US SUPREME COURT ALLOWS CITIES TO SUE BANKS FOR FINANCIAL WOES

By Kevin Funnell

Old bank sign engraved in stone or concrete above the door of financial building concept for finance and business

Last week, the US Supreme Court, in a 5-3 decision in the case of Bank of America Corp. et al. v. City of Miami, Florida, gave both municipalities (in this case, the City of Miami) and the mortgage lenders they love to sue (in this case, Bank of America, Wells Fargo, and Citigroup), some good news and some bad news. Housing Wire’s Ben Lane gave a nice summary of the back story.

In its original lawsuit, Miami accused the lenders of “reverse redlining,” which led to a large number of foreclosures, lower property tax collections, and increased cost to the city to deal with the resulting property value loss and blight.

Per the Supreme Court’s decision, Miami claimed:

The City’s complaints charge that the Banks intentionally targeted predatory practices at African-American and Latino neighborhoods and residents, lending to minority borrowers on worse terms than equally creditworthy nonminority borrowers and inducing defaults by failing to extend refinancing and loan modifications to minority borrowers on fair terms. The City alleges that the Banks’ discriminatory conduct led to a disproportionate number of foreclosures and vacancies in majority minority neighborhoods, which impaired the City’s effort to assure racial integration, diminished the City’s property-tax revenue, and increased demand for police, fire, and other municipal services. The District Court dismissed the complaints on the grounds that (1) the harms alleged fell outside the zone of interests the FHA protects and (2) the complaints failed to show a sufficient causal connection between the City’s injuries and the Banks’ discriminatory conduct.

U.S. District Judge William Dimitrouleas initially dismissed the lawsuits in July 2014, ruling that the city lacked standing to sue, and that the alleged harm was too remote from the banks’ conduct.

Then, the city appealed the Dimitrouleas’s ruling to a higher court. And in September 2015, the 11th U.S. Circuit Court of Appeals reversed the lower court’s dismissal of the city’s claims under the federal Fair Housing Act.

Bank of America and Wells Fargo then appealed the Court of Appeals decision to the Supreme Court, while Citigroup elected not to appeal.

And in June of last year, the Supreme Court agreed to hear the case, stating that it will not rule on the merits of the city’s lawsuits, but rather whether Miami is allowed to bring the lawsuits in the first place.

The majority of the court held that municipalities that allege that they have been injured by the alleged “reverse redlining” of mortgage lenders (making loans on less favorable terms to members of protected minority groups than to members of non-minority groups) are “aggrieved persons” who are within the “zone of interests” the Fair Housing Act protects and, therefore, are entitled to pursue claims under that Act. The dissent argued that the majority erred in this determination, but they were outvoted so, unless a future SCOTUS overrules this precedent, expect other municipalities to stream to the litigation trough like pigs to slop.

Once at the trough, however, the pigs may find that they have to do a lot more oinking than they intended before table scraps are thrown their way. The court overturned the lower appeals court finding that to prevail on a claim, the city had to show only that the injuries allegedly sustained by the city were “foreseeable results of the Banks’ misconduct.” Instead, the SCOTUS decision requires that the municipality must show “proximate cause,” “some direct relationship” between the “injury asserted and the injurious conduct alleged,” and that this showing requires more than “foreseeability alone.” Rather than “draw the precise boundaries of proximate cause under the FHA,” however, the SCOTUS kicked the can back to the lower courts and asked them to “weigh in.” In other words, there will many miles to go (and millions in litigation costs to be incurred) before we sleep on this one.

The dissenting opinion by Justice Thomas (joined by Justices Alito and Kennedy) elaborates on why proving proximate accusation will be a tough row to hoe.

Moreover, the majority opinion leaves little doubt that neither Miami nor any similarly situated plaintiff can satisfy the rigorous standard for proximate cause that the Court adopts and leaves to the Court of Appeals to apply. See ante, at 11 (“The general tendency in these cases, in regard to damages at least, is not to go beyond the first step” (internal quotation marks omitted)).

Miami’s own account of causation shows that the link between the alleged FHA violation and its asserted injuries is exceedingly attenuated. According to Miami, the lenders’ injurious conduct was “target

[ing] black and Latino customers in Miami for predatory loans.” Brief for Respondent in No. 15–1111, p. 4 (internal quotation marks omitted). And according to Miami, the injuries asserted are its “loss of tax revenues” and its expenditure of “additional monies on municipal services to address” the consequences of urban blight. Id., at 6.

As Miami describes it, the chain of causation between the injurious conduct and its asserted injuries proceeds as follows: As a result of the lenders’ discriminatory loan practices, borrowers from predominantly minority neighborhoods were likely to default on their home loans, leading to foreclosures.Id., at 5–6. The foreclosures led to vacant houses. Id., at 6. The vacant houses, in turn, led to decreased property values for the surrounding homes. Ibid. Finally, those decreased property values resulted in homeowners paying lower property taxes to the city government. Ibid. Also, Miami explains, the foreclosed-upon, vacant homes eventually led to “vagrancy, criminal activity, and threats to public health and safety,” which the city had to address through the expenditures of municipal resources. Ibid. And all this occurred, according to Miami, between 2004 and 2012. See ibid. The Court of Appeals will not need to look far to discern other, independent events that might well have caused the injuries Miami alleges in these cases.

In light of this attenuated chain of causation, Miami’s asserted injuries are too remote from the injurious conduct it has alleged. See Associated Gen. Contractors of Cal., Inc. v. Carpenters, 459 U. S. 519, 532, n. 25 (1983). Indeed, any other conclusion would lead to disquieting consequences. Under Miami’s own theory of causation, its injuries are one step further removed from the allegedly discriminatory lending practices than the injuries suffered by the neighboring homeowners whose houses declined in value. No one suggests that those homeowners could sue under the FHA, and I think it is clear that they cannot.

Since the economic collapse of 2008, a number of municipalities (including Baltimore and Cleveland) have filed similar lawsuits. I have long been skeptical that a city can establish proximate cause. “Because the banks have money” is not, standing alone, enough to propel you over the finish line.

Proving causation is a difficult task, especially when there are so many unclean hands touching not only the subprime mortgage meltdown itself, but the apparent sinkhole in which cities like Miami, Cleveland, and Baltimore find themselves today. If the mayors of these cities are to be believed, the cities need hundreds of billions of dollars due to the devastation “caused” by the discriminatory practices of major mortgage lenders, so things must be horrible there. Of course, the loss of over half of your population (as has been the case with Cleveland) didn’t happen overnight, unless there was a nuclear explosion I missed. Crime, poverty, high taxes, a business-unfriendly environment, a lack of cohesive vision for the future and the will to implement that vision even if it existed, all might have had something to do with each city’s present woes, and I expect that the defendant banks will fire back with heavy weapons and plenty of ammunition.

That said, the fact that the SCOTUS gave cities looking to scapegoat lenders for civic leadership failures  a way to survive a motion to dismiss gives them a powerful tool to squeeze money from lenders. Out-of-pocket litigation and “soft” reputational risk costs will incentivize some lenders to simply pay off the plaintiffs. Cities understand that the banks are responsible to shareholders, many of whom, especially institutional investors, actually look at the bank’s bottom line. Many municipal leaders, particularly those running “old world” cesspools like the ones that have been doing the suing, are career machine politicians who know they can waive bright, shiny objects before the cowed masses and, for all practical purposes, avoid financial or political accountability by blaming all bad economic and social conditions on banks. They’ll bet on strong-arming the banks in a war of attrition, and they are cynics enough to carry it off, except with those banks that, like Bank of America and Wells Fargo in Miami, assume that their reputations are already so abused that they might as well fight and keep on winning in court until they finally win or the plaintiffs decide that it’s easier to try picking lower-hanging fruit and settle for a lot less than they’re asking.