In a victory for lenders and investors, the United States Court of Appeals for the Sixth Circuit affirmed the district court dismissal of the City of Cleveland’s public nuisance suit relating to subprime mortgage lending. City of Cleveland v. Ameriquest Mortgage Servicing, Inc., Case No. 09-3608 (6th Cir. July 27, 2010).

    The City of Cleveland brought a claim of public nuisance against Ameriquest Mortgage Securities, Inc., Bank of American, N.A., Bear Sterns & Co., Inc., Citibank, N.A., Citigroup Global Markets, Inc., Countrywide Securities Corporation, Credit Suisse First Boston LLC, Credit Suisse (USA), Inc., Deutsche Bank Securities, Inc., GMAC-RFC Holding Company, Goldman Sachs & Co., Greenwich Capital Markets, Inc., HSBC Securities (USA), Inc., JP Morgan Acquisition Corp., Chase Bank USA, N.A., Merrill Lynch, Pierce, Fenner & Smith Inc., Morgan Stanley & Co., Inc., Novastar Mortgage, Inc., Option One Mortgage Corporation, Washington Mutual Bank, Wells Fargo Bank, N.A., and Wells Fargo Asset Securities Corporation. The City claimed that subprime lending was categorically inappropriate for Cleveland due to its “unique” economic situation, characterized by a high poverty rate, sluggish economy, limited employment opportunities, and stable but not booming property values. The City sued defendants for their alleged role in securitizing subprime loans into mortgage-backed securities. The City alleged that the defendants’ activities constituted a public nuisance that resulted in thousands of foreclosed homes in neighborhoods through out Cleveland that became eyesores, fire hazards and easy prey for looters and drug dealers in search of a place to conduct their business.

    The district court dismissed the suit pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on four independent reasons: (1) preemption based on Ohio Revised Code Section 1.63, (2) the economic loss rule, (3) unreasonable interference of a public right and (4) proximate cause. [See our May 21, 2009 Alert]. The Sixth Circuit affirmed the dismissal based on the proximate cause rationale on the basis that the alleged harm and the alleged misconduct is too indirect to warrant recovery. As the court’s decision on the proximate cause issue resolved the case, the court declined to address the district court’s remaining reasons for dismissal.

    • Elizabeth Anstaett and Mike Tomkies