Richmond’s lawsuit against banks over swaps could move to federal court

Update: On April 15, the case was moved from Contra Costa Superior Court to U.S. District Court in San Francisco.

Richmond is suing two global banks over a $66 million financial deal it says violated California law and strapped the city for money needed to cover vital city services. Last week, the banks asked the case to be transferred from California Superior Court to federal court. 

The case, filed by Richmond on March 17, claims the city lost the money on interest rate swaps signed in the early 2000s. These deals were once promoted as a way to manage borrowing costs. But city officials now argue the deals were illegal, locking Richmond into years of costly payments.

“Our residents have had to endure higher taxes and reduced public services,” Mayor Eduardo Martinez in a March 18 statement. According to the lawsuit, the payments worsened the city’s finances and led to credit downgrades that made borrowing more expensive.

Richmond is asking the court to order the banks and financial advisers to return all payments made under swap deals, as well as cover the city’s legal fees and other litigation costs. 

The transactions in question include 10 swap agreements between 2005 and 2014 with a combined notional value of more than $210 million, including over $60 million paid to Royal Bank of Canada and about $4.4 million to JPMorgan Chase. 

Martinez said in an email that if the city wins the lawsuit, the money will go into the general fund, and the City Council will decide how to use it during the budget process.

Richmond also sued its financial advisers, PRAG and The Majors Group, for encouraging the city to keep paying on the deals even after Richmond’s credit rating was downgraded in 2015. According to the complaint, instead of flagging that the contracts might have broken state law, the firms pushed for restructuring and payouts. 

The lawsuit was filed jointly by the city and the Joint Powers Financing Authority, which issues bonds and manages debt on behalf of Richmond.

JPMorgan Chase, Royal Bank of Canada, and PRAG filed to move the case to federal court but have not responded to Richmond’s claims. The Majors Group declined an interview and instead offered a 400-word statement only if Richmond Confidential agreed to publish it in full. The news site did not agree to that condition.

Origins of the case

Martinez said the timing of the lawsuit was driven largely by statute-of-limitations concerns. In California, breach of contract claims typically carry a four-year limit, while fraud claims are subject to a three-year limit. The complaint invokes the discovery rule, arguing that although the contracts were signed more than a decade ago, the city only recently uncovered legal violations and could not have reasonably discovered them earlier. 

The idea of suing the banks over swap agreements didn’t begin with the current Richmond City Council, said former Mayor Tom Butt, who was mayor from 2015 to 2022. 

Toward the end of his term, Butt said, the city’s attorneys, consulting lawyers and financial managers began warning that the deals had not only turned out badly, but that the banks and advisers who sold them might have legal liability. “They might have misrepresented what was there,” he said.

Discussions about a lawsuit began, though no formal action was taken before Butt left office. Butt said the city was focused on other priorities, including a lawsuit filed against him. “We talked about it a lot,” he said, adding that while he supports the current lawsuit, “They’re taking credit for something that really wasn’t something they did.” 

Martinez said the city began tightening its financial policies in 2021 to prevent future exposure to risky derivatives. 

Richmond’s financial policies show that since 2021, the city can “no longer be permitted to use interest rate swaps when issuing debt.” Jimenez said this was a policy she helped advance when she first took office. That same year, she opposed financial advisers’ recommendation to enter a new swap agreement and urged the council to seek an independent review. 

At an Oct. 5, 2021, meeting, the City Council halted a proposed swap deal with Royal Bank of Canada and City National Bank, and voted 4-1 to commission a third-party review of the transaction and the city’s financial advisers. Jimenez, Marinez, Gayle McLaughlin and Demnlus Johnson backed the decision; Butt voted against it.

The independent review then found that Richmond had paid over $66 million in termination fees and entered into swap agreements that were “not legally appropriate.” The report was not made public, but Jimenez said its core findings are reflected in the lawsuit.

Other cases

California law allows local governments to ask courts to void contracts that don’t follow required legal procedures, but courts across the U.S. have been cautious about granting such requests in similar cases.

The table below highlights a sample of these cases, those with publicly available legal filings or media coverage that involved major banks. While not comprehensive, this sample captures some of the most prominent or illustrative lawsuits over the past two decades.

In Jefferson County, Alabama, revelations of bribery and secret commissions forced JPMorgan to forgo $842 millions in termination fees in 2015. Detroit, during its bankruptcy proceedings, managed to slash nearly 70% of its swap-related penalties through court-approved negotiations in 2014. Baltimore filed antitrust suits linked to global investigations into interest rates manipulation, ultimately securing hundreds of millions in settlements in 2024.

These outcomes often relied on more direct evidence of wrongdoing, such as bribery, collusion, data manipulation, or the leverage provided by bankruptcy to renegotiate existing agreements.

Richmond’s lawsuit takes a different approach: It claims the contracts were unlawful in the first place.

According to the complaint, the agreements violated California’s legal requirements for municipal debt by bypassing compliance steps, such as obtaining credit ratings, preparing assessments on how the deals would affect the city’s creditworthiness, and submitting the contracts for public hearings or proper council review, all of which are mandated by California law.

A case management conference has been scheduled in Superior Court for July 21, when the court would consider whether to accept Richmond’s claim that the contracts are void and allow the case to proceed. But since the defendants have moved the case to federal court, that hearing will likely be canceled unless the case is sent back to state court.

The defendants asked the case to be moved to federal court because the parties are from different states and the amount at stake exceeds $75,000. This type of removal takes effect automatically once federal jurisdictional criteria are met, unless the plaintiff files a motion to remand and prevails.

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