A Sub-Prime Tort? Public Nuisance - An Unfit Tool for Lending Regulation

Richard O. Faulk, Gardere Wynne Sewell LLP
John S. Gray, Gardere Wynne Sewell LLP
Diana P. Larson, Gardere Wynne Sewell LLP

Abstract

For the last decade, lawyers representing governmental entities such as cities, counties and states have used public nuisance claims to sue product manufacturers. These governmental authorities hope to recover monies spent to administer and/or create public health care or other social programs, as well as to abate health hazards and social problems allegedly caused by a wide range of products, including asbestos, guns, tobacco, lead paint and fossil fuels that produce greenhouse gases. They use public nuisance law because it supposedly allows them to avoid traditional causation and product identification problems and to bypass legislative programs – programs often passed to address the very problems they seek to redress. See Richard O. Faulk and John S. Gray, Alchemy in the Courtroom? The Transmutation of Public Nuisance Litigation, 2007 MICH. ST. L. REV. 941 (2007).

One recent use of public nuisance litigation, however, strains common law concepts even further. On January 10, 2008, the City of Cleveland filed suit against twenty-one financial institutions, such as Countrywide Financial Corporation, Lehman Brothers Holdings, Inc. and Wells Fargo, for allegedly creating the sub-prime mortgage fiasco plaguing most of the nation. See City of Cleveland v. Deutsche Bank Trust Co., CV 08-646970, in the Court of Common Pleas, Cuyahoga County, Ohio [hereinafter “Cleveland Complaint”]. According to the City of Cleveland, the defendants’ conduct in creating and selling sub-prime mortgages created a public nuisance that is forcing the City to incur damages associated with urban blight as hundreds and thousands of homeowners default on their mortgages and move out of their homes, leaving the City to deal with the vacant houses and associated criminal and social problems in affected neighborhoods.

As this WORKING PAPER will show, public nuisance is not a viable cause of action to address the social problems resulting from the mortgage crisis and sub-prime debacle. Ohio courts should join other state courts, such as those in Illinois, New Jersey and Rhode Island, by rejecting attempts to distort this ancient tort.