Supreme Court Report

SCOTUS will decide whether Miami can sue banks under the Fair Housing Act

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The mortgage-lending practices of the nation’s largest banks and their effects on inner-city neighborhoods will be the backdrop in a U.S. Supreme Court case to be argued in November.

The legal question essentially involves whether a city can be an “aggrieved person” under the Fair Housing Act of 1968 and thus have standing to seek redress for the harms cause by alleged discriminatory practices.

In 2013, the city of Miami filed separate but substantially similar lawsuits against the Bank of America, Citigroup and Wells Fargo, alleging that the banks violated the FHA by engaging in discriminatory lending practices that resulted in a disproportionate number of defaults by black and Latino homebuyers.

These defaults, in turn, harmed property values and resulted in a loss of tax revenues to the city, the suits contend.

“They were targeting minority buyers for riskier loans,” says Robert S. Peck, the president of the Center for Constitutional Litigation, a Washington, D.C.-based public-interest law firm that represents Miami.

The city’s case contends that the banks aimed predatory loans that carried more risk, steeper fees, and higher costs at minority customers than did those offered to white customers in similar situations.

The alleged predatory loans included those with higher interest rates than what were established by federal benchmarks, interest-only loans, balloon payment loans, loans with prepayment penalties, and adjustable rate mortgages with teaser rates.

An analysis conducted for the city showed that a black Wells Fargo borrower was about four times more likely to receive a predatory loan than a white borrower with similar underwriting qualifications was. A Latino Wells Fargo borrower was about 1½ times more likely to receive such loans than a similarly situated white borrower was, court papers say.

The suit alleged that by steering minority borrowers into such predatory loans, the banks caused their properties to fall into foreclosure more rapidly than for white borrowers. This deprived the city of tax revenue and required it to spend more to battle the resulting blight conditions.

The banks sought dismissal of the suit by arguing that the city lacked standing under the FHA because it fell outside the statute’s “zone of interests,” and that the banks’ actions could not be sufficiently tied to the harms cited by the city.

A federal district court agreed and dismissed Miami’s suits in 2014. But in 2015, a panel of the 11th Circuit U.S. Court of Appeals at Atlanta revived the suits.

The 11th Circuit said the phrase aggrieved person in the FHA extends standing as far as it can go under Article III of the Constitution. It also held that the city’s allegations were sufficient to meet the housing law’s proximate-cause requirement. The city’s suit alleged “the [banks’] discriminatory lending caused property owned by minorities to enter premature foreclosure, costing the city tax revenue and municipal expenditures.

“Although there are several links in that causal chain, none are unforeseeable,” the court panel said.

Two Societies

The big banks are facing such FHA suits not just from Miami but from a growing number of other cities.

“Municipalities are seeking damages—earmarked for their own coffers—that are vastly greater than what the Justice Department has claimed for direct victims of [housing] discrimination,” according to an amicus brief filed in the Supreme Court by the American Bankers Association and eight other banking groups.

Two of the banks asked the Supreme Court to review the 11th Circuit decision, and the justices will hear arguments on Nov. 8 in Wells Fargo & Co. v. City of Miami and Bank of America Corp. v. City of Miami.

Two terms ago, in Texas Department of Housing and Community Affairs v. Inclusive Communities Project Inc., the Supreme Court ruled 5-4 that disparate-impact claims are cognizable under the Fair Housing Act. That was a separate question than the one presented in these new cases. But the result was a surprise to many who expected the justices to rein in litigation under the FHA.

In his majority opinion, Justice Anthony M. Kennedy underscored the historical backdrop of the fair housing law being enacted at a time of great social unrest and said the nation had been moving toward two societies, “one black—one white.”

In the Miami case, Wells Fargo stresses Justice Kennedy’s observation in Inclusive Communities that the FHA’s central purpose is to “eradicate discriminatory practices within a sector of the nation’s economy.”

The banks sued by Miami say “the Fair Housing Act is about discrimination. It’s not about tax revenues or anything like that,” says Neal K. Katyal, a Hogan Lovells partner who represents Wells Fargo in the case.

“And the banks are also saying: This is a really long chain of causation” alleged by the city, Katyal noted at a panel discussion about the Supreme Court in late September. “It’s a kind of several-step theory.”

Katyal argued that the city of Miami falls well outside the limitation on zones of interests imposed by the FHA. He pointed to a 2011 Supreme Court decision in an employment discrimination suit brought under Title VII of the Civil Rights Act of 1964.

In Thompson v. North American Stainless LP, the high court held that the term aggrieved in Title VII permits a suit by a “plaintiff with an interest ‘arguably [sought] to be protected by the statutes’ ... while excluding plaintiffs … whose interests are unrelated to the statutory prohibitions in Title VII.”

The 11th Circuit, in the Miami cases, thought it was bound by dicta in three Supreme Court opinions from more than 30 years ago.

In Trafficante v. Metropolitan Life Insurance Co. in 1972, Gladstone, Realtors v. Village of Bellwood in 1979, and Havens Realty Corp. v. Coleman in 1982, the court discussed that the term aggrieved in the FHA extends as far as Article III permits. But in each of those cases, according to Katyal, the discussion was unnecessary to the case at hand.

That led Justice Antonin Scalia, in the court’s unanimous opinion in Thompson, to refer to the language on a “person aggrieved” in those earlier opinions as “ill-considered” dictum.

Katyal also argues that the city of Miami claims are too remote from the banks’ actions to be actionable.

“In that sense, the city is no different from the innumerable other individuals and entities that suffered economic losses after the collapse of the American housing market,” the Wells Fargo brief states.

Bank of America makes similar arguments in a merits brief filed by William M. Jay of Goodwin Proctor. (Both Katyal and Jay declined to be interviewed.)

“Several cities and counties have seized upon [the FHA] in an attempt to force large financial institutions to make up for shortfalls in municipal budgets,” the brief states. “And they contend their suits are proper because the FHA imposes no statutory limit on who may sue.”

“Those who were denied access to housing and those who suffered the effects of racial segregation are within the zone of interests,” the Bank of America brief says. “The municipal plaintiffs are not.”

Ending a Cycle of Blight

Peck, representing Miami, says that “if you look at the underpinnings of the Fair Housing Act, it was enacted because of widespread discriminatory housing practices but also about the fact that this discrimination was plaguing our cities.”

He points out that the high court’s 1979 decision in the Gladstone case upheld municipal standing under the FHA in the case of a village that sued a realty firm under the act regarding racial steering. Gladstone remains the key precedent on point supporting Miami’s suit, Peck says.

“The discriminatory mortgage-lending practices at issue here directly harm the city’s fair housing efforts; deprive it of the benefits of an integrated community; rob properties and neighborhoods of their value; diminish tax revenues; and demand extra police, fire and safety attention, draining the city’s resources,” Peck wrote in a brief. “The FHA was intended to end that cycle of urban blight, and Miami’s lawsuit plainly furthers those interests.”

Moreover, he argues that the 2011 Thompson decision does not help the banks as they contend because that decision’s definition of an aggrieved person under Title VII’s employment context does not control the interpretation of similar language in the FHA.

Peck argues that while Title VII is focused on discriminatory motives behind an adverse employment decision, the FHA is focused on broader results. He also contends that Miami has sufficiently pleaded proximate cause between the banks’ actions and the harms on the city by providing detailed evidence of statistical disparities between minority and white borrowers tied to policies that caused the disparity.

Cities and banks across the country will await the Supreme Court’s answer in these cases.

This article originally appeared in the November 2016 issue of the ABA Journal with this headline: “Blaming Banks: Court to decide whether Miami can sue banks under the Fair Housing Act for loss of tax revenue.”

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