Josh Blackman » City of Cleveland Sues Wall Street for Damage from Subprime Crisis. But Did Cleveland Even Have Standing? Mass v. EPA, Comer, and Global Warming Litigation.

City of Cleveland Sues Wall Street for Damage from Subprime Crisis. But Did Cleveland Even Have Standing? Mass v. EPA, Comer, and Global Warming Litigation.

July 27th, 2010

The City of Cleveland sued a number of Wall Street banks and mortgage lenders under a public nuisance tort for creating risky mortgage securities to be sold by investors that invariably destroyed their–ahem–lovely town. The 6th Circuit affirmed the District Court’s dismissal of the case, and argued, among other things, that the parties did not prove proximate clause.

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.

…

The alleged damages that subsequently occurred—eyesores, fires, drug deals, and

looting—were also not directly caused by the Defendants. Homeowners, whether the

initial buyers or mortgagees that later took possession of a home, were responsible for

maintaining their properties. Fires were likely started by negligent or malicious

individuals or occurred because a home was poorly built. Drug dealers and looters made

independent decisions to engage in that criminal conduct. Additionally, other companies

not listed in the complaint financed subprime loans and properties not subject to a

subprime loan nevertheless entered into foreclosure. Similar to Holmes and Anza,

Cleveland has not stated a viable claim when these actions could have occurred for “any

number of reasons unconnected to the asserted pattern of [misconduct].” Id. at 458.

…

Another similar reason that the complaint does not satisfy the directness

requirement, which also touches on the concerns implicated by the first Holmes factor,

is that the remote connection between the alleged misconduct and the alleged injury

makes it impossible “to ascertain the amount of [Cleveland’s] damages attributable to

the violation.” See Holmes, 503 U.S. at 269.

…

In sum, even when viewing the assertions in the complaint in a light most

favorable to Cleveland, the connection between the alleged harm and the alleged

misconduct is too indirect to warrant recovery. Although the facts are different than

those before the Supreme Court in Holmes and Anza, the same directness concerns are

implicated.

Cleveland didn’t have eyesores before the subprime meltdown? Really? Anyway, I digress.

Did the City of Cleveland even have Article III standing to sue? This is not my area of expertise, so I may be way off base here, but I think this case bears some similarities to Comer v. Murphy Oil. In Comer, residents in the Gulf Area who were hit by Hurricane Katrina brought suit against several oil companies under a common law nuisance tort, arguing that their activities contributed to global warming, and caused damage to their property. Relying on Massachusetts v. EPA, a panel of the 5th Circuit found that the Plaintiffs had standing to proceed. (Then Comer got procedurally weird. The 5th Circuit vacated the opinion and decided to rehear it En Banc. Only problem, too many Judges recused, and it was questionable whether a quorum existed. Before a curiously lonely en banc panel here, the Court affirmed the vacatur of the opinion. Look for this case to hit SCOTUS soon.)

These cases seem similar, at least on their faces.

The City of Cleveland is suing big bad bankers under a nuisance theory for causing “eyesores, fires, drug deals, and looting” because its residents accepted risky subprime loans.
Gulf Residents are suing big bad oil companies under a nuisance theory for causing damage that resulted from a Category 3 Hurricane making direct landfall with their property.

Are the levels of causation between oil companies and Hurricane Katrina, and bankers and the damages resulting from the Subprime Meltdown in Cleveland, that different?

My colleague Ilya Shapiro wrote a humorous blog post wondering whether people will start suing the sun for unseasonably cool weather. Is this really that far away?

The 6th Circuit did not discuss Comer, or Massachusetts v. EPA, and did even address standing. It jumped straight into deciding issues of proximate cause. But it seems in cases where the harm is so attenuated under a nuisance theory, standing should be an important issue.

Perhaps Dan Gilbert, owner of the Cleveland Cavaliers, can sue the City of Miami under a nuisance theory for destroying his city following the departure of LeBron James. Hopefully his attorneys will use a different font for their briefs.