Seven councils in England are suing Barclays over bank loans worth more than £500m they claim they were fraudulently sold.
The local authorities claim the banking giant manipulated the interest rates on the products, known as lobo loans.
Councils taking the action are Leeds, Greater Manchester Combined Authority, Newcastle, North East Lincolnshire, Nottingham, Oldham and Sheffield.
Barclays declined to comment on the case.
Between 2004 and 2010 the seven councils took out 49 Lender-Option Borrower-Option (lobo) loans with Barclays.
These complex high-cost loans had variable interest rates that could be changed by the lender.
The councils want the High Court to allow them to exit the loan agreements without paying any financial penalties.
The local authorities allege that because of Barclays' involvement in the London interbank offered rate scandal, known as the Libor scandal, the interest rates initially issued on the lobos were fraudulently set.
In 2012, UK and US financial regulators fined the bank £290m for trying to manipulate the key Libor rate, which influenced the cost of loans and mortgages.
Data gathered by the campaign group UK Debt Resistance, via freedom of information requests, shows that the seven councils taking the group action took out lobos worth a total of £550m.
What is a LOBO Loan?
Lobo loans are typically long-term loans ranging in length from 40 to 70 years.
The lender has the option to increase the rates at fixed points in the loan term (lender option dates).
The borrower must then either repay the loan plus a penalty fee, or move on to the higher rate of interest.
Lobos typically offer the borrower a low "teaser" interest rate for the first few years of the loan, to attract custom.
Source: House of Commons Library
Joel Benjamin, from campaign group UK Debt Resistance, has described the loans as "toxic".
He said the organisation was "heartened to see local councils filing legal action against Barclays related to lobo loans, which has resulted in hundreds of millions of pounds being skimmed from struggling town hall budgets".
Financial expert Abhishek Sachdev said lobos "contained huge quantifiable risk at the outset".
Mr Sachdev, who gave evidence about lobos to the Communities & Local Government Select Committee in 2015, said: "There is a reason why none of our large PLC corporate clients would ever enter into such a loan."
Leeds City Council took out £215m worth of lobos with Barclays, and are leading the group action. A spokesman said "these claims relate to Barclays' involvement in LIBOR manipulation. Barclays has been served with the Particulars of Claim and the proceedings are now active."
A spokesman for Barclays said they would not be commenting on the ongoing legal case.