UPDATE 2-Judge says premature to rule on Calif. eminent domain lawsuit

Thu Sep 12, 2013 4:21pm EDT

By Jim Christie and Dan Levine

SAN FRANCISCO, Sept 12 (Reuters) - A federal judge on Thursday said a lawsuit to stop a plan by the city of Richmond, California, to use its power of eminent domain to protect homeowners from foreclosure should not be heard at this time.

Trustees for mortgage investors have asked the U.S. District Court in San Francisco to issue an injunction against the plan.

U.S. District Judge Charles Breyer said he has not decided whether trustees for mortgage investors targeted by Richmond would ultimately prevail on their lawsuit, but believes he should not address the matter until the city actually decides to invoke eminent domain to seize underwater mortgages.

"I don't believe it's ripe for determination," Breyer said.

Breyer said he would rule by Monday on whether the lawsuit should be dismissed or put on hold.

Eminent domain allows governments to seize private property for a public purpose.

Investor group Mortgage Resolution Partners (MRP) crafted the plan for Richmond, located in San Francisco's East Bay and home to a Chevron refinery, to seize underwater mortgages - home loans in which the amount owed exceeds the value of the property.

Investors holding mortgages at issue in Richmond sued the city through their trustees Wells Fargo & Co, Deutsche Bank AG and The Bank of New York Mellon court to block the plan, which they say has no precedent and relies on them swallowing losses.

Richmond's city council voted 4-to-3 on Wednesday for Mayor Gayle McLaughlin's proposal for city staff to work more closely with San Francisco-based MRP to put the plan to work.

McLaughlin's proposal also directed city staff to work with other local governments interested in the plan, called for city staff and MRP to resolve legal issues and confirmed that Richmond's city council would need to vote to seize mortgages by eminent domain. A supermajority vote of the council would be needed to approve eminent domain actions.

Richmond has already offered to buy more than 620 delinquent and performing underwater mortgages from their trusts at deep discount pegged to the properties' current appraised prices to refinance them and reduce their principal.

Richmond and MRP have not had any takers on the offers. "No offers to negotiate either, which we, the city, would seriously entertain," said Graham Williams, chief executive of MRP.

Lawyers for the mortgage trustees last month requested an injunction to stop Richmond and MRP from pressing ahead, arguing that investors with holdings in residential mortgage-backed securities would be threatened if other local governments copy Richmond's tie-up with MRP and its use of eminent domain is allowed to stand.

The trustees' legal team also questioned profits that Richmond and MRP could split after acquiring mortgages and refinancing them.

Lawyers for Richmond and MRP urged Breyer to turn down the request for an injunction, saying any lawsuits over the city's use of eminent domain belong in state court if it is used.

Edward Burg, a Los Angeles lawyer specializing in California eminent domain law, sees the city prevailing on the injunction matter. But Richmond risks costly, lengthy lawsuits in state court if it goes through with eminent domain actions, said Burg, an attorney with Manatt, Phelps & Phillips.

Richmond and MRP are prepared to defend eminent domain actions in state court, Bill Falik, an attorney and partner in the investor group, said.

"Ultimately I think we have the proper ammunition," Falik said.

The case in U.S. District Court, Northern District of California is Wells Fargo Bank, National Association, as Trustee, et. al. v. City of Richmond, California and Mortgage Resolution Partners Llc, Case No. CV-13-3663.

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