Advice to Cooperative Boards: Apply Properly Tailored Rules Evenly to Protected Classes

In order to prevent discrimination claims brought by members of legally protected classes (i.e. racial minorities), it is crucial that cooperative boards construct rules with legitimate purposes (beneficial to the cooperative without being a means to exclude) and evenly enforce said rules. Federal Law prohibits the unavailability or denial of a dwelling to any person because of race, color, religion, sex, familial status or national origin. Cooperative boards are most vulnerable to these claims during a proposed resident’s application process.

Habitat Magazine recently contained a discussion of a Federal lawsuit pertaining to the Edgewater Park Owners Cooperative in the Bronx. Seizing upon a description in the New York Times that the cooperative was “not open to anyone,” the Fair Housing Justice Center sent both white and black testers to meet with a well-known real estate broker who frequently showed units in the cooperative. Said cooperative had a policy of requiring three letters of reference from existing shareholders as part of its purchase application. The white testers were advised that the rule could be dispensed with if they did not happen to be acquainted with current residents. The black testers were advised that if they did not know people who could provide the required references, that they should not pursue their purchase application.

The problems faced by the cooperative board in this case are as follows. The rationale behind the “three references” rule was weak in that it may be a pretext for excluding minorities who do not happen to know someone in the mostly white development. Further, as unevenly applied, the rule is detrimental to minorities and has less of an effect on whites. Even though the cooperative board never met with the applicants at issue and the real estate broker who was involved was not an agent, employee or representative of the cooperative, the cooperative was unsuccessful in its motion to dismiss the lawsuit because it promulgated the policy.

The reader should be aware that the case is still in the process of being resolved, as the real estate broker settled the claim against her and the cooperative did not prevail in its summary judgment motion. This leaves the matter to be resolved at trial with respect to the cooperative. Notwithstanding what will be the resolution of this particular case, the entire matter provides a cautionary tale for cooperative boards.

When our cooperative clients contact us to discuss proposed rules related to purchase application requirements, we proceed with caution. For instance, we will discuss the purpose behind the rule, discuss the need to apply the rule consistently and confirm that it does not have an adverse effect upon a legally protected class. Further, we suggest that if a purchase application does not appear acceptable to the cooperative board for financial or other objective reasons, that it be denied before an in-person interview is conducted. If the board never meets the applicant, then it cannot be accused of discrimination based upon the race of the applicant. It is crucial that members of legally protected classes be treated equally in order for cooperatives to avoid discrimination claims. Please contact our firm should you wish to discuss your proposed cooperative policies and their application.

Our firm is available to assist cooperative clients in developing regulations that are beneficial and can be fairly enforced. To give several examples, the enactment of flip taxes raises monies for the benefit of the entire building and enhances a “neighborly” atmosphere, in that it discourages people from buying units with the sole intent of selling them quickly at a profit. Likewise, carefully developed subleasing policies maintain stable groups of residents who have a common interest in quality of life, rather than a building of transient residents. Even rules intended to enhance building security, such as requiring food delivery persons to be met in the building lobby, rather than allowing them to enter the building, can be deemed to have a valid purpose. We look forward to discussing the formulation of cooperative rules with our readers.