February 2012

Fair Housing: Disparate Impact Case Reinstated

A decade-long battle over the redevelopment of a low income neighborhood in Mt. Holly, N.J. will continue now that the Third Circuit Court of Appeals has reversed a dismissal on summary judgment of the residents’ Fair Housing Act lawsuit: Mt. Holly Gardens Citizens in Action, Inc. v. Township of Mt. Holly, 2011 WL 4035780 (3d. Cir. 2011).

Redevelopment Plan
Mt. Holly township has adopted and begun implementation of a plan for the redevelopment of the Mt. Holly Gardens neighborhood, a 30-acre area of 329 homes, most of which are (or were) brick townhouses. According to the 2000 census, the neighborhood was 46 percent African-American, 29 percent Hispanic and 20 percent non-Hispanic Whites. Almost all of the residents were classified as “low income,” and most were “very low” or “extremely low” income.

The neighborhood had significant problems that warranted a redevelopment plan. It was crowded, which led to over paving and drainage problems. Some owners were absentee landlords, and many properties had fallen into disrepair, while others were boarded up. These conditions facilitated crime – although comprising less than 2 percent of the township’s land area and 10 percent of its population, Mt. Holly Gardens suffered from 28 percent of the town’s crime in 1999. In 2000, a study commissioned by the township concluded that the area “offered a significant opportunity for redevelopment” due to blight, excess land coverage, poor land use and high crime rates.

Over the following years, the township created a number of redevelopment plans, the key element of which was the demolition of most of the existing homes in the neighborhood and their replacement with new housing, the vast majority of which would be market-rate. Many residents opposed the plans, believing they would be unable to find affordable replacement housing in the town. The township had offered qualified homeowners $15,000 in cash plus a $20,000 interest-free loan to help them purchase new properties; tenants were offered up to $7,500 in relocation assistance, but opponents believed these amounts inadequate.

The township began acquiring and demolishing housing units and by 2008 had demolished 75 units and purchased another 148 which were left vacant, rendering the neighborhood essentially uninhabitable. By 2011, only 70 homes remained in private hands, and most of the remaining units had been demolished.

Fair Housing Claims
In 2003, a community group filed suit against Mt. Holly in New Jersey court, but the suit was ultimately dismissed with a finding the discrimination claims were not ripe because the plan had not yet been implemented. In 2008, they filed suit in federal court, raising the discrimination claims again, this time under the Fair Housing Act, and seeking an injunction against the redevelopment as well as damages and compensation. The district court granted summary judgment to the township, holding that there was no prima facie case of discrimination and that, even if such a case had been made, the plaintiffs had failed to show that there was a less discriminatory alternative.

Disparate Impact Claim
The Third Circuit reversed and remanded, stating that the trial court had failed to give the plaintiffs the benefit of reasonable inferences and had misapplied the test for disparate impact.

A claim for disparate impact under the FHA proceeds in a series of shifting burdens. First, the plaintiff must make out a prima facie case, showing that the challenged acts have a racially discriminatory effect – that is, they disproportionately burden a protected class. If that is shown, the defendant must then show that its actions have a legitimate, nondiscriminatory purpose and that there is “no alternative course of action that would enable that interest to be served with less discriminatory impact.” Finally, if the defendant can make this showing, the plaintiff can still prevail if it can show that there is such an alternative course of action.

The appellate court held that it had been an error to dismiss the case because, when viewed in the light most favorable to the plaintiffs, the evidence was sufficient to establish a prima facie case. The evidence showed that 22 percent of African-American households and 32 percent of Hispanic households in the town would be affected, compared with 2.7 percent of White households. Moreover, only one in five minority households in the county could afford market-rate replacement housing, compared with four out of five White households. The district court had failed to give adequate weight to this evidence in light of the stage of the proceedings, which called for all reasonable inferences to be made against the granting of summary judgment.

Moreover, the court held that the district court had applied a legally incorrect test by looking at discriminatory treatment rather than discriminatory effect. That is, the trial court essentially held that because minorities in the neighborhood were treated the same as the White residents, there was no discrimination. This was an error because it ignored the fact that the challenged plans affected a disproportionate number of minorities. The township argued that such a test would make it nearly impossible to redevelop minority neighborhoods, a claim that the court rejected. The FHA permits such plans, but requires that the township examine whether redevelopment can be achieved with less of a discriminatory impact.

Whether such an alternative exists, the court held, is “similar to the test of whether the defendant has demonstrated that a requested accommodation [for a disabled person] is ‘unreasonable.’” This requires a showing that the alternative would “impose an undue hardship under the circumstances of this specific case.” As this could not be resolved without an evaluation of conflicting evidence, summary judgment was inappropriate.

This article was written by Alvin L. Arnold and originally appeared in BDO USA, LLP's "Real Estate Monitor" newsletter (Winter 2012). Copyright 2012 BDO USA, LLP. All rights reserved. www.bdo.com. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.