Posted May 1st, 2017.
By Evan Weinberger
Law360, New York (May 1, 2017, 8:21 PM EDT) — A decision Monday in the U.S. Supreme Court allowing the city of Miami to bring a case against two major banks under a federal fair housing law affirmed municipalities’ ability to sue over alleged discriminatory lending, but the opinion set the stage for making those cases significantly harder to bring, experts say.
The Supreme Court’s decision in the case involving lawsuits Miami filed against Bank of America Corp. and Wells Fargo & Co. was split in two ways, with the court looking separately at whether cities have standing to bring claims and their damages theories, as well as on the substance of one of the questions.
First, the court split 5-3 on the question of whether Miami has the standing to bring a case alleging that discriminatory lending practices violate the Fair Housing Act, with the majority saying it does. The high court also ruled 8-0 that the Eleventh Circuit needed to review whether Miami had argued effectively that the banks’ actions led to foreclosures, which then led to lower tax revenues and higher expenses as the city dealt with blight.
While the Supreme Court did not officially take a position, the opinion gave a clear road map for how many steps a municipal plaintiff could take from the point where a bad loan is made to the end result of those bad loans resulting in harm to the city or county.
In short, municipalities will likely not be given the chance to make long, multistep arguments about liability, according to Valerie Hletko, a partner a Buckley Sandler LLP.
“While the dissent breaks out the causal chain further, even the majority’s thumbnail sketch of the causal chain alleged shows that the theory of liability goes, at a minimum, ‘beyond the first step,’” she said, noting that the dissent went further than the opinion on the issue of proximate cause.
The underlying cases that Miami filed against San Francisco-based Wells Fargo and Charlotte, North Carolina-based Bank of America allege that the banks’ lending practices unfairly targeted black and Latino borrowers with subprime loans they could not repay in the runup to the 2008 financial crisis.
When those loans went bad, those borrowers couldn’t keep up with their payments, and many were ultimately foreclosed upon, the city contended. Those foreclosures led to lower tax revenues, while the city was forced to pay more for upkeep and security at those properties.
Miami argued that Wells Fargo and Bank of America should be forced to pay damages. Ultimately, the Eleventh Circuit agreed, stating that the city met the “zone of interests” standards mandated by the Fair Housing Act and that it had effectively argued that the banks’ actions had caused harm. Upon appeal, the Supreme Court agreed with the argument about zone of interests.
“The city’s claimed injuries fall within the zone of interests that the FHA arguably protects. Hence, the city is an ‘aggrieved person’ able to bring suit under the statute,” Justice Stephen Breyer wrote for the 5-3 majority, joined by Chief Justice John Roberts and Justices Sonia Sotomayor, Elena Kagan and Ruth Bader Ginsburg.
Justices Clarence Thomas, Anthony Kennedy and Samuel Alito dissented on that issue.
The court’s decision on the zone of interest question essentially kept with decades of precedents in affirming municipalities’ rights to bring cases against lenders and other segments of the housing market they believe are violating fair housing law. There had been some fear that the Supreme Court would alter that balance.
“It is a ruling that on balance is a victory for people who care about fair housing in that it recognizes precedent which makes clear that cities should enjoy standing to bring claims and have their day in court,” said Kristen Clarke, the president and executive director of the Lawyers’ Committee for Civil Rights Under Law.
Although that victory was important, the Supreme Court also set up a hurdle for cities and other local governments when they bring cases over just how close they need to be to the alleged fair lending violations for their claims to survive. The high court ruled 8-0 to send the case back to the lower courts in order to determine whether Miami had effectively argued proximate cause or whether its claims were too attenuated.
While the court officially punted on that question and left it to the lower courts to determine, it did provide some “suggestive language” that appeared to guide the lower courts to restrict the available proximate cause arguments, said Kathleen Engel, a professor at Suffolk University Law School.
The Fair Housing Act may provide a right of action for municipalities, but it does not allow for the causes of action that include ripple effects that extend far beyond the initial lending decisions, the opinion said.
“Nothing in the statute suggests that Congress intended to provide a remedy wherever those ripples travel,” the majority said.
And although the court gave no direct instructions to lower courts on how to deal with ripple effects, that language left Wells Fargo pleased with the outcome.
“We believe that under the stringent standards articulated by the Supreme Court, it will be very difficult for Miami or any other municipality to show the required connection between the claimed damages and unsubstantiated allegations about our lending practices, which do not reflect how we operate in the communities we serve,” said Tom Goyda, a spokesman for Wells Fargo.
Fair housing activists said they would be looking out for how lower courts interpret the proximate cause portion of Monday’s decision, especially with how it plays out in other similar cases brought by local governments around the country.
“I think that these cases will get resolved on a case-by-case basis,” Clarke said. “What’s most important is that key stakeholders are not being denied access to the courts.”
However, because those governments still have access to federal courts, good lawyers will work to find ways to overcome those proximate cause challenges, said Saba Bireda of Sanford Heisler Sharp LLP, who was part of a team of attorneys who wrote an amicus brief on behalf of 39 members of Congress supporting the city in its interpretation of the FHA.
“Lawyers know how to draft a complaint in accordance with the Supreme Court’s order,” Bireda said.
But those attorneys and the municipalities they represent will most likely have to limit their claims.
“There has to be a direct relationship between the wrongful conduct and the injury,” Engel said.
The cases are Bank of America Corp v. City of Miami, case number 15-1111, and Wells Fargo & Co. v. City of Miami, case number 15-1112, both in the Supreme Court of the United States.
–Editing by Christine Chun and Brian Baresch.