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From Banking and Finance Law Daily, August 26, 2013

Richmond says mortgage seizure is being studied, suit to stop it premature

By Matthew Garza, J.D.

The city of Richmond, California has moved to dismiss a lawsuit filed against it by an investor group led by Wells Fargo and Deutsche Bank in response to the city’s threatened use of eminent domain to seize underwater mortgages, arguing that the banks’ suit should be dismissed because it is not ripe for adjudication. The city said that it is still exploring negotiations as a means of acquiring underwater loans that it says led to a depressed economy and blight in the city and has not authorized the use of eminent domain (Wells Fargo Bank v. City of Richmond, California, August 23, 2013).

The city’s dismissal motion said that the use of the eminent domain law would require advance notice to property owners, who would have the right to object at a public hearing, a specific finding of public interest and necessity, and a two-thirds vote by the Richmond City Council. “The City Council has not adopted a resolution of necessity and may never do so, so this case is not ripe,” argued the city. The banks also lack standing because they have suffered no direct injury, nor are they in immediate danger of suffering injury.

Background. The Richmond City Manager’s Office sent a letter to banks and mortgage servicers at the end of July offering to acquire the rights to certain underwater loans at their fair market value and indicating that, if an agreement could not be reached, the city may seize the loans and “the owner will have the right to have the amount of just compensation to be paid by the city for the loans fixed by a court of law.”

The city asserted that policy experts have long urged this type of principal-reduction solution as a viable option to save cities from continuing stagnation and deterioration, but the city is simply exploring the use of eminent domain as a potential approach to help keep homeowners in their homes for the benefit of the city and its neighborhoods.

Ripeness. The banks’ suit asks the court to decide on whether it would be lawful for Richmond to use eminent domain to acquire the underwater loans, but the city cannot exercise that power until the seven members adopts a resolution of necessity by supermajority vote. Such a resolution may never be proposed, the city said, and it is also possible that such a resolution would be rejected or may not cover the loans at issue in the banks’ lawsuit, or the issue could be sent back for further study by the city council.

The preliminary steps taken by the city do not amount to a resolution of necessity, the city said, and the very reason for a resolution of necessity is to identify the exact property at issue and set out what the city has found to be “the public interest and necessity” for exercising eminent domain authority.

“Hearing a legal challenge now could embroil the federal courts and the City in speculative litigation about the legality of a plan the City Council never adopted, with much of that litigation devoted to disputes about the contents of the unapproved ‘plan’ and the Banks’ mischaracterizations of the non-existent ‘plan.’”

Standing. The city also argued that the banks lack Article III standing for many of the same reasons. The city urged the court to reject the banks’ assertion that they will be injured if the city goes through with the eminent domain plan because no action can be taken before the adoption of a resolution by the city. The banks’ suit at this point should be considered “conjectural” and “hypothetical,” according to the city. The preliminary steps taken by the city also has not caused the banks to suffer injury. “The Banks suffer no more harm than any other property owner that receives such an offer letter, and they have no greater right than other property owners to advisory opinions from the federal courts about the legality of hypothetical takings.”

The case is No. CV-13-3663-CRB.

Attorneys: Douglas Hallward-Driemeir (Ropes & Gray LLP) for Wells Fargo Bank, National Association, Deutsche Bank National Trust Company, and Deutsche Bank Trust Company Americas. Scott Alan Kronland (Altshuler Berzon LLP) for City of Richmond, California and Mortgage Resolution Partners LLC.

Companies: Deutsche Bank National Trust Company; Deutsche Bank Trust Company Americas; Mortgage Resolution Partners LLC; Wells Fargo Bank, National Association

LitigationEnforcement: CaliforniaNews Loans Mortgages

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