A federal judge has dismissed a lawsuit filed by the City of Cleveland against several investment bankers that allegedly helped create the city’s foreclosure crisis by securitizing risky subprime loans. The city has since appealed the judgment.
The case was originally filed in January 2008 against more than 20 defendants — including Ameriquest Mortgage Securities Inc., Chase Bank USA, N.A., and Citibank N.A. — who are blamed for the “epidemic of foreclosures afflicting the city,” according to court records. By helping to package subprime loans into residential mortgage-backed securities, the defendants allegedly enabled the bad lending practices that led to the current crisis.
In a second amended complaint, Cleveland claims that the defendants should have known that foreclosures would spike as a result of their activities. It sought to recover costs for monitoring, maintaining, and demolishing foreclosed properties. In addition, it also sought the “diminution” in property tax revenues as a result of foreclosures.
The city based its case on its public nuisance law.
But the defendants fired back, claiming that Cleveland’s public nuisance claim is preempted by Ohio law and barred by the economic loss doctrine — which “precludes recovery in tort for purely economic losses not arising from tangible physical harm to persons or property.”
In addition, the lenders claim that the city has not alleged unreasonable interference with a public right, and its allegations “are insufficient to demonstrate proximate cause.”
The lenders also claim that the city’s move amounts to an attempt to regulate mortgage activities in violation of the Ohio Revised Code.
The judge agreed.
On Friday, federal district court Judge Sara Lioi ruled in favor of the defendants and dismissed the case. She noted that the economic loss doctrine bars the city’s claim and that the city’s allegations don’t establish unreasonable interference with a public right. The judge also said Cleveland’s allegations are insufficient to demonstrate that the “defendants’ conduct proximately caused its alleged damages.”
Cleveland filed an appeal yesterday in U.S. District Court for the Northern District of Ohio Eastern Division.
Defendants named in the case are:
- Ameriquest Mortgage Securities Inc.;
- Bank of America, N.A.;
- Bear Stearns & Co. Inc.;
- Chase Bank USA, N.A.;
- Citibank N.A.;
- Citigroup Global Markets Inc.;
- Countrywide Securities Corp.;
- Credit Suisse USA Inc.;
- Credit Suisse (USA) LLC;
- Deutsche Bank Securities Inc.
- GMAC-RFC Holding Co.
- Goldman Sachs & Co.;
- Greenwich Capital Markets Inc.;
- HSBC Securities (USA) Inc.;
- JP Morgan Acquisition Corp.
- Merrill Lynch, Pierce, Fenner & Smith Inc.;
- Morgan Stanley & Co. Inc.;
- Novastar Mortgage Inc.;
- Option One Mortgage Corp.;
- Washington Mutual Bank.;
- Wells Fargo Asset Securities Corp.; and
- Wells Fargo Bank, N.A.
City of Cleveland, Plaintiff vs. Ameriquest Mortgage Securities, Inc., et al, Defendants.
Case No.1:08-cv-00139-SL, docket numbers 197, 199, 202, 205, 207, 208, 209 and 228; Jan. 16, 2008 (U.S. District Court for the Northern District of Ohio Eastern Division).
Cleveland Suing Securitizers, Lenders
The city of Cleveland, stung by declining property tax revenues, is attempting to reach into the deep pockets of Wall Street firms. The city has filed a lawsuit against 21 mortgage lenders and investment bankers.