On May 1, 2017, the Supreme Court
of the United States issued a
In 2013, the City of Miami filed
suit against Bank of America and Wells Fargo, asserting that the lenders had
violated the provisions of the FHA and engaged in predatory lending practices
by granting loans to minority borrowers that, among other things, contained
“excessively high interest rates, unjustified fees, teaser low-rate lows . . .
and . . . unjustified refusals to refinance or modify the loans.” The City of Miami asserted that these
practices resulted in higher default and foreclosure rates for these borrowers,
which, in turn, led to a decrease in property values and a suppression of
Miami’s tax revenue. Furthermore, the
City of Miami asserted that these practices increased the demand for municipal
services in the affected neighborhoods, including an increased demand for
police, fire, and building code enforcement services, which resulted in
increased costs to the City of Miami.
Bank of America and Wells Fargo
moved to dismiss the suits, contending that the City of Miami did not have
standing to assert claims under the FHA.
Specifically, the lenders argued that municipalities, like the City of
Miami, did not fall into the “zone of interests” that Congress intended the
provisions of the FHA to protect. In a
5-3 decision, the Supreme Court disagreed.
In determining that Miami had
standing, the Court looked first to the FHA’s definition of “aggrieved
person.” The FHA very broadly defines “aggrieved
person” as “any person who . . . claims to have been injured by a
discriminatory housing practice” or believes that such an injury “is about to
occur.” In interpreting this definition,
the Court noted that it had consistently ruled in the past that this definition
indicated “a Congressional intention to define standing as broadly as is
permitted by Article III of the Constitution.”
Justice Breyer, writing for the
majority, pointed to similar lawsuits that the Court had allowed to proceed it
the past, including a village that was granted standing when it sought recovery
under the FHA for “racial-steering practices” that resulted in lost tax revenue
and undermined the racial balance of its community. Although the FHA was amended after those
cases, the Court noted that Congress made no significant changes to the
definition of “aggrieved person.” This
lack of significant change showed an intent by Congress to “retain the relevant
statutory text” and embrace the Court’s expansive interpretation of standing
under the FHA. As a result, the Court
was compelled to find that the City of Miami had standing under the FHA.
Bank of America and Wells Fargo
next argued that, even if the City of Miami had standing to sue, the City of
Miami could not show that the damages claimed were sufficiently related to the
claimed FHA violations such that they were proximately caused by the alleged
violations of the FHA. In this regard,
Bank of America and Wells Fargo found more success.
The United States Court of Appeals
for the Eleventh Circuit had ruled that the City of Miami could make a showing
of proximate causation because the result of the lenders’ allegedly predatory
or discriminatory lending practices were foreseeable. In a victory for the lenders, the Supreme
Court rejected the Eleventh Circuit’s ruling that foreseeability alone is
sufficient to establish proximate cause under the FHA. Noting that the housing market is
interconnected with economic and social life and that a violation under the FHA
might “be expected to cause ripples of harm to flow far beyond the defendant’s
misconduct,” the Court observed that “[n]othing in the statute suggests that
Congress intended to provide a remedy wherever those ripples travel.” The Court also noted that “entertaining suits
to recover damages for any foreseeable result of an FHA violation would risk
massive and complex damages litigation.”
As a result, the Supreme Court noted that a claim for damages under the
FHA was akin to a tort action and subject to the “traditional requirement” of
proximate cause which bars suits for harm that is “too remote” from the
unlawful conduct.
Accordingly, the Supreme Court
held that the City of Miami, and those following its blueprint, were required
to show a direct connection between the alleged violation of the FHA and the
claimed injury. The Court, declined,
however to establish the particular limits of proximate cause. Rather, the Supreme Court directed the lower
courts to “define, in the first instance, the contours of proximate cause under
the FHA” and further to determine how that standard would apply to the City of
Miami’s allegations of lost tax revenue and increased expenses.
Although the majority declined to
offer an opinion as to whether such damages could meet the identified proximate
cause test, Justice Thomas opined, in his dissent, that the majority’s opinion
left “little doubt that neither Miami nor any similarly situated plaintiff can
satisfy the rigorous standard” where “the link between the alleged FHA violation
and its asserted injuries is exceedingly attenuated.” Nevertheless, despite Justice Thomas’
caution, the Court’s decision allows the City of Miami, and other
municipalities, to go forward, but how far?
Notably, about two weeks after
the Court issued its decision, the City of Philadelphia filed suit against
Wells Fargo, alleging violations of the FHA and seeking unspecified
damages. Although it is unlikely that
the City of Philadelphia will be the last municipality to assert these claims,
it is still unclear whether these claims can be successful.
This is a development that
lenders in Massachusetts, and across the nation, will watch carefully. Massachusetts is not far removed from its own
mortgage and foreclosure battleground.
Although there has been no public progress in these cases in the lower
court, other municipalities are bringing similar claims against lenders in
other jurisdictions. For example, the
City of Providence filed suit against Santander Bank in the federal court in
Rhode Island a years ago for violations of the FHA and the Equal Credit
Opportunity Act, claiming the same type of injuries as the City of Miami. That action was quickly settled and
dismissed. The issue of proximate cause
will likely work its way back to the Supreme Court, which appears to have
already set a high bar for damages.
Kendra Berardi, ChrisBergan and Larry Heffernan all practice in the Boston office of Robinson + Cole
LLP. Kendra Berardi co-chairs REBA’s
continuing education committee and serves on the association’s executive
committee. She can be contacted by email
at kberadi@rc.com.
Chris can be reached at cbergean@rc.com and Larry can be contacted at lheffernan@rc.com.
