The Lesson of Baltimore: Never Settle

A few weeks ago, we discussed doubts raised by federal district court judge J. Frederick Motz about the viability of a lawsuit filed by the City of Baltimore against Wells Fargo, that alleged that Wells Fargo's predatory and discriminatory lending practices ("reverse redlining") are the root cause of the nuclear winter wasteland that Baltimore's inner city has become. Last week, Judge Motz ended those doubts by dismissing the lawsuit. He also had some harsh words for the plaintiff about the "real causes" of the deterioration of Baltimore and the "implausibility" of attempting to pick Wells Fargo's deep pockets as a quick fix by blaming it all on them.

"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 did allow that the City of Baltimore could refile a complaint that might survive dismissal if it "could restrict its claims to specific damages allegedly suffered because of actual houses made vacant by Wells Fargo's lending practices." What fun is that? If you're going to try to steal money from the private sector, you want to go for the really big payday by concocting a story that makes a well-capitalized defendant the Great Satan, then spinning it non-stop to the press and to a jury of the bad bank's "peers." Having to confine your self to "actual damages" and "the facts" is for chumps. There's no future in the facts for politicians. They spend their lives doing to the facts what dogs so to fire hydrants.

Besides, the "facts" will show that Wells Fargo isn't responsible for enough to fund even one municipal pol's PAC.

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."

The American Banker (paid subscription required) discussed the approach taken by Buffalo as having more staying power, although perhaps not any more merit. As we discussed a year ago, Buffalo tried to make lenders who chose not to foreclose on vacant homes the "de facto" owners for purposes of city code violations and was handed its head by the trial court. Buffalo's still trying to squeeze lenders who take title through foreclosure to vacant homes whose condition violates the city's ordinances out of money for  the cost of each such home that the city is forced to raze. The damages in such cases aren't exactly pocket change but they aren't the gazillions and bazillions that cities would like to extract from lenders to replace their decimated tax bases.

However, as the article's author, Jeff Horwitz, observes, most of these municipal suits are being taken on a contingency basis by firms that defense attorney Andrew Sandler claims are "running around the country trying to persuade city councils to file these cases." Thus, the law firm, not the city, is fronting the lion's share of the fees, and, therefore, the city has no immediate financial incentive for dropping the cases. On the other hand, if the lenders all hang tough and keep fighting these lawsuits (and continuing to win), the "betting-on-the-come" trial lawyers will eventually fold. The danger lies in some lenders settling cases simply to be shed of the litigation.

Howard Cayne, a partner in Arnold & Porter's Washington office who represents banks, suggested that municipalities, even if they cannot win in court, could still "hope that the imposition of legal costs will force banks to settle." Anything other than a united front would be a disaster, he added, as any significant settlement would invite further litigation.

In other words, lenders, in this arena, "no quarter, asked or given," is the only way to fight.