The U.S. Supreme Court recently heard oral argument in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc.—the case presenting  the issue of whether disparate impact claims are cognizable under the Fair Housing Act (FHA). Two prior cases presenting this issue, Twp. Of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. and Magner v. Gallagher, were settled after merits briefing but before oral argument was heard in the Supreme Court.

Inclusive Communities involves an FHA challenge to the allocation of low income housing tax credits (LIHTCs). The district court found that the manner in which Texas Department of Housing and Community Affairs (TDHCA) allocated its LIHTCs, while facially neutral, had a disparate impact on the basis of race. The court found that the TDHCA disproportionately approved LIHTCs for non-elderly affordable housing developments in predominantly minority neighborhoods, while it disproportionately denied tax credits for similar affordable housing developments in predominantly white neighborhoods. After a bench trial, the court determined that the respondent had established a prima facie case of disparate impact liability based primarily upon its statistical evidence. The court allocated to the TDHCA the burden of demonstrating that no less discriminatory alternatives existed for furthering its legitimate interest in awarding LIHTCs in an objective, transparent, and race-neutral manner, and concluded that the TDHCA had failed to do so.

On appeal, the U.S. Court of Appeals for the Fifth Circuit adhered to its prior decisions holding that disparate impact claims are cognizable under the FHA but adopted the burden-shifting approach used in the U.S. Department of Housing and Urban Development (HUD’s) disparate impact rule. The Supreme Court subsequently granted the TDHCA petition for writ of certiorari with respect to the question of whether disparate impact claims are cognizable under the FHA.

Arguing on behalf of the TDHCA, the Solicitor General of Texas (Texas SG) emphasized that the FHA does not include the effects-based language that the Supreme Court, in its Title VII and the Age Discrimination in Employment Act precedents, had identified as the statutory basis for disparate impact claims. Instead, the Texas SG argued that the FHA discrimination proscriptions prohibit only discrimination “because of” race or other prohibited bases. In response to a question by Justice Samuel Alito, the Texas SG confirmed his position was that disparate impact claims either were cognizable under the FHA, as originally enacted in 1968, or they were not, and that the 1988 amendments did not expand the scope of its discrimination proscriptions.

In this connection, the TDHCA's opening brief noted the following remark made by President Reagan on signing the FHA Amendments of 1988: “At the same time, I want to emphasize that this bill does not represent any congressional or executive branch endorsement of the notion, expressed in some judicial opinions, that title 8 violations may be established by a showing of disparate impact or discriminatory effects of a practice that is taken without discriminatory intent. Title 8 speaks only to intentional discrimination.” This remark was not mentioned, however, during the oral argument discussion relating to the FHA Amendments of 1988.

The Texas SG also argued that, if a disparate impact on a protected class is prohibited, then it may become necessary to consider race-based factors in order to avoid adverse effects based upon race. Conversely, counsel for Inclusive Communities argued that disparate impact claims should be cognizable under the FHA because they furthered the statutory purpose, and remedies to address allegedly discriminatory effects need not use race-based criteria.

The U.S. Solicitor General (SG) argued that the Court should defer to HUD interpretations of the FHA, both in its disparate impact rule and in HUD interpretations that preceded the rule’s adoption, because the HUD interpretation was a permissible interpretation of the statute. The reference to HUD interpretations that preceded the adoption of the HUD disparate impact rule came in response to a question posed by Justice Alito after noting that the HUD rule was proposed within days after the certiorari petition was granted in Magner v. Gallagher. Reciting the chronology of events, Justice Alito had asked, “Should we be concerned here about the use of Chevron [deference principles] to manipulate the decisions of this Court?”

Justices Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan, and Sonia Sotomayor asked questions suggesting their support for respondent’s position. Justice Breyer, for example, asked, “[I]t’s been the law for 40 years [or] just a little bit less, disaster has not occurred, and why when something is so well established throughout the United States should this Court come in and change it?” Justice Sotomayor focused on the “or otherwise make unavailable” language in the FHA and distinguished between the issue presented—whether disparate impact claims are cognizable under the FHA—and questions relating to how a disparate impact proscription is applied in particular cases, stating at the beginning of respondent’s argument that “[w]e’re not talking about this case” and asking “[w]hy don’t you get to the legal issue, if you could.”

Although it has been reported that Justice Antonin Scalia initially seemed receptive to a statutory construction argument that favored the respondents, he subsequently challenged counsel for Inclusive Communities on key points. For example, at one point he remarked: “It isn’t the [otherwise make] ‘unavailable’ word that’s the problem. The problem is unavailable on the basis of race. You can say ‘unavailable’ a million times, but the statute requires that it be made unavailable for racial reasons.” He then suggested that counsel for Inclusive Communities was arguing, “no, it doesn’t have to be; it could be unavailable simply because you use some other nonracial reason” if “it produces a result that is—is not—. . . that the races have to be in the same proportion as they are in the general population.” When counsel for Inclusive Communities began to respond that his argument “is that if, in fact, racial discrimination is a foreseeable consequence of what someone is doing,” Justice Scalia promptly interjected that “[r]acial disparity is not racial discrimination” and one should not “equate racial disparity with discrimination” because “[t]he two are quite different.”

Chief Justice John Roberts asked whether there was “a way to avoid a disparate-impact consequence without taking race into account in carrying out the governmental activity.” He went on to say: “It seems to me that if the objection is that there aren’t a sufficient number of minorities in a particular project, you have to look at the race until you get to whatever you regard as the right target.” He subsequently asked the SG what would be the disparate impact in a case such as this—not using the LIHTCs in a manner that promotes housing integration in an affluent neighborhood, or not using them in a manner that promotes better housing in a low-income area?

Justice Anthony Kennedy pressed the SG on the same point. He asked whether the positions of the SG and the respondent were that “there is initially a disparate impact at step one” in either case posited by the Chief Justice and that, “in either case step one has been satisfied.” The gist of this question was whether either approach to the use of the LIHTCs could result in a disparate impact. When the SG responded “[t]hat may be right,” Justice Kennedy remarked, “that seems very odd to me.” Interestingly, in the course of this exchange, the SG also stated that the United States had no position on whether the claim in Inclusive Communities was a viable disparate impact claim. The SG noted that Judge Edith Jones had made a good point in her concurring opinion in the Fifth Circuit, in which she maintained that the respondent had failed to isolate the specific policy it contends is causing the disparate impact.

Finally, some of the oral argument related to the viability of the petitioners’ constitutional avoidance argument. In its reply brief, the TDHCA had argued that, if the FHA is interpreted to encompass disparate impact claims, the Court will be forced to confront the same type of equal-protection question left unresolved in the Title VII case of Ricci v. DeStefano: whether, or to what extent, a disparate impact prohibition is consistent with the constitutional guarantee of equal protection or, as TDHCA phrased it in its reply brief, “when the government can require or coerce race-based decisionmaking.” In this regard, the petitioners had asserted in their reply brief that “there is a serious argument that FHA disparate-impact liability would violate the Equal Protection Clause” because “FHA disparate-impact claims can force each regulated entity to evaluate the racial outcomes of its housing decisions and make race-based decisions to avoid liability.”

The oral argument transcript is available here. The Supreme Court will issue its decision sometime before the end of June 2015.

Ballard Spahr’s Consumer Financial Services Group has created a Fair Lending Task Force that brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of Consumer Financial Protection Bureau examinations), litigators who defend against claims of fair lending violations, and attorneys who understand the statistical analyses that underlie fair lending assessments and discrimination claims.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or Mortgage Banking Group Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, or in the firm's Housing Group, Amy M. Glassman at 202.661.7680 or glassmana@ballardspahr.com.


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