Several community assistance organizations are suing California, alleging the state improperly diverted nearly $370 million that was intended to help homeowners struggling with foreclosures.
The lawsuit was filed Friday against Gov. Jerry Brown and other state officials in Sacramento County Superior Court. It says the money was siphoned off to the state's general fund as California struggled with a massive budget deficit and has never been repaid.
California now has a budget surplus.
The money was part of the $25 billion settlement between major banks and nearly every state in 2012, with California receiving the largest share.
A Department of Finance spokesman says the administration is confident its budget actions are legally sound.
The suit was filed by Neil Barofsky, who previously was inspector general for the federal bank bailout.