City Of Cleveland v. Ameriquest Mortgage Sec. Inc.
| Decision Date | 27 July 2010 |
| Docket Number | No. 09-3608.,09-3608. |
| Parties | CITY OF CLEVELAND, Plaintiff-Appellant, v. AMERIQUEST MORTGAGE SECURITIES, INC.; Bear Stearns & Co., Inc.; Citigroup Global Markets, Inc.; Countrywide Securities Corporation; Credit Suisse First Boston LLC; Credit Suisse (USA), Inc.; Goldman Sachs & Co.; Deutsche Bank Securities, Inc.; Greenwich Capital Markets, Inc.; GMAC-RFC; HSBC Securities (USA), Inc.; JP Morgan Acquisition Corp.; Merrill Lynch, Pierce, Fenner & Smith, Incorporated; Morgan Stanley & Co., Inc.; Novastar Mortgage, Inc.; Option One Mortgage Corporation; Washington Mutual Bank; Wells Fargo Bank, N.A.; Wells Fargo Asset Securities Corporation; Citibank, N.A.; Chase Bank USA, N.A.; Bank of America, N.A., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
OPINION TEXT STARTS HERE
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ARGUED: Joshua R. Cohen, Cohen Rosenthal & Kramer LLP, Cleveland, Ohio, for Appellant. David F. Adler, Jones Day, Cleveland, Ohio, for Appellees. ON BRIEF: Joshua R. Cohen, Jason R. Bristol, Cohen Rosenthal & Kramer LLP, Cleveland, Ohio, Robert J. Triozzi, Gary S. Singletary, Michael F. Cosgrove, City of Cleveland Law Department, Cleveland, Ohio, for Appellant. David F. Adler, Andrew G. Fiorella, Jones Day, Cleveland, Ohio, Louis A. Chaiten, Eric E. Murphy, Jones Day, Columbus, Ohio, Robert D. Kehoe, Joseph J. Jerse, Kehoe & Associates, Cleveland, Ohio, Joanne N. Davies, Buchalter Nemer, Irvine, California, Bernard LeSage, Shannon Keast, Buchalter Nemer, Los Angeles, California, Michael N. Ungar, Isaac Schulz, Richik Sarkar, Ulmer & Berne, Cleveland, Ohio, Brian D. Boyle, Christopher D. Catalano, O'Melveny & Myers LLP, Washington, D.C., William H. Falin, Moscarino & Treu, Cleveland, Ohio, Charles E. Davidow, Paul Weiss Rifkind Wharton & Garrison, Washington, D.C., Gabrielle E. Tenzer, Paul Weiss Rifkind Wharton & Garrison, New York, New York, William W. Jacobs, Kip Thomas Bollin, Robin M. Wilson, Thompson Hine, Cleveland, Ohio, Jeffrey Q. Smith, Scott E. Eckas, Bingham McCutchen LLP, New York, New York, Richard H. Klapper, Michael T. Tomaino, Jr., Sullivan & Cromwell LLP, New York, New York, W. Stuart Dornette, Taft Stettinius & Hollister LLP, Cincinnati, Ohio, Stephen M. O'Bryan, Taft Stettinius & Hollister LLP, Cleveland, Ohio, Thomas Robert Lucchesi, Baker & Hostetler LLP, Cleveland, Ohio, Benjamin Klubes, Buckley Sandler LLP, Washington, D.C., David H. Kistenbroker, Theresa L. Davis, Katten Muchin Rosenman LLP, Chicago, Illinois, Robert B. Casarona, Roetzel & Andress, LPA, Cleveland, Ohio, Robert N. Rapp, Calfee, Halter & Griswold LLP, Cleveland, Ohio, Jay B. Kasner, Skadden, Arps, Slate, Meagher & Flom, New York, New York, Joseph L. Barloon, Skadden, Arps, Slate, Meagher & Flom, Washington, D.C., John F. Marsh, Hahn Loeser & Parks, Columbus, Ohio, Brian Brooks, O'Melveny & Meyers, Washington, D.C., Elizabeth McKeen, O'Melveny & Meyers, Newport Beach, California, Joseph T. Dattilo, Brouse McDowell, Cleveland, Ohio, Patrick M. McLaughlin, McLaughlin & McCaffrey, LLP, Cleveland, Ohio, Robert D. Wick, Keith A. Noreika, Covington & Burling LLP, Washington, D.C., for Appellees. Linda I. Cook, Ohio Poverty Law Center, Columbus, Ohio, Eugene L. Hollins, Dale D. Cook, Wiles, Boyle, Burkholder & Bringardner Co., L.P.A., Columbus, Ohio, for Amici Curiae.
Before SUHRHEINRICH, McKEAGUE, and GRIFFIN, Circuit Judges.
In this diversity case, the city of Cleveland, Ohio (“Cleveland”), brings a public nuisance suit against twenty-two financial entities (“Defendants”) that it claims are responsible for a large portion of the subprime lending market in Cleveland and nationally. 1 Cleveland argues that the Defendants' financing of subprime mortgages, the alleged public nuisance, led to a foreclosure crisis in Cleveland that devastated its neighborhoods and economy. On appeal, Cleveland initially contends that the district court erred when it refused to remand this suit to Ohio state court. It also appeals, on the merits, the district court's four independent reasons for dismissing this suit pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure: (1) preemption, (2) the economic loss rule, (3) unreasonable interference of a public right, and (4) proximate cause. The district court considered each reason to be dispositive in favor of all Defendants. For the reasons that follow, we AFFIRM.
In its complaint, Cleveland acknowledges that, for the most part, the Defendants did not originate the subprime mortgages at issue in this appeal. Nevertheless, it alleges that the Defendants' financing, purchasing, and pooling of vast amounts of these loans, to create mortgage-backed securities to sell to their customers, constituted a public nuisance. Cleveland puts forward the following factual pattern to support its claim:
(1) Wall Street made cash available to subprime lenders, which (2) used the funds to make subprime loans to consumers, then (3) sold the related mortgages back to the same cadre of Wall Street, which (4) packaged them and sold the income they generated to investors in the form of mortgage-backed securities, and (5) used the proceeds to repeat the process.
Cleveland maintains that, beginning in 2003, the Defendants became more brazen in their lending activities and began to direct lenders on the types of loans to issue to meet the Defendants' securitization needs. These pressures “subverted the normal operation of the mortgage market and inevitably led to the abandonment of meaningful underwriting standards.” Because of growth in the real-estate market, the Defendants ignored these issues and turned a blind-eye even when loans made no economic sense. The complaint concludes that these “securitizers” were principally responsible for the financial crisis.
Cleveland alleges that the factors that led to the housing bubble never materialized in Cleveland because of its high rate of poverty, sluggish job market, struggling Rust-Belt economy, declining manufacturing sector, sparse housing demand, and difficulty fostering new industries. Cleveland's unique economic plight and its stagnant housing market made mass foreclosures the foreseeable and inevitable result of the subprime financing provided by the Defendants. The Defendants knew about these unique issues but nevertheless continued to finance subprime mortgages in Cleveland. These activities led to thousands of foreclosed homes in neighborhoods throughout Cleveland that became “eyesores, fire hazards, and easy prey for looters and drug dealers in search of a place to conduct their business.”
Cleveland claims that each foreclosure creates tangible costs for the city, including increased expenditures for fire and police protection and maintenance and demolition costs. Tax revenues also plummeted because of the decline in housing values due to the foreclosed homes. Cleveland seeks to recover millions in municipal expenditures and diminished tax revenues as damages.
Cleveland filed suit on January 10, 2008, in the Court of Common Pleas for Cuyahoga County, Ohio. It brought a single claim of public nuisance against twenty- one defendants-some of which are current Defendants. Asserting diversity of citizenship, Lehman Brothers Holdings, Inc. (“Lehman Brothers”), 2 removed the suit to the Northern District of Ohio on January 16, 2008. Cleveland moved the next day to remand the case to state court. It argued that Lehman Brothers's removal was improper because Lehman Brothers was required to either obtain the unanimous consent of all of the defendants before removing the case or explain in its Notice of Removal why it did not pursue this course of action. All of the defendants joined a motion opposing the motion to remand shortly thereafter. After supplemental briefing and oral argument, the district court denied Cleveland's motion to remand on August 8, 2008. City of Cleveland v. Deutsche Bank Trust Co., 571 F.Supp.2d 807 (N.D.Ohio 2008).
Subsequently, Cleveland filed a new public nuisance claim in state court. It made allegations similar to those found in the original complaint but brought the suit against some new defendants and some affiliates of the original defendants. For example, Countrywide Financial Corp. was a defendant in the original suit, but Cleveland sued Countrywide Home Loans, Inc. and Countrywide Securities Corp. in its new state court suit. A Joint Motion for Entry of Agreed Order Regarding Plaintiff's Motion for Leave to Amend (“Joint Motion”) was then agreed to, 3 which the district court approved. The Joint Motion was intended “to resolve the disagreement that has arisen between the parties and to avoid protracted litigation....” City of Cleveland v. Deutsche Bank Trust Co., No. 1:08-CV-00139 (N.D.Ohio September 29, 2008) (order approving Joint Motion). Among other things, it limited which defendants Cleveland could sue. Afterwards, Cleveland filed its Second Amended complaint in federal court-the complaint at issue in this appeal-against the current Defendants.
Defendants filed eight separate motions to dismiss-some individually and some collectively. The district court dismissed the complaint pursuant to Rule 12(b)(6) on May 15, 2009, for four independent reasons. City of Cleveland v. Ameriquest Mortg. Sec., Inc., 621 F.Supp.2d 513 (N.D.Ohio 2009). First, the court held that Ohio Rev.Code § 1.63, an Ohio state law that forbids municipalities from engaging in mortgage regulation, preempted Cleveland's public nuisance claim. Id. at 520. Second, the court held that Ohio's economic loss rule barred Cleveland's claim. Id. at 526. Third, the court held that subprime lending cannot form the basis of a public nuisance claim because it is legal, and that, by extension, funding subprime lending also cannot be a public nuisance. Id. at 531. Fourth, ...
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