U.S. Supreme Court Confirms Disparate-Impact Discrimination Claims Are Recognizable Under the Fair Housing Act in LIHTC CasePublications - Client Alert | July 1, 2015
In a decision issued on June 25, 2015, the United States Supreme Court ruled that the Fair Housing Act of 1968 (the FHA) prohibits unintentional, or “disparate,” discrimination as well as intentionally discriminatory practices. The case was decided in the context of disparate-income claims against a state agency administering the federal Low Income Housing Tax Credit (LIHTC) program. The Supreme Court’s opinion, while allowing FHA disparate-impact claims to proceed, also included cautionary language counseling lower courts against adjudicating disparate-impact claims in a manner that would discourage housing authorities and developers from engaging in housing development for low-income persons. The case will now return to the federal trial court for a determination, on the merits, of whether the LIHTC allocation decisions by the state housing agency constituted disparate-income discrimination.
Texas Department of Housing and Community Affairs v. The Inclusive Communities Project was initiated by a lawsuit filed in Texas federal court in 2008 by the Inclusive Communities Project (ICP), a nonprofit organization. ICP sued the Texas Department of Housing and Community Affairs (the TDHCA), claiming the TDHCA engaged in intentional and disparate-impact discrimination with respect to the allocation of LIHTCs. ICP accused the Texas agency of disproportionately awarding LIHTCs to developers for properties to be developed in minority neighborhoods instead of in predominantly nonminority suburban neighborhoods.
The trial court in the case declined to find intentional discrimination by the TDHCA. However, the trial court did find that the TDHCA had violated the FHA by disproportionally approving applications for the development of nonelderly LIHTC units in minority neighborhoods, leading to a concentration of such units in those areas. In making its findings, the trial court rejected the TDHCA’s assertion that its discretion in awarding LIHTCs had been limited by the requirements of federal and state law. Instead, the court concluded that the TDHCA could have added more discretionary, “below-the-line” criteria to its evaluations and also could have “chose[n] the number of points to be accorded each above-and below-the-line criterion, so long as the priority of statutory above-the-line criteria is maintained . . .” Doing so would have, in the court’s view, “effectively reduce[d] the discriminatory impact [of allocation decisions] while still furthering [the TDHCA’s] interests.” The trial court also adopted a remedial plan which included alterations to the TDHCA qualified allocation plan (QAP) and stated the court would review the plan annually for at least five years.
The TDHCA appealed to the United States Court of Appeals for the Fifth Circuit, challenging whether disparate-impact claims were cognizable under the FHA. The Fifth Circuit, consistent with its prior decisions, confirmed that disparate-impact discrimination claims could be pursued under the FHA, including in the context of ICP’s case against the TDHCA. However, the Fifth Circuit found the trial court had applied the incorrect standard to evaluate the ICP’s disparate-impact claim. The Fifth Circuit adopted a three-part test for disparate-impact, placing the burden on the plaintiff to demonstrate a less discriminatory policy or practice could be used to pursue a substantial, legitimate, non-discriminatory interest that results in disparate-impacts, consistent with a regulation on disparate-impact issued by the Department of Housing and Urban Development. The Fifth Circuit remanded the case to the trial court with instructions to apply that standard to the facts of the case.
The TDHCA then appealed the case to the United States Supreme Court. The Supreme Court agreed to hear arguments in the case to specifically determine whether “housing decisions with a disparate-impact” are prohibited by the FHA. The trial court’s determination of whether the TDHCA violated the FHA under the standard articulated by the Fifth Circuit was stayed pending resolution of the Fifth Circuit case by the Supreme Court.
The Supreme Court’s Findings
The Supreme Court, in a 5-4 opinion authored by Justice Anthony Kennedy, concluded the FHA permits plaintiffs to prove discrimination based on disparate-impact evidence.
The Court based its decision on the text of the FHA, which expressly makes it unlawful to “otherwise make unavailable” housing based on race, color, religion, sex, familial status or national origin. The Court concluded that “Congress’ use of the phrase ‘otherwise make unavailable’. . . refers to the consequences of an action rather than the actor’s intent.” The Court was also persuaded by the fact that in 1988, after numerous federal courts of appeal had upheld FHA disparate-impact claims, Congress amended the FHA but did not revise the text of the statute to prohibit disparate-impact claims while at the same time approving amendments which assumed the existence of disparate-impact claims and further rejecting an amendment which would have eliminated disparate-impact liability for certain zoning decisions.
The Court further found that “[r]ecognition of disparate-impact claims is consistent with the FHA’s central purpose” of “eradicat[ing] discriminatory practices within a sector of our Nation’s economy,” which discriminatory practices include “housing restrictions that function unfairly to exclude minorities from certain neighborhoods without any sufficient justification.” The Court stated that allowing disparate-impact claims under the FHA would “play a role in uncovering discriminatory intent” by permitting plaintiffs to counteract “unconscious prejudices and disguised animus that escape easy classification.”
At the same time, the Court noted that “[t]he FHA is not an instrument to force housing authorities to reorder their priorities” and instead “aims to ensure that those priorities can be achieved without arbitrarily creating discriminatory effects or perpetuating segregation.” The Court further found that housing authorities and private developers were required to have “leeway to state and explain the valid interest served by their policies” and found that “housing authorities and private developers [must] be allowed to maintain a policy if they can prove it necessary to achieve a valid interest.”
Along those lines, the Court observed that the FHA should not “put housing authorities and private developers in a double bind of liability, subject to suit whether they choose to rejuvenate a city core or promote new low-income housing in suburban communities.” The Court therefore found that disparate-impact claims which rely on statistical disparities “must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity” and also endorsed a “robust causality requirement” for disparate-impact claims to protect defendants from “racial disparities they did not create.”
The Court conceded that “it seems difficult to say as a general matter that a decision to build low-income housing in a blighted inner-city neighborhood instead of a suburb is discriminatory, or vice versa.” Accordingly, it found that courts “must examine with care whether a plaintiff has made out a prima facie case of disparate-impact” such that its case may proceed. For that reason, the Court stated (without deciding the issue) that “if the ICP cannot show a causal connection between [TDHCA’s] policy and a disparate-impact – for instance, because federal law substantially limits the Department’s discretion – that should result in dismissal of this case.”
The Supreme Court further cautioned that lower courts should “avoid interpreting disparate-impact liability to be so expansive as to inject racial considerations into every housing decision.” It also acknowledged the potential issues created by its decision, noting that “[i]f the specter of disparate-impact litigation causes private developers to no longer construct or renovate housing units for low-income individuals, then the FHA would have undermined its own purpose as well as the free-market system.”
The case now will return to the trial court for a further evaluation of whether ICP proved its disparate-impact claims against the TDHCA under the standard articulated by the Supreme Court and the Fifth Circuit.
The Potential Impact on HFAs
In recognizing that disparate-impact claims may be brought under the FHA, the Supreme Court arguably opened the door to a new level of scrutiny to be applied to the policies and procedures, including QAPs, of housing finance agencies (HFAs). It is not necessary that overt discrimination be present to challenge a housing policy or procedure. On the other hand, writing for the majority, Justice Kennedy was clear that disparate-impact liability must be limited so those entities, like HFAs, are able to “carry out their business” and continue to make decisions based upon the public interest.
Justice Kennedy made clear that “[i]t would be paradoxical to construe the FHA to impose onerous costs on actors who encourage revitalizing dilapidated housing in our Nation’s cities merely because some other priority might seem preferable. Entrepreneurs must be given latitude to consider market factors. Zoning officials . . . must often make decisions based on a mix of factors, both objective (such as cost and traffic patterns) and, at least to some extent, subjective (such as preserving historic architecture). These factors contribute to a community’s quality of life and are legitimate concerns for housing authorities.” Whether the lower courts follow these instructions remains to be seen.
If you have any questions about the Supreme Court’s decision about the Fair Housing Act, please contact your Kutak Rock attorney or one of the authors of this client alert.