SAN FRANCISCO — BlackRock’s request with other bondholders for a court order to block a plan by the city of Richmond, Calif., to take over underwater mortgages through eminent domain is “not ripe,” a federal judge said while declining for now to issue an injunction against the city.
U.S. District Judge Charles Breyer in San Francisco said during a 40-minute hearing Thursday that the bank trustees for the bondholders could renew their request for an injunction if Richmond’s City Council votes to begin seizing the loans.
While lawyers for the trustees argued that such a vote is just “ministerial” and the city is “committed” to implement the plan, Breyer said courts shouldn’t “jump in” before other steps are completed to allow seizure of the loans.
“That’s called the democratic process,” Breyer said. He didn’t rule on the merits of the bondholders’ lawsuit, which alleges that taking control of loans through eminent domain violates the U.S. Constitution.
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Breyer said he will issue a ruling Sept. 16 on an injunction and the city’s request to dismiss the case. He said Thursday that he could put the case on hold, rather than dismiss it. He gave attorneys for the banks and the city until Friday afternoon to file arguments.
The city’s plan violates constitutional protections governing private contracts, interstate commerce and the taking of private property for public use without just compensation, according to complaints filed by Wells Fargo, Deutsche Bank and Bank of New York Mellon Corp. on behalf of investors that hold bonds backed by the Richmond mortgages. The investors include Pacific Investment Management and DoubleLine Capital.
John Ertman, a lawyer for Wells Fargo, acknowledged that the City Council must vote before using eminent domain. He said the council has voted twice before to move ahead with the plan, including this week when a supermajority of the 7-member panel voted 5-2 not to shelve the plan.
“That is true, but given their commitment to going ahead with the program, that’s just a ministerial act,” he told Breyer. He alleged that the city and its financing partners are trying to avoid having to face investors’ claims in federal court. To seize the loans, Richmond must file an action in state court and could then come back to Breyer and argue that the banks’ claims should be transferred to the state proceeding.
“That can’t be the right outcome,” Ertman said. “We are entitled to be in federal district court.”
A ruling favoring bondholders would dissuade other cities from following in Richmond’s footsteps, Dan Schechter, a law professor at Loyola Law School, Los Angeles, said by phone Wednesday.
The City Council voted Wednesday to move forward with a program to reduce the principal on troubled mortgages. Under the plan proposed by Steven Gluckstern’s Mortgage Resolution Partners, the city would seize the loans and refinance them, providing borrowers with built-in equity, to avert foreclosures.
Mortgage Resolution Partners would provide services and arrange for private investment funds that would profit by buying the loans for less than property values.
The company is shopping around the plan to several communities; Richmond is the only one to pursue the plan, City Manager Bill Lindsay told the council Sept. 10.