On January 11, 2006 the City of Cleveland sued 21 investment banks and mortgage lenders alleging that they had created a public nuisance after a wave of foreclosures on subprime mortgages have allegedly left "entire streets, blocks and neighborhoods of Cleveland" vacant. (See news reports here and here; a copy of the complaint is available here.) Cleveland claims that it has suffered "hundreds of millions of dollars in damages" stemming from the depletion of Cleveland's tax base, increased fire and police costs associated with vacant properties, and demolition expenses.
This lawsuit follows on the heels of one filed by the City of Baltimore alleging that it has suffered similar damages. The Baltimore lawsuit, however, was premised on the allegation that the subprime lending practices violated fair housing laws. The Baltimore lawsuit was summarized in this blog in a January 8 post. It would seem that Cleveland will have similar difficulties in proving harm as referenced in our earlier post.
Cleveland's choice of pleading a public nuisance claim is an interesting tactical choice. Its use of the public nuisance tort continues the trend of states and municipalities partnering with the plaintiffs bar to target unpopular industries or practices, such as the asbestos industry, the tobacco industry, firearms manufacturers, and lead paint manufacturers. See, e.g. Victor E. Schwartz and Phil Goldberg, The Law of Public Nuisance: Maintaining Rational Boundaries on a Rational Tort, Washburn Law Journal, Vol. 45, No. 3 (Spring 2006). Plaintiffs have achieved mixed results. Cleveland will have similar hurdles to overcome in making its case. On the one hand, the mortgage lending practice complained of were legal at the time and the industry is highly regulated. This militates against finding a nuisance. It also appears there may be problems proving proximate cause, based on all of the other actors (borrowers, brokers, etc.) involved in the subprime lending process. On the other hand, the conduct is tied to the use of land, which is the traditional province of public nuisance law. In any event, we expect that the defendants will file a motion to dismiss the complaint, and will be interested in the outcome. A favorable treatment of the case may lead to many other states and municipalities following Cleveland's lead.