A federal court in Texas recently dismissed a housing discrimination claim that was based on alleged disparate impact under the Fair Housing Act (FHA), the latest in a series of decisions applying landmark U.S. Supreme Court guidance.

The U.S. District Court for the Northern District of Texas dismissed claims filed against the Texas Department of Housing and Community Affairs (TDHCA) in the fair housing case, The Inclusive Communities Project, Inc. v. The Texas Department of Housing and Community Affairs. The August 26, 2016, decision represents the culmination of several years of litigation, including last year's U.S. Supreme Court decision that found that disparate impact is a cognizable claim under the FHA.

As discussed in prior Ballard Spahr alerts, The Inclusive Communities Project (ICP) originally filed a disparate impact claim under the FHA, alleging that the allocation process used by TDHCA to award low-income housing tax credits (LIHTC) had a disparate impact on racial minorities. The district court initially ruled in favor of ICP, finding that ICP made a prima facie showing that TDHCA's policy violated the FHA. Following the district court's original opinion, the U.S. Department of Housing and Urban Development (HUD) issued regulations establishing a three-step burden-shifting approach for disparate impact claims brought under the FHA. On appeal, the Fifth Circuit Court of Appeals adopted HUD's approach and reversed the district court decision, remanding the case to the district court to apply HUD's burden-shifting framework to ICP's claims and TDHCA's defenses.

After granting certiorari, the U.S. Supreme Court in June 2015 held that disparate impact claims were cognizable under the FHA, but did not rule on the merits of ICP's claims. Following the burden-shifting analysis of the HUD regulations, the Supreme Court also emphasized that to successfully assert a disparate impact claim, plaintiffs must demonstrate a robust causality between the challenged practice and the disparity.

On remand, the district court reconsidered whether ICP indeed made a prima facie showing of disparate impact in light of the guidance from the Supreme Court decision. The district court last week held that ICP’s claims of disparate impact failed under the current standards for a number of reasons.

First, the court ruled, ICP failed to identify a specific, facially neutral policy that caused the disparate racial impact, as required by the first prong of the burden-shifting analysis. ICP challenged TDHCA's exercise of discretion in its LIHTC awards, but the court held that it could not rely on a generalized policy of discretion (even when considered cumulatively) to prove disparate impact. Absent a specific TDHCA policy, the court could not determine whether the practice actually created a barrier to fair housing or devise an adequate race-neutral remedy to alleviate the alleged disparities.

Next, the district court held that ICP's claim failed because it was, in essence, a complaint for disparate treatment, despite the disparate impact language. Relying on prior case law, the court found that because ICP challenged the results of TDHCA's subjective discretion rather than the existence of the discretion itself, the claim should be dismissed.

Lastly, the district court found that ICP's claim failed to show a robust causal connection between TDHCA's use of discretion in awarding LIHTCs and statistical disparities between LIHTC awards in different areas. ICP could not prove that TDHCA's use of discretion, and not other factors such as federal legislative action, actually caused the statistical disparities throughout the years evaluated.

The outcome of this case reflects an ongoing trend in federal and state court decisions applying the new Supreme Court "safeguards" against "abusive disparate impact claims." Almost all plaintiffs have experienced multiple difficulties making a prima facie case of disparate impact liability under the FHA and have seen their claims dismissed.

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.

The firm's Housing Group regularly represents and advises clients, including rental property owners, on a range of issues related to the FHA, and defends a variety claims brought under its provisions.


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