Four major U.S. cities that pay for the upkeep of foreclosed properties are trying to recoup the costs of services including lawn mowing, repairs and security by suing banks they claim contributed to their “urban blight.”
A federal judge in Memphis, Tennessee, on May 4 and another in Baltimore on April 22 denied Wells Fargo & Co.’s request to dismiss the predatory-lending lawsuits brought against the bank. A lawsuit by the city of Cleveland against JPMorgan Chase & Co. and Ally Financial Inc. is also pending before an Ohio judge.
In one case, Deutsche Bank AG, described by Los Angeles City Attorney Carmen Trutanich as one of the city’s “major slumlords,” may be found liable for hundreds of millions of dollars, including restitution for current and former tenants, according to a statement by the city.
“We started out looking to sue as many as 16 lenders,” Webb Brewer, a lawyer who represents Memphis, said in a telephone interview. “It’s a tall order to fight all those banks at once. We never alleged that Wells Fargo was alone in employing these practices.”
The cities’ lawsuits invoke various legal theories, and some have targeted the banks as bundlers of mortgages into securities rather than as lenders. The cases brought by Baltimore and Memphis, which will now shift to pre-trial evidence gathering, are similar. They both accuse San Francisco-based Wells Fargo of violating the Fair Housing Act by so-called reverse redlining -- targeting black neighborhoods for predatory lending.
Buildings in Disrepair
Los Angeles sued Deutsche Bank May 4 as trustee of mortgage-backed securities and is seeking reimbursement for costs of property repair. The city accused the bank of buying more than 2,200 properties through foreclosure and letting vacant buildings fall into disrepair. The day before, the U.S. government alleged in a lawsuit seeking $1 billion that the Frankfurt-based bank lied to qualify thousands of risky mortgages for a government insurance program.
Renee Calabro, a spokeswoman for Deutsche Bank, said the day the Los Angeles complaint was filed that it’s “against the wrong party” because loan servicers, rather than trustees, are responsible for maintenance of foreclosed properties. She said May 3 the U.S. suit was “unreasonable and unfair” and the bank would fight it.
“Obviously the cities face significant hurdles in proving the chain of causation from predatory mortgage lending to foreclosures, abandonment and urban blight,” Alan White, a law professor at Valparaiso University in Indiana, said in an e-mail about the Baltimore and Memphis cases. “Still, these cases may result in financial institutions having some accountability for the devastation caused by the crisis, accountability that has been in short supply to date.”
Baltimore and Memphis claim Wells Fargo approved unqualified black borrowers to refinance their mortgages or take out home-equity loans, and steered other black borrowers who qualified for prime loans into subprime loans. Subprime loans, made to borrowers with poor credit ratings, have higher interest payments and also higher fees for the lenders.
Those practices caused foreclosures and abandonment of properties, which injured the areas through higher spending on services and lower tax revenue, the municipalities said. Both cases include sworn statements from former Wells Fargo employees who said the bank targeted black neighborhoods for predatory lending.
Shelby County, of which Memphis is the county seat, is also a plaintiff in the Tennessee case.
“We disagree with both rulings,” Vickee Adams, a Wells Fargo spokeswoman, said in a telephone interview. “We know that our team members make loan decisions based on credit and transaction risk, and that we serve all of our customers without bias. We lend with the overarching goal of approving applications when the customer has the ability to repay the loan.” She said the bank will fight the lawsuits.
U.S. District Judge J. Frederick Motz in Baltimore had dismissed two earlier complaints by Baltimore, allowing the city to amend them to fix what he saw as defects. The case is now focused on properties Baltimore claims are vacant only because of Wells Fargo’s alleged predatory lending.
“The city provides an in-depth explanation of how targeting homeowners with predatory refinance and home-equity loans of the type allegedly made by Wells Fargo can create vacancies in homes that would otherwise be occupied,” Motz wrote in his April 22 decision.
In deciding dismissal motions, judges rule on the legal sufficiency, not the merits, of the allegations. Once a case survives a motion to dismiss, the plaintiffs may demand the exchange of evidence from defendants in the “discovery” phase.
Baltimore identified 190 vacant Wells Fargo properties where it had to provide services such as “inspecting, boarding, cleaning, cutting grass and weeds, prosecuting, condemning, sending fire personnel, sending police personnel and more.”
The complaint includes accusations by Baltimore residents of squatters occupying vacant homes, firefighters coming to put out fires and one child being taken to the hospital because of being bitten by a rat.
In upholding the Fair Housing Act complaint against Wells Fargo in Tennessee, U.S. District Judge S. Thomas Anderson in Memphis didn’t limit the case to vacant homes. The complaint also included a claim under the state’s consumer-protection law.
Wells Fargo’s foreclosure rates in targeted black neighborhoods of both Memphis and Shelby County are almost 18 percent -- five times the rate in predominantly white city neighborhoods and seven times in predominantly white county neighborhoods, according to court papers. Those figures are much higher than that of other lenders, according to the plaintiffs.
Not Savvy Enough
“The prevailing attitude was that African-American customers weren’t savvy enough to know they were getting a bad loan, so we would have a better chance of convincing them to apply for a high-cost, subprime loan,” according to a sworn statement by Mario Taylor, a former Wells Fargo credit officer.
Wells Fargo said in court papers that, of the 50 properties listed in the complaint, it made loans for and foreclosed on only 30 in what the plaintiffs said were predominantly black neighborhoods, and 20 of those were “made to borrowers believed to be investors.” The defaults on the remaining 10 were due to “circumstances such as curtailment of income, medical problems and structural problems at the property.”
Cleveland’s suit, in Ohio state court in that city, focuses on financial companies’ securitization of house loans. It sued units of New York-based JPMorgan and Detroit-based Ally Financial, arguing they should pay for the costs the city incurred as a result of foreclosures that stemmed from their bundling of subprime mortgages into securities.
The banks “knew or should have known” that the subprime lending “would inevitably result in mass foreclosures, given the city’s unique economic plight,” Cleveland’s lawyers wrote in court papers.
The city also alleged that the financial companies’ “filing of sham foreclosure complaints” violated the state’s racketeering statute and that JPMorgan and Ally owe it money under a state law allowing cities to recoup from owners the costs of demolishing vacant buildings.
Birmingham, Alabama lost a case it brought and Buffalo, New York, lost its suit for the most part. Cleveland has lost a companion case in federal court.
On March 21, the U.S. Supreme Court declined to hear Cleveland’s appeal of the dismissal of its lawsuit against 22 financial companies, including New York-based Goldman Sachs Group Inc. and Citigroup Inc., and Charlotte, North Carolina-based Bank of America Corp., that bundled subprime mortgages into securities.
U.S. District Judge Sara Lioi in Cleveland ruled in 2009 that the funding of subprime lending couldn’t form the basis of Cleveland’s public-nuisance claim because such lending is legal and that state law forbids municipalities from regulating mortgages.
“We respectfully disagreed with the court’s interpretation of Ohio law,” Joshua Cohen, a lawyer for the city at Cohen Rosenthal & Kramer LLP in Cleveland, said in a telephone interview. “We’re hoping the state-court judge will see it differently.”
Court of Common Pleas Judge Brian J. Corrigan in Cleveland has yet to rule on the financial company’s request to dismiss the case.
“The claims brought in this case are based on the same theories that have been rejected” in the federal case, Jim Olecki, a spokesman for Ally Financial, said in an e-mail. The company is “optimistic that the state court will take these prior rulings into consideration as it makes its decision.”
Thomas Kelly, a spokesman for JPMorgan, declined to comment.
Like Cleveland’s case in federal court, Birmingham’s Fair Housing Act suit against Citigroup and Bank of America’s Countrywide Financial unit was dismissed early in the litigation. In August 2009, U.S. District Judge Karon Owen Bowdre in Birmingham found the city’s alleged injuries were “too tenuously connected” to the conduct alleged.
The Birmingham complaint was similar to those of Baltimore and Memphis.
Most of the 36 financial companies Buffalo sued for public nuisance in 2008, including Citigroup and Bank of America, were dismissed from the case under an order of summary judgment, Marco Cercone, a lawyer for several defendants in the case, said in a telephone interview. The summary judgment could not immediately be confirmed in court filings.
A “handful” settled, Cercone said. Cercone, a partner at Rupp, Baase, Pfalzgraf, Cunningham & Coppola LLC in Buffalo, declined to name them or his clients. Shirley Norton, a Bank of America spokeswoman, and Mark Rodgers, a Citigroup spokesman, confirmed their companies won against Buffalo without the need of a trial.
Buffalo Acting Corporation Counsel David Rodriguez didn’t return calls seeking comment. Mike DeGeorge, spokesman for Buffalo Mayor Byron Brown, declined to immediately comment.
The cases are People of the State of California and the City of Los Angeles v. Deutsche Bank National Trust Co., 11-460878, Superior Court of California, Los Angeles County (Los Angeles); Mayor and City Council of Baltimore v. Wells Fargo Bank NA, 08-00062, U.S. District Court for the District of Maryland (Baltimore); City of Memphis v. Wells Fargo, 09-cv-02857, Western District of Tennessee (Memphis); U.S. v. Deutsche Bank AG, 11-02976, U.S. District Court for the Southern District of New York (Manhattan); City of Cleveland v. JPMorgan Chase Bank NA, 08-668608, Ohio Court of Common Pleas, Cuyahoga County (Cleveland); City of Cleveland v. Ameriquest Mortgage Securities Inc., 08-00139, U.S. District Court for the Northern District of Ohio (Cleveland); City of Birmingham v. Citigroup Inc., 09-00467, U.S. District Court for the Northern District of Alabama (Birmingham); and City of Buffalo v. ABN AMRO Mortgage Group Inc., 08-02200, New York State Supreme Court, Erie County (Buffalo).