Sixth Circuit: Cleveland v. Wall Street filed with 'frustrated regulatory intent'

John O'Brien Sep. 26, 2012, 2:25pm


CINCINNATI (Legal Newsline) - A lower court was wrong to dismiss Chase Bank's challenge of litigation filed against it by the city of Cleveland over subprime mortgages, the U.S. Court of Appeals for the Sixth Circuit has ruled.

However, since the U.S. Supreme Court has refused an appeal in Cleveland's first lawsuit against Chase and the bank was dropped as a defendant in the second lawsuit in July, the ruling is essentially moot, wrote Judge Karen Nelson Moore.

Cleveland sued 21 financial institutions in 2008, alleging they created a public nuisance by securitizing subprime mortgages. The financial collapse hit Cleveland especially hard, and the city recently used funds from a national settlement to knock down vacant and dilapidated homes, the Huffington Post reported.

The lawsuit was filed by the city through attorney Joshua Cohen of Cohen Rosenthal & Kramer. It was the subject of a 2010 documentary titled "Cleveland vs. Wall Street."

"Cleveland's decision to address the issue of subprime-mortgage securitization through litigation arguably reflects an otherwise frustrated regulatory intent, as the city likely could not regulate such activity directly," Moore wrote.

"Ohio law appears to prevent Cleveland from regulating subprime mortgages in the traditional manner (i.e. by municipal ordinance), as it vests the state with sole authority to '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.'"

Cleveland's first lawsuit was filed in January 2008 and made the public nuisance allegation. It said the defendants' actions contributed to decreased property values, a smaller tax base and an increase in criminal activity. The city sought to recover costs associated with foreclosed properties and decreased tax revenues.

Chase filed a challenge to the case a month later, claiming the action was preempted by the National Bank Act. The company requested an injunction against the lawsuit.

Cleveland filed a second lawsuit in August 2008, this one against JPMorgan Chase Bank. Its motion to amend its first lawsuit to add it as a defendant had been rejected.

Eventually, a district court granted the defendants' motion to dismiss the first lawsuit on the grounds that the suit was preempted by state law, was barred by the economic-loss doctrine and that the complaint failed to demonstrate that the defendants' actions unreasonably interfered with a public right or were the cause of the alleged harm.

In 2011, the U.S. Supreme Court voted not to hear the city's appeal of the decision.

The second lawsuit continues in Cuyahoga County's appeals court. The city is appealing a ruling that dismissed Cleveland's public nuisance and Ohio Corrupt Activities Act claims.

In July, Cleveland withdrew its claims against JPMorgan Chase.

Though ultimately moot, the court ruled Chase's lawsuit against the city falls within the line of cases recognizing federal jurisdiction over preemption-based challenges to state laws brought against state officials, even though its suit challenges a lawsuit filed by the city instead of direct regulation.

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