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9th Cir. (En Banc) Rejects All of City’s FHA Claims Against Lender

fair housing actThe U.S. Court of Appeals for the Ninth Circuit, en banc, recently affirmed in part and reversed in part a trial court’s partial grant and partial denial of a bank’s motion to dismiss the City of Oakland’s claims under the federal Fair Housing Act.

In so ruling, the Ninth Circuit en banc held that all of the city’s claims – including the claims for damages, as well as for injunctive and declaratory relief — should be dismissed because, under Bank of America Corp. v. City of Miami, 137 S. Ct. 1296 (2017), foreseeability alone is not sufficient to establish proximate cause under the FHA, and there must be “some direct relation between the injury asserted and the injurious conduct alleged.”

The Court concluded that the downstream “ripples of harm” from the bank’s alleged lending practices were too attenuated and traveled too far beyond the bank’s alleged misconduct to establish proximate cause.

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 bank under the Fair Housing Act, 42 U.S.C. § 3601 et seq., claiming that the bank’s supposed discriminatory lending practices caused higher default rates, which triggered higher foreclosure rates that drove down the assessed value of properties, ultimately resulting in lost property tax revenue and increased municipal expenditures.

While the case was pending in the trial court, the Supreme Court of the United States decided Bank of America Corp. v. City of Miami, 137 S. Ct. 1296 (2017), and clarified the requirements for proximate cause under the FHA. Id. at 1305–06. Emphasizing that “foreseeability alone” is not sufficient to establish proximate cause, the Supreme Court required “some direct relation between the injury asserted and the injurious conduct alleged.” Id. (quoting Holmes v. Sec. Inv. Prot. Corp., 503 U.S. 258, 268 (1992)).

The trial court dismissed Oakland’s claims as to increased municipal expenditures but allowed the claims as to decreased property tax revenue to proceed. The trial court also dismissed on standing grounds Oakland’s claim that discriminatory lending practices undermined its racial-integration goals. Finally, the trial court allowed all claims for declaratory and injunctive relief to proceed, reasoning that Miami’s directness requirement “does not appear to extend” to these claims.

The trial court certified two issues for interlocutory appeal under 28 U.S.C. § 1292(b): (1) whether Oakland’s claims for damages satisfied the FHA’s proximate-cause requirement; and (2) whether that proximate-cause requirement applies to claims for injunctive and declaratory relief.

A panel of the Ninth Circuit affirmed the trial court’s determination that Oakland sufficiently pleaded proximate cause for the decreased property tax revenue claim, affirmed the trial court’s determination that Oakland failed to plead proximate cause for the increased municipal expenditures claim, and reversed the trial court’s determination that Miami’s proximate-cause requirement did not apply to injunctive and declaratory relief. The Ninth Circuit then voted to rehear the case en banc.

To begin, the Ninth Circuit en banc determined that Oakland’s theory of harm stretched proximate causation “beyond the first step,” Miami, 137 S. Ct. at 1306, because Oakland’s theory ran to depressed housing values, and ultimately to reduced tax revenue and increased municipal expenditures. Thus, the Court held that Oakland failed “a strict application of the ‘general tendency’ not to stretch proximate causation ‘beyond the first step.’” Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118, 139 (2014) (quoting Holmes v. Sec. Inv. Prot. Corp., 503 U.S. 258, 271 (1992)).

The Court next considered whether there was some basis not to “conform[] . . . to the general tendency” not to go “beyond the first step” in this matter. Holmes, 503 U.S. at 272. The Supreme Court in Miami articulated that this analysis rests on two considerations: “the ‘nature of the statutory cause of action’ and an assessment ‘of what is administratively possible and convenient.’” 137 S. Ct. at 1306 (first quoting Lexmark, 572 U.S. at 133; and then Holmes, 503 U.S. at 268).

The Ninth Circuit reasoned that the nature of a particular statutory cause of action implicates whether proximate cause can extend “beyond the first step” because some statutes support proximate cause for injuries further downstream. The Court concluded that the FHA is not such a statute because the harm that the statute guards against — issuing discriminatory loans that result in a default because of a failure to refinance or modify the loans on fair terms — is situated at the “first step”: the issuance of the discriminatory loan. The harm to the borrower has a clear direct relation to conduct prohibited by the FHA.

By contrast, the Ninth Circuit noted that the situations in which the Supreme Court has countenanced a finding of proximate cause “beyond the first step” arose from statutes that themselves encompass harm “beyond the first step.” See Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639 (2008); see also Lexmark, 572 U.S. 118.

Having determined that the nature of the FHA does not warrant the extension of proximate cause “beyond the first step,” the Ninth Circuit turned to Miami’s second consideration: “what is administratively possible and convenient.” 137 S. Ct. at 1306. In articulating this inquiry, Miami cited to Holmes, where the Court laid out three factors relevant to administrability: (1) the ability to distinguish the “damages attributable to the violation, as distinct from other, independent, factors”; (2) “the risk of multiple recoveries”; and (3) whether more direct plaintiffs could “be counted on to vindicate the law as private attorneys general.” Holmes, 503 U.S. at 269–70 (citation omitted).

By citing to Holmes in its description of the administrability component of the direct-relation standard, the Ninth Circuit here reasoned that Miami appeared to endorse the use of the Holmes factors within the application of the direct-relation standard. Miami, 137 S. Ct. at 1306.

The Ninth Circuit concluded that the Holmes factors reinforced its view that Oakland had not met the directness requirement of the proximate cause standard. The first factor is the ability to distinguish the “damages attributable to the violation, as distinct from other, independent, factors.” Holmes, 503 U.S. at 269 (citation omitted). In the Court’s view, Oakland’s theory of harm failed this test because Oakland did not allege that an increase in foreclosures was “surely attributable” to the discriminatory lending. Lexmark, 572 U.S. at 140.

The Ninth Circuit determined that the chain becomes attenuated when variables of property value (which could turn not only on foreclosure but neglect, criminal activity, changing demographics, and macroeconomic trends) and reduced tax revenues were piled on top of a cascading number of independent variables. Thus, the Court held that Oakland’s “theory of liability rests not just on separate actions, but separate actions carried out by separate parties,” in some cases third, fourth, or fifth parties. Hemi Grp., LLC v. City of New York, 559 U.S. 1, 11 (2010)).

The second Holmes factor is whether allowing proximate cause to extend “beyond the first step” would require the court to “adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries.” Holmes, 503 U.S. at 269 (citations omitted). The Ninth Circuit concluded that this risk was not present here because only Oakland (or a related administrative authority) could recover lost property tax revenue. However, while the presence of this risk can indicate the need to rigorously adhere to the “first step” analysis, the Court noted that nothing suggests that the absence of a risk of duplicative recoveries warrants extending “beyond the first step.” Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 459 (2006).

The third Holmes factor is whether directly injured victims “can generally be counted on to vindicate the law as private attorneys general.” Holmes, 503 U.S. at 269–70. Here, the Ninth Circuit decided that the answer is clearly yes because directly harmed borrowers can sue individually and are incentivized to do so through the availability of punitive damages, attorneys’ fees, and equitable relief. See 42 U.S.C. § 3613(c)(1)–(2). The Court also pointed out that harmed borrowers can sue as a class. See, e.g., Havens Realty Corp. v. Coleman, 455 U.S. 363, 366–67 & n.3 (1982).

Having followed Miami to consider the nature of the FHA and what is administratively possible and convenient, the Ninth Circuit concluded that Oakland’s claimed harm of reduced tax revenue was too remote from the cause of action and that nothing advised in favor of going “beyond the first step” of proximate causation.

Furthermore, the Ninth Circuit held that Oakland’s claim stemming from increased municipal expenditures also failed the proximate cause test because this claim was even further afield from the alleged wrongdoing than the reduced tax revenue claim.

Finally, the Ninth Circuit noted that the Court in Miami held that proximate cause is required under the FHA, and in doing so, did not distinguish between claims for damages and those for declaratory and injunctive relief. 137 S. Ct. at 1305–06. Therefore, the Court here read Miami to require a showing of proximate cause for all claims arising under the FHA, including claims for declaratory and injunctive relief.

Accordingly, the Ninth Circuit affirmed the trial court’s dismissal of the damages claim related to increased municipal expenditures and reversed the trial court’s denial of the bank’s motion to dismiss the damages claim related to lost property tax revenue and the claims for injunctive and declaratory relief.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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