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9th Cir. Allows City of Oakland’s FHA ‘Predatory Lending Discrimination’ Claims to Proceed

fair housing actThe U.S. Court of Appeals for the Ninth Circuit recently held that the city of Oakland’s amended complaint alleging unlawful discriminatory lending practices against a national bank and its parent holding company sufficiently stated a claim that its decreased property tax revenues, but not its increased municipal expenses, were proximately caused by the alleged predatory lending practices.

In so ruling, the Court also held that the federal Fair Housing Act’s (FHA) proximate cause standard applied to claims for injunctive and declaratory relief, reversing the trial court’s holding that the city did not have to meet this standard for such claims.

A copy of the opinion in City of Oakland v. Wells Fargo & Company is available at: Link to Opinion.

The city of Oakland sued a national bank and its parent, alleging that they violated the FHA “by issuing predatory loans to its Black and Latino residents … [that] caused widespread foreclosures that reduced the City’s property-tax revenues and increased its municipal expenses.” The city sought “to recover damages in the form of lost property tax revenues and increased municipal expenses and to enjoin [the bank] from continuing to issue predatory home loans to Black and Latino borrowers.”

The defendants moved to dismiss for failure to state a claim upon which relief can be granted. The trial court denied the defendants’ motion “as to Oakland’s claims for lost property-tax revenues[,]” and granted the defendants’ “motion to dismiss as to Oakland’s claims for increased municipal expenses.” The trial court also denied the defendants’ “motion to dismiss as to Oakland’s claims seeking injunctive and declaratory relief….”

The defendants appealed the trial court’s partial denial of their motion to dismiss.

On appeal, the Ninth Circuit began by discussing the history of this country’s racial and ethnic discrimination, which led to the enactment of the federal Fair Housing Act of 1968  “to ensure fair access to housing for racial minorities and other historically disadvantaged groups[,]” which had suffered from “several government-sanctioned practices [that] disadvantaged racial and ethnic minorities’ fair access to housing, including rapid urbanization, the flight of White families to suburban neighborhoods, racially restrictive covenants, real estate agents who steered homebuyers into racially homogenous areas, and discriminatory lending practices like redlining and reverse redlining.”

The Court then turned to the statutory background of the FHA, explaining that the act “makes it unlawful to ‘discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race.’ … More broadly, it makes it unlawful for ‘any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race[.]’”

The Ninth Circuit also explained that the FHA provides “a private right of action for damages and injunctive relief” and gives federal district courts and state courts concurrent jurisdiction to remedy discriminatory housing practices. “It is well established the term ‘aggrieved person’ under the FHA includes cities.”

The Court then discussed the factual background alleged in Oakland’s complaint, cataloging the defendants’ allegedly discriminatory lending practices, including “[r]edlining[, which] is the practice of denying home loans to residents of minority neighborhoods[, and] [r]everse redlining, [which] is the practice of issuing home loans to minority borrowers with significantly higher costs and more onerous terms than those offered similarly situated White borrowers — also known as ‘predatory loans.’”

The Court then embarked upon an extended discussion of the city’s regression analyses, which the city argued would show that “its Black and Latino residents are more likely to receive predatory loans …; that those predatory loans cause foreclosures; and that those foreclosures reduce property values and consequently diminish the City’s property-tax revenues.” The Court noted that there was no statistical backing for the city’s allegations that the “predatory loans increase its municipal expenses, forcing it to reduce its spending in fair-housing programs aimed at guaranteeing that all of its residents have equal access to safe and affordable housing.”

The Ninth Circuit found that the “City’s first set of regression analyses support its allegation that [the defendant bank] issues predatory home loans to Black and Latino borrowers.” It also agreed that “[a] second set of regression analyses using the same data shows that Black and Latino borrowers who receive predatory home loans from [the defendant bank] are far more likely to have their homes foreclosed on than White borrowers who receive non-predatory loans.”

The Court also found that “[a] third set of regression analyses, which use a technique known as ‘Hedonic regression,’ establishes that foreclosures caused by [the bank’s] predatory loans reduce the value of both foreclosed properties and other properties nearby.”

The Ninth Circuit then discussed the proximate cause standard under the FHA in order to “determine whether the FHA’s proximate-cause requirement is sufficiently broad and inclusive to encompass Oakland’s aggregate, citywide injuries.”

First, the Court stressed that “proximate cause is not a requirement of Article III [standing], but rather an element of the cause of action under a statute, and it ‘must be adequately alleged at the pleading stage in order for the case to proceed.’”

Consistent with the common law principle, which was “designed to limit liability[,]” the Court reasoned that “the purpose of the FHA’s proximate-cause requirement is to limit recovery to more direct harms, because ‘[n]othing in the statute suggests that Congress intended to provide a remedy wherever” the ripples of harm caused by a defendant’s misconduct flow.

The Ninth Circuit further explained that “[t]here is no hard and fast rule for establishing proximate cause … [and the] requirement varies by statute.” “Although proximate cause ‘is not easy to define,’ the basic inquiry is ‘whether the harm alleged has a sufficiently close connection to the conduct the statute prohibits.”

The Court then discussed “[t]he only controlling Supreme Court precedent on the FHA’s proximate-cause requirement[,] its recent decision in [Bank of Am. Corp. v. City of Miami (Miami I)]. In that case, the City of Miami, like Oakland, claimed that [the banks’] discriminatory lending practices caused Miami’s decreased property-tax revenues and increased municipal expenses. … Reversing the Eleventh Circuit, the Court held that ‘to establish proximate cause under the FHA, a plaintiff must do more than show that its injuries foreseeably flowed from the alleged statutory violation.’ Rather, ‘some direct relation between the injury asserted and the injurious conduct alleged’ is required.”

Noting that the Supreme Court in Miami I stopped short of outlining “the precise boundaries of proximate cause under the FHA[,]” the Ninth Circuit reasoned that it was required “to decide the questions before us as a matter of first impression, guided by the two-step analysis laid out by the Supreme Court in Miami I: first, we must evaluate ‘the contours of proximate cause under the FHA,’ and second, we ‘decide how that standard applies to the City’s claim for lost property-tax revenue and increased municipal expenses.’”

As to the first prong, the Ninth Circuit explained that “we evaluate (1) the ‘nature of the statutory cause of action’ and (2) what is administratively feasible [and that] [i]n this case, both considerations lead us to confidently conclude that the FHA’s proximate-cause requirement is sufficiently broad and inclusive to encompass aggregate, city-wide injuries.”

In support, the Court cited the broadly-worded text of the FHA, “which reveals that Congress intended the statute to provide redress for a multitude of injuries that result from housing discrimination” and the broad definition of “aggrieved person” as including ‘any person who claims to have been injured by a discriminatory housing practice.’” As applied to the case at bar, the Court noted that the FHA prohibited racial discrimination in transactions such as loans “for purchasing, constructing, improving, repairing, or maintaining a dwelling. … Based on this far-reaching language, Congress clearly intended the FHA to tackle discrimination throughout the real estate market.”

In addition, the Court reasoned that even though the FHA’s text “is sufficient to establish that Congress intended the FHA’s proximate-cause requirement to be very broad,” it would “also look at the FHA’s legislative history to discern what Congress intended the statute’s remedial aims to be, and whether aggregate, city-wide injuries fall within the scope of its proximate-cause requirement.” After doing so, the Court concluded that “[t]he FHA’s legislative history underscores that Congress intended the statute to reach beyond those individuals who are the immediate victims of direct discrimination, such as tenants, homebuyers, and home-loan borrowers. There is no doubt that Congress intended the statute to cover aggregate, city-wide injuries.”

Having concluded that the FHA’s proximate-cause requirement was broad enough to include Oakland’s alleged injuries, the Ninth Circuit addressed administrative feasibility and convenience. “Administrative feasibility is important because ‘proximate cause generally bars suits for alleged harm that is too remote from the defendant’s unlawful conduct.’ … Therefore, when we decide what is ‘administratively possible,’ we typically ask whether a plaintiff’s alleged injuries are ‘too remote’ to satisfy the proximate-cause requirement of the statute as issue.”

The Ninth Circuit noted that the Supreme Court in Holmes “laid out three factors that govern whether an indirect injury is administratively feasible under a given statute: (1) whether it is possible to ascertain ‘a plaintiff’s [indirect] damages attributable to the violation, as distinct from other, independent factors’; (2)  whether it is possible to ‘apportion[] damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries’; and (3) whether allowing recovery for indirect injury is ‘unjustified by the general interest in deterring injurious conduct, since directly injured victims can generally be counted on to vindicate the law as private attorneys general.’” It then concluded that “[a]ll three of these factors support a finding that at least some of Oakland’s aggregate, city-wide injuries are administratively feasible and convenient under the FHA.”

The Court reasoned that Oakland, “relying on its proposed statistical regression analysis, … plausibly alleges that it can precisely calculate the exact loss in property values attributable to foreclosures caused by [the bank’s] predatory loans, isolated from any losses attributable to non-[bank] foreclosure or other independent causes, such as neighborhood conditions.”

Because the amended complaint and studies cited explained in detail how Oakland “will conduct the regression analysis to quantify the loss in property values attributable to [the defendant bank’s] … discriminatory lending[,]” the Ninth Circuit held that the city “offered much more than a purely formulaic recitation of how the FHA’s causation requirement will be met — it has plausibly alleged a harm that is measurable using sophisticated, reliable, and scientifically rigorous methodologies.”

Next, the Court found that “there is no risk of duplicative recoveries in this case” because, in contract to antitrust cases, “individual borrowers cannot recover for Oakland’s aggregate, city-wide injuries like reduced property-tax revenues or increased municipal expenses, which means there will be no need for the district court to apportion these damages between multiple plaintiffs. Furthermore, the injuries to individual borrowers … are completely independent, which means it is entirely possible to apportion the damages directly suffered by the individual borrowers from Oakland’s damages.”

Finally, the Ninth Circuit reasoned that just because “individual borrowers can sue to vindicate their rights under the FHA does not mean that the City is unjustified in also doing so. Oakland’s lawsuit in no way affects the ability of the individual borrowers to recover from [the defendant bank] for the same discriminatory lending practices.”

The Court concluded that “it is administratively feasible for the district court to administer the aggregate, city-wide injuries that Oakland claims it suffered as a result of [the bank’s] unlawful discriminatory lending practices throughout the City.”

Turning to Oakland’s claim for damages, the Court held that “the allegations in the amended complaint are sufficient to plead that Oakland’s reduced property-tax revenues, but not its increased municipal expenses, are proximately caused by [the defendants’] discriminatory lending practices.”

As to the reduced property-tax revenues, the Ninth Circuit reasoned that even though lost property-tax revenues is “[f]ar from being within the first step of the causal chain [because] the drop in Oakland’s tax base is several steps removed from [the bank’s] discriminatory lending practices[,] these injuries are within the FHA’s proximate-cause requirement because the City plausibly alleged that they have a ‘sufficiently close connection to the conduct the statute prohibits.’”

After rejecting the defendants’ arguments challenging the use of regression analyses and statistics “to overcome the remoteness of a plaintiff’s injury[,]” the Court held that “Oakland has plausibly alleged that its decrease in property-tax revenues has some direct and continuous relation to [the bank’s] discriminatory lending practices throughout much of the City.”

The Ninth Circuit cautioned that it was important to remember that this “reaches us at the motion to dismiss stage, where Oakland has the burden of meeting a plausibility standard, not a reasonable probability or more-likely-than-not standard.” Thus, “Oakland’s allegations still need to be tested through discovery, including the rigors of expert rebuttal. … The City’s regression analyses will be scrutinized during discovery and at trial before it can be determined that [the bank’s] conduct more likely than not diminished the City’s tax base.”

Although the Court held that the amended complaint plausibly alleged that the bank’s racially discriminatory lending practices “have some direct relation to its lost property-tax revenues,” it refused to reach the same conclusion as to increased municipal expenses.

The Court reasoned that Oakland’s allegations amounted to nothing more than unsupported legal conclusions because “[w]ithout more, the district court cannot precisely ascertain which increases in municipal expenses are attributable to foreclosures caused by [the bank’s] predatory loans to Black and Latino residents. … Accordingly, Oakland’s conclusory proximate-cause allegations as to its alleged increased municipal expenses are implausible and the district court did not err in dismissing them.”

Finally, the Court held that “the FHA’s proximate-cause requirement applies to claims for injunctive or declaratory relief[,]” reasoning that [t]he district court was apparently mistaken in its reading of Miami I and other Supreme Court precedents clearly establishing that the plaintiffs must satisfy the proximate-cause requirement to receive any form of relief.”

Accordingly, the Ninth Circuit affirmed the trial court’s denial of the defendants’ motion to dismiss as to the city of Oakland’s “claims for lost property-tax revenues” and the trial court’s grant of the defendants’ motion to dismiss as to “Oakland’s claims for increased municipal expenses.” It reversed, however, the trial court’s “conclusion that that Oakland did not have to satisfy the FHA’s proximate-cause requirement as to its claims for declaratory and injunctive relief.”  The Ninth Circuit remanded the case for further proceedings consistent with its opinion.

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Hector Lora has substantial experience in all phases of complex commercial litigation, including motion practice, written discovery, depositions, mediations, bench and jury trials, and appellate practice. For more than a decade, his practice has focused extensively on the defense of civil enforcement actions filed by the FTC, as well as real estate litigation, and contested mortgage and condominium lien foreclosures and foreclosure of security interests under UCC Article 9. Hector also has substantial experience in advising a variety of types of businesses regarding their compliance with applicable federal and state laws, including the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Telemarketing Sales Rule, the Controlling the Assault of Nonsolicited Pornography and Marketing Act of 2003, and Florida laws governing telephone solicitation and communication. Hector received his Juris Doctor from the Georgetown University Law Center, and his undergraduate degree with honors from the University of Florida. For more information, see https://mauricewutscher.com/attorneys/hector-e-lora/

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