Supreme Court Rules Cities Can Sue Banks Over Racially Discriminatory Lending Practices

by | May 19, 2017 | Race Discrimination

The U.S. Supreme Court’s recent decision in Bank of America v. City of Miami (decided the same day as a companion case, Wells Fargo & Co. et al. v. City of Miami, Florida) has been declared a mixed bag by many legal commentators. While the Court confirmed years of precedence in finding that cities, like Miami, have standing to sue under the Fair Housing Act (FHA), the Court also clarified that cities seeking damages must meet a high burden in showing that their injuries were caused by alleged discrimination. Municipalities seeking redress for harm caused by housing discrimination should certainly be encouraged by the Court’s decision – and they should seek ways to build a tight case for causation if they want to be successful.

The Miami case was just one of many filed by municipalities in the wake of the 2008 mortgage crisis in an attempt to recover from the financial impact of widespread foreclosures.  The FHA, with its broad purpose to “provide, within constitutional limitations, for fair housing throughout the United States” provided the statutory basis for the cities’ lawsuits.   Many of these cases were based on a theory of “reverse redlining;” in addition to traditional redlining where prospective minority home buyers were denied loans offered to white buyers, the cities alleged that several large banks targeted racial minorities for riskier and more expensive loan products that resulted in a disproportionate number of foreclosure in minority communities.

While the lawsuits filed by Baltimore, Memphis, and Chicago (by the Illinois Attorney General) were settled as part of DOJ consent decree in 2011, several other cities, including Miami, filed suit after the DOJ settlement was announced.

In 2013, Miami initiated identical lawsuits against Bank of America and Wells Fargo.  Miami alleged that the banks’ mortgage lending practices led to a wave of foreclosures in the city’s minority communities.  At the time of the lawsuit, the city claimed that Miami had “the highest foreclosure rate among the 20 largest metropolitan statistical areas in the country.”  As a result of the foreclosures, the city alleged it had suffered a significant loss in tax revenues and incurred substantial costs associated with the foreclosed properties.

Bank of America and Wells Fargo, also hit by similar litigation in several other cities, immediately filed motions to dismiss focused on whether Miami, as a non-mortgage holder, could demonstrate that they had standing to sue under a law intended to prohibit discrimination in the housing market.  Although the Supreme Court had long held that standing under the FHA is defined “as broadly as is permitted by Article III of the Constitution,” the banks argued that the Court’s decision in Lexmark Intern., Inc. v. Static Control Components, Inc. required the city to establish that its claims were in the FHA’s “zone of interests.” In other words, the city had to show that its interests were more than “marginally related” to the purpose of the statute. The banks also argued that the city had failed to show that the banks’ alleged conduct was the “proximate cause” of its injuries.

The district court granted the motions to dismiss finding that the city’s injuries fell outside of the FHA’s zone of interests because the city had only pled economic injuries, not injuries affected by a “racial interest.”  Furthermore, the district court held that the city failed to adequately allege that the banks’ conduct caused the foreclosures and that the foreclosures caused specific harm to the city.

On appeal, the Eleventh Circuit Court of Appeals reversed, finding that the City met the definition of an “aggrieved person” under the FHA and, therefore, “thus, to the extent a zone of interests analysis applies to the FHA, it encompasses the City’s allegations in this case.”  On the causation question, the court held that the FHA’s proximate cause requirement demanded only foreseeability and that the injuries to the city were reasonably foreseeable.  The Eleventh Circuit remanded the cases and ordered the district court to accept the City’s amended complaints – prompting the banks to file for review from the Supreme Court to determine whether the City’s amended complaints “satisfied the FHA’s zone-of- interests and proximate-cause requirements.”

In a 5-3 decision, the Court held that the City’s injuries fell within the FHA’s zone of interests thereby making the City an “’aggrieved person’ able to bring suit under the statute.”  On the proximate cause question, the Court disagreed with the Eleventh Circuit finding that the City had only to show foreseeability to establish proximate cause. The Court held City had to prove some “direct relation” between its injuries and the discriminatory conduct but refused to define “direct relation.” The Eleventh Circuit and other courts around the country will now be tasked with determining whether cities can make this showing.

The Bank of America decision was closely watched by both banks and housing advocates given its potential impact on FHA litigation.  A team of lawyers from the Washington, DC office of Sanford Heisler Sharp filed an amicus brief in the case on behalf of more than 35 current and former Members of Congress including former Vice-President Walter F. Mondale, former Minority Leader Harry Reid, and Senator Tim Kaine.  The amicus brief argued that the legislative history of the FHA supported a finding that the city was an “aggrieved person” under the statute.

Predictably, banks have declared victory after the decision, suggesting that cities will not be able to meet the proximate cause requirement.  Wells Fargo claimed that “it will be very difficult for Miami or any other municipality to show the required connection between the claimed damages” and allegations of discriminatory lending practices.  However, several open cases filed by other cities remain, including Los Angeles, Oakland, and Providence. These cities now have a roadmap to amend their complaints in accordance with the Court’s decision.  Moreover, Philadelphia filed a new suit against Wells Fargo on May 5.  The city’s complaint includes data the city believes shows a “direct connection between foreclosures affecting minority communities and Wells Fargo’s discriminatory lending practices, and their attendant harm.”

Only time will tell whether the Court’s decision will hurt or help cities’ efforts to finally attain recompense for the disastrous effects of the mortgage crisis on minority communities.  Municipalities interested in initiating actions must take heed of the FHA’s two-year statute of limitations and determine whether data, such as data establishing the prevalence of high risk loans given to minority borrowers and the probability that these loans would end in foreclosure, is available and sufficient to establish the “direct relation” needed to establish causation.