Inclusive Cmtys. Project, Inc. v. Tex. Dep't of Hous. & Cmty. Affairs

747 F.3d 275

The INCLUSIVE COMMUNITIES PROJECT, INCORPORATED, Plaintiff–Appellee

v.TEXAS DEPARTMENT OF HOUSING AND COMMUNITY AFFAIRS; Michael Gerber; Leslie Bingham–Escareno; Tomas Cardenas; C Kent Conine; Dionicio Vidal Flores, Sonny; Juan Sanchez Munoz; Gloria L. Ray, In Their Official Capacities, Defendants–Appellants

Frazier Revitalization, Incorporated, Intervenor–Appellant

The Inclusive Communities Project, Incorporated, Plaintiff–Appellee

v.Texas Department of Housing and Community Affairs; Michael Gerber; Leslie Bingham–Escareno; Tomas Cardenas; C Kent Conine; Dionicio Vidal Flores, Sonny; Juan Sanchez Munoz; Gloria L. Ray, In Their Official Capacities, Defendants–Appellants.

Nos. 12–11211, 13–10306.

United States Court of Appeals, Fifth Circuit.

March 24, 2014.

Michael Maury Daniel, Laura Beth Beshara Daniel & Beshara, P.C., Dallas, TX, for Plaintiff–Appellee.

Beth Ellen Klusmann, Esq., Office of the Attorney General, Office of the Solicitor General, Austin, TX, George Tomas Rhodus, Counsel, Looper Reed & McGraw, P.C., Dallas, TX, for Defendants–Appellants.

Michael Klein, Sedgwick, L.L.P., Austin, TX, for Amicus Curiae.

Appeals from the United States District Court for the Northern District of Texas.

Before JONES, WIENER, and GRAVES, Circuit Judges.

JAMES E. GRAVES, JR., Circuit Judge:

In this housing discrimination case, the district court held that plaintiff The Inclusive Communities Project (“ICP”) had proven that Defendants' allocation of Low Income Housing Tax Credits (“LIHTC”) in Dallas resulted in a disparate impact on African–American residents under the Fair Housing Act (“FHA”). The primary issue on appeal is the correct legal standard to be applied in disparate impact claims under the FHA. We adopt the standard announced in recently enacted Department of Housing and Urban Development (“HUD”) regulations regarding the burdens of proof in disparate impact housing discrimination cases, see24 C.F.R. § 100.500, and remand to the district court for application of this standard in the first instance.

I. Factual and Procedural Background

ICP filed this action against Defendants the Texas Department of Housing and Community Affairs (“TDHCA”) and its Executive Director and board members in their official capacities under the FHA, the Fourteenth Amendment, and 42 U.S.C. §§ 1982 and 1983. “ICP is a non-profit organization that seeks racial and socioeconomic integration in the Dallas metropolitan area. In particular, ICP assists low-income, predominately African–American families who are eligible for the Dallas Housing Authority's Section 8 Housing Choice Voucher program (‘Section 8’) in finding affordable housing in predominately Caucasian, suburban neighborhoods.” Inclusive Communities Project, Inc. v. Texas Dep't of Hous. & Cmty. Affairs (ICP II), 860 F.Supp.2d 312, 314 (N.D.Tex.2012) (order after bench trial) (footnote omitted). A development that receives tax credits under the LIHTC program cannot refuse tenants because of their use of Section 8 vouchers; thus “it is important to ICP where the developments are located in the Dallas metropolitan area.” Id.

Under § 42 of the Internal Revenue Code, the federal government provides LIHTC that are distributed to developers of low-income housing through a designated state agency. See generally26 U.S.C. § 42. TDHCA administers the federal LIHTC program in Texas. SeeTex. Gov't Code § 2306.6701 et seq. Developers apply to TDHCA for tax credits for particular housing projects. Such credits may be sold to finance construction of the project. ICP II, 860 F.Supp.2d at 314. The number of credits TDHCA may award for a low-income housing project is determined by calculating the project's “qualified basis,” which is a fraction representing the percentage of the project occupied by low-income residents multiplied by eligible costs. See26 U.S.C. § 42(c).

There are two types of credits: 9% credits and 4% credits. The 9% credits are distributed on an annual cycle and are oversubscribed, and developers must compete with each other to earn the available credits. As the district court explained:

Certain federal and state laws dictate, at least in part, the manner in which TDHCA can select the applications that will receive 9% tax credits. First, I.R.C. § 42 requires that the designated state agency adopt a “Qualified Allocation Plan” (“QAP”) that prescribes the “selection criteria.” See id. at § 42(m)(1)(A)-(B). The QAP must include, inter alia, certain selection criteria, see id. at § 42(m)(1)(C), and preferences, see id. at § 42(m)(1)(B); otherwise, “zero” housing credit dollars will be provided, see id. at § 42(m)(1)(A). Second, the Texas Government Code regulates how TDHCA administers the LIHTC program. The Code requires TDHCA to adopt annually a QAP and corresponding manual. Id. at § 2306.67022. It also sets out how TDHCA is to evaluate applications. TDHCA must first “determine whether the application satisfies the threshold criteria” in the QAP. Id. at § 2306.6710(a). Applications that meet the threshold criteria are then “score[d] and rank[ed]” by “a point system” that “prioritizes in descending order” ten listed statutory criteria (also called “above-the-line criteria”), which directly affects TDHCA's discretion in creating the “selection criteria” in each QAP. Id. at § 2306.6710(b). The Texas Attorney General has interpreted this provision to obligate TDHCA to “use a point system that prioritizes the [statutory] criteria in that specific order.” Tex. Att'y Gen. Op. No. GA–0208, 2004 WL 1434796, at *4 (2004). Although the Texas Government Code does not mandate the points to be accorded each statutory criterion, “the statute must be construed to require [TDHCA] to assign more points to the first criterion than to the second, and so on, in order to effectuate the mandate that the scoring system ‘prioritiz[e the criteria] in descending order.’ ” Id. (quoting Tex. Gov't Code Ann. § 2306.6710(b)(1) (West 2004)). And while TDHCA can consider other criteria and preferences (also called “below-the-line” criteria), it “lacks discretionary authority to intersperse other factors into the ranking system that will have greater points than” the statutory criteria. Id. at *6 (citation and internal quotation omitted). Once TDHCA adopts a QAP, it submits the plan to the Governor, who can “approve, reject, or modify and approve” it. Tex. Gov't Code Ann. § 2306.6724(b)-(c) (West 2001). Once approved, TDHCA staff review the applications in accordance with the QAP, underwrite applications in order “to determine the financial feasibility of the development and an appropriate level of housing tax credits,” id. at § 2306.6710(b)(1)(A) & (d), and submit their recommendations to TDHCA. See id. at § 2306.6724(e). TDHCA then reviews the staff recommendations and issues final commitments in accordance with the QAP. See id. at § 2306.6724(e)-(f).

ICP II, 860 F.Supp.2d at 314–16 (footnotes omitted). The parties heavily dispute the amount of discretion TDHCA has to award 9% credits to projects other than those receiving the highest scores. By contrast, all agree that the 4% credits are allocated on a non-competitive basis year-round to developments that use private activity bonds as a component of their project financing, some of which are issued by TDHCA. Applicants need to meet only certain threshold eligibility and underwriting requirements in order to receive 4% tax credits. Applications for the 4% tax credits are not subject to scoring under the QAP selection criteria. See id. at 316.

In March 2008, ICP filed suit against Defendants, claiming that the distribution of LIHTC in Dallas violated 42 U.S.C. §§ 1982 and 1983, the Fourteenth Amendment, and the FHA, 42 U.S.C. §§ 3604 and 3605. The FHA makes it unlawful, inter alia, to “make unavailable or deny, a dwelling to any person because of race....” 42 U.S.C. § 3604(a). Section 3605(a) provides that it is unlawful, inter alia, “for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race....” Id. § 3605(a). A “residential real estate-related transaction” includes providing financial assistance for the construction of a dwelling. Id. § 3605(b). ICP alleged that Defendants were disproportionately approving tax credit units in minority-concentrated neighborhoods and disproportionately disapproving tax credit units in predominantly Caucasian neighborhoods, thereby creating a concentration of the units in minority areas, a lack of units in other areas, and maintaining and perpetuating segregated housing patterns.

ICP filed a motion for partial summary judgment to establish standing and a prima facie case of discrimination. Defendants filed motions for judgment on the pleadings and summary judgment. Defendants argued that, assuming that ICP had established a prima facie case, Defendants won as a matter of law, under both disparatetreatment and disparate impact theories of discrimination.¹ The district court denied Defendants' motions and granted ICP partial summary judgment, concluding that ICP had made a prima facie showing of both intentional discrimination and disparate impact. Inclusive Communities Project, Inc. v. Texas Dep't of Hous. & Cmty. Affairs (ICPI), 749 F.Supp.2d 486, 499–500, 501–02 (N.D.Tex.2010) (order granting partial summary judgment). With regard to the disparate impact case, the court concluded that “TCP has established that its clients are African–Americans, members of a protected class, who rely on government assistance with housing, and that TDHCA has disproportionately approved tax credits for non-elderly developments in minority neighborhoods and, conversely, has disproportionately denied tax credits for non-elderly housing in predominately Caucasian neighborhoods.” Id. at 499. In particular, the court relied on...