Oct. 29 (Bloomberg) -- The U.S. Supreme Court signaled interest in a case that could shield lenders from many race-bias lawsuits, asking the Obama administration for its views on clash over the demolition of a predominantly minority New Jersey neighborhood.
The appeal by Mount Holly, New Jersey, asks the justices to decide whether the U.S. Fair Housing Act authorizes suits even without allegations of intentional bias. Lower courts have said suits can instead claim that a government policy or a company lending practice has a discriminatory impact.
The issue is potentially a timely one for lenders because the Obama administration has repeatedly used the so-called disparate-impact legal theory in pressing lawsuits against banks. Over the last year, Bank of America Corp., Wells Fargo & Co. and SunTrust Banks Inc. have agreed to pay a total of almost $500 million to settle claims.
“Defending allegations of disparate impact -- even if proven to be meritless -- is typically very expensive,” five lender trade groups, led by the American Financial Services Association, argued in court papers urging the justices to intervene.
The Supreme Court’s just-begun term may redefine the legal protections for racial minorities. The court under Chief Justice John Roberts already is considering rolling back university affirmative action programs and may take up a challenge to a central part of the 1965 Voting Rights Act.
The justices directed their request today to U.S. Solicitor General Donald Verrilli, the administration’s top Supreme Court lawyer.
The case stems from an effort by Mount Holly to redevelop what it said was a blighted, high-crime area. Known as the Gardens, the neighborhood was originally developed to provide homes for returning World War II veterans and their growing families. In more recent years, the Gardens was the only predominantly black and Hispanic area in town, with 75 percent minority residents in 329 residential units.
The town began buying homes in the Gardens, in most cases paying between $30,000 and $50,000, until only 70 remained in private hands. The redevelopment effort has since stalled, even as the town has destroyed scores of homes and accumulated $18 million in debt. No new houses have been built, and the remaining structures now form a patchwork amid vacant lots.
A group of current and former residents sued, claiming the effort had a disparate impact on minorities. A federal appeals court said the case could go forward.
In its appeal, Mount Holly says the Fair Housing Act is written differently than other discrimination statutes, indicating that Congress didn’t intend to allow disparate-impact claims. The town said government agencies shouldn’t be left vulnerable to suits over non-discriminatory policies.
“Allowing disparate impact claims under the FHA would render illegal many legitimate governmental and private activities designed to promote the general welfare of the community,” Mount Holly argued.
The suing residents urged the court not to hear the appeal.
“Where the courts of appeals are in broad and longstanding agreement on an issue of statutory interpretation and Congress has acquiesced in this interpretation for nearly 38 years, there is simply no need for this court to weigh in on the meaning of the statutory text,” they said in court papers.
The Supreme Court had agreed to consider the disparate-impact issue in its last term, in a case involving St. Paul, Minnesota. The city dropped its appeal in February, scuttling the case.
Congressional Republicans have accused the Obama administration of improperly inducing St. Paul to drop the case -- to avert a Supreme Court decision limiting the Fair Housing Act -- by promising to stay out of an unrelated fraud suit against the city.
Although lending is governed by a different part of the Fair Housing Act, the financial-services trade groups said a high court ruling will probably affect both types of cases.
The banks’ stance is a risky one, says Tom Goldstein, a Washington lawyer who represented a group of landlords suing St. Paul under the Fair Housing Act in last year’s case. Goldstein, whose Scotusblog website is sponsored by Bloomberg Law, said the banks instead could have argued that the part of the law covering lending precludes disparate-impact claims even if the housing provision doesn’t.
“Lenders may be making a grave mistake by embracing this challenge,” Goldstein said. The lending provision “provides a better defense than this one.”
The Fair Housing Act is one of a handful of statutes that bar discrimination in financial services. Lenders have also sought to stop disparate-impact suits under the Equal Credit Opportunity Act, the law barring discrimination in all types of lending.
The disparate-impact doctrine has drawn attention over the past year because a new regulator, the Consumer Financial Protection Bureau, adopted it. The CFPB, created by the Dodd-Frank financial regulatory overhaul of 2010, handles enforcement of the Equal Credit Opportunity Act.
The case is Township of Mount Holly v. Mount Holly Gardens Citizens in Action, 11-1507.
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