SAN FRANCISCO -- A federal judge on Thursday said a lawsuit to halt Richmond's plan to seize underwater mortgages was filed prematurely because the city has not yet invoked eminent domain.
U.S. District Court Senior Judge Charles Breyer said he would rule Monday whether to dismiss the injunction request or stay it until hearing at a later date.
"The court is not offering an opinion about whether it would or would not (approve the Richmond plan)," Breyer said. "But this is not ripe for determination."
The lawsuit seeking a preliminary injunction was filed by Wells Fargo, Deutsche Bank AG and The Bank of New York Mellon on behalf of investors against Richmond and its investment firm partner, Mortgage Resolution Partners.
Breyer spent more than 15 minutes questioning the banks' lawyers, sometimes caustically. "Isn't this a no-brainer, really?" Breyer asked at one point, referring to his earlier conclusion that the banks' case was ill-timed.
Breyer brushed aside the banks' contention that eminent domain action was imminent.
Breyer noted that the City Council has not yet approved the use of eminent domain to seize mortgages and pointed out that such a decision would require a supermajority of council members. Five of seven council members would need to agree before the city could invoke eminent domain; only four agreed to continue crafting a plan at this week's council meeting, leaving the fate of the effort in serious doubt.
Reeling from foreclosures and with the city saying 51 percent of its residents owe more than their homes are worth, Richmond voted in April to enter a tentative agreement with MRP to explore the unprecedented plan of using eminent domain to seize mortgages and refinance them at current market rates. The city has sent out a letter threatening to invoke eminent domain if security trusts for more than 620 delinquent and performing underwater mortgages reject offers made by the city to buy the loans at deep discounts pegged to the properties' current appraised prices.
At one point, John Ertman of Ropes & Gray LLP, an attorney for the plaintiffs, told the judge, "It is clear there is a passion in Richmond for carrying out this program."
Breyer cut him off: "I'm sure people care a great deal about their houses, as they should," he said, adding that the real question is whether "the present status of this matter is going to require further action (by the city)."
Attorneys representing the city and MRP kept their arguments short after Breyer showed early on his inclination to refrain from intervening before Richmond officials make a substantive decision.
"(The plaintiffs' case) is like challenging immigration reform long before Congress adopts it," said Scott Kronland of Altshuler Berzon LLP, the firm representing the city and MRP.
Pivoting from Breyer's swift rejection of his initial arguments, Ertman said the city's decision this week to continue studying the possibility of using eminent domain and to create a Joint Powers Authority that would encourage other cities to partner in the effort was a "red herring" diverting attention from their goals to move forward.
Breyer assured Ertman that the court could respond quickly in the event the city moves forward with the approach, which he called "novel."
"A JPA is not a five-minute turnaround," Breyer said.
Breyer told attorneys from both sides to file additional briefs Friday and be back in court Monday to hear his decision.
Outside the courtroom, supporters were pleased.
"It's a definite victory," said Richmond Mayor Gayle McLaughlin, the plan's most outspoken supporter. "The banks' injunction is off the table. The judge said dismiss or stay, and I expect he'll dismiss it."
MRP Chairman Steven Gluckstern said the mortgage investors "used their unlimited checkbook to file a frivolous lawsuit" in a failed attempt to intimidate the city.
"The lawsuit made no sense, and the judge treated it as such," Gluckstern said.
Ertman released a statement soon after the proceedings.
"This is an unprecedented application of eminent domain powers that we believe is facially unconstitutional," Ertman's statement read. "The court indicated it would rule on the ripeness issue on Monday."
Contact Robert Rogers at 510-262-2726. Follow him at Twitter.com/roberthrogers.