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Co-Op Board Rejections
Shed light on them

The National Law Journal
Monday, June 25, 2007

Sunlight is the best disinfectant, Justice Louis D. Brandeis opined. On matters of political or corporate governance, progressive thinkers usually agree. But not necessarily where transparency would trench on the interests of co-operative apartment owners, as appears from the generally left-leaning New York City Council's failure to grant a hearing on a bill that would force co-op boards to reveal the reasons for rejecting would-be buyers' applications.

So-called Intro 119, supported by 40 civil rights groups, aims to deter discrimination in housing and make it easier for victims to vindicate their rights. Yet some otherwise die-hard liberals have swelled the chorus of catcalls from building owners and managers, attacking the bill as an undue burden on shareholders and a threat to their freedom to select their neighbors. This critique boils down to a plea to maintain the "clubby" status quo, at the cost of enhancing protection from bias in a critical segment of the housing market. (New York City, with more than 300,000 co-ops, is the leader of the pack, but extrapolation from 2005 American Community Survey statistics suggests that almost 5 million people in the United States live in such units.) The nation's co-op capital has an obligation to permit Intro 119 – and the co-op purchase approval process – to see the wholesome light of day.

Discrimination persists

Discrimination against minorities, people with disabilities and other protected groups remains alive and well in co-ops. Because they wish to maintain good relationships with boards and to protect prospective buyers, brokers frequently steer the latter to buildings regarded as compatible. As one put it: "[W]e try to take the temperature of the building to find out what kind of people the board is looking for." Jay Romano, "Last Co-op Hurdle: The Board Interview," N.Y. Times, Feb. 25, 2007, Sec. 11. While all shareholders are entitled to look for financially and socially responsible neighbors, a number want only "people like us" – not African-American, wheelchair-bound, gay or Jewish.

Illegal bias is difficult to fight in any context; a 2002 Urban Institute study found that 83% of home seekers who believed they had suffered discrimination did not take any remedial action. But it is especially hard to combat in the co-op setting. Unlike in apartment rentals or purchases of houses, disappointed co-op buyers cannot realistically get fair-housing or government agencies to "test" whether people with equivalent credentials were treated differently based on protected-class status since board approval is sought only after the parties sign a contract and the applicant obtains financing.

Thus, when co-ops turn down a prospective purchaser, they mainly do what their trade associations and lawyers recommend: withhold information about the reason for the rejection. This strategy not only denies fundamental fairness but also profoundly exacerbates the problem of fighting discrimination.

Intro 119 mandates that co-ops reveal in a timely manner the specific grounds for rejecting an application; it also imposes meaningful penalties for failing to do so — damages, and a ban on proffering new reasons in defense of a discrimination charge brought by a disappointed applicant. Its provisions would discourage boards from violating human rights laws.

First, victims will be alerted to circumstances suggesting bias if the required statement cites only vague or subjective grounds for the action taken, such as "the family does not fit in." The law will also prod co-ops to put their cards on the table up front, thereby reducing the incidence of pretextual (or, at best, unreliable) post hoc rationalizations produced in litigation to defend turndowns. In addition, it will facilitate a more open co-op market. When would-be purchasers know rejection will entitle them to pierce the veil of corporate secrecy, more of them will dare to explore the full universe of co-op buildings, just as fewer board members will dare to engage in discrimination. Equally important, most co-ops would probably attempt to comply with the mandate in good faith, and thus be more apt to recognize, and nip in the bud, conduct based on unlawful bias.

Contrary to its opponents' claims, the law's burdens do not outweigh its considerable benefits. Only evasion is made difficult – it should be. Every board knows its reasons at the time it acts. The industry itself states that rejections occur quite rarely; hence, most co-ops will have very few statements to complete. Concerns voiced over the potential for baseless litigation, and consequent discouragement of board service, are overblown: The bill expressly preserves co-ops' right to turn someone down on any nondiscriminatory ground.

Thus, co-op owners have nothing to lose but their "right" to hide the ball. Limousine liberals should pay heed.