Did banks jump too soon in opposing eminent domain mortgage seizures?

August 23, 2013

The first rule of litigation in federal court is that you can’t bring a suit unless it’s based on an actual controversy. U.S. courts do not issue advisory opinions. Federal judges only have jurisdiction to oversee disputes that present an issue ripe for decision. And according to a new brief by the city of Richmond, California, its plan to use eminent domain to take over mortgages from mortgage-backed securities trusts is not ripe under Article III of the U.S. Constitution and should not be tested in the suits that MBS trustees filed earlier this month in federal court in San Francisco. Counsel for the city and Mortgage Resolution Partners (the private company supplying the capital for Richmond’s contemplated mortgage takeover plan) contend that Wells Fargo and Deutsche Bank acted precipitately when they moved for a preliminary injunction to block the city from proceeding with eminent domain takeovers.

According to Richmond’s lawyers at Altshuler Berzon, the eminent domain plan is still a hypothetical, not a reality, because the city council hasn’t yet voted on a resolution specifically approving the takeover of any loan, and it may reject such a resolution if one is proposed (despite a unanimous vote in April to launch the mortgage seizure program). Even if the council does vote to snatch some or all of the 624 mortgages that Richmond has offered to buy from MBS trusts (and that MBS trusts have refused to sell), the brief said that the proper time and place for the MBS trustees to raise their objections to the plan’s constitutionality is in an eminent domain proceeding in California state court, not a preliminary injunction case in federal court.

I predicted when the banks filed their suits that ripeness was going to be the threshold question in the battle over eminent domain mortgage seizures. The city’s brief shows how much Richmond and MRP would like to erase the trustees’ federal-court challenge without even litigating the merits of arguments that the plan, which the trustees claim will benefit MRP and selected homeowners at the expense of MBS investors and the broader housing market, violates the Takings, Commerce and Contracts clauses. Richmond’s new brief does address those arguments, asserting that a program intended to benefit strapped homeowners and ward of foreclosure blight easily satisfies the “public use” requirement of a government taking; that the plan doesn’t violate the Commerce Clause because it does not discriminate against investors outside of California; and that the Supreme Court held in the 1984 decision Hawaii Housing Authority v. Midkiff that the Contracts Clause doesn’t apply to eminent domain seizures. Richmond and MRP also make some constitutional arguments of their own, asserting that the city council has a First Amendment right to establish a record on the use of eminent domain to take over securitized mortgages. But the bulk of the new brief is dedicated to showing U.S. District Court Charles Breyer – who is overseeing the Wells Fargo and Deutsche Bank case – that he doesn’t have jurisdiction.

“The banks protest that the city has taken ‘substantial steps’ to implement what they call a ‘seizure program,'” the brief said. “But, by the same logic, the federal government had taken ‘substantial steps’ to implement a national health care ‘program’ long before Congress eventually passed legislation, including multiple town hall meetings, economic analyses, blue-ribbon commissions, etc., over the course of many years. President Obama had even promised such a ‘program’ would come to fruition if he were elected. Yet before Congress actually adopted (and the President signed) the necessary legislation, no one would have standing to challenge it because implementation was still ‘conjectural’ and ‘hypothetical'” – just like, the brief contended, Richmond’s eminent domain plan. The banks’ case, the brief said, is “the quintessential example of claims that are not Article III ripe.”

The new brief is actually not the first time in the very brief history of this suit that Richmond and MRP have requested that Judge Breyer end the banks’ bid for a preliminary injunction. Last week the defendants asked the judge to remove the Wells Fargo and Deutsche Bank injunction motion from the court calendar because the case is not ripe. The trustees’ response, which is a preview of the arguments their lawyers at Ropes & Gray will make next week against the city’s latest brief, argued that there’s no real doubt Richmond will use its eminent domain power to seize the mortgages that the trusts have refused to sell and that unless the city’s plan is enjoined, MBS trusts will suffer irreparable harm.

“The plan to seize loans in Richmond through eminent domain is not, as defendants suggest, ‘purely hypothetical,’ but has been in place for at least several months, and Richmond has already taken several concrete steps to implement the loan seizure program,” the banks argued. “Because there is a ‘practical likelihood’ that the program will be implemented, plaintiffs’ (injunction) motion is unquestionably ripe for adjudication.” (I reached out to a representative for the trustees but the banks were not able to provide immediate comment on Richmond’s new motion.)

Judge Breyer did not hear oral arguments on Richmond’s motion last week to take the injunction bid off the calendar and did not issue a ruling, though his inaction had the effect of denying the city’s request. Interestingly, Wells Fargo and Deutsche Bank, like Richmond and MRP, relied in their brief last week on Supreme Court precedent in Midkiff, though the trustees cited Midkiff to support the proposition that federal courts can rule on claims for declaratory and injunctive relief before eminent domain plans are fully implemented. The city refuted the banks’ interpretation of the case in its brief on Thursday. Clearly, Midkiff will be required reading for Judge Breyer in the Wells Fargo and Deutsche Bank case. (The judge will also be assigned a very similar declaratory judgment suit against Richmond and MRP by MBS trustees Bank of New York Mellon and U.S. Bank; those banks have not yet moved for a preliminary injunction.)

The rhetoric from both sides shrouds the eminent domain mortgage seizure debate as uninvitingly as late-August humidity. So I, for one, am glad that the first issue for Judge Breyer is almost purely an interpretation of the law. The judge won’t have to weigh Richmond’s contention that taking over mortgages on underwater homes is the only way it can restore the city’s tax rolls and economic health, nor the MBS trustees’ argument that there’s no public good in a plan to seize performing loans at unfair prices simply in order to enrich MRP. Is Richmond on the verge of a foreclosure crisis that only eminent domain can avert? Will the nationwide housing market be impaired because MBS investors won’t assume the risk that eminent domain seizures will erode the value of their holdings? Those may be questions Breyer will eventually answer, but first he’s got to decide if he can even hear them.

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