The Supreme Court of the United States (SCOTUS) just decided several potential societal altering cases. With the high court issuing rulings on gay marriage and Obamacare, the Supreme Court’s decision in Texas Department of Housing v. Inclusive Communities Project, Inc. (“Texas Department of Housing”) did not garner significant national media attention. However, because SCOTUS, by a 5-4 decision, sanctioned fair housing disparate impact claims, the Texas Department of Housing case will have a tremendous and unpredictable impact on the rental industry for years to come.

The question presented in Texas Department of Housing was whether a disparate impact claim can be brought under the Federal Fair Housing Act (FHA). The FHA clearly bars intentional discrimination based on protected class status, i.e. policies or practices that discriminate against tenants because of race, creed, color, national origin, sex, familial status, or disability. Courts classify intentional discrimination as disparate treatment. In a disparate treatment case, a tenant must establish that the landlord had a discriminatory intent or motive. In a disparate impact case, the tenant does not need to prove a discriminatory intent, but rather only prove that the challenged housing practice or policy disproportionately adversely affects tenants that are members of a protected class, and that such practices or policies are not otherwise justified by a legitimate rationale.

In Texas Department of Housing, the plaintiffs alleged that the Texas Department of Housing (Department) caused continued segregated housing patterns by its disproportionate allocation of tax credits. Specifically, the Department granted too many credits for housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods. The plaintiffs wanted the Department to modify its policies to encourage the construction of low-income housing in suburban communities. In finding for the plaintiffs, the District Court relied on statistical evidence. Fair housing disparate impact cases are always proved through the use of statistical evidence because it doesn’t matter what your intentions are, only the results of your policies. Specifically, the Department approved tax credits 49.7% of the time in low Caucasian areas, but only 37.4% of the time did the Department approve proposed units in high Caucasian areas. The Court also found that “92.29% of low housing income tax credit units in the city of Dallas were located in census tracts with less than 50% Caucasian residents.”

Based on the Supreme Court’s ruling and previously adopted HUD regulations, promulgated during the Obama administration, a landlord can be found liable for the results of practices and policies absent any discriminatory intent. Under the law, the tenant would first have the burden of proving that a challenged practice caused or predictably will cause a discriminatory effect. Again, this is done through statistical evidence. Supposedly, if a statistical discrepancy is caused by factors other than the landlord’s policy, a tenant doesn’t have a case and there would be no fair housing liability. If a court found that a tenant has shown, through statistical evidence, that your policy disparately impacted minorities (protected class members), you would have an opportunity to demonstrate that the challenged policy was necessary to achieve one or more substantial, legitimate, nondiscriminatory interests. However, even if you proved you had a legitimate non-discriminatory business reason for the policy, you would still be found liable if the tenant proved that you could achieve the same goal or policy through less discriminatory means.

As pointed out, the outcome in Texas Department of Housing was close, with five justices voting to recognize disparate impact claims, and four justices voting to not recognize disparate impact fair housing liability. The Supreme Court Justices who voted against disparate impact illustrated the problems that the multifamily industry will face as a result of this decision.

Disparate impact liability can and will lead to absurd results. As Justice Scalia pointed out in the dissenting opinion, “nobody wants to live in a rat’s nest”. But this was the exact result (unsanitary housing) because of a disparate impact case. Specifically, in the Magner case, the city of St. Paul, Minnesota adopted an aggressive code enforcement policy to crack down on slumlords that weren’t properly attending to their rentals. Everyone agreed that the City of St. Paul could not possibly have a discriminatory intent in aggressively enforcing the building codes to make landlords repair and eradicate pests, including rats. Despite this, based on disparate impact fair housing liability theory, a court was able to conclude that St. Paul’s aggressive enforcement of the Housing Code was actionable because making landlords respond to “rodent infestation, missing dead-bolt locks, inadequate sanitation facilities, inadequate heat, inoperable smoke detectors, broken or missing doors,” and the like increased the price of rent. Since minorities were statistically more likely to fall into “the bottom bracket for household adjusted median family income,” they were disproportionately affected (disparately impacted) by the rent increases. In short, St. Paul’s good-faith attempt to ensure minimally acceptable housing for its poorest residents could not ward off a disparate impact lawsuit.

The dissenting minority in Texas Department of Housing went on to state that the Court’s embracing of the same theories that led to the absurd result in Magner is a serious mistake. “The Fair Housing Act does not create disparate-impact liability, nor do this Court’s precedents. And today’s decision will have unfortunate consequences for local government, private enterprise, and those living in poverty. Something has gone badly awry when a city can’t even make slumlords kill rats without fear of a lawsuit.” “It follows that the FHA does not authorize disparate-impact suits. Under a statute like the FHA that prohibits actions taken “because of ” protected characteristics, intent makes all the difference. Disparate impact, however, does not turn on “”˜subjective intent.’”

The very case before the court (Texas Department of Housing) further illustrates the point that disparate impact liability may attach regardless of what you do. “The Texas Department of Housing and Community Affairs (the Department) has only so many tax credits to distribute. If it gives credits for housing in lower income areas, many families””including many minority families”” will obtain better housing. That is a good thing. But if the Department gives credits for housing in higher income areas, some of those families will be able to afford to move into more desirable neighborhoods. That is also a good thing. Either path, however, might trigger a disparate impact suit. This is not mere speculation.” The justice went on to argue that based on disparate impact theory, the Texas Department of Housing could have been sued for disparately impacting minorities regardless of what it did.

According to HUD, you don’t need to fear disparate impact liability if you can demonstrate that your policies or practices serve substantial, legitimate, nondiscriminatory interests and that those interests cannot be served by another policy that would impact protected class members less. Thus, HUD argued that even if your policy disparately impacts minorities, you’re not liable if you have legitimate non-discriminatory business reasons for the policy, and there is not another means to achieve your objectives without impacting minorities. However, as the dissenting minority points out, what are “substantial interests”, “legitimate interests”, and “non-discriminatory interests”? Are you liable if your policy serves a substantial interest, but the court finds that it is not a legitimate interest?

The bottom line is that these terms will mean what HUD and courts say they mean. Unfortunately, we will only know how HUD and the courts will define these terms after owners and managers get sued, and have to spend tens of thousands, if not hundreds of thousands of dollars, defending themselves. Any good attorney will tell you that the outcome of most lawsuits cannot be precisely predicted. However, the law should promote substantially likely outcomes based on a set of facts. When HUD and the courts are free to determine that any policy disparately impacts protected class members based on whether, in their opinion, the policy serves a “substantial interest” or “non-discriminatory interest”, there is no substantial certainty or predictability that any given policy will be immune from a disparate impact legal challenge.

Finally, the worst effect of this disparate impact ruling by the Supreme Court is that it will inevitably increase the cost of doing rental business. Everyone that has been in the multifamily industry for any length of time knows that, unfortunately, paying to settle non-meritorious claims by tenants is a cost of doing business. It makes sense to settle a claim for $500, and avoid paying $4,000 in attorneys’ fees that you will never recover. However, the costs of litigating a disparate impact claim are on an entirely different level. Without even considering substantial costs for expert witnesses and depositions, attorneys’ fees alone, in a disparate impact case, could easily run into tens of thousands of dollars, and even into six figures. In addition, if you lose, you have to pay the tenant’s attorneys’ fees as well. Fair housing attorneys use this as leverage to extract settlements that have no bearing on actual damages. “If you don’t settle, and even if we win only $20,000, you’re going to have to pay our attorneys’ fees which will be over $200,000”. Thus, disparate impact liability is likely to create no-win scenarios for the multifamily industry. Spending significant money defending, or paying inflated settlements.

View Resource »