Cleveland Loses Appeal of Suit Blaming Wall Street for Foreclosures

July 28, 2010

The city of Cleveland lost its appeal Tuesday of a lawsuit accusing 22 Wall Street bank and mortgage lenders of creating a public nuisance by creating risky mortgage securities to be sold to investors.

A three-judge panel of the U.S. Sixth Circuit Court of Appeals concluded that Cleveland could not recover because there was only “too indirect” a link between the defendants’ conduct and what the city has characterized as a foreclosure crisis that damaged neighborhoods and the local economy.

The defendants include most of the nation’s largest banks and lenders, including Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co., as well as many smaller or defunct lenders.

Joshua Cohen, a partner at Cohen Rosenthal & Kramer LLP who represented Cleveland, in an interview said the city “respectfully disagrees” with the decision and plans to seek review by all the Sixth Circuit judges.

“We believe that the investment banks are responsible for the devastation in our neighborhoods that has been caused by subprime foreclosures,” he said. “It was entirely foreseeable by Wall Street.”

Various cities including Baltimore and Memphis, Tennessee, have also filed lawsuits accusing financial companies of allowing lending practices that fueled foreclosures and deterioration in neighborhoods.

In its original January 2008 lawsuit, Cleveland accused the defendants of violating an Ohio public nuisance law by allowing or encouraging brazen lending activities as early as 2003, to create enough subprime and risky loans to meet their securitization needs and desire for higher profits.

The city alleged that its high poverty rate and close ties to a declining manufacturing sector made mass foreclosures an inevitable result, saying foreclosures in the city had risen to more than 7,500 in 2007 from fewer than 120 in 2002.

But Senior Judge Richard Suhrheinrich, writing for the Sixth Circuit panel, accepted a district court judge’s finding that Cleveland failed to demonstrate “any direct relationship” between the banks’ conduct and its alleged injuries.

“The case of the alleged harms is a set of actions (neglect of property, starting fires, looting, and dealing drugs) that is completely distinct from the asserted misconduct (financing subprime loans),” Suhrheinrich wrote in a 15-page opinion.

He said the injuries could have been caused by other factors, including home buyers themselves choosing to enter into subprime mortgages, or mortgagees not involved in securitization choosing to begin foreclosures.

“It would be easier to calculate the damages suffered by property owners in a specific neighborhood, where the court could more readily ascertain how many foreclosures occurred and what caused them,” the judge added. “To the extent that misconduct occurred when the defendants sold mortgages to create mortgage-backed securities, the buyers of these securities can bring their own causes of action.”

The case is Cleveland v. Ameriquest Mortgage Securities Inc et al, U.S. Sixth Circuit Court of Appeals, No. 09-3608.

(Reporting by Jonathan Stempel, editing by Gerald E. McCormick)

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