TEXAS DEP’T OF HOUSING AND COMMUNITY AFFAIRS V. INCLUSIVE COMMUNITIES PROJECT: FACIALLY NEUTRAL BYLAWS AND RULES AND REGULATIONS MAY SUBJECT AN ASSOCIATION TO LIABILITY UNDER THE FAIR HOUSING ACT

On June 25, 2015, the United States Supreme Court decided Texas Dep’t of Housing and Community Affairs v. Inclusive Communities Project, __ US __ (2015), a decision that affects community associations throughout the country, including in Michigan. In a surprise to many court observers, the Supreme Court endorsed the disparate impact theory of liability under the federal Fair Housing Act, 42 U.S.C. § 3601, et seq., (the “Act”), as opposed to the stricter standard of disparate treatment. Under a disparate impact theory, a plaintiff does not have to prove discriminatory intent. This is in contrast to a disparate treatment theory of liability, under which liability depends on whether a protected trait “actually motivated” the decision being challenged.

The Supreme Court was expected by many to adopt the reasoning of the district court in American Insurance Association v. United States Department of Housing and Urban Development, __ F. Supp. 3d __ (D.D.C. 2014), in which a federal district court in Washington, D.C., had vacated the United States Department of Housing and Urban Development’s (“HUD”) disparate impact rule on the basis that the Act prohibited disparate treatment only. The Supreme Court’s decision in Texas Dep’t of Housing and Community Affairs, however, held otherwise and allowed liability to be imposed even in the absence of discriminatory intent. Texas Dep’t of Housing and Community Affairs is significant to condominium and homeowner associations specifically because it reaffirms that such organizations are faced with potential liability even in the presence of facially neutral bylaws, rules, and regulations, and that liability can be imposed even if there is no intent to discriminate.

 The Supreme Court Speaks: Texas Dep’t of Housing and
Community Affairs v. Inclusive Communities Project
.

Case Background

In Texas, low-income federal housing credits are distributed by the Texas Department of Housing and Community Affairs (the “Department”). The Inclusive Communities Project, Inc., (“ICP”) is a Texas non-profit corporation that assists low-income families with affordable housing. In 2008 ICP brought suit against the Department alleging that the Department’s distribution of federal tax credits continued segregated housing patterns by allocating too many tax credits in “predominantly black inner-city areas and too few in predominantly white suburban neighborhoods.”

ICP alleged that even though the Department may not have intended to discriminate, the system used to allocate tax credits resulted in a disparate impact under §§ 804(a) and 805(a) of the Act. In other words, ICP argued that the Department’s system of tax credit allocation discriminated on the basis of race because it had an adverse impact on black residents seeking tax credits by continuing a pattern of segregated housing, regardless of the Department’s actual intent.

Factually, ICP was able to show that between 1999 and 2008, the Department had approved tax credits for 49.7% of proposed non-elderly units in 0% to 9.9% Caucasian areas, but only 37.4% in 90% to 100% Caucasian areas. In addition, 92.29% of the tax credits in the city of Dallas were allocated to areas with less than 50% Caucasian residents. Based on this allocation, the lower court had concluded that ICP had demonstrated a prima facie case of disparate impact under the Act. The lower court had further concluded that in response the Department had failed to prove “that there were no other less discriminatory alternatives to advancing their proffered interest,” and, therefore, had failed to rebut ICP’s prima facie case. Significantly, the lower court had assumed that the Department’s interests were legitimate, but still imposed liability under the Act.

The Supreme Court Decision

The case eventually made its way to the United States Supreme Court which considered whether a disparate impact theory could create liability under the Act even if there was no intent to discriminate. The Court answered in the affirmative, stating that disparate impact liability under the Act “permits plaintiffs to counteract unconscious prejudices and disguised animus that escape easy classification as disparate treatment.”

The Court, however, also discussed several safeguards intended to protect against unwarranted liability. The Court recognized that disparate impact liability mandated the removal of “artificial, arbitrary, and unnecessary barriers,” not the displacement of valid governmental policies. In the context of housing, the Act was not an instrument to force housing authorities to reorder priorities, but instead aimed to ensure that those priorities could be achieved without creating discriminatory effects or perpetuating segregation. For example, “racial imbalance” does not, without more, establish a prima facie case of disparate impact. A claim based solely on a statistical disparity should fail if the plaintiff cannot point to a defendant’s policy causing that disparity. A plaintiff must be able to show a causal connection between the challenged policy and the disparate impact. The Supreme Court also recognized that it was important to provide leeway to housing authorities and private developers to explain any valid interests served by their challenged policies. Much like the “business necessity standard” under a Title VII claim, if a defendant can demonstrate that a challenged policy is necessary to achieve a valid interest (such as achieving compliance with health and safety codes), then that policy is most likely going to stand. Further, if liability is found, then any remedial order “should concentrate on the elimination of the offending practice ‘that arbitrar[ily] . . . operates invidiously to discriminate . . . .’”

The Texas Dep’t of Housing and Community Affairs Decision
Impacts Condominium and Homeowner Associations
Because it Allows Liability Even in the Absence of an
Intent to Discriminate.

Texas Dep’t of Housing and Community Affairs is significant because it allows challenges to neutral policies that have negative effects on protected classes. While the Texas Dep’t of Housing and Community Affairs decision was based on race, the Act and Michigan’s own Elliott-Larsen Civil Rights Act protect against housing discrimination based on several additional protected classes: race, color, religion, sex, national origin, familial status, disability, marital status, or age. A policy which results in a disparate impact on any of these protected classes could result in liability under the Act.

 How the Supreme Court’s Decision May Impact
Michigan Community Associations

Condominium and homeowner associations are subject to the Act through their bylaws, their rules and regulations, services or facilities provided in connection with housing, and through the actions of their officers and management companies. Even where bylaws and rules and regulations are facially neutral, it is possible for these policies to create liability if their implementation results in a disparate impact on a protected class. Civil penalties under the Act include varying monetary penalties depending on the number of violations, and a defendant could also be liable for court costs and attorney’s fees. It is also possible for individual board members to be subject to liability. Potential theories under which an association could face liability under a Texas Dep’t of Housing and Community Affairs framework, (i.e., disparate impact), include the following:

  • Occupancy Limitations. Bylaws or rules and regulations that contain occupancy limitations could be construed to discriminate on the basis of familial status. For example, a “two-person per bedroom” limitation would most likely be considered to have a disparate impact on families with children if challenged.
  • Age Restrictions for use of Pool or Clubhouse. Bylaws or rules and regulations that contain age restrictions limiting or preventing access to pools or a clubhouse could be construed to discriminate on the basis of age or familial status.
  • Clothing Attire Restrictions. Bylaws or rules and regulations that limit appropriate attire in common areas may be construed to discriminate on the basis of religion. For example, some community associations have a “no hats in the clubhouse” policy. If a Muslim woman desired to cover her head out of religious observance, the limitation may be considered illegal and unenforceable.
  • Job Requirements. Residency limitations based on a requirement that unit owners maintain a job, or maintain a job for a specified time period, could be construed as having a disparate impact on those unable to work due to disability or age.
  • Aesthetic/Appearance Requirements. Rules or regulations which limit or restrict, on a facially neutral basis, signs, hangings, or other objects could create disparate impact liability if such limitations or restrictions negatively impact a protected class, such as on the basis of religion.
  • Substance Abuse. Rules and regulations which are used to differentiate residents based on past substance abuse, as opposed to current illegal drug use, or which result in a disparate impact on past substance abusers, could be construed as a violation of the Act on the basis of disability.
  • Rights of First Refusal. Bylaws may reserve to the association a right of first refusal as to a prospective resident. Historical use of this right that has a disparate impact on a protected class could create liability under the Act, especially if the association is unable to articulate a valid interest served by its decisions.
  • FHA Certification. Any prospective purchaser of a condominium that wishes to utilize a Fair Housing Administration (“FHA”) insured mortgage is limited to condominiums on the list of FHA-approved condominium projects. This is a method used by HUD in an effort to ensure the viability and health of the condominium project securing the FHA mortgage. However, some figures suggest minorities are disproportionately dependent on FHA financing as opposed to conventional mortgage financing. By not considering FHA approval, it is conceivable that an association could be faced with a disparate impact challenge based on race— both by outside individuals who wish to purchase units and by unit owners who wish to increase the market in which their unit can be sold. The viability of this theory could depend on the outcome on remand of Texas Dep’t of Housing and Community Affairs.
  • Animal Restrictions. Limitations on a resident’s ability to maintain a dog or other animal of their choosing could have a disparate impact on residents with disabilities if the dog or other animal constitutes a reasonable accommodation to a disability.

Each of the above scenarios presents a situation where a plaintiff may attempt to utilize a disparate impact theory of liability based on an otherwise facially neutral bylaw or rule. While it is true that courts have, historically, been reluctant to impose liability when the policy being challenged is facially neutral and there is no intent to discriminate in the policy’s enforcement, Texas Dep’t of Housing and Community Affairs affirms a plaintiff’s right to utilize a disparate impact theory without having to prove an intent to discriminate. Under Texas Dep’t of Housing, if a plaintiff is able to demonstrate a causal connection between the bylaw, rule or regulation being challenged and the disparate impact, then the burden is on the association to demonstrate that the policy being challenged is necessary to achieve a valid interest.

Conclusion

In order to avoid the potential for liability, it is important that an association periodically review its bylaws, and its rules and regulations in order to ensure both that its policies are facially neutral, and that the implementation of facially neutral policies does not adversely impact a protected class. If there is evidence of an adverse impact on a protected class, then an association should contact its attorney to amend its bylaws and/or its rules and regulations to ensure compliance with the Fair Housing Act.

Matthew W. Heron is an AV rated attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on commercial litigation and real estate, including community association, condominium law, real estate litigation, zoning and land use.  Mr. Heron also has extensive experience in a variety of litigation matters, including insurance coverage, non-compete agreements, automotive supplier disputes, and breach of contract.  He can be reached at (734) 261-2400 or mheron@cmda-law.com.