A few years back, I posted an article in this blog about the efforts of the City of Richmond, California, to pursue a novel “eminent domain” remedy in dealing with the aftershocks of the subprime mortgage crisis on real estate and the economy there. While it has been nearly a decade since that debacle, many areas still struggle in its aftermath, and a number of jurisdictions continue to seek creative ways to address these problems. In a recent decision, the U.S. Supreme Court has ruled that cities that claim to have suffered harm due to the consequences of banks’ discriminatory lending practices have standing to sue for damages against those financial institutions under the federal Fair Housing Act (the “FHA”), but must demonstrate that such damages were sufficiently related to the banks’ conduct and were not merely foreseeable in order to prevail.
For those of you who may not be familiar with the origin or intent of the FHA, which is codified at 42 U.S.C. Section 3601 et seq., this legislation was signed into law by President Lyndon B. Johnson in 1968, shortly after the assassination of Dr. Martin Luther King, Jr. Its purpose was to protect people from discrimination on the grounds of race, sex, religion, and national origin in the renting, buying, or financing of housing. In a 2015 decision, the U.S. Supreme Court held that housing policies violated the FHA if they had a disparate impact on minorities and resulted in segregation by race, even if there was no discriminatory intent.
In the case at issue here, the City of Miami, Florida, brought a lawsuit in federal district court against Bank of America and Wells Fargo Bank, advancing the argument, which had never previously been asserted, that these institutions were liable to the city for damages under the FHA for their discriminatory lending practices against African-American and Hispanic residents of the City. Such policies included directing minority borrowers into riskier, higher interest rate mortgages than non-minority borrowers, in addition to failing to offer minority borrowers refinancing and loan modification arrangements on the same terms as non-minority borrowers.
These activities, according to the City, led to a higher number of defaults among minority borrowers, destabilizing the neighborhoods in which their homes were located, interfering with efforts to integrate the City’s neighborhoods, reducing its property tax revenues, and increasing demand for municipal services due to the negative impacts of abandoned properties in foreclosure, all of which had a negative impact on the City, nearly driving it into bankruptcy. The defendant banks challenged these assertions, alleging that such demands had never been asserted under the FHA before because the FHA had never been intended to be used for these purposes.
The trial court dismissed the City’s lawsuit, concluding that the aftereffects suffered by the City were not the type of concerns covered by the FHA, and that the City had failed to demonstrate enough of a connection between the actions of the banks and the injuries alleged by the City to be able to satisfy the legal causation requirement for such demands. On appeal, the Eleventh Circuit reversed, finding that the City’s claims were encompassed within the types of interests protected under the FHA, and were sufficiently related to the banks’ conduct that they could be proven at trial if the City could show that they were a “foreseeable” result of such conduct. The banks then sought review by the Supreme Court.
In a decision described as mixed by some observers, the Supreme Court ruled that the FHA allowed cities to sue banks over their lending practices, but also imposed a high standard of proof, requiring them to establish that the harm they suffered was caused directly by those practices. Holding that that the City had standing to sue under the FHA, the Supreme Court pointed out that the statute’s language indicated that Congress intended to define “standing” under that law as broadly as possible, thus including cities among those having the right to bring suit for the urban blight alleged to have resulted from the banks’ misconduct.
On the other hand, however, the Supreme Court rejected the Eleventh Circuit’s conclusion that cities need only demonstrate that the injuries they suffered were a “foreseeable” result of the banks’ conduct. Noting the deep roots of the housing market in the economy and our modern society, the Court pointed out that it was reasonable to expect that banks’ violations of the FHA would have impacts well outside the immediate scope of their actions, and there was nothing in the statute to believe that Congress intended to provide a remedy for all of those impacts. As a result, the Supreme Court sent the litigation back to the trial court for a determination of whether the City could prove that its damages were a direct result of the banks’ activities in violation of the FHA.
The case is Bank of America, et al. v. City of Miami, Florida, et al. (May 1, 2017) U.S. Supreme Court, Case Nos. 15-1111 and 15-1112.
