On a quiet day in the office, attorney Joshua Cohen talks about the case that has consumed him since its filing in 2008. It's the one in which Cleveland Mayor Frank Jackson has sued 21 banks for their role in the foreclosure crisis. All the big players are named, and then some: from Ameriquest, JP Morgan-Chase, Bank One, and Deutsche Bank to Goldman Sachs and Merrill Lynch.
If the odds of beating 21 of the nation's biggest lenders makes Jackson's quest seem rather quixotic, then Cohen is his loyal servant Sancho Panza — but quite a bit brainier. He doesn't look like the kind of high-powered attorney you see on prime-time TV. At ease in his Warehouse District office, he's dressed in khakis and a red and blue plaid buttoned-down shirt, more professorial than courtroom shark.
But Cohen's résumé includes high-profile cases that make a difference to entire cities — like the one he took up half a career ago on behalf of Browns season ticket holders. He's the guy who sued the Cleveland Browns when Art Modell moved the franchise to Baltimore; for wounded Dawg Pounders, Cohen scored a $3 million settlement.
The case against the banks isn't a class action about individual homeowner losses, or whether they were tricked into signing commitments they couldn't keep. Cohen knows that's a common misunderstanding. Instead, it's about the big picture from the city's point of view — an attempt to recover money Cleveland has been forced to spend cleaning up the mess Wall Street left behind.
The foreclosed homes often end up as abandoned, ugly board-ups that are a haven for crime. The city is left to mow the grass when neighbors complain about rodents. The police end up dealing with festering drug problems. All of that costs money. And ultimately, the city must demolish thousands of these derelict properties at a cost of $7,000 each or more. But Cleveland is not alone: A similar case filed by the City of Buffalo, New York, claims the maintenance, police attention, and eventual demolition of foreclosed homes totaled as much as $16,000 per building. Of course, Buffalo was left holding the tab.
"Was it irresponsible lenders or borrowers?" Cohen asks rhetorically. "You could argue that until the cows come home. But whatever conclusion you reach, Cleveland was an innocent bystander. It's amazing to me that the financiers have not been called to answer for this in any meaningful way."
And in cases filed by cities across the country, that much has proven true. In addition to Cleveland and Buffalo, similar suits have been filed by Cincinnati, Baltimore, Maryland, and Memphis.
The only suit to gain any traction so far was filed in Massachusetts, resulting in a $60 million settlement from Goldman Sachs. According to law professor Kathleen Engle — whose book on subprime lending begins and ends in Cleveland — Massachusetts' broadly written consumer-protection law "makes it very nerve-wracking for corporations who are defendants."
Cleveland's suit, meanwhile, hasn't even been able to get a hearing. Filed in January 2008, it alleges that the banks created a public nuisance by financing home loans the borrowers couldn't realistically repay.
"Banks are in the business of assessing risk, which is why it is incredible to us that they couldn't foresee the effect of making money available as they did," Cohen says. "Historically, if you go for a loan, the bank wouldn't give it if you didn't have the money to pay it back."
But the courts haven't seen it that way. A U.S. District Court judge threw the suit out in May 2009 for a list of reasons, including the fact that state law governs bank loans and trumps local nuisance law.
Besides that, as Cleveland State law professor Kermit Lind says, facilitating lawful conduct — buying a house — by financing it can't qualify as a public nuisance.
The city appealed, taking the case to the U.S. Sixth Circuit — which probably suited the banks' interests well. As Lind says, the federal courts "have a reputation for being more favorable to large corporate interests, and they don't have much understanding — certainly not a sympathetic understanding — of local law or local government."
So perhaps it wasn't surprising at that point that the Sixth Circuit also rejected the case, its only reason being that the Wall Street banks that financed the loans were too far removed from the situation to be held liable. In legalese: They failed to meet the requirement of "proximate cause."
Lind says the distance between borrowers and financiers is intentional. "One of the deliberate design features of the mortgage-finance industry was to atomize it, to hold investors harmless. It's hard to say the harm was done by anyone. It's like trying to hold raindrops accountable in a drizzle."
Cleveland's case is at the Hail Mary point of appealing to the Supreme Court. Cohen and the city have until mid-January to file their request for review.
"We're going to argue that it should have been sent back to state court by the Sixth Circuit, instead of dismissed," Cohen says, almost immediately conceding that a sit-down with the Supreme Court is a very long shot. "We have no reason not to try," he says. "And the city wants to."
If the court agrees to hear the case, it will be on the procedural issue that it should be argued in state court. And if the Supreme Court agrees, the case will start from scratch at the state level.
If all that sounds grim, Cohen lightens up a little when he talks about Cleveland Vs. Wall Street, a film that aims to tell the story of the case. He is one of its stars. He recalls a scene in which the filmmaker interviews Michael Osinski, the computer programmer who wrote the software that enabled banks to package loans — including subprime loans — so that the bundles could be sold as an investment. Osinski has written about the guilt he carries for having created the tool that enabled greed to run roughshod over entire neighborhoods. He applies the kind of common-sense logic that seems lost in the cloud cover of financial relationships, indicating that he and the banks who hired him knew many of the loans they underwrote would go bad.
"If they couldn't pay at 7 percent, how could they pay at 14 percent?" he asks.
The city will know by January whether the Supreme Court views that kind of logic — as well as recent revelations about "robo-signing" on foreclosures and the continuing impact of the crisis — as reasons to hear the case, or just more blameless raindrops in the storm.
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