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Burbank Apartments Tenant Association v. Kargman

Supreme Judicial Court of Massachusetts, Suffolk

April 13, 2016

Burbank Apartments Tenant Association & others [1]
v.
William M. Kargman [2] & others. [3]

         Argued December 8, 2015.

         Corrected April 22, 2016.

Page 108

          Civil action commenced in the Boston Division of the Housing Court Department on March 16, 2011.

         A motion to dismiss was heard by Jeffrey M. Winik, J. The Supreme Judicial Court granted an application for direct appellate review.

          Ann E. Jochnick ( James M. McCreight with her) for the plaintiffs.

          Janet Steckel Lundberg for the defendants.

         The following submitted briefs for amici curiae:

          John Cann, of Minnesota, for Sargent Shriver National Center on Poverty Law & others.

          Harry J. Kelly & Joshua S. Barlow for Greater Boston Real Estate Board & others.

          Joseph D. Rich & Thomas Silverstein, of the District of Columbia, Oren M. Sellstrom, of California, & Laura Maslow-Armand for Lawyers' Committee for Civil Rights Under Law & another.

          John J. McDermott, of Virginia, & Eleftherios Papadopoulos for National Apartment Association & another.

          Esme Caramello, Louis Fisher, Erika Johnson, Aditya Pai, & Katie Renzler for Fair Housing Center of Greater Boston & others.

          Roberta L. Rubin, Special Assistant Attorney General, for Department of Housing and Community Development.

         Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, & Hines, JJ.

         OPINION

          [48 N.E.3d 397] Cordy, J.

          This case arises out of a decision made by the defendants, the principals and owners of Burbank Apartments (Burbank), not to renew Burbank's project-based Section 8 housing assistance payments contract [48 N.E.3d 398] (HAP) with the United States Department of Housing and Urban Development (HUD) when its forty-year mortgage subsidy contract expired on March 31, 2011. In lieu of those project-based subsidies, the defendants opted instead to accept from its tenants Section 8 enhanced vouchers, enabling tenants living in units subsidized on a project basis to remain as tenants under an alternative Federal housing program.[4] See 42 U.S.C. § 1437f (2012).

Page 109

          The plaintiffs, comprised of current and potential Burbank tenants, complained that Burbank's decision violated § 3604 of the Federal Fair Housing Act (FHA or Title VIII), 42 U.S.C. § § 3601 et seq. (2012), and the Massachusetts antidiscrimination law, G. L. c. 151B, § 4, both by virtue of intentional discrimination as well as disparate impact on members of otherwise protected classes of citizens. In particular, the plaintiffs alleged that the defendants' decision not to renew their HAP would have a disproportionately negative effect on people of color, the disabled and elderly, female-headed households, recipients of public and rental assistance, and families with children (collectively, members of protected classes).

         In March, 2011, the plaintiffs moved to enjoin the defendants from allowing Burbank's project-based HAP to lapse; the defendants demurred, and a Housing Court judge (motion judge) denied the injunction. The plaintiffs filed an amended complaint in June, 2011, which the defendants moved to dismiss for failure to state a claim, pursuant to Mass. R. Civ. P. 12 (b) (6), 365 Mass. 754 (1974), and oral arguments were held on January 25, 2012. On December 31, 2014, the motion judge granted the defendants' motion to dismiss. The plaintiffs appealed.

         The plaintiffs' housing discrimination claims, based on the theory of disparate impact, raise an issue of first impression in Massachusetts concerning the relationship among Section 8, the FHA, and the Massachusetts antidiscrimination statute (together the fair housing statutes). Specifically, can a private building owner's decision not to renew participation in the project-based Section 8 subsidy program in favor of tenant-based Section 8 subsidies be the basis of a disparate impact claim when such decision was otherwise permitted by both Federal and State statutes, as well as by contract? And, if so, what are the pleading requirements for making out such a claim?

         In his comprehensive memorandum of decision and order, the motion judge determined that a disparate impact claim under these circumstances is not legally cognizable, and never reached the second question. Subsequently, the United States Supreme Court released its decision in Texas Dep't of Hous. & Community Affairs v. The Inclusive Communities Project, Inc., 135 S.Ct. 2507, 2525, 192 L.Ed.2d 514 (2015) ( Inclusive Communities ), holding that claims,

Page 110

such as this one, based on the theory of disparate impact are generally cognizable under the FHA. We granted the plaintiffs' application for direct appellate review to consider their allegations in the context of the FHA, as well as the potential for similar claims under Massachusetts antidiscrimination law, and to examine the impact of the Inclusive Communities decision.

         We affirm the decision of the motion judge granting the motion to dismiss, although [48 N.E.3d 399] on somewhat different grounds. We conclude that even where the property owner has acted in accord with statute, regulation, and contract, a disparate impact claim under the fair housing statutes can be brought, subject to rigorous pleading requirements. The plaintiffs in the present case, however, have not satisfied those requirements.[5]

         1. Background.

         a. Statutory background.

         In 1965, Congress, under the auspices of the National Housing Act of 1934, approved a mortgage insurance program known as § 221(d)(3) of the National Housing Act, 12 U.S.C. § 1715l(d)(3) (2012). See 12 U.S.C. § 1701s(a). Pursuant to § 221(d)(3), which was " designed to assist private industry in providing housing for low and moderate income families and displaced families," 12 U.S.C. § 1715l(a), HUD can offer below market interest rate (BMIR) mortgage loans to private property owners in exchange for an agreement from those owners to provide affordable housing.[6] See 12 U.S.C. § 1715l(d)(3). The regulatory agreements, and the attached mortgages, may have up to forty-year terms, 12 U.S.C. § 1701s(a), but permit the owners to opt to pay down those mortgages and withdraw from the program after twenty years. 12 U.S.C. § 1715l(g)(4)(A).

          The Section 8 housing program was enacted in 1974 for the

Page 111

purpose of " aiding low-income families in obtaining a decent place to live and of promoting economically mixed housing." 42 U.S.C. § 1437f(a).[7] See Figgs v. Boston Hous. Auth., 469 Mass. 354, 362, 14 N.E.3d 229 (2014); Feemster v. BSA Ltd. Partnership, 471 F.Supp.2d 87, 91 (D.D.C. 2007), aff'd, 548 F.3d 1063, 383 U.S.App.D.C. 376 (D.C. Cir. 2008). Housing assistance through Section 8 is obtained through either " tenant-based" or " project-based" subsidies. 24 C.F.R. § 982.1(b)(1) (2015). Both forms are funded by the Federal government and administered by State or local public housing agencies (PHAs). See 42 U.S.C. § 1437f(a); 24 C.F.R. § 982.1(a)(1). For project-based assistance, the " rental assistance is paid for families who live in specific housing developments or units." 24 C.F.R. § 982.1(b)(1). Tenant-based assistance, on the other hand, is appurtenant to the tenant, and the " assisted unit is selected by the family," so that the tenant may opt to " rent a unit anywhere ... in the jurisdiction of a PHA that runs a voucher program." Id. See 42 U.S.C. § 1437f(r); 24 C.F.R. § § 982.353(a) (2010), 982.355(a) (2015). After Congress enacted the Section 8 program in 1974, many of the units built with the assistance of the § 221(d)(3) [48 N.E.3d 400] mortgage program were transferred to project-based Section 8 rent subsidies, including many of those at Burbank. See Feemster, supra.

          In 1987, and in response to subsequent concerns that owners operating under § 221(d)(3) regulatory agreements were opting to pay down their mortgages early and opt out of the Section 8 program, see Franconia Assocs. v. United States, 536 U.S. 129, 136, 122 S.Ct. 1993, 153 L.Ed.2d 132 (2002), citing H. R. Rep. No. 100-122, at 53 (1987) (interpreting 1994 version of 42 U.S.C. § 1472[c][B]), Congress enacted the Emergency Low-Income Housing Preservation Act of 1987 (ELIHPA) to provide incentives for continued participation by property owners. Franconia Assocs., supra, citing 42 U.S.C. § 1472(c)(4)(B) (1994 & Supp. V). Congress also later provided further protection for tenants, including eligibility for tenant-based vouchers on the expiration of a project-based HAP. 12 U.S.C. § 4113 (2012). Pursuant to that statute, where an owner opted to terminate or discontinue project-based subsidies, low income tenants in the units previously subject to that program automatically would be eligible for Section 8 mobile vouchers, see 12 U.S.C. § 4113(a), and, in some instances, enhanced vouch-

Page 112

ers. See 12 U.S.C. § 4113(f). Further, property owners opting out of project-based subsidies -- but continuing to maintain the property for residential rental occupancy -- are required to accept the tenant-based Section 8 subsidies for which their tenants were automatically eligible. 12 U.S.C. § 4113(d).

          In 2009, the Legislature enacted cognate legislation, G. L. c. 40T (c. 40T), which addresses the rights and obligations of owners operating with project-based Section 8 subsidies. See G. L. c. 40T, § 1. See also St. 2009, c. 159, § 1. Like the equivalent Federal statutes, c. 40T provides substantive protections for tenants previously occupying units covered by project-based subsidies. See, e.g., G. L. c. 40T, § § 2 ( b ), 7. See also 42 U.S.C. § 1437f(c)(8)(B). Also consonant with Federal law, however, c. 40T does not restrict owners from prepaying their mortgages or opting out of their subsidy contracts after doing so. See G. L. c. 40T, § 2 ( a ) (" Nothing herein shall prohibit the owner from taking actions to terminate an affordability restriction" ).

          The distinctions between project-based and tenant-based subsidies (and among the various tenant-based subsidies themselves) are not insignificant. Generally, all Section 8 tenants contribute a portion of their income to the rent based on an income indicator, amounting to the higher of thirty per cent of their monthly adjusted income or ten per cent of their monthly gross income.[8] See 42 U.S.C. § § 1437a(a)(1), 1437f(o)(2)(A). There are, however, variations on the general scheme depending on the subsidy program, including who is responsible for determining a unit's rental price. For project-based entities, the PHA is responsible for setting rental prices for specific units. See 24 C.F.R. § § 983.301 (2014), 983.302 (2006).[9]

          Rental prices for tenants holding tenant-based vouchers, on the other hand, are negotiated between the owner and the tenant. 24 C.F.R. § 982.506 (1999). The Secretary of HUD sets a " payment standard" applicable to the units selected by the tenant, based on the fair market rental [48 N.E.3d 401] value of the unit, and in accordance with HUD regulation. See 42 U.S.C. § 1437f(o)(1)(A)-(B). Where the rent established in negotiation between the owner and the tenant exceeds the established payment standard, the PHA will pay only the difference between the income indicator and the payment

Page 113

standard, as opposed to the rental value, meaning that holders of tenant-based vouchers may be subject to paying a greater portion of their income than tenants living in project-based units. See id. at § 1437f(o)(2)(B).

          Enhanced vouchers, a more protective variation on the tenant-based subsidy, insulate holders from these rent variances, as their rent payments are still determined based on the difference between the income indicator and the rent, even if that rent exceeds the payment standard. Id. at § 1437f(t)(1)(B). In either tenant-based subsidy scenario, however, the rental value negotiation between an owner and tenant-based subsidy holder is subject to PHA approval, meaning that PHAs can opt not to approve a rental agreement and refuse to pay the subsidy if the PHA determines that the rent is not " reasonable." See 24 C.F.R. § 982.507 (2014); 42 U.S.C. § 1437f(o)(10)(B). Because rents are established by the PHA under the project-based subsidy program, tenants living in project-based units are not subject to any reasonableness determination.[10]

         b. Factual and procedural background.[11]

         The seven named plaintiffs in the amended complaint are an amalgamation of current Burbank tenants, prospective tenants, and organizations that represent the interests of other Burbank tenants and more prospective Burbank residents in the community. The four individual plaintiffs, En Ci Guan, Richard Webster, Byron Alford, and Satisha Cleckley, are all members of protected classes. Prior to the defendants' decision not to renew their Section 8 HAP, Guan and Webster lived in units supported by Section 8 project-based subsidies. Alford was a resident of a Burbank unit not supported by the Section 8 project-based subsidy, and Cleckley was a nontenant who had sought to apply for an apartment at Burbank. Neither Alford nor Cleckley was ever in receipt of the project-based subsidy. The individual plaintiffs claimed that the decision to allow the project-based subsidy to lapse discriminates against current Burbank tenants and potential Burbank tenants in the Fenway community. The three organizational plaintiffs, Burbank

Page 114

Apartments Tenant Association, made up of tenants who reside at Burbank; the Massachusetts Coalition for the Homeless, a nonprofit corporation that works with homeless individuals and families; and the Fenway Community Development Corporation, a nonprofit corporation devoted to enhancing diversity in the Fenway neighborhood, alleged that the loss of low income housing at Burbank would harm the neighborhood. The defendants are the principals and owners of Burbank.[12]

          [48 N.E.3d 402] Burbank is a scattered site 173-unit rental development located in the Fenway neighborhood of Boston. Beginning in 1970, the defendants began renovation of Burbank with the assistance of a federally insured and subsidized § 221(d)(3) BMIR mortgage loan. See 12 U.S.C. § 1715l(d)(3). Pursuant to their regulatory agreement with HUD, the defendants were obligated to lease the Burbank apartments to low or moderate income families for " so long as the contract of mortgage insurance continues in effect." The defendants' mortgage was to be fully paid by April 1, 2011, with prepayment of the mortgage permitted as of April 1, 1991.

         In 1982, the eligible tenants occupying Burbank's units began to receive support from project-based Section 8 subsidies.[13] Sixty-seven of the 173 units were designated as project-based Section 8 units.

         The defendants opted not to prepay their loan in 1991. Instead, they signed an ELIPHA use agreement[14] in 1994, specifying that HUD " shall not require the [defendants] to renew or extend any assistance contract beyond [April 1, 2011,] and shall not subject the [defendants] to more onerous requirements than those which exist under the Section 8 program." The use agreement remained in effect for the balance of the HAP.

         In 2010, the defendants provided a one-year notice of expiration to HUD and the ...


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