In what may prove to be a significant victory for cooperative and condominium boards sued for housing discrimination, an appellate court recently applied the protection of the business judgment rule to a discrimination claim for disability accommodation.

In Pelton v. 77 Park Avenue Condominium, et al., the plaintiff—a unit owner suffering from muscular dystrophy—claimed that the condominium and the nine members of its board discriminated against him in violation of the New York City Human Rights Law. The plaintiff sought $23.5 million in damages, acknowledging that the condominium board agreed to some accommodations by purchasing a special wheelchair lift, providing special building access, granting exception to a house rule prohibiting in-unit laundry machines, and assessing $130,000 from unit owners for renovations to make the building handicap accessible. However, the board also denied requests for other structural modifications to building facilities and for reprioritization building-wide renovations.  

The court determined that the board’s decisions concerning structural modifications throughout the condominium to accommodate Mr. Pelton was protected by the “deferential standard” of the business judgment rule (BCL), and therefore, the board’s decisions would not be subject to judicial scrutiny.  

Discrimination Law Before Pelton

City, state, and federal anti-discrimination laws seek to shield individuals from housing related decisions that are motivated by animus towards a particular class of people, whether based on, race, creed, color, national origin, sex, sexual orientation, age, disability, and/or marital status. In addition, these laws also require cooperatives and condominiums to make “reasonable accommodations” for disabled residents upon request, so that they may use and enjoy the premises as their neighbors do.  

“Reasonable accommodations” may include exceptions to rules, policies, services, or procedures—such as allowing a disabled resident to own a dog, despite a house rule prohibiting pets—as well as structural modifications to building facilities, such as wheelchair ramps or mechanical lifts. Accommodations must sometimes be made at the expense of the housing association when the claim is brought under the New York City Human Rights Law.

Typically, a shareholder or unit owner may make a discrimination claim for a failure to accommodate by demonstrating that:

1. He or she suffers from a disability as defined by law

2. Officers or representatives of the association knew or reasonably should have known of his or her disability

3. The requested disability accommodation may be necessary to afford him or her equal opportunity to use and enjoy the dwelling, and

4. The board for the housing association refused the accommodation.

Prior to the Pelton case, once a claimant satisfied the above minimum requirements to make a claim for reasonable accommodation, known as the prima facie case, a housing association could not simply rely on the business judgment rule to defend against the claim. The business judgment rule prohibits courts from second-guessing corporate decisions, unless the claimant can show either that the board acted outside the scope of its authority in a manner that did not further a legitimate corporate purpose, or in bad faith.  

It was generally presumed, however, that the business judgment rule did not apply in these types of cases.  Rather, conventional belief—and practice—was that once a claimant stated a prima facie discrimination case, the respondent, (i.e. the board), would then have the burden of proving the legitimacy and non-discriminatory bases of their decisions in order to avoid monetary damages, fines, and injunctive remedies.

In defending against a discrimination claim for failure to accommodate a disability, attorneys often rely on specialized case law that analyzes the discrimination statutes, and argue that the board’s denial of the accommodation was legitimate and non-discriminatory because:

(1) The accommodation was unreasonable due to financial or logistical burdens that it would impose on the association, and/or:

(2) The disabled person had not demonstrated that the requested accommodation was medically necessary.

In addition, counsel might choose to attack the prima facie case by arguing that the claimant does not qualify for disability status under the law, or that the board did not formally deny the requested accommodation since the claimant’s request was procedurally defective in the first place.

However, in the pre-trial stages of a discrimination proceeding, these defenses often fail to achieve dismissal.  The disability status of the claimant, the “reasonableness” of the requested accommodation, and/or cost burdens imposed on neighbors or the association at large are often fact-specific issues that courts or quasi-judicial government agencies will not resolve without a trial or hearing.  Since trials are often cost prohibitive, attorneys for housing associations may try to settle claims that, in actuality, have little merit.  Settlements typically result in a monetary payment to the claimant, as well as an agreement to provide the requested disability accommodation or some compromise version of the request.  In addition, in the event that a board member is found personally liability at trial, she would not be eligible for indemnification since discriminatory acts are considered intentional in nature.

Consequently, while some discrimination claims may involve bona fide grievances, boards and landlords often find that anti-discrimination laws are subject to improper motives and abuses by unit owners, shareholders, and rental tenants who wish to challenge board decisions simply because they do not serve their particular wants, needs, or desires.  Often when defending against discrimination claims, board members feel that they are presumed guilty until proven otherwise by having to proffer lengthy explanations about the legitimacy and reasonability of their decisions.  

For these reasons and others, the Pelton decision will be greatly welcomed by boards throughout the metropolitan area as the reasonableness and good faith of board decisions may now be taken into account.  

In reaching its decision, the Appellate Division, First Department relied on two landmark cooperative housing law decisions; Levandusky v. One Fifth Ave. Apt. Corp. and 40 W. 67th St. v. Pullman.  While those cases did not concern violations of anti-discrimination statutes, they ruled that claims against cooperative boards should be dismissed where the aggrieved cooperative shareholder cannot specifically demonstrate beyond mere inference or conjecture that the board acted: (i) outside the scope of their authority; (ii) in a way that did not legitimately further a corporate purpose; or (iii) in bad faith.  

In dismissing Mr. Pelton’s claim, the court found that “[C]ourts must hold those who would challenge the decisions of condominium and cooperative boards to the requirement of pleading with specificity claims of discriminatory conduct or wrongdoing.  Otherwise, the threat of baseless litigation, with its attendant serious financial and personal burdens, would pose a formidable obstacle to those willing to volunteer their talent, experience and knowledge for the common good of their homeowner communities by serving on such a board.”

The court then noted the degree to which to the board had already accommodated Mr. Pelton and focused on the necessity of encouraging volunteer governance and the financial burdens imposed on housing associations in defending against claims that might otherwise satisfy the minimal requirements of the prima facie case.

Since the Pelton case dealt solely with disability accommodations, the general applicability of the business judgment rule to other types of discrimination claims is currently unknown.  There certainly will be limits to the defense. To be sure, the business judgment defense will not be available when challenging the disability status of the claimant or the medical necessity of the accommodation.

It also remains to be seen whether the business judgment rule will apply to discrimination claims other than for disability accommodations, such as when a co-op board rejects a purchase or sublease application submitted by an individual who is a member of a protected class.  

Furthermore, in Mr. Pelton’s situation, the condominium board provided many of the requested accommodations.  One could therefore argue that the court dismissed Mr. Pelton’s claim because there was no evidence of bad faith or self dealing. Indeed, one may readily question whether the business judgment rule would apply where a board refuses to grant even a single accommodation request.  Most likely, if the business judgment rule is to play a role in this area of the law, courts and governmental agencies will have to make some factual review of these claims so that the bona fide needs of disabled persons are met.

Nevertheless, at a minimum, Pelton may have signaled a legal change whereby the prima facie case alone may not be sufficient for a claimant to survive early dismissal of his or her case.  This may go a long way towards leveling what many volunteer board members have long believed to be an uneven playing field in the area of disability accommodations.

Ian Brandt and Robert Braverman are attorneys with the Manhattan-based law firm of Braverman & Associates, PC.