At the center of this saga are two cases involving St. Paul, Minnesota. One case, Magner v. Gallagher, sat on last term’s Supreme Court docket, the city having brought it to the Court to ask the justices to overrule a darling policy of the Obama administration. The other case was a potential lawsuit against St. Paul that the federal government was considering supporting. A deal was struck where the city would drop their Supreme Court appeal in exchange for the federal government not supporting the lawsuit against the city.
That, at least, was the finding of a report from the House Committee on Oversight and Government Reform. The report described the backroom deal as harming “the rule of law in the United States and the reputation of the Department of Justice as a fair and impartial arbiter of justice.”
To understand the nuances of the story we must first understand why Magner was a potentially landmark case that could have radically changed the administration’s housing policies, as well as its prosecution of big banks for non‐intentional, statistical discrimination, the so‐called “disparate impact” theory of discrimination.
Disparate impact occurs when a neutral policy, such as using credit scores to determine interest rates, has a disproportionate impact on minorities. No intentional discrimination is alleged, but when a company faces a charge of disparate impact, the burden shifts to it to show that the policy is justified. In reality, demonstrating this is very difficult, and companies often settle to avoid drawn‐out litigation.
The Obama administration is a big fan of disparate impact theory. They’ve used it to extract large settlements from big banks, and they even created an entire unit in the Justice Department to pursue claims.
Yet it is not clear that the language of the Fair Housing Act (FHA) allows for disparate impact claims. Although nearly every court of appeals has held that it does, the Supreme Court has not yet weighed‐in directly on the issue.
Magner v. Gallagher was the case that would have answered that question, and the administration feared that a majority of justices would confine the law’s prohibitions to intentional, not incidental, discrimination.
Thus a secret deal was struck, and the official doing the dealing was none other than newly minted Secretary of Labor Thomas Perez, formerly Assistant U.S. Attorney General.
This story has been under‐reported and under‐criticized. Now, in an interesting twist, the Court is again preparing to hear a case about disparate impact and the FHA. So revisiting the Magner story and watching the administration for similar transgressions seems prudent.
According to the Oversight Committee, in February 2012, Perez flew to St. Paul to negotiate Magner’s dismissal. By that time, the case was only weeks from oral argument, and briefs from both sides had been filed.
The case originated from the city of St. Paul’s decision to enforce housing codes “to the max.” City inspectors documented code violations such as rodent infestation, inadequate sanitary facilities, and inoperable smoke detectors. Some owners were forced to make costly renovations, while others decided to sell their properties altogether. This policy allegedly disproportionately affected African‐Americans, thus giving rise to a discrimination claim, despite the fact that intentional discrimination was not alleged.
Remember there is another case involved, a potential lawsuit against the city of St. Paul. That case came from Mr. Frederick Newell, a St. Paul small business owner who had spent a decade trying to improve the situation of low‐income residents in the city. Mr. Newell sought to improve his community through Section 3 of the Housing and Urban Development Act, which requires that recipients of HUD assistance (that is, state and local governments) provide job assistance and employment to “the greatest extent possible” for low‐income residents. Mr. Newell began to suspect the city had falsely claimed to be in compliance with Section 3 for six years in order to get $62 million in federal aid. He decided to blow the whistle.
Mr. Newell hoped to bring a qui tam suit, a legal action that allows whistleblowers to participate in a case and receive some of the recovered funds as a reward. In order for a qui tam suit to work, however, the government must support the citizen.
Mr. Newell brought his suit to the U.S. Attorneys and to the lawyers at HUD. After looking into the allegations, it seemed clear that St. Paul’s “certifications of Section 3 compliance to obtain HUD funds were actually more than reckless and that the City had actual knowledge that they were false.” Thus, the government was poised to support Mr. Newell’s act of civic responsibility.
Enter Thomas Perez.
As described by the Oversight Committee, Perez realized that Mr. Newell’s case against St. Paul was his bargaining chip, and he “manipulated the levers of government to prevent the Supreme Court from hearing an important appeal.”
Mr. Perez allegedly worked behind the scenes with both U.S. Attorneys and attorneys from HUD to prevent Mr. Newell’s case from being supported, essentially ending the suit and depriving taxpayers of their day in court and a recovery of as much as $200 million. The city of St. Paul then withdrew its appeal in Magner two weeks before argument. The report also found that Mr. Perez tried to cover up his machinations by instructing attorneys to omit discussing Magner in memos and by securing the agreement as a non‐written, “handshake” deal.
Quite simply, according to the report, Mr. Perez traded Mr. Newell’s case for dismissing Magner. They sold out a whistleblower to keep pursuing suspect policies.
The Supreme Court is now gearing up to review another case, Township of Mt. Holly v. Mt. Holly Gardens Citizens in Action, that asks the exact same question as Magner: does the FHA allow disparate impact claims?
The case appears to be moving forward, but there have also been talks of settlement. When powerful people are working behind the scenes, you never know what can happen.