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Montgomery County v. Bank of America Corp.

United States District Court, D. Maryland, Southern Division

September 30, 2019

MONTGOMERY COUNTY, MARYLAND, et al., Plaintiffs,
v.
BANK OF AMERICA CORP., et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          Paul W. Grimm United States District Judge

         On November 20, 2018, Plaintiffs Montgomery County, Maryland and Prince George's County, Maryland (the “Counties”) filed two lawsuits in this Court pursuant to the Fair Housing Act (“FHA”), 42 U.S.C. § 3601 et seq.: one before Judge Messitte, Prince George's County v. Wells Fargo & Co., No. PJM-18-3576 (the “Wells Fargo case”), and the one that is pending before me, Compl., ECF No. 1. In the Wells Fargo case, the Counties brought claims for disparate impact and disparate treatment against Wells Fargo & Co. and related entities (“Wells Fargo”), alleging that the defendants “engaged in predatory lending practices relative to FHA-protected minority communities”; they claimed that the defendants' practices amounted to an “‘equity-stripping' scheme”[1] that “contributed to the recent financial crisis characterized by mortgage loan delinquencies, mortgage loan defaults, foreclosures, and home vacancies across the country and more specifically in Plaintiff Counties, particularly in communities with high concentrations of FHA-protected minority residents.” Prince George's County v. Wells Fargo & Co. (“Wells Fargo”), No. PJM, 18-3576, ___F.Supp.3d__, 2019 WL 3766526, at *1 (D. Md. Aug. 9, 2019). The first disparate impact claim arises from the effects of the “equity-stripping” scheme throughout the life of the loan, “beginning with loan origination and continuing through servicing and mortgage foreclosure, ” while the second is “based solely on Wells Fargo's mortgage servicing and foreclosure practices.” Id. The third count is for “intentional disparate treatment throughout the entire equity-stripping scheme.” Id.

         Here, the defendants are different, but the claims are the same. Defendants are Bank of America Corp.; Bank of America, N.A.; and BAC Home Loans Servicing, LP (collectively, “Bank of America”); Countrywide Financial Corp.; Countrywide Home Loans, Inc.; Countrywide Bank, FSB; and Countrywide Warehouse Lending, LLC (collectively, “Countrywide”); and Merrill Lynch & Co.; Merrill Lynch Mortgage Capital, Inc.; and Merrill Lynch Mortgage Lending Inc. (collectively, “Merrill” and, along with Bank of America and Countrywide, the “Banks”). Compl. “The Complaint alleges that Defendants are engaging in a nationwide equity stripping scheme involving a pattern and practice of discrimination that begins with steering minorities into non-prime loans, continues through servicing, and ends with foreclosure or vacancy.” Pls.' Opp'n 2; see Id. at 3 (citing Compl. ¶¶ 4, 6-8, 92-93, 140-41, 187-96, 329-34, 345-48, 361-64); Defs.' Mem. 1. As in the Wells Fargo case, the Counties claim disparate impact on minorities based on the Banks' loan origination, mortgage servicing, and foreclosure practices; disparate impact on minorities based on the Banks' mortgage servicing and foreclosure practices alone; and intentional disparate treatment of minorities based on the entirety of the alleged equity-stripping scheme. Compl. ¶¶ 125, 133, 137. In both cases, “[t]he Counties sue as individual aggrieved persons under 42 U.S.C. § 3602(i), not in their parens patriae capacities.” Wells Fargo, 2019 WL 3766526, at *1; Compl. ¶¶ 16-17.

         Wells Fargo and the Defendants in the case before me both filed motions to dismiss. Defs.' Mot., ECF No. 48; ECF No. 24 in Wells Fargo. Wells Fargo argued, inter alia, that the Counties' claims were untimely, failed to state a claim, and the Counties could not “meet the rigorous requirement of pleading direct proximate cause recognized by the United States Supreme Court on a review of FHA allegations parallel to those made by the Counties in Bank of America Corp. v. City of Miami, 137 S.Ct. 1296 (2017), ” because the alleged injures “are too remote to satisfy the ‘close connection that proximate cause requires.'” Wells Fargo Mot. 1-2. The Banks raise the same arguments. Defs.' Mot. 2.

         Recently, Judge Messitte issued a well-reasoned Memorandum Opinion in which he rejected both the statute of limitations argument and also Wells Fargo's argument that the Counties failed to allege disparate impact or disparate treatment sufficiently. Wells Fargo, 2019 WL 3766526, at *9, *10. He concluded that “the ‘some direct relation' standard” from City of Miami, 137 S.Ct. at 1306, was “well pled in regard to [a subset of the] claimed injuries”: the expenses the Counties incurred “processing foreclosures occasioned by Defendants' purported violations, including costs for foreclosure notices, court proceedings, Sheriffs' auctions, Sheriffs' evictions, and registration, monitoring, and maintenance of empty properties.” Wells Fargo, 2019 WL 3766526, at *5. As for “damages based on the cost of having to provide municipal services on foreclosed properties, such as fire and police, as well as social services that were needed to assist evicted or foreclosed borrowers”; “tax base injuries”; and “lost revenue from certain utility operations and lost recording fees, ” Judge Messitte found that they were “further removed from Defendants' alleged equity-stripping practices than are the costs associated with processing foreclosures” and “allow[ed] the Counties time to amend their complaint to include more detail in respect of the claims, if indeed they are able to do so”; he also noted that limited discovery on these issues prior to amendment may be warranted. Id. at *6, *7-8. The claims for non-economic damages, however, Judge Messitte concluded were “a bridge too far, ” and he dismissed them, while allowing the Counties' claims for “injunctive and declaratory relief against Defendants' alleged equity-stripping practices” to proceed. Id. at *9.

         The Banks' Motion to Dismiss is fully briefed and pending. See ECF Nos. 48-1, 50, 51; see also Pls.' Notice of Supp. Auth., ECF No. 53 (attaching copy of City of Miami v. Wells Fargo & Co., 923 F.3d 1260 (11th Cir. 2019), ECF No. 53-1); Defs.' Resp., ECF No. 54. A hearing is not necessary. See Loc. R. 105.6. Informed by this Court's opinion in Wells Fargo, 2019 WL 3766526, the Supreme Court's and Eleventh Circuit's opinions in City of Miami, 127 S.Ct. 1296, and City of Miami, 923 F.3d 1260, and opinions from other courts in similar FHA litigation against banks that allegedly engaged in the same type of equity-stripping schemes that injured the municipal plaintiffs, and considering the allegations in the 170-page, 560-paragraph Complaint before me, I will deny the motion as to some of the Counties' claims, grant it as to the remainder of the claims, and allow the Counties to file an amended complaint to bolster their allegations in their insufficiently pled claims, insofar as they have a good faith basis for doing so.

         Background [2]

         The FHA, which has a “broad remedial purpose” is a “‘far-reaching' statute that ‘takes aim at discrimination that might be found throughout the real estate market and throughout the process of buying, maintaining, or selling a home.'” Wells Fargo, 2019 WL 3766526, at *3 (quoting City of Miami, 923 F.3d at 1278, 1279). Pursuant to the Fair Housing Act, it is unlawful for “any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.” 42 U.S.C. § 3605(a). Any “‘aggrieved person, '” that is, “‘any person who . . . claims to have been injured by a discriminatory housing practice, '” may “file a civil action seeking damages for a violation of the statute.” City of Miami, 137 S.Ct. at 1300 (quoting 42 U.S.C. §§ 3602(i), 3613(a)(1)(A), (c)(1)).

         The Counties claim that the Banks engaged in “residential mortgage lending and servicing activities” that amounted to “intentional, predatory, ” and discriminatory “equity-stripping schemes.” Compl. ¶¶ 3-4. The equity-stripping scheme included “targeted marketing practices, discretionary pricing policies, credit score override practices, underwriting policies, wholesale mortgage funding and mortgage securitization operations, compensation policies and mortgage servicing operations” that “each individually, or in combination with each other, authorized, approved, or otherwise encouraged the origination and funding of first and second lien residential mortgage loans with different terms and conditions to similarly financially situated borrowers on the improper basis of race, color, ethnicity, sex and age.” Id. ¶ 6. Specifically,

Defendants' various mortgage origination, securitization and servicing policies and practices allowed or encouraged: (a) unchecked or improper credit approval decisions for minority borrowers, resulting in borrowers being approved for and receiving refinance and home equity loans they could not afford and consequently were likely to become delinquent and/or default on; (b) subjective surcharges on minority borrowers of additional points, fees and other credit and servicing costs over and above an otherwise objective risk-based financing rate for such loan products, increasing the likelihood of delinquencies and/or defaults on such loans; (c) minority borrowers to be steered into higher cost loan products, also increasing the likelihood of delinquencies and/or defaults on such loans; and (d) undisclosed inflation of appraisal values of minority residences in order to support inflated loan amounts to minority borrowers, further increasing the likelihood of delinquencies and/or defaults on such loans.

Id. ¶ 7.

         The schemes caused “- and will continue to cause - unprecedented numbers of mortgage loan delinquencies, defaults, foreclosures and/or home vacancies in Plaintiffs' communities and neighborhoods, particularly those communities with high percentages of FHA protected minority residents.” Compl. ¶ 3. Costs that the Banks imposed as part of the scheme include “a wide range of income generating fees” for failure to make mortgage payments, “including late payment fees, insufficient funds fees, property inspection fees, broker price opinions, property preservation fees (e.g., taking photos), foreclosure fees, force placed insurance and documentation fees, etc.” Id. ¶ 4.

         According to the Counties, “Defendants' entire subprime and higher cost mortgage lending, securitization and servicing operations were geared to exploit borrowers, particularly FHA protected homeowner-borrowers, in order to maximize their corporate profits and their management's compensation.” Id. ¶ 5. They claim that the Banks “identif[ied] and target[ed] FHA protected minority borrowers using advanced data mining techniques and predictive analysis methodologies.” Id. ¶ 7. The effect was that “Plaintiffs' communities and neighborhoods with relatively higher concentrations of FHA protected African American and Latino/Hispanic minority homeowners have disproportionately and disparately received more of such higher cost mortgage loans and have been disproportionately and disparately impacted by the increased delinquencies, defaults, foreclosures and home vacancies resulting from such loans.” Id. ¶ 8.

         As noted, the Counties are not however, suing in parens patriae; they bring their claims as aggrieved persons, alleging that the Counties themselves were injured (and will continue to be injured) by the Banks' equity-stripping scheme. See Compl. ¶ 9; 42 U.S.C. § 3602(i). They claim:

Defendants' discriminatory mortgage servicing and foreclosure activities have directly caused tremendous tangible monetary damage to Plaintiffs including, but not limited to: (i) out-of-pocket costs for required eviction and foreclosure notices, judicial and non-judicial foreclosure-related processes; (ii) registration and monitoring of foreclosed properties; (iii) inspecting, securing, cleaning, maintaining and/or demolishing abandoned or vacant properties; (iv) additional municipal police and fire services on specific vacant or foreclosed properties for which Defendants are responsible, as well as other services to the evicted or foreclosed homeowners of such properties; (v) the loss of various property tax and concession income on specific vacant or foreclosed properties for which Defendants are responsible; and (vi) for the loss of certain property recording and transfer fee income on such properties, all of which is directly tied to the defaulted nonprime mortgage loans that Defendants originated, funded and/or serviced. In addition, Plaintiffs have been damaged as a result of the necessary reallocation of their limited resources, as well as to their missions to provide fair and affordable housing and prevent urban blight. Plaintiffs believe that they will continue to be injured by Defendants' discriminatory housing practices that are about to occur, particularly the continuing home vacancies and foreclosures occurring in higher concentrated minority areas.

Compl. ¶ 9.

         Standard of Review

         Pursuant to Rule 12(b)(6), a plaintiff's claims are subject to dismissal if they “fail[ ] to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). A pleading must contain “a short and plain statement of the claim showing that the pleader is entitled to relief, ” Fed.R.Civ.P. 8(a)(2), and must state “a plausible claim for relief, ” Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. Rule 12(b)(6)'s purpose “is to test the sufficiency of a complaint and not to resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses.” Velencia v. Drezhlo, No. RDB-12-237, 2012 WL 6562764, at *4 (D. Md. Dec. 13, 2012) (quoting Presley v. City of Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006)).

         Generally, a Rule 12(b)(6) motion to dismiss does not “permit an analysis of potential defenses a defendant may have to the asserted claims.” J&J Sports Prods., Inc. v. Pro Street Shop, LLC, t/a Pro St. Cafe, No. DKC 18-1000, 2019 WL 3290161, at *2 (D. Md. July 22, 2019). Nonetheless,

dismissal may be appropriate when a meritorious affirmative defense is clear from the face of the complaint. Brooks v. City of Winston-Salem, 85 F.3d 178, 181 (4th Cir. 1996) (citing Richmond, Fredericksburg & Potomac R.R. Co. v. Forst, 250 (4th Cir. 1993)). “The statute of limitations is an affirmative defense that should only be employed to dismiss claims pursuant to Rule 12(b)(6) when it is clear from the face of the complaint that the claims are time barred.” Long v. Welch & Rushe, Inc., 28 F.Supp.3d 446, 456 (D. Md. 2014) (citations omitted); see also 5A Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 1357, at 352 (3d ed. 2019) (“A complaint showing that the governing statute of limitations has run on the plaintiff's claim for relief is the most common situation in which the affirmative defense appears on the face of the pleading[, ]” rendering dismissal appropriate).

Id.

         A court's evaluation of a Rule 12(b)(6) motion is “generally limited to a review of the allegations in the complaint itself, ” though a court also may consider “documents that are explicitly incorporated into the complaint by reference, ” those “attached to the complaint as exhibits, ” and documents that are considered “integral to the complaint, ” provided there is no dispute about the document's authenticity. Goines v. Valley Cmty. Servs. Bd., 822 F.3d 159, 165-66 (4th Cir. 2016). The Banks attached a Memorandum from the Montgomery County Attorney to the President of Montgomery County Council, ECF No. 48-3; a Fall 2004 “District 5 Report from Tom Perez, ” ECF No. 48-4; and a June 2012 “Analysis of Impediments to Fair Housing Choice, ECF No. 48-5, to their Motion to Dismiss. ECF Nos. 48-3 - 48-5. These documents are not integral to the Complaint. Accordingly, I will not consider them in deciding this motion. See Goines, 822 F.3d at 165-66.

         Statute of Limitations

         A two-year statute of limitations applies to FHA claims. 42 U.S.C. § 3613 (a)(1)(A).

         Specifically,

[a]n aggrieved person may commence a civil action . . . not later than 2 years after the occurrence or the termination of an alleged discriminatory housing practice, or the breach of a conciliation agreement entered into under this subchapter, whichever occurs last, to obtain appropriate relief with respect to such discriminatory housing practice or breach.

Id. (emphasis added).

         The Banks argue that, “[o]n its face, the Complaint plainly runs afoul of this deadline” because “[i]t does not identify a single specific loan that was made or foreclosure that occurred within the two-year limitations period” and it does not “assert any type of statistical analysis of conduct within the window that reflects discriminatory loans, servicing, or foreclosures.” Defs.' Mem. 27. Noting that “a ‘“continuing violation” of the Fair Housing Act should be treated differently from one discrete act of discrimination, '” the Counties counter that “the two-year limitations period has not even commenced” because they alleged “an ongoing discriminatory equity stripping practice” that has not yet terminated. Pls.' Opp'n 13 (quoting Havens Realty Corp. v. Coleman, 455 U.S. 363, 380-81 (1982)).

         “[W]here a plaintiff, pursuant to the Fair Housing Act, challenges not just one incident of conduct violative of the Act, but an unlawful practice that continues into the limitations period, the complaint is timely when it is filed within [two years] of the last asserted occurrence of that practice.” Havens Realty Corp. v. Coleman, 455 U.S. 363, 380-81 (1982); see County of Cook v. HSBC N. Am. Holdings Inc. (“Cook (HSBC) II”), 314 F.Supp.3d 950, 969 (N.D. Ill. 2018) (quoting Havens); Nat'l Fair Hous. Alliance v. HHHunt Corp., 919 F.Supp.2d 712, 715 n.1 (W.D. Va. 2013) (“The words ‘or the termination' were added [to 42 U.S.C. § 3613 (a)(1)(A)] by Congress in 19[8]8, and several courts have noted that the amendment was intended to clarify Congress's intent to allow parties to recover for earlier acts under the FHA that constitute part of an ongoing pattern or practice.”); County of Cook v. Bank of Am. Corp. (“Cook (Bank of Am.) I”), 181 F.Supp.3d 513, 520 (2015) (noting that Congress added the words “or the termination” to “codify the continuing violation doctrine recognized in Havens). “[T]here must be some type of relationship or connection between the acts that occurred within the limitations period and those that occurred before that time.” HHHunt Corp., 919 F.Supp.2d at 716. In Cook (HSBC) II, the court held that “adjudication of HSBC's statute of limitations defense must await summary judgment” because “each of the County's counts include[d] plausible allegations that HSBC continue[d] to service and foreclose on loans in a discriminatory manner.” 314 F.Supp.3d at 969 (citing, e.g., City of Los Angeles v. Citigroup Inc., 24 F.Supp.3d 940, 951-52 (2014) (concluding on a motion to dismiss that allegations similar to the Cook (HSBC) II plaintiffs' claims were timely under the continuing violations doctrine)).

         In County of Cook, Illinois v. Wells Fargo & Co. (“Cook (Wells Fargo)”), “the complaint clearly allege[d] that Wells Fargo continue[d] to the present day to implement its equity-stripping practice, ” such as by “still making decisions ‘whether or not to modify a defaulted or high cost loan at the borrower's request and whether to foreclose on a particular defaulted borrower's home, ” decisions that were “part and parcel of Wells Fargo's equity-stripping practice.” 314 F.Supp.3d 975, 995-96 (2018). The court observed that “equity stripping by its ‘very nature involves repeated conduct.” Id. at 996 (quoting Nat'l R.R. Passenger Corp. v. Morgan, 536 U.S. 101, 115 (2002)). On these bases, the court concluded that “the complaint plausibly pleads that the practice has not yet terminated, see 42 U.S.C. § 3613(a)(1)(A), thus rendering timely the County's claims.” Id.

         Here, the Counties claim that all of the allegedly discriminatory acts are part of a comprehensive equity-stripping scheme that spans the life of the loans, continuing until the inevitable foreclosure. Compl. ¶¶ 3-9, 59, 334, 434, 452. Thus, they have alleged “an unlawful practice” rather than discrete incidents. See Havens, 455 U.S. at 380-81. And, they allege that the Banks continue to service some of these predatory loans, and that some loans have not yet, but will, result in foreclosure. Compl. ¶¶ 9, 59, 434, 459, 559. Therefore, the ongoing acts relate to the acts that occurred outside the limitations period, as they relate to loans that previously were made as part of the challenged scheme, such that the Banks have alleged a continuing violation.[3]See HHHunt Corp., 919 F.Supp.2d at 716.

         The Banks insist that, even if the Counties alleged a continuing violation, they had “notice of [their] claims prior to the limitations period, ” and that notice “prevents application of the continuing violation doctrine.” Defs.' Mem. 27-28 (citing Ocean Acres Ltd. P'ship v. Dare Cty. Bd. of Health, 707 F.2d 103, 107 (4th Cir. 1983)). In this regard, they rely on documents, such as a memorandum from the Montgomery County Attorney to the President of the Montgomery County Council, to establish notice. But, as noted, these exhibits are not properly before me on a motion to dismiss. See Goines, 822 F.3d at 165-66. Moreover, as also noted, the defense of statute of limitations must be “clear from the face of the complaint, ” not shown through exhibits, to be considered on a motion to dismiss. See Brooks v. City of Winston-Salem, 85 F.3d 178, 181 (4th Cir. 1996); J&J Sports Prods., 2019 WL 3290161, at *2; see also Wells Fargo, 2019 WL 3766526, at *9 (“When a court is ruling on a Motion to Dismiss pursuant to Rule 12(b)(6), it generally may not consider extrinsic evidence, Chesapeake Bay Found., Inc. v. Severstal Sparrows Point, LLC, 794 F.Supp.2d 602, 611 (D. Md. 2011), although it may take judicial notice of matters of public record. Philips v. Pitt Cty. Mem'l Hosp., 572 F.3d 176, 180 (4th Cir. 2009).”).

         In any event, this Court has rejected this argument previously, as has the Northern District of Illinois. See Wells Fargo, 2019 WL 3766526, at *9 (noting Wells Fargo's argument in favor of dismissal that, “based on certain communications sent, for instance, by the Montgomery County Attorney to the Montgomery County Council, the Counties had actual knowledge of their purportedly actionable injuries more than three years before the present suit was filed, which is to say, out of time” and concluding that the Court could not “resolve this issue at this early stage of the proceedings”); Cook (Bank of Am.) I, 181 F.Supp.3d at 521 (“I cannot determine on the basis of the complaint whether the County knew or should have known between 2004 and 2008 that 95, 000 home loans signed by minority borrowers contained discriminatory terms and conditions. In support of their statute of limitations argument, Defendants ask me to consider documents that are beyond the scope of a motion to dismiss.”); see also Cook (Wells Fargo), 314 F.Supp.3d at 996 (“At minimum, because it is not apparent from the pleadings when Cook County ‘knew or should have known' that the equity-stripping practice constituted an actionable cumulative violation under the FHA, the motion to dismiss on the ground that the FHA's two-year statute of limitations has run is premature.”).

         In Wells Fargo, Judge ...


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