Pacific Investment Management Co. and BlackRock Inc. are among bond investors seeking a court order blocking Richmond, California, and Mortgage Resolution Partners LLC from seizing mortgages through eminent domain, saying the initiative would hurt savers and retirees.

The city's plan is unconstitutional, according to a complaint filed yesterday by mortgage-bond trustees in federal court in San Francisco. The trustees, Wells Fargo & Co. and Deutsche Bank AG, were directed to take the action by investors in the debt that also include Jeffrey Gundlach's DoubleLine Capital LP, said John Ertman, a partner at Ropes & Gray LLP.

"Mortgage Resolution Partners is threatening to seriously harm average Americans, including public pension members, other retirees and individual savers through a brazen scheme to abuse government powers for its own profit," Ertman said in an e- mailed statement on behalf of investors.

The plan advanced last month with Richmond backing offers to buy 624 loans, making it the first city to push the idea so far forward. Those offers would need to be refused before the city could follow through with its mayor's vow to invoke its potential powers to force sales of the mostly non-delinquent loans, so that homeowners could get their debt balances cut to less than the current values of their properties.

The program would harm owners of mortgage bonds by paying them too little for loans, as well as damage communities by drying up lending, at least 18 trade groups representing asset managers, bankers, real-estate firms and builders have said in past statements. Costs to investors could exceed $200 million just on loans in Richmond, according to the complaint.

Proponents of the plan, including Cornell University law professor Robert Hockett and Steven Gluckstern's Mortgage Resolution Partners, which is advising municipalities and lining up private funds that would profit as the buyer of the loans, dispute those claims. They have said that the plan will survive court scrutiny.

At least a dozen cities still dealing with the fallout of worst slump in home prices since the Great Depression are studying the eminent domain idea. Others include El Monte, California, North Las Vegas, Nevada, and Irvington, New Jersey. Communities such as San Bernardino County, California, and Chicago abandoned the plan after considering it last year.

Under the program that Mortgage Resolution Partners has pitched, a private investment fund would buy loans from bond trusts for amounts less than current property values. The prices would be based on financial models or comparable trades and sanctioned by courts.

The mortgages then would be reduced and homeowners refinanced into new debt insured by the Federal Housing Administration.

Richmond's plan would harm interstate commerce because lenders will be less willing to underwrite mortgages and investor confidence in the market for mortgage-backed securities and "by extension, the national housing market and national economy" would be undermined, according to yesterday's complaint.

The plan is also discriminatory because it targets only certain loans, the trustees alleged. It violates California and U.S. constitutional protections against impairing private contracts and the taking of private property for public use without just compensation, according to the complaint.

Richmond Mayor Gayle McLaughlin declined to comment on specifics of the lawsuit because she hadn't seen it yet.

"I continue to stand by this program and the benefits to our residents," she said in a telephone interview. "We feel comfortable with the legality of this."

Mortgage Resolution Partners, which is based in San Francisco, has reviewed the lawsuit and is confident it can prevail in court, Chairman Gluckstern said in an e-mail.

"No investor in any trust will be made worse off by the sale of any loan. Rather, it is these trustees that are wasting trust assets at the expense of America's pensioners by pursuing fruitless litigation," Gluckstern said. "Sadly, the financial institutions that brought us this crisis are yet again part of the problem rather than part of the solution."

Government-controlled Freddie Mac is also unhappy with the "threat" of eminent domain being invoked, William McDavid, its general counsel, said yesterday on conference call with reporters. While loans in mortgage bonds guaranteed by the company and rival Fannie Mae aren't being targeted, the firms also own non-agency securities.

"We would consider taking legal action" if Freddie Mac's regulator, the Federal Housing Finance Agency, wants to pursue it, McDavid said.

Andrew Wilson, a spokesman for Fannie Mae, confirmed that the company was among the investors authorizing Wells Fargo and Deutsche Bank to sue.

The case is Wells Fargo Bank v. City of Richmond, 13-3663, U.S. District Court, Northern District of California (San Francisco).

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