Villas West II of Willowridge v. Mcglothin

• Decision Date: 15 May 2008
• Docket Number: No. 34S02-0805-CV-266.,34S02-0805-CV-266.
• Citation: 885 N.E.2d 1274
• Parties: VILLAS WEST II OF WILLOWRIDGE HOMEOWNERS ASSOCIATION, INC., Appellant (Plaintiff/Cross-Defendant Below), v. Edna McGLOTHIN, Appellee (Defendant/Cross-Claimant Below).
• Court: Indiana Supreme Court

885 N.E.2d 1274

VILLAS WEST II OF WILLOWRIDGE HOMEOWNERS ASSOCIATION, INC., Appellant (Plaintiff/Cross-Defendant Below), v. Edna McGLOTHIN, Appellee (Defendant/Cross-Claimant Below).

No. 34S02-0805-CV-266.

Supreme Court of Indiana.

May 15, 2008.

Jeremy A. Peelle, Kokomo, P. Thomas Murray, Jr., Indianapolis, IN, Lara A. Anderson, Bolingbrook, IL, Attorneys for Appellant.

Joseph H. Davis, Kokomo, IN, Attorney for Appellee.

On Petition to Transfer from the Indiana Court of Appeals, No. 34A02-0504-CV-370.

SHEPARD, Chief Justice.

A homeowner whose deed contained various covenants applicable to her subdivision rented out her residence, notwithstanding a covenant not to do so. Her homeowners association sued to enforce the prohibition, and she countersued, claiming that the agreement she had made through the covenant violated the Fair Housing Act. Her counter-complaint appeared to include elements of two very different claims—disparate impact and intentional discrimination.

The trial court granted her relief, appearing largely to rely on disparate impact. We conclude that relief on these grounds was erroneous. We remand for reconsideration of the intentional discrimination claims.

Facts and Procedural History

Algy and Edna McGlothin, husband and wife, purchased a home in Villas West II Planned Unit Development of Willowridge Subdivision on August 26, 1996. Villas West II is a 149-lot development located in the City of Kokomo.¹

The McGlothins purchased their home subject to "any and all easements, agreements and restrictions of record." One of these provisions prohibited owners from leasing their residences:

Lease of Dwelling by Owner. For the purpose of maintaining the congenial and residential character of Villas West II and for the protection of the Owners with regard to financially responsible residents, lease of a Dwelling by an Owner, shall not be allowed. Each Dwelling shall be occupied by an Owner and their immediate family.

(Appellant's App. at 43.)²

Mrs. McGlothin lived in the home until she broke her hip in 1998 and moved to a nursing home. Mr. McGlothin lived in the home another five months until he also moved into the nursing home. Mr. McGlothin remained in the nursing home until his death in June 1999. After Mr. McGlothin's death, the McGlothins' daughter began leasing out the home.

On August 20, 2002, the Villas West II Homeowners Association notified the McGlothins' daughter that Mrs. McGlothin was in violation of the no-lease covenant and demanded compliance. In response, Mrs. McGlothin's lawyer acknowledged the covenant, but argued that the rent payments were necessary to maintain Mrs. McGlothin in the nursing home.³ He also stated that the no-lease provision could be invalid, alleging it had racially discriminatory roots.

Although not unsympathetic to Mrs. McGlothin's situation, the Homeowners Association declined to acquiesce in her violation of the no-lease covenant, citing concerns "about its residents and the economic consequences the violation could have on the neighborhood and property values as a whole." (Id. at 92.) The Homeowners Association demanded that the tenant vacate the premises to avoid further legal action and attached a draft complaint seeking an injunction against the renting of the premises, the eviction of the current tenant, attorney fees, and all other damages.

Unable to resolve the matter, the Homeowners Association filed the complaint on October 10, 2002. Mrs. McGlothin subsequently filed her answer, affirmative defense, and counterclaim alleging the Association's enforcement of the no-lease covenant violated the Fair Housing Act. The Homeowners Association moved for summary judgment, which the trial court denied.

After a bench trial, the court concluded that the covenant violated the Fair Housing Act, finding it had a greater adverse effect on African Americans and racial minorities and finding "no legitimate non-discriminatory reason" for the no-lease covenant. (Id. at 17-19.) The court entered judgment for Mrs. McGlothin. The Homeowners Association appealed, and the Court of Appeals affirmed. Villas West II of Willowridge, Homeowners Ass'n, Inc. v. McGlothin, 841 N.E.2d 584, 608 (Ind.Ct.App.2006). We grant transfer, reverse, and remand.

I. The Prevalence of Real Estate Covenants

A restrictive covenant is an express contract between grantor and grantee that restrains the grantee's use of his land. Holliday v. Crooked Creek Villages Homeowners Ass'n, Inc., 759 N.E.2d 1088 (Ind.Ct.App.2001). Covenants control many aspects of land, including what may be built on the land (fence or above ground pool), how the land may be used (private or commercial), and alienability of the land. See, e.g., Robert G. Natelson, Law of Property Owners Associations 56-58, 153-66 (1989).

Restrictive covenants are used to maintain or enhance the value of land by reciprocal undertakings that restrain or regulate groups of properties. Holliday, 759 N.E.2d at 1092. These covenants are common in condominium or other "common-interest" housing subdivisions. Prior to selling the first unit or plat, the subdivision or condominium owner creates a declaration or master deed that contains all of the restrictions.⁴ Property owners who purchase their properties subject to such restrictions give up a certain degree of individual freedom in exchange for the protections from living in a community of reciprocal undertakings.

Restrictions found in a declaration (like those found in a master deed) "are clothed with a very strong presumption of validity which arises from the fact that each individual unit owner purchases his unit knowing of and accepting the restrictions to be imposed." Hidden Harbour Estates, Inc. v. Basso, 393 So.2d 637, 639 (Fla.Dist.Ct.App.1981). Analogizing restrictions in declarations to covenants running with the land, the Basso court held that restrictions in the declaration "will not be invalidated absent a showing that they are wholly arbitrary in their application, in violation of public policy, or that they abrogate some fundamental constitutional right." Id. at 639-40. Today, as the Basso court anticipated, restrictive covenants function identically in planned subdivisions and condominiums and function identically regardless of whether they are found in a master deed or a declaration. Natelson, supra, at 58-60 ("the integration between the law of condominium and the law of other covenanted subdivisions is well on the way to being complete," and thus, not proper "to speak or write of `condominium law' and `homeowners association law' as if they were discrete topics").⁵

Condominium associations frequently adopt no-lease covenants that bar rental of units and forbid absentee ownership. Jordan I. Shifrin, No-Leasing Restrictions on Condominium Owners: The Legal Landscape, 94 Ill. B.J. 80, 80-81 (2006). These covenants are adopted to address owners' concerns "about the negative effects of high resident turnover and renters' perceived lack of attention to the property." Id. at 80. Some empirical data validates these concerns; a California study showed that "[a] high number of leased units (over 30%) can impair significantly the market position of the subdivision." Robert G. Natelson, Consent, Coercion, and "Reasonableness" in Private Law: The Special Case of the Property Owners Association, 51 Ohio St. L.J. 41, 73 n. 150 (1990). Courts commonly enforce no-lease restrictive covenants.⁶ See, e.g., Flagler Fed. Sav. & Loan Ass'n v. Crestview Towers Condo. Ass'n, Inc., 595 So.2d 198 (Fla.Dist.Ct.App.1992) (association may prohibit leasing; restrictions in declaration presumed valid); Seagate Condo. Ass'n, Inc. v. Duffy, 330 So.2d 484 (Fla.Dist.Ct.App.1976) (leasing restrictions not unreasonable restraints on alienation restrictions promote residential character of community); Apple II Condo. Ass'n v. Worth Bank & Trust Co., 277 Ill.App.3d 345, 213 Ill.Dec. 463, 659 N.E.2d 93, 99 (1995) (leasing prohibition made part of declaration presumed valid and upheld unless restriction "arbitrary, against public policy or violates some fundamental constitutional right of the unit owners").

II. Disparate Impact Claims Under the Fair Housing Act

Still, agreements to limit the use of real property are subject to challenge under other law. The challenge here is based on the Fair Housing Act (FHA), enacted as Title VIII of the Civil Rights Act of 1968. FHA claims can take either of two routes: disparate treatment or disparate impact.

Disparate treatment claims require proof of intentionally discriminatory treatment of a protected class. Disparate impact claims, by contrast, require no proof of intent, and can be established if a policy or practice has a discriminatory effect on a protected class, even if the policy or practice is facially nondiscriminatory. Disparate impact recovery was first allowed in employment discrimination cases under Title VII of the Civil Rights Act of 1964. See Griggs v. Duke Power Co., 401 U.S. 424, 91 S.Ct. 849, 28 L.Ed.2d 158 (1971). Title VII makes it illegal for an employer "to fail or refuse to hire or to discharge" a person "because of" a prohibited reason such as race. 42 U.S.C.A. § 2000e-2(a)(1) (West 2008). Title VIII uses the same critical language, making it unlawful to "refuse to sell or rent . . . a dwelling to any person because of" race. 42 U.S.C.A. § 3604. Based on this identical language, disparate impact recovery under the FHA has been allowed by all federal circuit courts that have addressed the question.⁷

There is wide agreement in the federal circuit courts that the FHA allows disparate impact claims, but no consensus about the proper framework for analyzing such a claim.⁸ The U.S. Supreme Court has not addressed the issue, and circuits have developed a variety of approaches, for the most part derived from three early FHA disparate impact cases, Metropolitan Housing Development Corp. v. Village of Arlington Heights, 558 F.2d 1283 (7th...