City's Wells Fargo lawsuit dismissed

U.S. judge calls claims of millions in predatory lending damages 'not plausible'

January 07, 2010|By Tricia Bishop | tricia.bishop@baltsun.com

A federal court judge on Wednesday dismissed Baltimore's landmark lawsuit against Wells Fargo & Co., saying it was "not plausible" that the mortgage giant triggered millions of dollars in damages, as the city claimed, by causing increased foreclosures through racist, predatory lending.

"The alleged connection is even more implausible when considered against the background of other factors leading to the deterioration of the inner city," U.S. District Judge J. Frederick Motz explained in a six-page memorandum opinion accompanying the dismissal order. He pointed specifically to Baltimore's "extensive unemployment, lack of educational opportunity and choice, irresponsible parenting, disrespect for the law, widespread drug use, and violence."

Motz, who's served a long career in the city, did leave the door open for Baltimore to file a more limited complaint by Feb. 3. The city could restrict its claims to specific damages allegedly suffered because of actual houses made vacant by Wells Fargo's lending practices, he wrote.

"He's asking the city to paint with a less broad brush if it wishes to do that," City Solicitor George Nilson summarized. Counselors plan to discuss their options, which include appealing or filing a narrowed lawsuit, as early as today, he said.

Motz hinted at a hearing last month that he could dismiss the suit as too broad. The decision was in line with others across the country dismissing similar suits that were filed, like Baltimore's, in the wake of the subprime mortgage crisis.

Comparable cases, seeking compensation for alleged foreclosure losses, in Cleveland and in Birmingham, Ala., were also dismissed in their districts.

Motz's dismissal essentially said Baltimore did not have the proper "standing" - basically the right - to sue because it didn't effectively show a causal connection for its wide-ranging claims, which alleged "tens of millions" of dollars in losses.

'Reverse redlining'
Baltimore's lawsuit was said to be the first of its kind when it was filed in January 2008. It, like others, claimed Wells Fargo targeted minority borrowers for bad loans - an illegal practice known as "reverse redlining" - which allegedly led to defaults and a disproportionately high rate of foreclosures and vacancies in black or Latino neighborhoods.

Wells Fargo vehemently denies the allegations and has accused the city of being so cash-poor that it has to sue for revenue.

But city attorneys proffered affidavits of former Wells Fargo employees as evidence. And they promised to quantify the exact damages incurred. Through arguments, they claimed the reverse redlining was real and that it caused millions in losses through:

•More abandoned homes.

•Lower property values and tax revenue.

•A rise in criminal activity and law enforcement expenditures.

•An increase in social services fees and construction rehabilitation costs.

But the judge was skeptical of the scope of the city's claims. Baltimore has as many as 30,000 vacant homes, according to the original complaint, but so far, the city has identified only 80 vacancies related to Wells Fargo in African-American neighborhoods.

"Thus, using the City's own figures," Motz wrote, "Wells Fargo is responsible for only a negligible portion of the City's vacant housing stock."

Nilson said those numbers were preliminary, reflecting only a "very limited exchange of information," and he expressed disappointment in the judge's decision to dismiss before "meaningful discovery" - or evidence-gathering - could take place.

"I don't agree with all of the significant elements of the judge's analysis. But of course, he's the judge, and he wears black robes," Nilson said. "I respect his analysis even if I may not agree with it."

Wells Fargo has said there are too many possible factors to show what caused a vacancy, including the economy, unemployment or divorce.

Cara Heiden, co-president of Wells Fargo Home Mortgage, said she was pleased by the court's decision to reject the claim.

More lawsuits filed
"From the beginning, we have consistently maintained that Baltimore's economic problems could not be attributed to the negligible number of foreclosures Wells Fargo has done in Baltimore," she said.

Judge Motz's decision appears consistent with that belief, Heiden added, as do the decisions in Birmingham and Cleveland.

Still, the lawsuits keep coming. The state of Illinois filed a comparable case in July, and Memphis, Tenn., filed a suit last week.

Heiden suggested that cities were suing because of the challenging economic times, but added that the company will "vigorously defend" itself against the allegations.

"We know how it is that we go about business and doing right by the customer," she said.

Lawsuit chronology
Jan. 8, 2008 The city sues Wells Fargo

March 21, 2008 Wells Fargo files a motion to dismiss, challenging the city's right - or "standing" - to sue

June 1, 2009 The city files an amended complaint that's more than 800 pages long with exhibits

July 2, 2009 U.S. District Judge Bensen Legg denies the motion to dismiss the suit and allows discovery to go forward

Aug. 6, 2009 The case is reassigned to Judge J. Frederick Motz

Sept. 18, 2009 Wells Fargo files a new motion to dismiss

Dec. 14, 2009 A hearing on the motion to dismiss is held

Jan. 6, 2010 Judge Motz dismisses the city's suit

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