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In Steele v. 400 East 77th Street Corp., a Manhattan Supreme Court concluded earlier this year that a claim of racial discrimination in connection with a co-op apartment purchase would not be dismissed on a motion for summary judgment. Instead, discovery was required.

This action sought to recover compensatory and punitive damages for alleged racial discrimination against the plaintiffs, Monica Steele, a Hispanic, and Scott Steele, an African-American, by defendants who rejected the plaintiffs' proposed purchase of a co-op apartment in Manhattan. The named defendants were the co-op corporation and its board of directors (Pami Wexelman, Stephanie Failla, William Serpe, Stanley Heisler, Daniel Osborn, Felicia Goldring, and Burton A. Buchner). Defendants then moved for an order granting summary judgment in their favor, dismissing the complaint.

In October 1999, the Steeles entered into a contract to purchase 298 shares allocated to Unit 4L at 400 East 77th Street in Manhattan. The contract indicated that the purchase price for the unit was $205,000. Plaintiffs paid ten percent as a contract deposit. Of the $184,500 balance due at closing, plaintiffs planned to pay $20,000 in cash and obtain financing to pay the remaining $164,500. After review of the Steeles' application and an interview, the board rejected the application.

In the complaint, verified October 13, 2000, the Steeles claimed that their purchase application was rejected based on their race and national origin, in violation of the Civil Rights Law; the Fair Housing Act; New York State Executive Law; and New York City Administrative Code. The sixth affirmative defense in the defendants' answer, verified November 21, 2000, of relevance here, alleged that "defendants acted reasonably, properly, lawfully, and without any discriminatory animus, motive, intent or effect."

As explained by the defendants, under the co-op's proprietary lease and the standard contract of sale for the transfer of a co-op unit, all transfers of shares were subject to approval by the co-op. The board delegated the responsibility for reviewing applications and conducting interviews to an admissions committee, consisting of three members of the board. At the time of the Steeles' application, the committee's members were Heisler, Failla, and Wexelman; Failla, however, did not take part in the review.

Prospective purchasers were required to submit to the co-op or its managing agent an application for approval of the sale, together with such documents as the co-op reasonably required, and to attend an interview if requested. The co-op required a prospective purchaser to submit for review the contract of sale, purchase application, personal financial statement, federal and state tax returns, bank statements, landlord and personal references, and credit card statements, and to sign an authorization permitting the managing agent to obtain a credit report for the prospective purchaser.

The Steeles alleged that, in accordance with defendants' requirements, they submitted an application with three letters of reference, pay stubs, verification of employment, income tax returns, and documentation of assets and liabilities. They maintained that the application documented that they had a combined income of $133,000 and more than $85,000 in cash. The Steeles also gave the board authorization to obtain their credit reports. Information submitted indicated that Mrs. Steele was an attorney and Mr. Steele a graduate of Cornell University. They were subsequently interviewed by Heisler and Wexelman in the lobby of the building.

The defendants contended that the admissions committee determined that the Steeles' income and net worth together were insufficient to meet the obligations of a shareholder, and for that reason, rejected their application. They claimed that they were not satisfied with the Steeles' initial application, which was confusing, and presented a number of financial concerns. The defendants alleged that they had instructed the managing agent to request revised financial statements from the Steeles.

The defendants further claimed that they had told the managing agent that an interview with the Steeles should not be scheduled until after they had received the revised statements. However, according to the defendants, the managing agent mistakenly invited the Steeles to attend an interview with the admissions committee even though they had not yet submitted new financial statements. However, as long as the Steeles were already in the building, the admissions committee went ahead with the interview. The Steeles submitted their revised financial statements to the admissions committee at that time.

The defendants claimed that, upon review of these new financial statements, the committee was certain that the Steeles were living beyond their means and not financially able to maintain and operate the unit. In this regard, the defendants claimed that they determined that the Steeles' income and net worth together with their outstanding liabilities were insufficient to meet the obligations of a shareholder. The board also felt that the couple's monthly maintenance and mortgage charges would present financial difficulty for them, especially if the co-op imposed special assessments, as seemed likely. According to the board, some of the significant problems with the application, which caused them to reject the Steeles' application, included the following:

"if plaintiffs purchased the Unit, the monthly amount which they would be paying for maintenance for the Unit ($831.90 per month) and mortgage (approximately $1,150 per month), would be more than double the monthly rent that plaintiffs were then paying as rent.

"plaintiffs owed a $17,500 credit card debt to American Express.

"Monica Steele owed $23,000 for student loans.

"plaintiffs' credit report indicated that three of plaintiffs' credit accounts (i.e., two with Macy's and one with FDS National Bank) had been 'closed at the credit grantor's request.'"

The Steeles alleged that the issues that the defendants raised to justify their rejection of the Steeles' application (i.e., the credit report, credit card debt, and Monica Steele's student loan) were never raised during the interview with the Steeles, and were not genuine reasons for the rejection.

The defendants contended that summary judgment should be entered in their favor because they had adequately set forth: (a) the process for review of applications by the co-op; (b) the standards that are applied when considering applications; (c) the details of the review and consideration given to the plaintiffs' application; and (d) the legitimate non-discriminatory reason for rejecting the plaintiffs' application. The defendants claimed that the evidence revealed that they acted without discriminatory intent and within the co-op's sound business judgment when the Steeles' application was rejected. The rejection, the defendants maintained, was based solely on the Steeles' financial condition and was unrelated to their race or national origin.

The Steeles submitted that, whether the board's stated reasons for rejecting their application were valid, or merely a pretext for prohibited discriminatory conduct, was a question of fact that should be determined at trial. They maintained that defendants had not demonstrated their entitlement to summary judgment as a matter of law. The Steeles further argued that the motion was premature because depositions and other discovery had yet to be conducted.

In analyzing the issues, the court said that the proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issue of fact. Upon review, the court denied the motion because material issues of fact existed with respect to the reasons for the defendants' denial of the application to purchase the unit.

The Steeles also claimed that the motion should be denied as premature, because depositions had not yet been conducted. The court agreed. Although the defendants argued that they already responded to the Steeles' combined demands and notice to produce (including production of its bylaws, rules, application, board minutes, 20 applications of prospective purchasers, and correspondence concerning the Steeles' application), the court held that the Steeles' right to depose the individuals familiar with the board's application review process and the review of the application were crucial to the Steeles' ability to adequately prosecute this action. As a result, the court ordered that the defendants' motion for summary judgment be denied without prejudice to renewal upon completion of discovery.

Comment: This is the latest illustration of what a co-op board can face when it rejects an apartment purchaser who is a member of a protected class, who then claims that such rejection was based on improper discrimination. In this case, where the board set forth permissible grounds to justify the rejection, the court was unwilling to accept such grounds to dismiss the discrimination claim. Instead, the court ordered pretrial discovery to afford the plaintiffs an opportunity to refute the co-op's position. Thus, the claim remains and the co-op is forced to incur further defense costs.

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