U.S. Supreme Court Rules That Municipalities Can Sue Banks Over Impact of Foreclosure
The Supreme Court’s 5-3 decision is a result of a suit initiated by the City of Miami (“Miami”) against Bank of America and Wells Fargo & Co., (collectively known as the “Banks”) under the FHA for alleged discriminatory mortgage lending practices and unjust enrichment. Miami alleged that the Banks intentionally targeted predatory practices at minority borrowers on worse terms than equally creditworthy nonminority borrowers and induced defaults by failing to extend refinancing and loan modifications on fair terms. Miami alleged that it had standing under the FHA to bring the suit as Congress designed the FHA precisely to protect municipal rights and that it had specifically rejected an attempt to limit standing exclusively to persons directly discriminated against. Miami further alleged that these discriminatory lending practices led to foreseeable financial losses caused by the urban blight, decreased property tax revenue, and increased cost for municipal services which were directly caused by the discriminatory lending practices of the Banks.
In response to Miami’s claims, the Banks argued that the Court should use a zone-of-interests test, for a narrow interpretation of standing under the FHA. The Banks reasoned that the zone-of-interests for the FHA only includes “aggrieved persons” who were, themselves, injured by housing discrimination. Further, the Banks argue that the FHA is not designed to remedy financial injuries or even public rights. The Banks further argued that the FHA requires that a party prove a direct and foreseeable link between its injury and the statutory violation of another party before receiving compensation for that injury. As applied to this case, the Banks reasoned that far too many tenuous links separate the financial injuries to the City of Miami and the alleged discriminatory lending practices of the Banks. The Banks further argued that issues such as job loss, recession, illness, death, drugs and divorce could lead to foreclosure in any municipality including Miami. The banks also argued that holding in favor of Miami would open the flood gates to suit by over nineteen thousand municipalities, taxpayers and any individual living near or in a blighted community.
Justice Stephen Breyer, writing for the majority, held that Miami was an "aggrieved person" within the meaning of the FHA, but concluded that the foreseeability of the City’s financial injuries alone was not sufficient to establish proximate cause under the FHA. The Supreme Court noted that the Court has consistently held that the FHA’s definition of an “aggrieved person” reflects a congressional intent to confer standing broadly. Despite this fact, however, the Court recognized that the ‘housing market is interconnected with economic and social life” and that a violation of the FHA may “be expected to cause ripples of harm to flow” beyond the defendant’s misconduct. The Court ruled that Congress did not intend to provide a remedy regardless of where those “ripples” travel and that a municipality must prove more than just the damage done by a bank’s lending practices was foreseeable. Consequently, the case was remanded to the lower court to define, in the first instance, the contours of proximate cause under the FHA and decide how that standard applies to Miami’s claims for lost property-tax revenue and increased municipal expenses.
The Supreme Court’s decision in this case seems to reflect an effort by the majority to effectuate a compromise to not close the courthouse doors to Miami and other cities who are pursuing a novel theory of law under the FHA while simultaneously making recovery of their claims for damages more difficult to prove. Although the Court did not explicitly describe what would constitute the direct relationship that must be shown in order to prevail, it certainly ruled that merely showing that the City’s damages were foreseeable was not enough. Ultimately, the lower courts will be left with the hard work of trying to determine what would be sufficient proximate cause in these cases. As a result, enterprising contingency-fee counsel will likely continue to attempt to bring these claims on behalf of municipalities, thereby exposing lenders to additional risk in the future.
To read the full slip opinion, please click here.