• TAA joins the State of Texas 
    in attack on disparate impact theory 

    By John Sepehri, TAA General Counsel

    The Texas Apartment Association has filed an amicus (friend of the court) brief on behalf of the Texas Department of Housing and Community Affairs (TDHCA), as a result of a ruling in a federal appeals court in a case involving the use of disparate impact theory in proving housing discrimination.

    Under disparate impact theory, which the U.S. Department of Housing and Urban Development (HUD) recognized formally in a rule last year, a housing discrimination case is allowed to proceed using evidence that an action disproportionately affected a protected class under the Fair Housing Act (FHA)—even if no evidence was presented to show that the intent of the action was to discriminate against that class.

    TDHCA and Texas Attorney General Greg Abbott’s office are challenging the appropriateness of disparate impact as a basis for a housing discrimination claim, and hoping to persuade the U.S. Supreme Court to review the decision in the appeals case. The trial court proceedings have been put on hold, pending the litigants learning whether the Supreme Court will take the case.

    Federal appeals court issues potentially key housing anti-discrimination opinion

    In March, 2014, the United States Court of Appeals for the Fifth Circuit issued an opinion that may result in United States Supreme Court review of a major multifamily industry priority.

    Specifically, the Fifth Circuit examined issues in a lawsuit that Inclusive Communities Project, Inc. (ICP) brought against TDHCA and related parties for FHA violations.

    ICP is a non-profit organization that generally seeks racial and socioeconomic integration in the Dallas area, and focuses on finding low-income, predominately African–American families eligible for Section 8 assistance affordable housing in predominately Caucasian neighborhoods. ICP’s complaint against TDHCA centered on TDHCA’s allocation of low-income housing tax credits in the Dallas area.

    ICP asserted that TDHCA improperly exercised discretion it alleges ICP has in allocating tax credits. According to ICP, TDHCA exercised such alleged discretion to make housing and financial assistance for housing construction unavailable because of race, in violation of the FHA (and the U.S. Constitution).

    The case obviously concerns operators involved with tax credit housing, but it is also generally significant to the multifamily industry because ICP based its case against TDHCA on the basis of disparate impact theory. That is, ICP wanted to proceed based on statistical evidence that TDHCA’s practices were felt disproportionately based on race, not necessarily that ICP could prove by other evidence that TDHCA’s practices were racially motivated.

    Fifth Circuit holds HUD disparate impact rule applies in FHA cases

    The case made its way from a federal trial court in Dallas to the United States Court of Appeals for the Fifth Circuit. Significantly, neither the Fifth Circuit nor the trial court considered whether disparate impact is appropriate in an FHA case. That was presumed by those courts because prior Fifth Circuit precedents from years back stated that plaintiffs could pursue an FHA claim on a disparate impact theory.[1]

    What the Fifth Circuit decided in its March, 2014 opinion was that the district court needed to apply disparate impact according to a template set forth by HUD. That is, various courts have differed on the specifics of how a disparate impact case may proceed in terms of who has to prove exactly what and at what point. Although the Fifth Circuit has for years held disparate impact is appropriate in the FHA context, the Fifth Circuit had never articulated the specifics of applying the theory.

    So the trial court had applied a standard from a different federal appeals court (the United States Court of Appeals for the Second Circuit). The HUD standard actually may be better for the industry than that Second Circuit’s standard. Under the Second Circuit’s version, a plaintiff shows disparate impact with statistics or other appropriate evidence, the defendant then has to provide evidence of legitimate business interest/need/purpose (or governmental interest, in the TDHCA case), and provide evidence that means with less of a disparate impact were not available.

    The HUD rule actually places the burden for that third step on the plaintiff, which has to be the party to provide evidence that less-impactful methods existed. In any event, the Fifth Circuit sent the case back to the trial court to apply the HUD version of disparate impact, not the Second Circuit’s version.

    The State of Texas and TAA are seeking U.S. Supreme Court review of disparate impact

    The Texas attorney general’s office quickly sought review on TDHCA’s behalf from the United States Supreme Court, and TAA filed an amicus brief in support of TDHCA. Both the state and TAA are urging the Supreme Court to take the case and address this threshold issue of whether disparate impact is appropriate in FHA cases in light of that court twice having before agreed to review that issue, but not deciding it because the litigants settled.[2]

    Indeed, normally, the U.S. Supreme Court would not hear a case until fully resolved in the lower courts, but in this instance, there is a greater likelihood the court may agree to hear the case because it has expressed interest in the issues presented before, and resolving the threshold issue of disparate impact’s applicability could avoid wasting judicial and litigant resources in the lower courts.

    Both the state and TAA asserted two principal arguments against disparate impact use in FHA cases. First, they argue that Congress wrote the FHA in a way that clearly makes disparate impact inapplicable to FHA cases, as distinguished from other anti-discrimination laws.

    However, the briefs also point out that even were the court to look beyond the plain language of the FHA, legislative history confirms that Congress viewed intentional discrimination as the barrier to equality in the housing market, and designed the Fair Housing Act to combat that alone.

    Finally, the briefs note the practical problems with importing disparate impact analysis to the FHA because doing so may impose unduly severe consequences on housing providers by overexposing them to lawsuits based on race-neutral, routine decision-making (sometimes even prompted by attempts to satisfy other governmental directives).[3]

    Due to the timing of the Fifth Circuit’s decision and the Supreme Court’s practice of recessing for the summer, whether the court will hear the case is unlikely to be known until sometime after its next term begins in October. Nonetheless, there is reason for optimism in the multifamily industry because the court has shown a willingness to tackle this issue. TAA will, of course, monitor, update members and take additional action as necessary.

    [1] In one footnote, however, the Fifth Circuit acknowledged that TDHCA had pointed out that the U.S. Supreme Court has twice granted review of cases involving the applicability of disparate impact. Unfortunately, the footnote went on to provide that in the absence of those two cases proceeding, the Fifth Circuit had to follow its prior controlling precedents. That footnote also pointed out that all circuits that have considered the question have found disparate impact is applicable in FHA cases.

    [2] News reports suggest that the Obama administration “encouraged” the prior litigants to settle the cases in large part because it feared the U.S. Supreme Court would find disparate impact theory invalid in FHA cases.

    [3] The state also argued that the U.S. Supreme Court should also take the case even if disparate impact were somehow valid in FHA cases to resolve which variant of the theory applies.