The City of Cleveland made national headlines last January when it filed a lawsuit against 21 major investment banks, blaming the investment banks for the severe foreclosure crisis that has hit the city.  The City sought to recover damages to cover the cost of monitoring, maintaining, and demolishing foreclosed properties; and the diminution in the City’s property tax revenues caused by the depreciating effect foreclosures have had on the affected homes and surrounding properties.

The City’s complaint alleged that the banks created a public nuisance when they irresponsibly securitized and sold subprime loans, creating a climate for lenders to make risky loans within the City, which ultimately led to the foreclosure crisis.   Cleveland Mayor, Frank Jackson was even quoted in The Cleveland Plain Dealer on January 11, 2008, saying: "To me, this is no different than organized crime or drugs."

Well, as it turns out, the Judge disagrees with the Mayor’s assessment of the foreclosure crisis.  In fact, in a favorable decision to the lenders, the Court has granted the Defendants’ motion to dismiss the case, albeit with a little less fanfare than the filing of the case had originally received. 

The Court listed four primary reasons for dismissing the City’s case.  First, the court found that the City was attempting to regulate the lending industry through a public nuisance lawsuit, and that applicable State law governing lending practices preempts the City’s ability to enforce a public nuisance statute.  

Second, the Court found that the City did not suffer any actual damages arising from the foreclosure crisis, and it was therefore barred from recovering its monetary losses under the economic loss rule. The court noted that the homeowners are the ones that have suffered the actual damages arising from the foreclosure crisis, and in view of the fact that the City has only suffered a monetary loss it is not entitled to recover any damages.
 
Third, the Court found that the lenders’ conduct could not constitute a public nuisance because mortgage lending is subject to numerous statutory regulations, and specifically, sub-prime lending is permitted under the law. 

Finally, the Court determined that the City could not prove that the lenders’ actions had directly caused any damage to the City.   The City’s losses came about from a myriad of interrelated causes arising from the foreclosure crisis.  Therefore, any damages suffered by the City as a result, were merely incidental to the foreclosure crisis itself.

The City has filed a notice of appeal of the Judge’s decision to dismiss the case, and the matter will now go up to the Court of Appeals.  We will continue to monitor the proceedings and provide updates as the case progresses. 

If you have any questions on this information, please contact Mr. Benjamin N. Hoen, Esq. Ben is an Associate focused on foreclosure services in the Cleveland office of Weltman, Weinberg & Reis Co., L.P.A., practicing in the Real Estate Default Group.  He can be reached at (216) 685-1164 or via email at bhoen@weltman.com.

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