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  • Writer's pictureKirk Hartley

Lawsuit Challenges Arizona’s Diversion of Mortgage Fraud Settlement Money into Its General Fun

Trust fund settlements are a growing part of the litigation industry. How well they work is another issue.

Public interest groups in Arizona say that a mortgage-fraud trust fund settlement is being abused by the state to divert $ 50 million into the state’s general revenues. Indeed, the groups have filed a lawsuit and the complaint is persuasive. The complaint, motion for tro, and ancillary papers are available here on the web site of The Arizona Center for Law in the Public Interest (ACLPI). The press release summary tells the story and is set out below. According to a popular press article, Arizona’s AG apparently is going to defend against the lawsuit even though he opposed the transfer of money.

"On May 24, 2012, the Center, along with the Morris Institute of Justice, filed a lawsuit challenging the legislature’s sweep of $50 million from the Court Ordered Trust Fund set up to benefit Arizonan’s hurt by the foreclosure crisis as part of the National Mortgage Foreclosure Settlement.

Arizona currently has the highest foreclosure rate in the country. In March 2012, there were 9,497 foreclosure filings, the equivalent of 1 in every 300 housing units. Arizona, along with Nevada, has the highest rate of distressed property transactions in the country.

In response to this crisis, the Arizona Attorney General, Tom Horne, joined with attorneys general from forty-eight other states and the United States government to bring a civil action against Ally/GMAC Mortgage, Bank of America, CitiMortgage, JP Morgan Chase and Wells Fargo, the five largest loan servicers in the United States. The plaintiffs in that litigation filed a complaint in federal district court in the District of Columbia that alleged that the defendants had violated numerous federal and state laws in the manner in which they originated and serviced single family residential mortgages.

Shortly after the action was filed, a national settlement was successfully negotiated by the parties and on April 4, 2012, a Consent Judgment that memorialized and documented the terms of that settlement was entered by the district court.

Under the Consent Judgment, the Arizona Attorney General is to receive $97,784,204 in settlement funds. The Consent Judgment sets forth the allowable uses of these settlement funds and states that the Attorney General as trustee “shall” deposit the funds with the State Treasurer and the funds “shall” be held in a separate “Court Ordered Trust Fund.” That didn’t stop the Arizona legislature, however, which decided that it would raid the trust fund in an effort to balance its budget.

On May 1, 2012, the Arizona Legislature passed its budget bill for fiscal year 2012, which Governor Brewer signed on May 7, 2012. That budget bill directed the Attorney General to transfer $50 million from the Court Ordered Trust Fund to the state’s general fund.

The lawsuit seeks to stop that transfer on several grounds, including breach of trust. A copy of the Complaint and Motion for Temporary Restraining Order and Preliminary Injunction is available below."

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