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National Fair Housing Alliance v. Deutsche Bank National Trust

United States District Court, N.D. Illinois, Eastern Division

November 13, 2019

NATIONAL FAIR HOUSING ALLIANCE, et al., Plaintiffs,
v.
DEUTSCHE BANK NATIONAL TRUST, as trustee; DEUTSCHE BANK TRUST COMPANY AMERICAS, as trustee; OCWEN LOAN SERVICING, LLC; and ALTISOURCE SOLUTIONS, INC., Defendants.

          MEMORANDUM OPINION AND ORDER

          HARRY D. LEINENWEBER JUDGE

         This Fair Housing Act lawsuit alleges discriminatory housing maintenance in communities of color. Defendants Deutsche Bank National Trust, Deutsche Bank Trust Company Americas, Ocwen Loan Servicing, LLC, and Altisource Solutions, Inc., move to dismiss Plaintiffs' Second Amended Complaint. For the reasons stated below, the Motion to Dismiss (Dkt. No. 71) is granted in part and denied in part.

         I. BACKGROUND

         In addition to reciting the relevant pleadings herein, the Court incorporates the facts and holdings from its opinion granting Defendants' prior motion to dismiss this case. See Nat'l Fair Hous. All. v. Deutsche Bank, No. 18 C 0839, 2018 WL 6045216 (N.D. Ill. Nov. 19, 2018). The following facts are taken as true for the purpose of Defendants' Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6).

         A. Facts

         Plaintiffs are national and local fair housing organizations whose mission is to end housing discrimination and promote integration. Defendants Deutsche Bank National Trust and Deutsche Bank Trust Company Americas (collectively, the “Deutsche Bank Defendants”) are financial institutions that own mortgages, and consequently, foreclosed homes, across the country. Defendants Ocwen Loan Servicing, LLC (“Ocwen”) and Altisource Solutions, Inc. (“Altisource”) (collectively, the “Servicer Defendants”) provide property preservation, maintenance, and other services for properties that the Deutsche Bank Defendants own.

         During the 1990s and early 2000s, many lenders sought to expand markets for “subprime” home mortgage products-that is, mortgages with unfavorable and risky loan terms, often issued to borrowers with low credit ratings. The subprime lending boom collapsed in 2008, leading to a foreclosure crisis in the U.S. When a home mortgage that a bank owns goes into default and foreclosure, the bank obtains title to the home, which is then referred to as “Real Estate Owned” (REO). See Nat'l Fair Hous. All. v. Fed. Nat'l Mortg. Ass'n, 294 F.Supp.3d 940, 943 (N.D. Cal. 2018). Essentially, an REO property is a vacant home possessed by a bank. The large volume of foreclosures beginning in 2008 created many REO properties, which were and are disproportionately located in communities of color (predominately African-American and Hispanic neighborhoods). As a result of the subprime mortgage market collapse, the Deutsche Bank Defendants became owners of a large inventory of REO properties in communities of color.

         Beginning in 2011, Plaintiffs undertook an investigation of Defendants' maintenance of the REO properties they owned across the country. Plaintiffs sought to measure the extent to which Defendants maintained REOs in communities of color and in predominately white neighborhoods. Plaintiffs examined 1, 141 REO properties owned by the Deutsche Bank Defendants. For each property investigated, Plaintiffs collected evidence on 39 objective aspects of routine exterior maintenance such as graffiti, damage to windows, and overgrown grass. Plaintiffs' investigation revealed “highly significant disparities” in the exterior maintenance and marketing of Deutsche Bank-owned homes in communities of color compared to white communities. (SAC ¶ 5.)

         B. Procedural History

         In February 2018, Plaintiffs filed suit against Defendants under the Fair Housing Act of 1968 (FHA), 42 U.S.C. § 3601, et seq. Plaintiffs' Complaint centered on Defendants' practices with respect to the REO properties they own in thirty metropolitan areas, including Chicago. Plaintiffs alleged that Defendants violated 42 U.S.C. §§ 3604(a), 3604(b), 3605, 3617, and violated the FHA generally by perpetuating segregation.

         Defendants moved to dismiss the Complaint. The Court granted that motion in full and made the following relevant holdings: (1) a significant portion of the dataset Plaintiffs relied on must be removed as it was untimely under the FHA's two-year statute of limitations; (2) Plaintiffs' § 3604 claims must be dismissed because they failed to allege that the REO properties were neglected to such an extent as to dissuade purchasers from buying them; (3) Plaintiffs' § 3605 claims must be dismissed because Plaintiffs failed to allege any specific real-estate transaction impeded by Defendants' conduct; (4) Plaintiffs' perpetuating segregation claim must be dismissed because the Court did not yet have the properly sheared dataset upon which this claim is based; and (5) Plaintiffs failed to state either a disparate impact or discriminatory intent theory of discrimination under the FHA. See Nat'l Fair Hous. All., 2018 WL 6045216.

         Plaintiffs filed their Second Amended Complaint (SAC) in May 2019. They dropped their 42 U.S.C. § 3617 claim, but otherwise assert the same claims against Defendants as in their original Complaint. Plaintiffs again allege that Defendants' exterior maintenance of REO properties constitutes unlawful racial discrimination, in the form of both disparate impact and disparate treatment, under the FHA. They seek a declaratory judgment that Defendants' conduct violates the FHA, an injunction that prohibits Defendants from violating the FHA, compensatory and punitive damages, and attorneys' fees. Plaintiffs contend that they have added allegations that render the SAC sufficient under Rule 12(b)(6). Defendants again move to dismiss for failure to state a claim.

         II. LEGAL STANDARD

         A motion to dismiss pursuant to Rule 12(b)(6) challenges the sufficiency of a complaint by arguing that it fails to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(6); Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 736 (7th Cir. 2014). When considering a motion to dismiss, the Court accepts all well-pleaded factual allegations as true and draws all reasonable inferences in favor of the plaintiff. Trujillo v. Rockledge Furniture LLC, 926 F.3d 395, 397 (7th Cir. 2019). However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). To survive a motion to dismiss under Rule 12(b)(6), a complaint must provide enough factual information to “state a claim to relief that is plausible on its face” and “raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007). A complaint is facially plausible when a plaintiff alleges “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.

         III. DISCUSSION

         Defendants assert four primary arguments in favor of dismissal: (1) Plaintiffs' allegations do not establish proximate cause; (2) the Deutsche Bank Defendants are not liable under the FHA; (3) Plaintiffs fail to plead either a disparate impact or disparate treatment theory of discrimination; and (4) Plaintiffs failed to plead claim-specific elements. The Court will address each argument in turn.

         A. Proximate Causation

         First, the Court examines whether Plaintiffs have alleged proximate cause under the FHA. As the Court noted in its previous opinion, the recent Supreme Court decision Bank of Am. Corp. v. City of Miami, Fla., 137 S.Ct. 1296 (2017), controls this issue. In City of Miami, the Supreme Court considered FHA claims brought by the City of Miami against two banks that allegedly intentionally issued mortgages with less favorable terms to African-American and Hispanic borrowers than to similarly situated white borrowers. Id. at 1301. The Court examined what degree of causation is required to state a claim under the FHA. Id. at 1305-06. In all cases of loss, courts must attribute loss to the proximate cause, not to “any remote cause.” Id. at 1305. The Court found that a claim for damages under the FHA is “akin to a tort action” and therefore a plaintiff must establish proximate cause in order to recover damages for a violation of the FHA. Id. (internal quotation and citation omitted). Proximate cause analysis is “controlled by the nature of the statutory cause of action, ” which in turn is governed by an inquiry into whether the harm alleged has a “sufficiently close connection” to the conduct the statute prohibits. Id. at 1305 (citation omitted).

         In City of Miami, the city sought damages to account for the loss of property tax revenue and the need to spend more on municipal services, caused by the increase in foreclosures, which were caused by the banks' discriminatory lending practices. The Eleventh Circuit had held that the City's injuries were sufficient to satisfy the proximate cause requirement because they were “foreseeable.” City of Miami, 137 S.Ct. at 1305-06. The Supreme Court disagreed and held that to establish proximate cause in an FHA case, a plaintiff must do more than show that its injuries foreseeably flowed from the statutory violation. Id. at 1306. While the Court declined to define a standard of proximate cause under the FHA, it did note that proximate cause under the FHA requires “some direct relation between the injury asserted and the injurious conduct alleged.” Id. at 1306 (citation omitted). The Court further observed that for statutes with common-law foundations, the “general tendency… in regard to damages at least, is not to go beyond the first step.” Id. (citing Hemi Group, LLC v. City of New York, 559 U.S. 1, 10 (2010)). Courts should also consider “what is administratively possible and convenient.” City of Miami, 137 S.Ct. at 1306 (citation omitted).

         In this case, Plaintiffs' original Complaint asserted the following injuries: Defendants' conduct had undermined their education and advocacy programs, diverted their scarce resources, and damaged their community investments. When this Court considered proximate cause in its dismissal opinion, it found that Plaintiffs' injuries did not “result[] directly from” Defendants' actions and thus ran afoul of City of Miami's warning about proximate cause. See Nat'l Fair Hous. All., 2018 WL 6045216, at *13. The Court found that, fatal to proximate cause, Plaintiffs' harm only materialized after “intermediate steps”:

[Plaintiffs'] theory is that Defendants' delegation practice resulted in poorly-executed property maintenance, which led to racially-disparate effects, ergo Plaintiffs had to invest more heavily (or simply saw less return on their preexisting investments) to combat those effects. Climbing this chain requires more steps than the FHA permits.

Id.

         Plaintiffs now allege that Defendants' failure to maintain REO properties in communities of color injured them in the following ways: (1) it required them to divert resources away from their usual activities; (2) frustrated their mission of eradicating housing discrimination; (3) required them to spend money on counteractive measures; (4) undermined the economic value and impact of Plaintiffs' community investments; and (5) harmed minority neighborhoods that Plaintiffs serve. Defendants again argue that Plaintiffs have failed to allege a “direct relation” between their injury and Defendants' conduct.

         However, this Court has reason to reconsider its earlier analysis on this issue. In City of Miami, the Supreme Court emphasized that it would not “draw the precise boundaries of proximate cause under the FHA, ” and instructed that lower courts “should define, in the first instance, the contours of proximate cause under the FHA.” City of Miami, 137 S.Ct. at 1306. This Court now has the benefit of Seventh and Eleventh Circuit opinions applying City of Miami and will reconsider the proximate cause issue with this binding and persuasive precedent in mind.

         After the Court issued its first dismissal opinion in this case, the Seventh Circuit published Kemper v. Deutsche Bank AG, 911 F.3d 383 (7th Cir. 2018), a decision that clarified the Seventh Circuit's thinking about proximate cause post-City of Miami. In Kemper, the mother of a U.S. servicemember who was killed in Iraq sued Deutsche Bank for providing material support to terrorism, in violation of the Anti-Terrorism Act. Kemper, 911 F.3d at 392-93. The plaintiff claimed that the Bank provided financial services to Iranian businesses, those Iranian entities went on to provide services to terrorist groups, and Iran was ultimately responsible for the terrorist attack in Iraq that killed her son. Id. at 386. Citing City of Miami, the Seventh Circuit held that the Anti-Terrorism Act requires proximate cause for liability. Kemper, 911 F.3d at 391. The court observed that “simply stating that the ATA requires proof of ‘proximate cause' does not help much. A firm definition for the term ‘proximate cause' has escaped judges, lawyers, and legal scholars for centuries.” Id. The Seventh Circuit noted that there is no precise formula for proximate cause; rather, it is a “flexible concept that does not lend itself to a black-letter rule that will dictate the result in every case.” Id. at 392 (citing Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 654 (2008)). Several factors are relevant to the proximate cause inquiry, which the court referred to as a “catch-all approach”: foreseeability, directness, whether the defendant's actions were a “substantial factor in the sequence of events” leading to the plaintiff's injuries, and other established principles of tort causation. Id. at 392.

         The Kemper court held that the plaintiff failed to plead facts that indicated Deutsche Bank's actions were the proximate cause of her son's death. Id. at 393-94. The Seventh Circuit found several important facts key to its decision: plaintiff did not allege that Deutsche Bank ever serviced a terrorist group directly; plaintiff could not show that the money Deutsche Bank facilitated into Iran was used specifically to fund terrorism; one of the links in the “causal chain” was Iran, a sovereign state with many legitimate operations and programs to fund; and plaintiff could not overcome the traditional tort doctrine of superseding cause-in that case, the numerous criminal intervening acts that separated Deutsche Bank from the terrorist attack. Id. at 392-93. Post-Kemper, district courts in the Seventh Circuit should not follow a strict “first step” test for proximate cause, but rather assess a variety of factors.

         Additionally, the Court now has the benefit of the Eleventh Circuit's decision on remand in City of Miami. See City of Miami v. Wells Fargo & Co., 923 F.3d 1260 (11th Cir. 2019). Taking up the Supreme Court's instruction to define the contours of proximate cause under the FHA, the Eleventh Circuit held that “proximate cause does not always cut off at the first step after a violative act.” Id. at 1273. That court noted that “Supreme Court precedent makes crystal clear that an intervening step does not necessarily mean proximate cause has not been plausibly alleged.” Id. (citing Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118, 134 (2014)). More important is “the certainty with which we can say the injury is fairly attributable to the statutory violation.” Id. The Eleventh Circuit emphasized that the Supreme Court's statement that proximate cause requires “some direct relation” is distinct from a requirement of “some direct causation.” Id. at 1272 (emphasis added). Indeed, the court noted that if there were a “hard and fast ‘only the first step' rule” limiting liability:

[A] plaintiff homeowner who was forced into foreclosure on account of a predatory bank loan that violated the Fair Housing Act would never be able to plausibly allege that the foreclosure was proximately caused by the bank's predation. By [defendant's] lights, there are two critical steps in the chain of causation between the act of redlining and foreclosure: the middle and distinct step being a homeowner's default. So inexorable a rule would even bar the homeowner from seeking redress for the foreclosure under the FHA, since the foreclosure only occurs after the homeowner takes the independent step of failing to make payments on the predatory loan.

Id. at 1276. Ultimately, the Eleventh Circuit found that the City of Miami had adequately pled proximate cause relating to its tax-base injury because the Bank's redlining practices “bear some direct relation to the City's fiscal injuries.” Id. at 1294. However, the Eleventh Circuit found that the City's increased municipal expenditures injury did not directly result from the Bank's conduct-there was “too much opportunity in the causal chain between foreclosure and increased expenditures for intervening actors and causes to play a role, and there has been no explanation by the City of how we might conceivably isolate the injury attributable to the Banks.” Id. Thus, the Eleventh Circuit emphasized that whether a court can practically determine damages is an important consideration in a proximate cause determination.

         So too did the Supreme Court in City of Miami emphasize that when assessing proximate cause under the FHA, courts must consider “what is administratively possible and convenient.” City of Miami, 137 S.Ct. at 1306 (citing Holmes v. Sec. Inv'r Prot. Corp., 503 U.S. 258, 268 (1992)). Administrative feasibility is “most closely connected to the policy judgments upon which proximate cause standards necessarily depend.” City of Miami v. Wells Fargo & Co., 923 F.3d 1260, 1281 (11th Cir. 2019); see also Holmes, 503 U.S. at 268 (“[P]roximate cause reflects ideas of what justice demands, or of what is administratively possible and convenient.”). For this reason, the Eleventh Circuit on remand in City of Miami found “in no small part” that the City plausibly plead proximate cause because it was “entirely practicable and not unduly inconvenient” for a court to “handle damages like the City's tax revenue injury.” City of Miami, 923 F.3d at 1281.

         Thus, the Court should consider the policy implications at hand in this case. Apart from municipalities themselves, a fair housing organization is likely in the “best position to allege and litigate this peculiar type of injury, to deter future violations, and, theoretically, to actually remedy its distinctive injury.” See City of Miami, 923 F.3d at 1281. This is because:

[I]n the fair housing context the initial victims, such as home-seekers or borrowers, may be less aware of the harm and less able to remedy it than entities such as a housing counseling organization or a municipal economic development office. These are entities that can identify a pattern of discrimination invisible to any individual victim and that also suffer a distinct, additional harm in the diversion of their resources and the frustration of their missions… [I]ndividuals who have been directly discriminated against cannot be counted on to vindicate their rights in the same way because: (1) any one individual's damages may be minimal; (2) home-seekers turned away may decide it is not worth the effort to vindicate a right to live among those who seek to exclude them; and, most fundamentally, (3) they may not know that they were victims of discrimination.

         Justin P. Steil & Dan Traficonte, A Flood-Not A Ripple-of Harm: Proximate Cause Under the Fair Housing Act, 40 Cardozo L. Rev. 1237, 1256, 1267 (2019).

         Defendants maintain that Plaintiffs' injuries are impermissibly “indirect.” They characterize Plaintiffs' causal theory as a many-linked chain, as follows: the Deutsche Bank Defendants decided they were not responsible for maintaining the exterior of their REO properties; the Deutsche Bank Defendants then retained servicers (Altisource and Ocwen) who were unqualified and disincentivized to properly maintain the REO properties; the Servicers then maintained the properties in a discriminatory manner; that lack of maintenance caused a decrease in property value, increased crime, and other neighborhood problems; and finally, Plaintiffs were injured by their need to divert resources into investigating and redressing this matter. However, the Seventh and Eleventh Circuit both rejected this method of counting “steps” between an action and an injury. See Kemper, 911 F.3d at 392; City of Miami, 923 F.3d at 1277-78. As the Eleventh Circuit explained, the defendant's “step-counting is self-evidently conducted so as to identify as many steps as possible… the ease with which we can count far fewer steps reinforces our view that step-counting is of limited value and cannot alone settle the challenging questions of proximate cause here.” City of Miami, 923 F.3d at 1277-78. So too can this Court, by less thinly slicing the “steps” between Defendant's conduct and Plaintiffs' injuries, view a more direct causal relationship, e.g.: Defendants discriminatorily failed to maintain REO in minority neighborhoods; Plaintiffs then had to spend time and money investigating and combatting the problems created by the REO properties in disrepair.

         Accordingly, the Court turns to its assessment of whether Defendants' conduct was the proximate cause of each category of injuries Plaintiffs allege-holistically and considering tort principles, as the Seventh Circuit instructs. See Kemper, 911 F.3d at 392.

         1. Diversion of Resources

         First, Plaintiffs assert that they have suffered damages by their need to divert resources away from existing programs to address Defendants' discriminatory conduct. (See SAC ¶ 185.) For example, Plaintiff National Fair Housing Alliance (NFHA) had to forgo its usual investigations into housing sales discrimination so that its staff could address the Defendant-owned and serviced REO properties that were falling into disrepair in communities of color. This Court originally found that Defendants were not the proximate cause of these injuries, based on the assessment that Plaintiffs' harms were not connected at the “first step” in a causal chain. As the Court outlined above, the Seventh Circuit has clarified that this is not the appropriate test in a proximate cause analysis.

         The Court now finds that the damages Plaintiffs incurred in the form of diversion of resources meet the three foremost factors in a proximate cause analysis: foreseeability, directness, and substantiality. See Kemper, 911 F.3d at 392. The variety of factors that a court might worry would independently explain a housing rights organization's damages are not present here. Here, there is a “clear, direct and immediate” path between Defendants' alleged discriminatory lack of maintenance and Plaintiffs' response to that lack of maintenance through investigations, reporting, and advocacy. See City of Miami, 923 F.3d at 1277 (finding proximate cause when “we can discern no obvious intervening roadblocks”).

         In this way, the injuries that Plaintiffs incurred responding to Defendants' failure to maintain their REO properties differ materially from those in City of Miami, where the City relied solely on the defendant bank's initial loan origination practices. See Cty. of Cook v. HSBC N. Am. Holdings Inc., 314 F.Supp.3d 950, 961 (N.D. Ill. 2018). That left open the possibility that “the foreclosures in Miami could have been caused by a wide array of factors outside of the lenders' control.” Id. at 962. In contrast, here, Plaintiffs point to Defendants' allegedly discriminatory REO property maintenance, which is directly linked to losses Plaintiffs have ...


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