SAN FRANCISCO (CN) – The city of Oakland should not be allowed to sue Wells Fargo under the Fair Housing Act over lost property tax revenue from the foreclosures it attributes to the bank’s discriminatory mortgage lending practices, an attorney for the bank told the Ninth Circuit on Monday.
Attorney Neal Kumar Katyal told a three-judge panel that Oakland’s supposed economic injuries are too far downstream from Wells Fargo’s alleged predatory loan scheme, under which minority borrowers were steered toward riskier and more costly home loans.
Oakland’s 2015 lawsuit bears a remarkable resemblance a prolonged legal battle between the city of Miami and Wells Fargo and Bank of America. In those cases – eventually consolidated as Wells Fargo v. City of Miami, Florida – the U.S. Supreme Court ruled 5-3 that while the city counts as an “aggrieved person” with standing to sue, the 11th Circuit Court of Appeals had also wrongly held that mere foreseeability was sufficient enough to meet the FHA’s “proximate cause” standard to find the banks had caused the city’s injuries.
In 2019, the appellate court again found that Miami had satisfied proximate cause, and Wells Fargo petitioned the Supreme Court to decide conclusively whether the FHA requires more than a “logical bond” between a violation of the law and the city’s lost tax revenue. But before the Supreme Court could decide whether to hear the petition, Miami suddenly and mysteriously dropped the case.
On Monday, Katyal – who also represented Wells Fargo in the Miami case – said the Ninth Circuit should side with the Supreme Court’s finding of no proximate cause.
“Discrimination in our housing markets is a tremendous evil. At the same time, the Supreme Court has recognized the act has critical limits and the court in the city of Miami cases held it requires proximate cause,” Katyal said. “The city’s alleged injuries are several steps removed from the asserted violation in this case. That fact dooms the city’s injuries.”
Katyal said if the Ninth Circuit found in Oakland’s favor, it would open the floodgates to electric companies or local coffee shops and florists to sue banks for lost business and “neighborhood degradation.” Instead, the injury must have immediately resulted from Wells Fargo’s alleged FHA violation.
U.S. Circuit Judge Mary Murguia latched on to the coffee shop analogy, drawing the distinction that a flower shop or coffee shop’s failure to attract business could be blamed on a number of factors, like poor management.
“A city’s decline in taxes seems to be much more directly attributable to a drop in property values,” Murguia, a Barack Obama appointee, said.
Katyal said they’re not all that different and in fact, it would be easier to tie a businesses’ losses to a drop in property values.
“You cannot just directly trace a relationship with a property value and the revenue a city is going to get in tax,” Katyal said. “You can only increase a property’s value by 2% a year under the California Constitution. And so actually in a place like the Bay Area in which property values tend to increase by more than that, if you have foreclosures it’s not clear the tax base goes down, and it very well may go up.”
He added, “We get that the Fair Housing Act needs to be implemented and implemented vigorously. And Congress provided ways to do that. You can have individuals sue, you can have class actions. The federal Justice Department can sue.”
As it happens, that’s just what the federal Department of Justice did when it investigated Wells Fargo for housing discrimination in 2009. The department sued the bank in 2010, leading to a consent decree by which the bank promised to correct its FHA violations and pay $125 million to compensate borrowers.
“What you don’t have in the statute is the ability for a city to bring this kind of lawsuit,” Kaytal said.
Representing Oakland, Robert Peck of the Center for Constitutional Litigation said Congress intended the FHA to include a city’s right to sue.
“Cities and their tax base was absolutely part of what they were considering when they passed the Fair Housing Act,” Peck argued. “Injury from discrimination affects the community as a whole and affects the tax base. When property values go down that’s an immediate direct impact.”
Both Murguia and U.S. Circuit Judge Richard Gould asked about the Miami case, and if it has any effect on the Ninth Circuit’s ruling.
“It does not,” Peck said, noting he believes the Supreme Court would not have granted Wells Fargo’s petition for certiorari.
Peck said the 11th Circuit’s decision “still has legs” and has recently influenced two housing cases since then. “I think there is still strong persuasive value,” Peck said.
Murguia also questioned the city’s position that it is uniquely positioned to file a large-scale lawsuit that can deter predatory lending. “Are borrowers able to file class actions or joint lawsuits that also aggregate their claims and why isn’t the threat of those types of lawsuits sufficient to deter a bank like Wells Fargo?” she asked.
“Because they’re almost never brought,” Peck said. “The type of injury we’re talking about here, where minorities are offered unknown to them riskier and more expensive loans than are offered to similarly situated nonminority borrowers and as a result, they don’t recognize their being discriminated against. The city is in a unique position to recognize locally what’s happening – whether there are the statistical variations that lead to disparate impact and the effect on their residents.”
Peck also noted that the Justice Department’s lawsuit against Wells Fargo was only about subprime mortgage loans that ended in 2008, and that “it brought a nationwide suit that was not specific to Oakland.”
Gould said the court would take the case under submission.
“This is obviously a very important case, and it’s also been excellently argued by counsel on both sides,” the Bill Clinton appointee said.