Scott E. Mollen

Co-ops—Buyer Failed to Show Co-op Rejected Him Based on Bias Against A Mexican-American—Fair Housing Act—Civil Rights Act of 1866—New York Executive Law—NYC Administrative Code and New York Civil Rights Law

A plaintiff sued a cooperative corporation (co-op), and members of its board of directors (board or defendants). He alleged that the defendants rejected his application to purchase a cooperative apartment because he is Mexican-American. He asserted violations of the Fair Housing Act (FHA), 42 U.S.C. §3601 et seq., the Civil Rights Act of 1866, 42 U.S.C. §1982, NY Exec. Law (NYSHRL) §296(5)(a)(2), NYC Admin. Code (NYCHRL) §8-107(5), and NY Civil Rights Law (NYCRL) §19-a.

The plaintiff originally brought public accommodation and housing discrimination claims "under a disparate treatment and a disparate impact theory." A first amended complaint (FAC) was dismissed without prejudice. The plaintiff had filed a second amended complaint (SAC). Thereafter, the court dismissed the disparate impact and public accommodation claims, but sustained remaining claims. The subject decision addressed the defendants' motion for summary judgment and motion to strike certain declarations filed by the plaintiff. The court granted the defendants' motion to strike in part and motion for summary judgment in its entirety.

The plaintiff is a United States-born "businessman of Mexican-American heritage," with an alleged net worth in excess of $50 million. After entering into a purchase-sale contract, the plaintiff submitted a "board package" which included, inter alia, "the application, a copy of the sale contract,…copies of the first pages of (his)…recent federal income tax returns, and a financial statement." The parties disputed whether the board package included additional financial information.

Since 2013, the defendant president of the board (president) had recommended that the board approve every applicant prior to the plaintiff. The co-op had previously required applicants whose primary residences and assets are located outside the United States to pay a large security deposit. The co-op had not required "security deposits from foreign applicants who maintain, in its view, substantial liquid assets within the United States."

The prior owner of the apartment filed for bankruptcy. The co-op had scheduled a bankruptcy court hearing to approve a contract of sale to "A." The plaintiff and sought to enter a higher bid. He was the winning bidder based on a bid of $1.275 million and had signed the contract with the trustee to purchase the apartment for $1.275 million.

The board then asked its counsel to conduct a background check on the plaintiff. The background check report indicated, inter alia, that there were approximately 60 lawsuits to which the plaintiff was "either a party, the corporate officer of a party, or a witness, or in which his name was otherwise associated," including litigation between the plaintiff and the Federal Deposit Insurance Corporation (FDIC).

The president asserted that two of those decisions were "particularly influential in his decision to recommend to the board that it not approve (plaintiff's) application." The FDIC had decided to remove the plaintiff as a director of a bank and to bar the plaintiff from "participating in, voting shares of, or serving on the board of any federally regulated bank for life." The FDIC asserted that the plaintiff had used his position at a bank to obtain "loans above applicable limits for entities in which he and his close associates were interested, as well as to engage in other self-interested lending practices." A federal circuit court of appeals stated that the plaintiff's actions "evidenced personal dishonesty" and the plaintiff had "acted untruthfully, and in violation of his fiduciary duty."

Although the president had reviewed the litigation information before recommending that the plaintiff's application be denied, however, the plaintiff alleged that the president, before receiving the report, had "already negatively evaluated the plaintiff's application." The president asserted that plaintiff's "financial statements and his involvement in the prior lawsuits raised concerns…." The financial statements had not been verified by an outside accountant or supported by brokerage statements. The president was concerned that the financial records "did not reflect sufficient cash or income to pay $1,275,000 for the apartment, plus the monthly maintenance payments," as well as the cost for the plaintiff's other residences. The president did not request additional information from the plaintiff. The plaintiff argued that an outside accountant had prepared his financial statements and the co-op had never requested brokerage statements.

The defendants asserted that the plaintiff was rejected based on evidence of the plaintiff's "litigious tendencies," "character," and "personal dishonesty" and financial condition. board minutes cited concerns as to inadequate finances and many litigations. The board had unanimously, with the exception of one board member not present, rejected the plaintiff's application.

At the time of rejection, the co-op had not disclosed to the plaintiff the reasons for the rejection. The co-op rejected the plaintiff's requests for reconsideration and an interview. The plaintiff thereafter sent an email to the board stating that he actually planned to purchase the apartment for his daughter. The president responded that the board did not want to continue the dialogue and the recent disclosure about the daughter's use revealed "a misrepresentation in his board package," since the board package stated that the plaintiff would be the only resident of the unit. The co-op thereafter purchased the apartment for $900,000.

The plaintiff claimed that an executive vice-president of the co-op (EVP) had stated that the plaintiff had been rejected because the board did not want his "kind" as a shareholder. The defendants did not admit or deny such fact, but argued that the EVP "lacked authority to tell any applicant why his or her application" was rejected.

The court had previously held that the plaintiff adequately alleged a prima facie case of housing discrimination under the FHA. However, he had failed to allege that defendants had knowledge of his racial background, "a necessary element of a racial discrimination claim under the FHA." Thus, the court had dismissed that claim.

Noting the "threadbare nature of the allegations," the court also previously dismissed the plaintiff's claims under 42 U.S.C. §§1982 and 2000a. Unlike the FHA, that statute requires that a plaintiff "specifically allege… an intent to discriminate on the basis of race by the defendant." Here, there was a lack of allegations in the (FAC) of "statements or actions indicative of racial animus" and that such complaint "failed to allege discriminatory intent." As to the §2000a claims, the court assumed arguendo that the co-op could constitute a public accommodation since a hotel and restaurant were operated on its premises. However, the only injury alleged in the (FAC) was that the board had denied the plaintiff's bid to attempt to buy an apartment, rather than his being denied access to the co-op's hotel, restaurant, or club, and therefore the FAC failed to state a public accommodation claim.

The court had dismissed a disparate impact theory of liability, since the FAC failed to allege a "significantly adverse or disproportionate impact on persons of a particular type produced by the defendant's facially neutral acts or practices." The court also held that the plaintiff failed to allege that the co-op's "bid process disproportionately affected any particular group." The plaintiff relied upon "conclusory allegations of a 'whites-only' policy based on counsel's unelaborated-upon 'information and belief.'" After dismissing the federal claims, the court had declined to exercise supplemental jurisdiction over the state and city law claims.

The plaintiff had then filed his SAC. The defendants moved to dismiss. Although the plaintiff had pursued FHA claims under both a disparate treatment and disparate impact theory, the court found that the plaintiff had stated a "plausible claim under the former, but not the latter."

The SAC adequately alleged that "the defendant directors were aware that (the plaintiff) was a Mexican-American before they rejected his application." However, the court had held that the SAC's claims under the disparate treatment theory were not defective "for failure to plead facts indicative of discriminatory intent. [T]o state a claim under the FHA, a plaintiff 'need only allege discriminatory effect, and need not show that the decision complained of was made with discriminatory intent.'" However, "the SAC again failed to state an FHA claim under a disparate impact theory," since the new allegations lacked "specifics as to the experiences of other minority group applicants whom he references and are too threadbare to plausibly allege a significantly adverse or disproportionate impact on such groups." The SAC also failed to "identify any neutrally-applied policy that resulted in a disparate impact." The SAC alleged intentional discrimination and "sounded not in disparate impact, but in disparate treatment."

As to the non-FHA housing discrimination claims, the court had found that the SAC's allegations adequately pled such claims "to the extent premised on a disparate treatment theory of liability." The court had dismissed the SAC's public accommodation claims, since the plaintiff had not alleged "that he had been 'refused a benefit of the restaurant qua public accommodation….'" The court also held that the plaintiff's allegation that he had been denied an opportunity to purchase the apartment based on his national origin failed to state a violation of 42 U.S.C §2000a and NYCHRL §8-107(4). The SAC's claim that plaintiff had been denied access to a "club," located at the co-op failed because it did not "plausibly allege that access had been denied on the basis of (the plaintiff's) race or ethnicity."

After the parties pursued discovery, the defendants moved for summary judgment.

The plaintiff sought to utilize certain affidavits after an expert discovery deadline had elapsed. One lawyer "expert" attempted to set forth his insight as to the Fair Housing Law. He opined that typically co-op boards would not evaluate a board package until it is complete and a deviation from such practice "most likely occurs when the board is looking for a reason to justify their denial of an application that they want to deny for improper reasons, such as discrimination." He claimed that "in his professional opinion, the three reasons offered by (the president) for denying (the plaintiff's) applications were pretexts for discrimination."

A second "expert affidavit" contained both factual and expert assertions. The second "expert" was the plaintiff's son. He allegedly overheard the co-op's attorney attempting to convince the trustee in bankruptcy to bar the plaintiff from bidding and on one occasion, he had been denied access to the club located at the co-op.

The court characterized such testimony as that of a "lay fact witness" and it was not violative of the expert testimony deadline. However, that affidavit also included a "linguistic analysis" of the names of various shareholders of the co-op. The court held that the "linguistic" portion of the affidavit was "untimely expert testimony." The son had reviewed the last names of some co-op shareholders and opined that those individuals were of "western European ancestry." The court held that the unexcused noncompliance with the deadline for expert testimony precluded consideration of such testimony. Thus, the court struck the "expert" lawyer's affidavit in its entirety and the son's affidavit to the extent that it purported to submit a "linguistic analysis."

Moreover, the plaintiff did not qualify the "expert" lawyer as an expert on FHA law and the court did not believe that expert testimony on the subject was appropriate. The plaintiff's son was not qualified "by training, education, or experience, to opine on the nationalities, ethnic origins, or backgrounds" of the co-op's shareholders, based on their surnames and, even if he were so qualified, such testimony would be irrelevant.

The court allowed part of an accountant's affidavit with respect to the plaintiff's financial statements. However, the court disregarded the accountant's statements that referred to the board's decision making process, i.e. whether the board "should have contacted him for more information." The accountant did not qualify as an expert on "proper board governance." Thus, the court granted the motion to strike the entirety of the lawyer's affidavit, and parts of the son's and the accountant's affidavits.

Discovery did not support a claim of discriminatory intent. There was no evidence of communications by any board member "explicitly or implicitly, about (plaintiff's) heritage or about Mexican-Americans in general, or about any other protected group, or in any other way suggesting discriminatory intent." There was no evidence that the board treated the plaintiff differently than any other comparable applicant. The co-op's apartments were owned by a "diverse" group of people, including at least three people who were from Mexico. The plaintiff lacked evidence to support his claim that the co-op's "in-house real estate brokers… screen applicants to allow only whites of western European ethnicities to buy and rent apartments," and "discourage minority prospective buyers from applying by telling them 'falsely' that there are no apartments currently available or those that are open for purchase are under contract…" The plaintiff also lacked evidence to establish his claim that the co-op's "apartments were owned exclusively by whites of western European ethnicities."

With respect to the non-discriminatory basis for the rejection of the plaintiff's application, the court noted the federal court decisions. The "financial misconduct and the corresponding FDIC sanction supplied not only a non-discriminatory basis, but a compelling one," for the defendants to reject the plaintiff's application. The plaintiff's "documented litigation history also supplied a non-discriminatory basis for the board to deny his application." The court also cited the plaintiff's involvement with "many lawsuits" and stated that the plaintiff's financial statements also raised non-discriminatory issues as to the plaintiff's ability to pay ongoing costs for the apartment.

The plaintiff had also failed to demonstrate that the president had decided to oppose the plaintiff's application before receiving the report. Accordingly, the court found that the defendants had "proffered a legitimate, non-discriminatory reason – indeed, three – for their denial."

The plaintiff argued that the justifications offered by the defendants were pretextual. He asserted that the co-op "deviated from its standard application procedure, insofar as it used a more stringent review process for him, apparently to unearth reasons to reject him." However, the record did not support such a claim.

Moreover, the court noted that even absent precedent for such a search, the "unusual circumstance in which (plaintiff's) interest surfaced – announcing it at a bankruptcy court hearing at which ("A"'s) bid was set to be approved – provided a legitimate basis for inquiry, via the simple expedient of a database search, into the background of the last-minute bidder." Based on the high cost of purchasing and owning an apartment at the co-op, the "streamlined background check into an applicant along the lines of (co-op's attorney's)…had been justified."

The plaintiff contended that given his $50 million+ net worth, it was "preposterous" to think that he lacked the ability to pay for the $1.275 million apartment. However, the court held that the co-op's president had reasonable concerns as to the plaintiff's finances, particularly given the bankruptcy of the prior owner and the plaintiff's "lifetime financial sanction from the FDIC for lending irregularities." The co-op was not required to request additional information and "draw out the application process, particularly given the other flags regarding (plaintiff), including his striking litigation history, regulatory sanctions, and adjudicated dishonesty…." These factors did not supply a basis to infer anti-Mexican animus.

The plaintiff also argued that he had prevailed in most of the lawsuits, that none involved landlord-tenant law, and he has never been convicted of a crime. However, the co-op was entitled to base its decision on the court decision which cited the plaintiff's lack of honesty and the "sheer number of lawsuits" that the plaintiff had brought. The board's decision not to "plumb other cases in (plaintiff's) long litigation history cannot, without more, be fairly read as a pretext for discrimination."

With respect to the alleged conversation with the co-op's EVP, that EVP denied making such statement, and although he was present during the board's deliberations, since he was not a member of the board, he had no basis to claim to know the thought processes of its members. Thus, the court held that the EVP "lacked a competent basis to assert that the board sub silentio, had acted out of anti-Mexican animus." Moreover, the words "your kind of person" might refer to a person's "ethnicity or national origin," but in subject context, it could have easily referred to the damaging facts with respect to the plaintiff's "adjudicated dishonesty to his regulatory bar by the FDIC, and to his litigiousness." A board could reasonably not want as a shareholder the "kind of person" who had such a "long and well-documented history of contentious and problematic behavior." Moreover, the co-op had shareholders of Mexican origin, and that supplied a "degree of evidence to the contrary."

Thus, the court granted summary judgment to the defendants on the plaintiff's FHA claim and other claims.

Comment: We do not see many of these cases because co-op boards do not owe fiduciary duties to prospective purchasers, existing shareholders usually need to sell and do not want to incur the expense and delays of a protracted litigation (and risk paying for the co- op's legal fees if they lose) and since co-ops need not and do not disclose reasons for a rejection, prospective purchasers usually lack evidence of discriminatory intent.

De La Fuente v. The Sherry Netherland Inc., U.S. District Court, S.D.N.Y., Case No. 17 Civ. 4759, decided July 30, 2019, Engelmayer, J.

 Scott E. Mollen is a partner at Herrick, Feinstein.