The Sixth Circuit has affirmed dismissal of a public nuisance case brought by the City of Cleveland against various companies that financed subprime mortgages in pdf-City of Cleveland v. Ameriquest Mortgage Securities, Case No. 09-3608 (July 27, 2010).

Given the recent increase of lawsuits against entities who are farther removed from the plaintiff’s ultimate injury but are alleged to be the underlying cause of injury, the Court’s decision provides further guidance on how far plaintiffs can reach for potential defendants or causes of action.

In the case, the City of Cleveland sued a number of high-profile companies that provided financing to subprime mortgage lenders and created mortgage-backed securities for public nuisance.  The City’s theory was that by exerting economic influence, the financing companies caused mortgage lenders in Cleveland to lend to unqualified homebuyers, which led to high foreclosure rates and numerous vacant properties in the City.  The vacant properties, in turn, became eyesores, were vandalized, or were used to conduct illegal activity, which caused the City to lose real estate tax income and to expend municipal resources in the form of police and fire service and demolition costs.

The Sixth Circuit held that the defendants’ conduct was too far removed from the City’s damages to support the City’s lawsuit.  In doing so, the court relied heavily on Anza v. Ideal Steel Supply Corp., 547 U.S. 451 (2006) and Cincinnati v. Beretta U.S.A. Corp., 768 N.E.2d 1136 (Ohio 2002).  Specifically, the Court found that that there were too many potential intervening causes to proceed.  Among other potential causes for the City’s alleged injuries, the Court cited lending decisions by the brokers that issue the mortgages, homeowners’ actions of getting mortgages and defaulting, the unlawful use or destruction of the properties by criminals, the poor job market, the national recession, and increased crime rates in general.

As reported by Jonathan Stempel of Reuters in Cleveland loses appeal of Wall St. mortgage case, attorneys for the City have already announced that they will seek en banc review by all the Circuit Judges.  In addition, the Reuters article notes that similar suits are being prosecuted by the cities of Baltimore, Maryland and Memphis, Tennessee.

The unanimous opinion was written by Judge Suhrheinrich and joined by Judge McKeague and Judge Griffin.