City of Cleveland v. Ameriquest Mortg. Securities

• Decision Date: 15 May 2009
• Docket Number: Case No. 1:08 cv 139.
• Citation: 621 F.Supp.2d 513
• Parties: CITY OF CLEVELAND, Plaintiff, v. AMERIQUEST MORTGAGE SECURITIES, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Ohio

621 F.Supp.2d 513

CITY OF CLEVELAND, Plaintiff, v. AMERIQUEST MORTGAGE SECURITIES, INC., et al., Defendants.

Case No. 1:08 cv 139.

United States District Court, N.D. Ohio, Eastern Division.

May 15, 2009.

COPYRIGHT MATERIAL OMITTED

Mark A. Stanton, Short, Shepherd & Stanton, Ellen M. Kramer, James B. Rosenthal, Joshua R. Cohen, Cohen, Rosenthal & Kramer, Cleveland, OH, Gary S. Singletary, Michael F. Cosgrove, Robert J. Triozzi, City of Cleveland Department of Law, Cleveland, OH, Judith B. Goldstein, Equal Justice Foundation, Columbus, OH, for Plaintiff.

Bernard E. Lesage, Buchalter Nemer, Los Angeles, CA, Joanne N. Davies, Buchalter Nemer, Irvine, CA, Joseph J. Jerse, Robert D. Kehoe, Kehoe & Associates, Cleveland, OH, for Defendants.

MEMORANDUM OPINION AND ORDER

SARA LIOI, District Judge.

This matter comes before the Court on motions to dismiss pursuant to Rule 12(b)(6) filed by all defendants. The matter has been fully briefed and is ripe for decision.

I. Factual & Procedural Background

In its Second Amended Complaint ("SAC"), plaintiff City of Cleveland (the "City" or "Plaintiff") asserts a single public nuisance cause of action against each of the following corporate defendants: Ameriquest Mortgage Securities, Inc., Bank of America, N.A., Bear Stearns & 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 (collectively, "Defendants").

Plaintiff blames subprime lending for the epidemic of foreclosures afflicting the City. Plaintiff claims 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 SAC targets Defendants not for engaging in direct subprime lending, but instead for their alleged role in securitizing subprime loans into mortgage-backed securities ("MBS"). This allegation appears calculated to capture the related activities of (1) creating MBS by bundling together subprime loans and/or (2) providing the funding used to purchase the underlying loans. Plaintiff asserts that this conduct created a public nuisance, with the resulting spike in foreclosure activity being its foreseeable result. The City seeks to recover damages it claims are represented by (1) the cost of monitoring, maintaining, and demolishing foreclosed properties; and (2) the diminution in the City's property tax revenues caused by the depreciating effect foreclosures have had on the affected homes and surrounding properties.

Via eight separate motions to dismiss — some filed individually and others in combination — Defendants move to dismiss the SAC under Rule 12(b)(6) for failure to state a claim for relief.¹ Individual defendants and groups of defendants present numerous arguments in support of dismissal, some of which apply only to certain defendants.² All Defendants, however, assert that the City's public nuisance claim fails because (a) it is preempted by Ohio law; (b) it is barred by the economic loss doctrine; (c) Plaintiff has not alleged interference with a public right; (d) Defendants' conduct did not constitute an unreasonable interference with a public right; and (e) the allegations in the SAC are insufficient to demonstrate proximate cause. The City filed a combined response in opposition to the motions to dismiss, and Defendants filed replies. In this memorandum, the Court addresses four of the aforementioned universally-applicable arguments raised by Defendants and, finding each of the four selected arguments independently sufficient to sustain the disposition of the case, declines to address Defendants' remaining contentions.³

II. Law & Analysis

A. Standard of Review

When reviewing a motion to dismiss for failure to state a claim, the court must construe the complaint in the light most favorable to the plaintiff, accept all well-pleaded factual allegations as true, and determine whether the moving party is entitled to judgment as a matter of law. Commercial Money Ctr., Inc. v. Ill. Union Ins. Co., 508 F.3d 327, 336 (6th Cir.2007) (citing United States v. Moriarty, 8 F.3d 329, 332 (1993)). To survive a motion to dismiss under Rule 12(b)(6), the complaint must contain "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "Although this is a liberal pleading standard, it requires more than the bare assertion of legal conclusions. Rather, the complaint must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory." First Am. Title Co. v. Devaugh, 480 F.3d 438, 444 (6th Cir.2007) (quoting Se. Tex. Inns, Inc. v. Prime Hospitality Corp., 462 F.3d 666, 671-72 (6th Cir.2006)).

B. Choice of Law

This case is before the Court on diversity jurisdiction, 28 U.S.C. § 1332, so the choice of law rules of the forum state apply. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Himmel v. Ford Motor Co., 342 F.3d 593, 598 (6th Cir.2003). In cases involving alleged torts, the law of the place of injury is presumed to govern. Morgan v. Biro Mfg. Co., Inc., 15 Ohio St.3d 339, 341, 474 N.E.2d 286 (1984). Because Plaintiff seeks to recover for injuries that allegedly occurred in Cleveland, Ohio, Ohio law controls.

C. State Law Preemption

Defendants argue that the City's complaint is preempted by Ohio state law, specifically, Ohio Revised Code § 1.63, which states:

The state solely shall regulate the business of originating, granting, servicing, and collecting loans and other forms of credit in the state and the manner in which any such business is conducted, and this regulation shall be in lieu of all other regulation of such activities by any municipal corporation or other political subdivision. Any ordinance, resolution, regulation, or other action by a municipal corporation or political subdivision to regulate, directly or indirectly, the origination, granting, servicing, or collection of loans or other forms of credit constitutes a conflict with the Revised Code, including, but not limited to, Titles XI, XIII, XVII, and XLVII, and with the uniform operation throughout the state of lending and other credit provisions, and is preempted.

Ohio Rev.Code § 1.63(A)-(B). Defendants maintain that the City's lawsuit is an "action by a municipal corporation [...] to regulate, directly or indirectly, the origination, granting, servicing, or collecting of loans or other forms of credit," and thus conflicts with the Ohio Revised Code, resulting in its preemption. The City responds by arguing that its public nuisance action is not a regulatory action, but simply an ordinary action to recover money or property, and therefore does not fall within the purview of § 1.63.⁴ The Court agrees with Defendants.

The statute expressly covers "[a]ny ordinance, resolution, regulation, or other action," and thus preempts more than just traditional legislative and administrative efforts. Ohio Rev.Code § 1.63 (emphasis added). Without question, common law actions for damages represent an important manner of regulating conduct. Riegel v. Medtronic, Inc., ___ U.S. ___, 128 S.Ct. 999, 1008, 169 L.Ed.2d 892 (2008) (citing Cipollone v. Liggett Group, Inc., 505 U.S. 504, 521, 112 S.Ct. 2608, 120 L.Ed.2d 407 (1992)) (a common law action "limited to damages [...] `can be, indeed is designed to be, a potent method of governing conduct and controlling policy.'"); San Diego Bldg. Trades Council, Millmen's Union, Local 2020 v. Garmon, 359 U.S. 236, 247, 79 S.Ct. 773, 3 L.Ed.2d 775 (1959) ("regulation can be as effectively exerted through an award of damages as through some form of preventive relief.")⁵

The United States Supreme Court has recognized that the judicial process can be viewed as the extension of a government's regulatory power. As the court explained, "[s]tate power may be exercised as much by a jury's application of a state rule of law in a civil suit," as by regulation or ordinance.

City of Philadelphia v. Beretta U.S.A. Corp., 126 F.Supp.2d 882, 889 (E.D.Pa. 2000) (quoting BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 572 n. 17, 116 S.Ct. 1589, 134 L.Ed.2d 809 (1996) and citing Geier v. Am. Honda Motor Co., 529 U.S. 861, 120 S.Ct. 1913, 146 L.Ed.2d 914 (2000); Int'l Paper Co. v. Ouellette, 479 U.S. 481, 495, 107 S.Ct. 805, 93 L.Ed.2d 883 (1987); New York Times v. Sullivan, 376 U.S. 254, 265, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964)). The Ohio General Assembly broadly defined the scope of municipal action preempted by § 1.63 to include "other action," not just municipal legislation or regulation. Given the expansive wording of the statute and the powerful regulatory potential of common law damage claims, the Court finds that § 1.63 includes common law public nuisance claims like the one asserted by the City. See City of Philadelphia, 126 F.Supp.2d at 889-90 (state statute specifying that power to regulate firearms in Pennsylvania rested exclusively with state legislature preempted common law public nuisance action brought by city against gun industry); see also Sturm, Ruger & Co. v. City of Atlanta, 253 Ga. App. 713, 560 S.E.2d 525, 530 (2002); Penelas v. Arms Tech., Inc., 778 So.2d 1042, 1045 (Fla.Ct.App.2001).

The City's citations to a definition contained in another (wholly irrelevant) section of the Ohio Revised Code (§...