Starting over four years ago, the City of Cleveland has attempted to deal with its housing foreclosure crisis, in part, by bringing suit against numerous financial institutions whose subprime lending activities the City alleges have contributed to the crisis. The procedural history of the City’s lawsuits is complicated, but, in Chase Bank USA, N.A. v. City of Cleveland (6th Cir., Case No. 10-4115/4116, Sept. 26, 2012) (PDF), the Sixth Circuit added another chapter, reversing a lower court’s decision that had dismissed the banks’ declaratory judgment action against the City.

The legal saga began when the City brought suit in January 2008 against 21 financial institutions in Ohio state court, charging the banks with public nuisance and seeking costs accrued from foreclosure and loss of tax revenue. That matter (“Cleveland I”) was removed to federal court, where it was dismissed because of preemption by Ohio state law, a ruling that the Sixth Circuit affirmed (PDF). The City tried again, this time including a non-diverse bank among the defendants to prevent removal, adding a charge that the banks had violated the Ohio Corrupt Activities Act, and filing the case in Ohio state court (“Cleveland II”). But in February 2008, a month after Cleveland I had been filed, Chase Bank, N.A. and certain other banks filed a suit against the City in the U.S. District Court for the Northern District of Ohio, seeking a declaratory judgment that the City’s nuisance claim was preempted by the National Bank Act and requesting that Cleveland I (and also Cleveland II, after it was filed) be enjoined. In August 2010, the district court dismissed the bank’s declaratory judgment action after it determined that it lacked subject matter jurisdiction to issue declaratory relief, even though the court determined that it did possess jurisdiction to issue an injunction. The banks appealed.

By the time this appeal reached the Sixth Circuit, the state court had dismissed Cleveland II, and the City appealed to Ohio’s Court of Appeals. Writing for a unanimous panel that included Circuit Judge Griffin and Judge Quist of the U.S. District Court for the Western District of Michigan, Circuit Judge Moore reversed the district court. Among other things, the Court concluded that common-law actions seeking monetary damages can serve a regulatory function and, thus, are subject to preemption under the National Bank Act. Thus, the Court determined, the banks had raised a federal question under the Supremacy Clause, for which the district court had jurisdiction. The Court also determined that the district court had too hastily dismissed the claim for injunctive relief when it prematurely found that the banks had not yet suffered irreparable harm. For these reasons, the Court reversed and remanded.

Just as foreclosures continue to be a significant issue in Cleveland and many other cities across the United States, so too does the legal contest between the City of Cleveland and the banks continue. This contest will now play out both in the banks’ declaratory judgment action in federal court and also in the City’s appeal before the Ohio Court of Appeals.