Federal Court Halts Lender Underwater Mortgages Lawsuit Against Richmond

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On September 12, the City of Richmond caught a small reprieve with respect to its plan to condemn underwater mortgages.  As reported by Reuters, the federal district court ruled that the lawsuit filed by lenders Wells Fargo, Deutsche Bank and The Bank of New York Mellon is unripe. The judge denied the lenders' request for an injunction to halt the City's plan to condemn underwater mortgages even though the lenders argued that the City's use of eminent domain in this context is unconstitutional.  Next Monday, the judge will decide whether to dismiss the action or leave it pending.

In reality, the City has not invoked its power of eminent domain and, as discussed on Wednesday, it would need to reconvene the city council and receive its super-majority approval of the plan before condemning anything. Therefore, the lenders need to wait until the City takes an affirmative action to use its power of eminent domain before pursuing their lawsuit any further.  While the lenders may have lost (at least for now) on a procedural issue, I'm sure the message was still sent loud and clear to the City of Richmond, and other cities for that matter, to seriously rethink their plan of action.  Look for an update on Monday as this story continues to unfold.