Law.com Empty Homes Spur Cities' Suits
Friday May 9, 3:02 am ET
Julie Kay , The National Law Journal
Homeowners aren't the only ones claiming they were victimized by the subprime foreclosure debacle sweeping the nation. Cities now dealing with scores of abandoned, foreclosed homes have started suing banks and mortgage companies to recoup their costs, while other cities are hauling lenders before code enforcement boards and county courts to force them to maintain abandoned properties.
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The innovative legal tactics are designed to recoup the city's lost property taxes as well as the cost of fire departments, police, code enforcement or even demolition -- any city services needed to clean up or deal with the foreclosed properties.
Cleveland; Baltimore; Buffalo, N.Y.; and Minneapolis, Minn., have all filed lawsuits against lenders or developers based on the devastating effects foreclosures have wreaked on their communities. The lawsuits were filed in recent months under different theories, in state and federal court.
Cleveland and Buffalo filed suits under public nuisance laws. Minneapolis' suit was brought on consumer fraud grounds, while Baltimore took the unusual approach of filing suit in federal court under alleged Fair Housing Act violations.
In addition to filing a lawsuit in February, Buffalo city prosecutors routinely haul banking officials before the local housing court to force them to fix up foreclosed and abandoned properties.
MORE TO COME
John Relman, a Washington attorney, was hired by the city of Baltimore to file suit against Wells Fargo. He has received inquiries from other cities and expects more foreclosure suits to be filed in the future.
"You can look at almost any of the major cities and see significant foreclosure trends, stretching across the country," said Relman of Relman & Dane. "Any city that has racially segregated housing patterns and high levels of foreclosure could wind up suing -- cities across the Midwest, cities in California. It's almost everywhere."
The notion that cities are also victims of the subprime foreclosure crisis started to catch on at the beginning of the year. While the details of the suits differ, they all allege that cities are losing tax revenue from foreclosed and neighboring homes whose values are reduced, and from having to keep the abandoned houses free from rats, vagrants and disrepair -- and from potentially turning into crack houses.
Cleveland and Baltimore filed their suits in early January. Cleveland's suit was filed in state court against 21 investment banks and lenders, essentially pitting middle America against Wall Street. It appears to be the first to be filed on the foreclosure issue using public nuisance laws. City of Cleveland v. Deutsche Bank, No. CV08646970 (Cuyahoga Co., Ohio, Ct. C.P.).
Public nuisance is one of the oldest common law torts and grants people the right to "quiet enjoyment." Such suits are brought on behalf of the public, alleging that the defendant caused an unreasonable interference with the health, safety and peace of comfort of the general public.
Cleveland alleges that, after suffering more than 7,500 foreclosures last year -- an average of 20 a day -- the city now has "entire streets, blocks and neighborhoods" of abandoned homes that have become "eyesores ... fire hazards ... and targets for looters and criminals."
The city hired a team of lawyers with Cohen Rosenthal & Kramer of Cleveland, headed up by Joshua Cohen, to assist. The firm is working on a contingency basis.
Cleveland is seeking to hold lenders accountable for predatory lending practices. "The purveyors of subprime loans could have or should have ... foreseen a foreclosure crisis as inescapable consequence of their conduct," the lawsuit states.
The lenders -- which have labeled the Cleveland suit without merit in countersuits -- include the biggest financial institutions in the United States, including Bear Stearns, Bank of America, Citigroup, Merrill Lynch, Lehman Brothers and Wells Fargo.
Merrill Lynch declined comment on the suit. JP Morgan Chase and Morgan Stanley did not return calls for comment by deadline. The American Bankers Association also declined comment.
Several of the banks countersued in federal court, alleging that federal banking laws render them immune from any state lawsuits.
"It's a blatant attempt by them to establish federal jurisdiction in case the main action is thrown out," Cohen said.
STRATEGIZING IN BUFFALO
Buffalo's suit against 39 lenders, including Citibank, Chase Manhattan and Bank of New York, also cited city and state nuisance laws as well as New York state's property maintenance code.
Kevin Heine, spokesman for Bank of New York, pointed out that, while some banks named in the suit did originate the mortgage loans, the Bank of New York did not originate any of them, nor did it buy up the loans. It merely acts as a trustee on the loans -- "the back office shop, so to speak," he said. "We are twice removed."
Officials with Citibank declined to comment.
Buffalo is trying to recoup its cost in demolishing 57 homes on which the banks foreclosed and then allegedly walked away from. Buffalo wants to collect the $16,000 it cost the city to demolish each home. City of Buffalo and Mayor Byron W. Brown v. ABN Amro Mortgage Co., No. 2008002200 (Erie Co., N.Y., Sup. Ct.).
While the amount of money may not be huge, Buffalo is clearly trying to send a message to banks: Don't abandon foreclosed properties. After all, there are an estimated 10,000 abandoned properties in that city.
Buffalo Corporation Counsel Alisa Lukasiewicz said her city's lawsuit was inspired by the Cleveland litigation. But it is different because it's largely based on Buffalo city code and targets properties abandoned by mortgagee holders.
Buffalo looked at all residential properties demolished in 2007 due to foreclosure and picked the 57 worst cases.
Similar actions that the city attempted in the past failed. The banks claimed they were exempt because they did not hold titles to the properties.
The current action "eliminates that loophole," and is based on the theory that any mortgagee who has exercised dominion over the property at the time of the foreclosure is liable, regardless of whether they bear a title, she said.
A trial is scheduled for late May; however, Buffalo is already in settlement talks with the banks to recoup the money the city spent on demolition of the properties, she said.
The defendants include Citibank, Bank of America and Chase Manhattan. They all declined to comment.
Baltimore's suit was filed in federal court on Fair Housing Act violations, targeting one lender, Wells Fargo. It alleges that the company discriminated against black borrowers by charging them a higher interest rate than whites. As a result, black borrowers were far more likely to suffer foreclosures than whites. Baltimore v. Wells Fargo Bank and Wells Fargo Financial Leasing, No. L08CV062 (D. Md.).
The city hired Relman, who previously sued financial companies on behalf of Boston home borrowers. Relman said he sued under the Fair Housing Act because standing is "broad and clear," there are unlimited punitive and compensatory damages, and the statute of limitations is generous.
With studies detailing exactly how much money is lost to cities and neighborhoods when foreclosures occur, "these are avenues for empirically establishing damages for city that foreclosures cost," Relman said.
But he also added, referring to the Cleveland suit, that it is "tricky to sue 21 of the biggest financial institutions. They will file 21 motions to dismiss. It's a very daunting logistical path in uncharted waters," he said. "By contrast, redlining suits have been very successful. They are two very different approaches."
Steve Carlson, a spokesman for Wells Fargo, called both suits "unfounded," and said the company prices its loans "based on credit risk," not race.
"We have the facts to support that both the Baltimore and Cleveland lawsuits are unfounded and misrepresent how our company does business," he said. "In both, we expect Wells Fargo to prevail."
Additionally, Carlson said Wells Fargo is not sure why Baltimore is targeting it, since the bank is responsible for just 1 percent of Baltimore's foreclosures.
"In Cleveland, we look forward to having the courts -- as they've done time and again -- uphold federal banking law, which gives the federal Office of the Comptroller of the Currency exclusive enforcement responsibility over national banks," he added.
In fact, Cleveland's suit has already been removed to federal court, where banking laws have been rewritten to favor banks in recent years.
A NARROW FOCUS
Minneapolis' two lawsuits are narrower, targeting a developer that converted 140 homes into rental units. The consumer fraud suits, filed April 2 in state court, allege that Minnesota developer TJ Waconia engaged in a complex and fraudulent residential real estate scheme to illegally drive up housing prices in north Minneapolis and then leave the area blighted with foreclosures. City of Minneapolis v. TJ Waconia, No. 27CV0887880 (Hennepin Co., Minn., Dist. Ct.)
The lawsuits seek the appointment of an administrator to manage and clean up the properties and to recover damages. They follow last year's acknowledgement by the FBI that it was investigating TJ Waconia for mortgage fraud.
"TJ Waconia has stripped our neighborhoods of people and value," said Minneapolis Council Member Diane Hofstede in a statement.
"We are filing this lawsuit to stop them from destroying our community and to send the message that these types of investors are not welcome in our city."
On April 16, following a stipulated agreement, a judge ruled in favor of the city and awarded possession of the properties to the city. William Skolnick, a Minneapolis solo attorney who represents TJ Waconia, said his client stipulated to the agreement because the principals admitted wrongdoing and "absolutely wanted to help the neighborhood."
Despite some early-round victories, James Tierney, director of the National State Attorneys General Program, a Columbia University-based program that provides research to state attorneys general, said cities have an uphill battle.
"The people who have committed the fraud have long since gone," Tierney said.
"A lot of the banks will have good defenses," he added. "They will blame the mortgage brokers who repackaged the loans. These are very difficult cases as a matter of law, and very thorny issues to unravel."