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En banc Ninth Circuit quashes Oakland bid to sue Wells Fargo for lost tax income

The en banc panel found factors other than supposedly biased loan terms, such as job loss or divorce, could have contributed to foreclosures that caused home values to plummet in Oakland.

SAN FRANCISCO (CN) — The city of Oakland cannot sue Wells Fargo for allegedly racist lending practices that it says triggered widespread foreclosures and lost property tax revenue, an en banc Ninth Circuit panel ruled Tuesday.

Reversing a prior Ninth Circuit opinion, an 11-judge en banc panel found the link between the bank’s lending practices and Oakland’s lost tax income was too remote. Because other factors could have contributed to foreclosures and lower property values, the panel concluded the city's Fair Housing Act lawsuit must be dismissed.

“The reason for default could be attributable to many independent factors, such as job loss, a medical hardship, a death in the family, a divorce, a fire or other catastrophe, Covid-19, broader economic trends, or any number of other unpredictable causes not present when the loan was made,” U.S. Circuit Judge M. Margaret McKeown, a Bill Clinton appointee, wrote for the 11-judge panel in a 25-page opinion.

Oakland sued Wells Fargo in 2015, claiming the bank steered minority homebuyers into predatory loans that caused hundreds of foreclosures and as much as $50 billion in reduced property values.

In August 2020, a three-judge Ninth Circuit panel advanced the lawsuit, finding the city’s proposed statistical analysis “precisely calculates the loss in property values in Oakland’s minority neighborhoods that is attributable to foreclosures caused by Wells Fargo’s predatory loans, which in turn can be used to calculate the city’s corresponding loss in property-tax revenues.”

After granting the bank’s request for an en banc rehearing and reviewing the case, the 11-judge panel reached a different conclusion. McKeown wrote that the city’s proposed studies only show that discriminatory lending terms increase the likelihood of foreclosure.

“They do not purport to show that discriminatory loans automatically result in decreased property values and then in decreased tax revenue,” she wrote.

In finding the Fair Housing Act requires a stricter standard for proximate cause, or how closely a defendant’s actions are related to an alleged harm, the panel relied on the U.S. Supreme Court’s 2017 decision in Miami v. Wells Fargo. In that opinion, the high court found Miami had standing to sue three banks for biased lending practices. But it also held that proximate cause requires more than deciding if a defendant, like a bank, could foresee their actions could cause harm to a plaintiff, like a city, through a theoretical chain of events.

The high court remanded the case to the 11th Circuit to determine if the city of Miami met that standard. In 2019, the appellate court found Miami had satisfied the requirement and advanced its Fair Housing Act lawsuit. The banks again sought Supreme Court review, but before that could happen, Miami suddenly and mysteriously dropped the case.

In applying the same standard to Oakland’s unfair lending suit, the Ninth Circuit reached the opposite conclusion. The en banc panel found too many intervening factors interrupted the chain of causation between the bank’s allegedly biased loan terms and the city’s loss in revenue.

“The chain becomes even more attenuated when variables of property value (which could turn not only on foreclosure but neglect, criminal activity, changing demographics, and macroeconomic trends) and reduced tax revenues are piled on top of a cascading number of independent variables,” McKeown wrote.

The panel noted that directly harmed borrowers and the federal government can already sue banks for Fair Housing Act violations, and a city's ability to sue isn't necessary to vindicate those rights.

The U.S. Justice Department did sue Wells Fargo in 2010, leading to a consent decree in which the bank paid $175 million to resolve claims that it steered Black and Latino borrowers into risky subprime loans from 2004 to 2009. Wells Fargo also agreed to a separate $1.2 billion settlement with the Justice Department in 2016 for fraudulently certifying loans as eligible for government insurance.

The Ninth Circuit on Tuesday also upheld the dismissal of Oakland’s claims over increased city spending to tackle blight and unsafe conditions at abandoned homes. The panel found those claims required even more intervening variables, including civil and criminal acts by third parties. McKeown wrote that those claims were “even further afield from the alleged wrongdoing than the reduced tax revenue claim.”

Chief U.S. Circuit Judge Sidney Thomas, also a Clinton appointee, and U.S. Circuit Judges Kim McLane Wardlaw, Richard Paez, Consuelo Callahan, Sandra Ikuta, Jacqueline Nguyen, Andrew Hurwitz, Ryan Nelson, Bridget Bade and Lawrence Van Dyke joined McKeown on the panel. Wardlaw and Paez were appointed by Clinton, Ikuta and Callahan by George W. Bush, Nguyen and Hurwitz by Barack Obama, and Nelson, Bade and Van Dyke by Donald Trump.

In an emailed statement, Wells Fargo spokeswoman Edith Rocío Robles said the bank is pleased with the Ninth Circuit's decision.

"Wells Fargo has denied the city’s claims from the start and the court concluded that all the claims must be dismissed," Robles said. "We will continue our focus on helping to expand home ownership opportunities in the City of Oakland and across the country.

The Oakland City Attorney’s Office did not immediately respond to a request for comment Tuesday.

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