Could a co-op require homeowners to consist primarily “of German extraction?”

While this question may sound like a case straight out of the Civil Rights era, a homeowner in Yaphank, New York filed a lawsuit last week challenging a co-op bylaw that contained such a provision. Yaphank, a bucolic hamlet on Long Island, has a complicated history with racism. During the 1930s, it was home to Camp Siegfried, a pro-Nazi summer camp supported by American Nazi sympathizers. Campers marched through the town bearing both the American flag and the Nazi swastika banner.

Camp Siegfried finally shut down in 1941, after Hitler declared war on the United States and Nazi sympathizers came under legal and political scrutiny. However, the co-op[1] that owns the land in Yaphank—the German American Settlement League—has kept the restrictive covenant in its bylaws. The plaintiffs in this case alleges that the League’s practices violate the Fair Housing Act and the New York State’s Human Rights Law[2], which prohibits discrimination based on race, color, religion, sex, or national origin.

In addition to the covenant on German ancestry, the League also restricts the ability of homeowners to publicly advertise their home for sale. Instead, a homeowner can only list the house in the community bulletin. Furthermore, any potential buyer must be sponsored by a League member and approved by a majority of League members and its Board of Directors. Because of these restrictions, the plaintiffs have been unable to sell their home or obtain a new mortgage.[3]

The first legal question that needs to be resolved is whether the plaintiffs have standing to claim discriminatory practices as homeowners and sellers.

In Stalker v. Steward Tenants Corp., the plaintiffs allege that the co-op rejected their proposed sale because the buyers were elderly. Stalker v. Stewart Tenants Corp., 93 A.D.3d 550, 551 (N.Y. App. Div. 2012). The court ruled that the Human Rights Law makes it unlawful to discriminate against any person based age or national origin. The expansive language of the statute provides a remedy for any person adversely affected by discrimination, including sellers. Id. Similarly, the plaintiffs in this case have stated a claim under the Human Rights Law.

Furthermore, the Stalker court held that the FHA contains substantially similar language as the Human Rights Law, thus giving the plaintiffs a claim under the FHA. Id. at 552. The FHA defines an “aggrieved person” as anyone who “claims to have been injured by a discriminatory housing practice” or “believes that such person will be injured by a discriminatory housing practice that is about to occur.” 42 U.S.C. § 3602(i). Unlike the plaintiffs in Stalker, the plaintiffs in this case have not found any buyers yet. However, this should not bar the plaintiffs’ claim. The plaintiffs’ intention to sell the house raises the possibility that an injury will occur when the house is sold. Furthermore, the difficulty that the plaintiffs have experienced with selling the house is arguably a direct result of the League’s discriminatory policies and thus may be an injury in itself.

The blatant language in the bylaw will probably lower the hurdle that the plaintiffs must overcome. To prove a prima facie case of discrimination under the FHA, a plaintiff only needs to demonstrate that the challenged action had a discriminatory effect. Broadway Triangle Comm. Coal. v. Bloomberg, 941 N.Y.S.2d 831, 835 (N.Y. Sup. Ct. 2011).

However, even if the League were to remove the bylaw in question, the plaintiffs might still not be able to sell a buyer of their choice. Any transaction requires the majority approval of the League and homeowners are not able to publicly market their property through a multiple listing service. These restrictions on transfer would effectively allow the co-op to maintain the all-white demographics of Yaphank.

Courts have traditionally given great deference to co-op boards. In 40 West 67th St. Corp., the New York court applied the business judgment rule to the decision of the co-op board to eject a tenant. 40 West 67th St. Corp. v. Pullman, 790 N.E.2d 1174, 1178 (N.Y. 2003). Under this rule, courts will defer to the decisions of the board as long as it acts for the purpose of the co-op, within its scope of authority, and in good faith. Id. at 1179. These factors create a high burden on the plaintiff to demonstrate the unreasonableness of the board’s decision, similar to a shareholder suit against the board of a public company.

While there are legitimate and important policy reasons to deferring to co-op boards—respecting private contractual arrangements, protecting the expectations of property owners, etc.—too much deference enables de facto discriminatory exclusion. Restrictive bylaws are more like contracts of adhesion than freely negotiated covenants. Individual homeowners are unlikely to possess the bargaining power necessary to remove undesirable covenants. While the private ordering of the rules on property should be respected if possible, the current judicial approach creates an imbalance of power that limits the ability of individuals to challenge unwanted and antiquated property rules.

[1] Rather than owning their homes directly, members of a co-op owns share in the co-op corporation, which legally owns the entire property.

[2] The complaint also includes cause of action under the Civil Rights Act of 1866 and local law.

[3] It would be difficult for a bank to foreclose on property owned by the League.