclosure assistance hotlines, state and local foreclosure mediation programs, legal assistance, housing remediation and anti-blight projects, funding for training and staffing of financial fraud or consumer protection enforcement efforts, and civil penalties.

I don’t think the plaintiffs are going to win this case. “To the extent practicable” gives the states a little wiggle room, and the clause about “to compensate the States for costs resulting from the alleged unlawful conduct of the defendants” gives them a lot more (you have to love “alleged unlawful conduct” there). A state can pretty easily argue that the foreclosure crisis wrecked their economy, and the compensation needs to cover the lost tax revenue from the resulting economic slowdown. “Civil penalties” can work in that way as well. And there’s no real limit on the specific purposes highlighted.

The homeowners may be on firmer ground when they claim that the legislature’s bill appropriating $50 million of settlement funds violates the Arizona Constitution. They argue that the transfer of funds does not count as an appropriation, yet it was included in a general appropriations bill. They also claim that the legislature has no authority to appropriate the money in a court ordered trust fund. And they’re trying to stop the transfer as a remedy.

Even if this fails, by highlighting what amounts to a robbery of funds intended to help homeowners, this lawsuit is well worth the effort. I hope this causes a string of copycat lawsuits against states who attempt this unconscionable maneuver. And it’s time some activist groups get involved as well to put pressure on state legislatures, Governors and Attorneys General over this. Presumably they want to be elected again, so making sure constituents see the faces of the people being robbed by them might work here.

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David Dayen

David Dayen