Cooperatives & Condominiums

Three-Reference Policy Serves As Foundation for Disparate Impact Claim

Fair Housing Justice Center, Inc. v. Silver Beach Gardens Corp. NYLJ 9/2/10, U.S. Dist. Ct., S.D.N.Y. (Patterson, J.)

In an action against two co-operative corporations by a fair housing organization, FHJC, alleging violations of the Fair Housing Act, the co-ops moved to dismiss for lack of standing and for failure to state a claim. The court denied the motions to dismiss, holding that the organization's claim that the co-op corporation's policy of requiring purchasers to obtain three references from current residents could potentially serve as the foundation for a disparate impact claim.

FHJC sent white testers and African-American testers to a real estate broker who had sold numerous homes in the two co-op communities. The broker had informed the white testers of the co-ops' requirement that new purchasers obtain three references from existing residents, but assured them they would have no trouble satisfying the requirement. Employees of one of the corporations reaffirmed that there was a three-reference policy, but when pressed, allegedly made the statement that “you need the three letters, but what I don't know can't hurt me.” By contrast, the broker informed the African-American testers that they had to know three residents to buy in the communities, and when the testers informed her that they didn't know anyone, she allegedly told them that there was no way they would be approved. She refused to show them any homes in either of the co-op communities. FHJC and the individual testers then brought this action against the broker and the two corporations, alleging violation of the Fair Housing Act. One corporation moved to dismiss for failure to state a claim, while the other moved to dismiss for lack of standing.

The court concluded that FHJC had organizational standing. On the merits of the claim, the court noted that in moving to dismiss for failure to state a claim, the co-op corporation had emphasized that it had no direct contact with the testers and could not be held liable for the acts of the broker. The court, however, emphasized that FHJC's complaint against the co-op alleged that the three-reference policy itself constituted a violation, independent of any action of the broker. The court first noted that the complaint alleges selective enforcement of the three-reference policy, supported by the broker's statements to the two sets of testers, and by the equivocal statement of the building employee. The court held that selective enforcement could support a claim of intentional discrimination in violation of section 3604 of the Fair Housing Act. The court then held that plaintiffs were entitled to use statistical data to demonstrate that the reference policies had a disparate impact on minority purchasers. Finally, the court rejected the argument that without an actual application from one of the testers, FHJC could not recover for a violation of the statute.

Campbell v. Mark Hotel Sponsor, LLC, NYLJ 9/16/10, U.S. Dist.Ct., SDNY (Pauley, J.)

In an action by co-op purchaser for breach of contract, co-op sponsor moved to dismiss for failure to state a claim. The court granted the motion in part and denied it in part, holding that the sale contract did not obligate purchaser to close on a unit that was not in habitable condition.

Purchaser contracted to buy the proprietary lease and shares associated with a unit at The Mark Hotel for $18.75 million. On May 19, 2008, she made two deposits for a total of more than $4.6 million. The purchase agreement obligated purchaser to close on the suite once a temporary or permanent certificate of occupancy was issued, notwithstanding any construction of the building not preventing purchaser's occupation of the suite. The agreement also entitled purchaser to make an inspection one week prior to closing. If the purchaser did not close by the required date, she would have 30 days to cure the default or purchaser could cancel and retain the deposit as liquidated damages. Sponsor scheduled a closing for March 31, 2009. Then, on March 25, sponsor adjourned the closing until April 7. On April 2, sponsor again adjourned the closing until April 16. On April 13, the New York City Department of Buildings issued a temporary certificate of occupancy. Two days later, purchaser inspected the suite, and allegedly discovered defects that made it unsuitable for permanent occupancy, including no heating or hot water, unfinished bathrooms, and an improperly functioning elevator. Purchaser sought assurances about the project's financial viability, but sponsor refused to provide them. She then adjourned the closing until May 11, and requested another inspection, which sponsor denied. Purchaser then applied to the state Attorney General for a determination on the disposition of down payments. Sponsor then declared purchaser in default, and asserted a claim to the deposit. Purchaser then brought this action alleging material breach of the purchase agreement. Sponsor moved to dismiss.

In refusing to dismiss the breach of contract claims, the court rejected sponsor's argument that purchaser was obligated to close once a certificate of occupancy was issued. The court concluded that the purchase agreement did not relieve sponsor of the obligation to provide a habitable apartment; moreover, the court held that even if the suite was habitable by the May 11 closing date, purchaser was not obligated to accept the apartment without an additional inspection of the suite. The court noted that because New York applies a caveat emptor rule to purchasers who do not inspect property prior to accepting it, purchaser had a right to such an inspection, especially in light of the alleged disrepair upon the first viewing. As a result, the court denied sponsor's motion to dismiss the breach of contract claims. The court, however, noted that purchaser's claim for return of the deposits contained allegations that the sponsor's actions were “sham” or “collusory.” Because those claims sound in fraud, they face heightened pleading requirements. But the court noted that the allegations of fraud are unnecessary to sustain the claim for return of the deposit. As a result, the court dismissed the fraud claim, but without prejudice to re-pleading the claim to describe her application for release of the escrowed funds.

Three-Reference Policy Serves As Foundation for Disparate Impact Claim

Fair Housing Justice Center, Inc. v. Silver Beach Gardens Corp. NYLJ 9/2/10, U.S. Dist. Ct., S.D.N.Y. (Patterson, J.)

In an action against two co-operative corporations by a fair housing organization, FHJC, alleging violations of the Fair Housing Act, the co-ops moved to dismiss for lack of standing and for failure to state a claim. The court denied the motions to dismiss, holding that the organization's claim that the co-op corporation's policy of requiring purchasers to obtain three references from current residents could potentially serve as the foundation for a disparate impact claim.

FHJC sent white testers and African-American testers to a real estate broker who had sold numerous homes in the two co-op communities. The broker had informed the white testers of the co-ops' requirement that new purchasers obtain three references from existing residents, but assured them they would have no trouble satisfying the requirement. Employees of one of the corporations reaffirmed that there was a three-reference policy, but when pressed, allegedly made the statement that “you need the three letters, but what I don't know can't hurt me.” By contrast, the broker informed the African-American testers that they had to know three residents to buy in the communities, and when the testers informed her that they didn't know anyone, she allegedly told them that there was no way they would be approved. She refused to show them any homes in either of the co-op communities. FHJC and the individual testers then brought this action against the broker and the two corporations, alleging violation of the Fair Housing Act. One corporation moved to dismiss for failure to state a claim, while the other moved to dismiss for lack of standing.

The court concluded that FHJC had organizational standing. On the merits of the claim, the court noted that in moving to dismiss for failure to state a claim, the co-op corporation had emphasized that it had no direct contact with the testers and could not be held liable for the acts of the broker. The court, however, emphasized that FHJC's complaint against the co-op alleged that the three-reference policy itself constituted a violation, independent of any action of the broker. The court first noted that the complaint alleges selective enforcement of the three-reference policy, supported by the broker's statements to the two sets of testers, and by the equivocal statement of the building employee. The court held that selective enforcement could support a claim of intentional discrimination in violation of section 3604 of the Fair Housing Act. The court then held that plaintiffs were entitled to use statistical data to demonstrate that the reference policies had a disparate impact on minority purchasers. Finally, the court rejected the argument that without an actual application from one of the testers, FHJC could not recover for a violation of the statute.

Campbell v. Mark Hotel Sponsor, LLC, NYLJ 9/16/10, U.S. Dist.Ct., SDNY (Pauley, J.)

In an action by co-op purchaser for breach of contract, co-op sponsor moved to dismiss for failure to state a claim. The court granted the motion in part and denied it in part, holding that the sale contract did not obligate purchaser to close on a unit that was not in habitable condition.

Purchaser contracted to buy the proprietary lease and shares associated with a unit at The Mark Hotel for $18.75 million. On May 19, 2008, she made two deposits for a total of more than $4.6 million. The purchase agreement obligated purchaser to close on the suite once a temporary or permanent certificate of occupancy was issued, notwithstanding any construction of the building not preventing purchaser's occupation of the suite. The agreement also entitled purchaser to make an inspection one week prior to closing. If the purchaser did not close by the required date, she would have 30 days to cure the default or purchaser could cancel and retain the deposit as liquidated damages. Sponsor scheduled a closing for March 31, 2009. Then, on March 25, sponsor adjourned the closing until April 7. On April 2, sponsor again adjourned the closing until April 16. On April 13, the New York City Department of Buildings issued a temporary certificate of occupancy. Two days later, purchaser inspected the suite, and allegedly discovered defects that made it unsuitable for permanent occupancy, including no heating or hot water, unfinished bathrooms, and an improperly functioning elevator. Purchaser sought assurances about the project's financial viability, but sponsor refused to provide them. She then adjourned the closing until May 11, and requested another inspection, which sponsor denied. Purchaser then applied to the state Attorney General for a determination on the disposition of down payments. Sponsor then declared purchaser in default, and asserted a claim to the deposit. Purchaser then brought this action alleging material breach of the purchase agreement. Sponsor moved to dismiss.

In refusing to dismiss the breach of contract claims, the court rejected sponsor's argument that purchaser was obligated to close once a certificate of occupancy was issued. The court concluded that the purchase agreement did not relieve sponsor of the obligation to provide a habitable apartment; moreover, the court held that even if the suite was habitable by the May 11 closing date, purchaser was not obligated to accept the apartment without an additional inspection of the suite. The court noted that because New York applies a caveat emptor rule to purchasers who do not inspect property prior to accepting it, purchaser had a right to such an inspection, especially in light of the alleged disrepair upon the first viewing. As a result, the court denied sponsor's motion to dismiss the breach of contract claims. The court, however, noted that purchaser's claim for return of the deposits contained allegations that the sponsor's actions were “sham” or “collusory.” Because those claims sound in fraud, they face heightened pleading requirements. But the court noted that the allegations of fraud are unnecessary to sustain the claim for return of the deposit. As a result, the court dismissed the fraud claim, but without prejudice to re-pleading the claim to describe her application for release of the escrowed funds.