Villas West II of Willowridge Homeowners Ass'n v. McGlothin

ATTORNEYS FOR APPELLANT ATTORNEY FOR APPELLEE
Jeremy A. Peelle Joseph H. Davis
Kokomo, Indiana Kokomo, Indiana

P. Thomas Murray, Jr.
Indianapolis, Indiana

Lara A. Anderson
Bolingbrook, Illinois

In the
Indiana Supreme Court FILED
May 15 2008, 2:33 pm
_________________________________
CLERK
No. 34S02-0805-CV-266 of the supreme court,
court of appeals and
tax court

VILLAS WEST II OF WILLOWRIDGE
HOMEOWNERS ASSOCIATION, INC.,
Appellant (Plaintiff / Cross-Defendant
Below),

v.

EDNA MCGLOTHIN,
Appellee (Defendant / Cross-Claimant
Below).
_________________________________

Appeal from the Howard Superior Court II, No. 34D02-0210-PL-893
The Honorable Stephen M. Jessup, Judge
_________________________________

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

May 15, 2008

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

1
Villas West II was platted in April 1990 and developed by Jim Bagley Construction Co., Inc. (Appellant’s App. at
10.)
2
The no-lease covenant was recorded on April 2, 1992. (App. at 11.)

2
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.

3
The trial court found that pursuant to 405 Ind. Admin. Code 2-3-15(c)(10), “Edna McGlothin was entitled to own
her home and receive Medicaid benefits so long as the rental income from her home [was] greater than the expenses
of ownership.” (App. at 12-13 (emphasis added)). Because Medicaid had already advanced $23,363.66 for Mrs.
McGlothin’s care, the court determined a lien could be placed on Mrs. McGlothin’s home to secure repayment and
could be foreclosed upon Mrs. McGlothin’s death or if the property was sold prior to her death. (Id. at 13.)

3
 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

4
The declaration or master deed setting forth the association’s powers over the subdivision and describing use
restrictions is typically called the “Declaration of Conditions, Covenants, and Restrictions” or “CC&Rs.” The
recording of the declaration coupled with the sale of the units creates the various restrictive covenants, easements,
and affirmative covenants detailed in the declaration. Natelson, supra, at 58.

4
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., 659 N.E.2d 93, 99
(Ill. App. Ct. 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

5
The use of restrictive covenants is certainly commonplace in this state. A Google search using the phrases
“restricted subdivision” and “Indiana” returns 3,320 websites.
6
Courts commonly enforce both covenants initially included in a subdivision’s declaration, as well as those added
later through amendments. Shifrin, supra, at 81 (“The constitutionality of these no-renter covenant modifications
has been challenged repeatedly since the mid-‘70s. With rare exceptions, the right of condominium owners to
modify their governing documents has been consistently upheld.”).

5
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 (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 Cir. 1977)
(Arlington Heights II),9 Resident Advisory Board v. Rizzo, 564 F.2d 126 (3d Cir. 1977), and
Huntington Branch, NAACP v. Town of Huntington, 844 F.2d 926 (2d Cir. 1988).

7
2922 Sherman Ave. Tenants’ Ass’n v. District of Columbia, 444 F.3d 673, 679 (D.C. Cir. 2006) (citing John F.
Stanton, The Fair Housing Act and Insurance: An Update and the Question of Disability Discrimination, 31 Hofstra
L. Rev. 141, 174 n.180 (2002) (listing cases)).
8
See John E. Theuman, Annotation, Evidence of Discriminatory Effect Alone as Sufficient to Prove, or to Establish
Prima Facie Case of, Violation of Fair Housing Act, 100 A.L.R. Fed. 97, § 3 (1990). See also C.H.R.O. v. Ackley,
No. CV99550633, 2001 WL 951374, at *3 (Conn. Super. Ct. July 20, 2001), in which a Connecticut trial court
looked to this annotation and concluded that “a cursory reading of that article and many of the cases cited set forth
such a morass of differing opinions in the federal cases on fundamental issues that this court will simply rely on
Second Circuit law.”
9
This case is commonly referred to as Arlington Heights II to distinguish it from the Seventh Circuit’s earlier ruling
in the same case, Metropolitan Housing Development Corp. v. Village of Arlington Heights, 517 F.2d 409 (7th Cir.
1975).

6
 In Arlington Heights II, the Seventh Circuit held that disparate impact recovery under the
FHA is proper when the defendant’s conduct produces a discriminatory effect and four factors
balance in favor of granting relief. The four factors are (1) the strength of the plaintiff’s showing
of discriminatory effect; (2) evidence of discriminatory intent, though not enough to satisfy the
constitutional standard of Washington v. Davis; (3) the defendant’s interest in the challenged
conduct; and (4) whether the plaintiff seeks affirmative relief or merely to restrain the defendant
from interfering with individual property owners who wish to provide housing. Arlington
Heights II, 558 F.2d at 1290.

One month after Arlington Heights II, the Third Circuit adopted a burden-shifting
framework similar to that already in use in Title VII employment cases. Rizzo, 564 F.2d at 148.
Under this approach, the plaintiff makes a prima facie case by showing that the defendant’s
action has a discriminatory effect. Id. The defendant can rebut this by showing a justification
which “serve[s], in theory and in practice, a legitimate, bona fide interest” and by showing that
“no alternative course of action could be adopted that would enable that interest to be served
with less discriminatory impact.” Id. at 149. The Rizzo court did not apply the Arlington
Heights II factors but acknowledged that the result would have been the same. Id. at 148 n.32.

A decade later, the Huntington court sought to merge Rizzo and Arlington Heights II.
Under the Huntington framework, the plaintiff establishes a prima facie case by showing that the
“challenged practice of the defendant actually or predictably results in racial discrimination.”
Huntington, 844 F.2d at 934. The defendant can rebut this case by showing that its “actions
furthered, in theory and in practice, a legitimate, bona fide governmental interest and that no
alternative would serve that interest with less discriminatory effect.” The court then balances the
four Arlington Heights II factors to determine whether to grant relief. Id. at 936.

These competing approaches spawned a variety of others. One source of disagreement
was the role, if any, of the Arlington Heights II factors. A few courts have used the factors as
part of the prima facie case. See, e.g., Smith v. Town of Clarkton, 682 F.2d 1055, 1065-66 (4th
Cir. 1982); Snyder v. Barry Realty, Inc., 953 F. Supp. 217, 220 (N.D. Ill. 1996). This approach
has been widely rejected as making the plaintiff’s case too difficult. E.g., Rizzo, 564 F.2d at 148

7
n.32; Huntington, 844 F.2d at 935; Hispanics United v. Vill. of Addison, 988 F. Supp. 1130,
1154 n.14 (N.D. Ill. 1997). Other courts applied the Arlington Heights II factors only in cases
involving public defendants. E.g., Betsey v. Turtle Creek, Assocs., 736 F.2d 983, 989 n.5 (4th
Cir. 1984). Still others discarded the second Arlington Heights II factor—proof of
discriminatory intent—and weighed the remaining three, reasoning that intent was relevant only
in disparate treatment cases. E.g., Mountain Side Mobile Estates P’ship v. Sec’y of Hous. &
Urban Dev., 56 F.3d 1243, 1252 (10th Cir. 1995); Arthur v. City of Toledo, 782 F.2d 565, 575
(6th Cir. 1986).

More recently, most federal circuits have abandoned the Arlington Heights II factors
altogether. E.g., Charleston Hous. Auth. v. U.S. Dept. of Agric., 419 F.3d 729 (8th Cir. 2005);
Tsombanidis v. West Haven Fire Dept., 352 F.3d 565 (2d Cir. 2003); Lapid-Laurel, L.L.C. v.
Zoning Bd. of Adjustment, 284 F.3d 442 (3d Cir. 2002); Langlois v. Abington Hous. Auth., 207
F.3d 43, 51 (1st Cir. 2000) (“True, one circuit court decision did refer to balancing, but the few
later circuit court decisions on point come closer to a simple justification test, and we think this
is by far the better approach.”) (citations omitted); Salute v. Stratford Greens Garden
Apartments, 136 F.3d 293 (2d Cir. 1998). Yet, at least one circuit and several district courts
have continued to balance. Reinhart v. Lincoln County, 482 F.3d 1225, 1229 (10th Cir. 2007)
(balancing three factors); Thompson v. U.S. Dept. of Hous. & Urban Dev., 348 F. Supp. 2d 398,
417 (D. Md. 2005) (balancing four factors); Peoria Area Landlord Ass’n v. City of Peoria, 168 F.
Supp. 2d 917, 921-22 (C.D. Ill. 2001) (balancing four factors); Corp. of Episcopal Church v. W.
Valley City, 119 F. Supp. 2d 1215, 1219 (D. Utah 2000) (balancing four factors).

Huntington’s burden-shifting framework has also morphed. Several courts changed
Huntington’s two burdens into three. See, e.g., Darst-Webbe Tenant Ass’n Bd. v. St. Louis
Hous. Auth., 417 F.3d 898, 902-03 (8th Cir. 2005); Harris v. Itzhaki, 183 F.3d 1043, 1051 (9th
Cir. 1999); Mountain Side, 56 F.3d at 1254; Hispanics United, 988 F. Supp. at 1162. This test
still requires plaintiffs to show a discriminatory effect, but rebutting defendants need to provide
only a bona fide, nondiscriminatory justification. Once the defendant offers an appropriate
justification, the burden shifts back to the plaintiff to show an alternative that would serve the
defendant’s interest with less discriminatory effect. Courts adopting this approach explain that

8
requiring the plaintiff to propose an alternative gives the plaintiff the ultimate burden of proving
a violation and has the advantage that “neither party is saddled with having to prove a negative
(the nonexistence of bona fide reasons or the absence of less discriminatory alternatives).”
Hispanics United, 988 F. Supp. at 1162.

Finally, a much smaller number of federal courts have applied a variant of the disparate
treatment test from McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973), a leading
employment discrimination case, to resolve disparate impact FHA claims. Under this approach,
the plaintiff must prove a discriminatory effect, which the defendant may rebut by offering a
legitimate, nondiscriminatory reason for its rule. Instead of the plaintiff then showing a less
discriminatory alternative, the plaintiff shows the defendant’s offered reason is a pretext. United
States v. Badgett, 976 F.2d 1176, 1178 (8th Cir. 1992); Snyder, 953 F. Supp. at 220.

Federal district courts in the Seventh Circuit are of course obligated to follow Seventh
Circuit precedent, including Arlington Heights II. We are not so restricted, and it appears that
Snyder, a district court opinion on which Arlington Heights II relied, is out of the mainstream of
federal authority.

Moreover, Arlington Heights II seems doctrinally unsound. In employment disparate
impact cases, burden-shifting tests are favored over factor-balancing tests. See Connecticut v.
Teal, 457 U.S. 440, 446-47 (1982); Dothard v. Rawlinson, 433 U.S. 321, 329 (1977); Albemarle
Paper Co. v. Moody, 422 U.S. 405, 425 (1975). Because Title VII and the FHA use the same
language in prohibiting discrimination, we should apply the same framework to both. Moreover,
mixing the Arlington Heights II factors with the burden-shifting framework produces an
unnecessarily complex process and introduces improper considerations. The burden-shifting
framework accommodates the two relevant Arlington Heights II factors by considering the
strength of the discriminatory effect of the challenged practice and the defendant’s interest
necessitating it. The remaining two factors—form of relief and intent—are improper
considerations in the disparate impact context.

9
 The relief sought is an inappropriate consideration because the FHA specifically
authorizes courts to award “preventive relief, including a permanent or temporary injunction,
restraining order, or other order.” It sets out no higher standard for plaintiffs seeking affirmative
relief. 42 U.S.C.A. § 3614(d)(1)(A).

Intent is an improper consideration because in disparate impact cases the disparate impact
itself is the violation, irrespective of intent. See Mountain Side, 56 F.3d at 1252. For the same
reason, the third burden should address less discriminatory alternatives, not pretext. Pretext is a
means of finding subjective intent to discriminate. The more persuasive federal courts have
specifically held that current FHA disparate impact law does not involve pretext. See
Huntington, 844 F.2d at 939 (“The McDonnell Douglas test, however, is an intent-based
standard for disparate treatment cases inapposite to the disparate impact claim asserted here. No
circuit, in an impact case, has required plaintiffs to prove that defendants’ justifications were
pretextual.”).

These observations lead us to reject the Arlington Heights II approach and, with it, any
search for pretext in a disparate impact case. Instead, we adopt the prevailing test, which
involves two shifts, not one. Requiring the plaintiff to identify a specific less restrictive
alternative is more efficient and fair than requiring the defendant to “guess at and eliminate” all
possible alternatives. Hispanics United, 988 F. Supp. at 1162.

In sum, to establish a right to disparate impact recovery under the FHA, a plaintiff must
establish a prima facie case by demonstrating that a policy or practice actually or predictably has
a significantly adverse or disproportionate impact on a protected class. To rebut this showing,
the defendant must demonstrate that its policy or practice has a manifest relationship to a
legitimate, nondiscriminatory interest. The plaintiff may then overcome the defendant’s showing
by demonstrating that a less discriminatory alternative would serve the defendant’s legitimate
interest equally well.

We now turn to application of this disparate impact framework to the record in this case.
The no-lease covenant at issue provides:

10
 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.

(App. at 43.) McGlothin contends that the no-lease covenant violates the FHA because it has an
impermissible disparate impact on African Americans. The trial court so found. (Id. at 20.)
Evidence presented at trial showed that regardless of income and age, African Americans rent
their homes in greater proportion than do whites. (Id. at 16-17.) The decrease in available rental
housing caused by the no-lease covenant will predictably and disproportionately affect African
Americans. While the evidence supporting this finding leaves something to be desired, we will
proceed on the basis that the prima facie case is established.

The Homeowners Association sought to rebut this prima facie case by demonstrating that
its no-lease provision has a manifest relationship to a legitimate, nondiscriminatory interest. The
trial court found that the Association’s reason for excluding renters from the subdivision is that
“renters do not maintain homes which they rent as well as owners maintain their homes.
Therefore, the exclusion of renters helps maintain property values.” (Id. at 18.) The record
contains ample expert testimony supporting this proposition. (Tr. at 65-67, 230.)

Because the Association asserted a legitimate, nondiscriminatory reason for its no-lease
covenant, the burden returned to McGlothin to propose an equally effective, less discriminatory
alternative. McGlothin drew the trial court’s attention to several other covenants which the trial
court found “more than adequately assured a neat, clean and visually attractive environment, and
a high degree of property maintenance.” (App. at 18.) These covenants require homeowners to,
among other things, maintain windows, door hardware, patios, and appliances; water lawns and
shrubs; keep the exterior free of trash, certain signs, certain communication devises, and certain
vehicles; and “promptly perform all maintenance and repair . . . which, if neglected, might
adversely affect any other Dwelling, Common Area or the value of the Property.” (Id. at 33-35,
38-42.) Because these additional covenants were in place, the trial court found that “the
Plaintiff’s justification for the no-rent provision lacks a factual basis, and is mere subterfuge,

11
rendering said provision unnecessary and useless.” (Id. at 18-19.) Ultimately, the trial court
found the covenant to violate the FHA.

This record does not support a claim under a disparate impact theory. Although the
specific property-maintenance covenants are a less discriminatory alternative to promote
maintenance, the covenants are not an equally effective means of maintaining property values.
Maintaining property values involves not merely maintaining property but also improving and
updating it. Under these covenants, owners are obligated only to maintain the home, not to
improve or update it. Owners who occupy their property have an incentive to improve and
update because they can both enjoy the improvements and reap the fruits of their labor upon
selling the home.

In a rental situation, however, this incentive is weakened because of divided ownership
and occupancy. The renter lacks some incentive to improve the property because he or she
would only benefit from the current enjoyment, not from an increased market value. Because the
additional property-maintenance covenants do not address the problem of divided interests in
rental property, they are not an equally effective, less discriminatory alternative to excluding
renters. Moreover, although there is nothing in this record directly addressing the point, it seems
obvious that an owner-occupant is both psychologically and financially invested in the property
to a greater extent than a renter.10 Personal motivation can surely achieve better results than
contractual compulsion in many cases. This is not a matter of reweighing evidence. Both
parties’ experts testified that owners maintain property better than do renters. (Tr. at 66, 86, 230-
31.) Because the evidence on this point is undisputed, to the extent the trial court found these
other covenants equally adequate to maintain property values, the trial court findings on this
point are clearly erroneous.

Because plaintiff points to no equally effective, less discriminatory alternatives to the
defendant’s legitimate nondiscriminatory policy, that policy does not support a disparate impact
FHA violation, even if it has a disparate impact on a protected class.

10
Surely, the psychology of this is recognized by prospective purchasers, who assess whether to make purchases
based in part on expectation that owner-occupant neighbors are likely to make such investments in maintenance.

12
 III. Disparate Treatment

McGlothin’s counterclaim contains certain allegations that are part of a disparate
treatment claim under the FHA. In her counterclaim, McGlothin alleged that

20. In making said covenant . . . the developer evidenced an intention to make
a preference, limitation, or discrimination among persons who could occupy
dwellings within the subdivision based on race, color, sex, familial status, or
national origin.

21. In seeking to enforce said covenant provision, members of Villas West II
or Willowridge Homeowners Association, Inc. evidence an intention to make a
preference, limitation, or discrimination among persons who could occupy
dwellings within the subdivision based on race, color, sex, familial status, or
national origin.

(App. at 55-56.) The trial court’s findings (and the trial record on intentional discrimination)
reflect certain contradictions. The court found that there was no conclusive evidence of
discriminatory intention behind the Homeowners Association’s attempt to enforce the no-lease
covenant. At the same time, it found the no-lease covenant to be a “subterfuge,” suggesting
pretext. (Id. at 19.) This finding as to the underlying motivation for the covenant flows from a
McGlothin witness who said the term “restricted” (used here in a developer’s advertisement) is
understood by minorities, especially African Americans, to be synonymous with “segregated.”
(Tr. at 304.) Two African American residents of Villas West II also testified on this point. One
African American resident testified that she did not think the covenant language indicated a
racial preference or exclusion. Another African American resident testified that the language in
the covenant and the developer’s advertisements did not convey any racial discrimination and
that she welcomed the covenant because renting had an adverse effect on property values. (Id. at
319-21, 324-27.)

The trial court’s findings about the developer’s intent are likewise ambiguous: “Whether
the builder of the tract realized it or not, the words ‘restricted,’ as used in its advertisements
clearly sent a message to the African American community . . . that African Americans (and
perhaps other minorities) are not welcome.” (App. at 19-20.) There is no evidence that the

13
Association ever promoted the subdivision as “restricted,” but the no-lease covenant and
advertisement did originate with the developer, who recorded the covenants and first controlled
the Association. (Tr. at 15-16.) The record does not contain evidence regarding when
advertisements using the word “restricted” were disseminated or whether those advertisements
were linked to the Villas West II subdivision.

The nature of these findings and the fact that McGlothin’s brief contains arguments
mostly but not exclusively pertinent to disparate impact understandably led the Court of Appeals
to conclude that “[o]nly disparate impact is at issue here.” Villas West, 841 N.E.2d at 599. We
find ourselves unable to discern whether relief is appropriate on McGlothin’s intentional
discrimination claim. The need for a fair adjudication suggests the desirability of remanding for
further evidence and findings.

Conclusion

We reverse the judgment of the trial court on the claim of disparate impact and remand
for reconsideration of the claim of intentional discrimination.

Dickson and Boehm, JJ., concur.
Rucker, J., dissents with separate opinion in which Sullivan, J., concurs.

14
Rucker, Justice, dissenting.

The majority works overtime and spends much ink to argue that Arlington Heights II is
flawed and should not be followed. To be sure, as the Court of Appeals noted, “a uniform
standard for determining liability based upon disparate impact remains elusive, and the disparate
impact jurisprudence has been described as ‘an increasingly incoherent body of case law.’”
Villas West II of Willowridge v. McGlothin, 841 N.E.2d 584, 599 (Ind. Ct. App. 2006) (quoting
Peter E. Mahoney, The End(s) of Disparate Impact: Doctrinal Reconstruction, Fair and Lending
Law, and the Antidiscrimination Principle, 47 Emory L.J. 409 (Spring 1998)). But even with its
imperfections, several state and federal jurisdictions continue to follow the Arlington Heights II
methodology. See, e.g., 2922 Sherman Ave. Tenants’ Ass’n. v. District of Columbia, 444 F.3d
673, 680-82 (D.C. Cir. 2006); Anderson ex rel. Dowd v. City of Boston, 375 F.3d 71, 83-90 (1st
Cir. 2004); Reese v. Miami-Dade County, 242 F. Supp. 2d 1292, 1304-06 (S.D. Fla. 2002); Hill
v. Cmty. of Damien of Molokai, 911 P.2d 861, 872-74 (N.M. 1996). Other than to make it
exceedingly more difficult for legitimate victims of housing discrimination to press their claims,
I see no reason to abandon this precedent. Indeed, applying the Arlington Heights II factors,
both the trial court and the Court of Appeals concluded that Villas West’s restrictive covenant
violated the Federal Fair Housing Act because of its disparate impact on members of the African
American community residing in the City of Kokomo. I agree and would affirm the judgment of
the trial court. Therefore I dissent.

Sullivan, J., concurs.

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