By Adam Leitman Bailey and Brandon M. Zlotnick

Adam Leitman Bailey, P.C. successfully represented a longtime client, which manages over properties in Manhattan, during the course of an investigation by the Office of the New York State Attorney General (“OAG”). The client has produced responses to a subpoena served by the OAG in early 2024, and thus far the OAG has not brought any claims against the client based on the investigation.

The OAG had initially investigated, from 2021 to 2023, the landlord of one property managed by the client, for alleged discrimination based on a lawful source of income. One individual, apparently a housing “tester,” contacted a real estate broker whom the landlord had retained, and asked whether the landlord accepted housing subsidy vouchers under the federal Section 8 voucher program (“Section 8”). The broker replied that she did not think so. This was incorrect: the landlord (and the management company) was willing to accept Section 8 voucher holders as tenants, but, due to the high price of the units in the property, the property had rarely had any applicants who were recipients of Section 8 or other housing vouchers, because voucher recipients had insufficient income, even when the vouchers were added, to be able to afford the units in the property.

The New York State Human Rights Law (“NYSHRL”), codified at New York Executive Law § 296, and the New York City Human Rights Law (“NYCHRL”), codified at New York City Administrative Code § 8-107, both prohibit discrimination in housing on the basis of, among other factors, an applicant’s lawful source of income. Thus, for example, a landlord and a property management company in New York City cannot refuse to lease an apartment to a housing applicant on the basis of the tenant’s receiving a housing subsidy, such as Section 8.

Violations of antidiscrimination laws typically can be in two different forms. One is disparate treatment, in which the housing provider discriminates directly based on a factor that it is not permitted to consider. For example, this would be the case if the housing provider outright refused to accept any applications from persons who held Section 8 vouchers. The other form of violation is disparate impact, in which the housing provider bases its decisions on a characteristic that itself is not prohibited from being considered, but that is correlated with a characteristic that cannot be considered, such deciding based on the non-prohibited characteristic has a disparate negative impact on persons who possess the characteristic that cannot be considered, even though the decision is not based directly on that characteristic. One example of disparate impact discrimination, recognized by an early Supreme Court decision interpreting the employment discrimination provisions of the Civil Rights Act of 1964, was an employer’s imposition of a requirement that applicants be college graduates, for a job that primarily involved manual labor.

The client had required that housing applicants either earn an annual income that was forty (40) times the monthly rent for the apartment sought, or, if they did not, provide a person who did meet that requirement as a guarantor of the applicant’s payment of the rent, in order to have their applications considered. This is a standard requirement imposed by landlords and property management companies. However, some recent court decisions at the trial level have found that imposition of a minimum-income requirement for housing applicants constitutes disparate impact discrimination against voucher recipients. The reasoning has been that voucher recipients are likely to have lower incomes than non-voucher recipients, since voucher eligibility is based on not having an income an excess of a maximum amount. Thus, a minimum-income requirement is significantly more likely to exclude a voucher recipient than to exclude a non-voucher recipient.

In the initial investigation by the OAG, the OAG deposed two employees of the client in order to determine whether the landlord had discriminated against applicants who held Section 8 or other government housing vouchers. Adam Leitman Bailey himself defended both depositions on behalf of the client, and the testimony demonstrated that the landlord had not discriminated. The OAG did not bring any claim against the landlord, and the statute of limitations for any claim based on the alleged discrimination against the tester expired years ago.

However, based on that initial allegation, and sporadic other complaints against that and other landlords who also used the client as the management company, the OAG served a subpoena on the client. The initial complaints had included, in addition to alleged discrimination against housing voucher holders, complaints that the client had either not returned a tenant’s security deposits within fourteen days of the tenant’s having moved out of the apartment after the end of the lease term, as required by law, or had not returned the full lease deposit less deductions for repairs of any damage caused by the tenant to the unit. They also featured complaints that the client had sought to enforce a term of the lease that required the tenant to pay to the landlord an amount equal to one month’s rent in the event the tenant provided, fewer than sixty (60) days prior to the end of the lease term, notice of his/her intent not to renew the lease at the end of that lease term (“untimely notice fees”).

The subpoena required production of a huge amount of material by the client, including documentation of the timing of all refunds of security deposits to all tenants, over a five-year period, in ten of the buildings managed by the client; documentation of all instances, over that period and in those buildings, in which all or a portion of the security deposit had not been refunded due to damage caused by the tenant to the apartment; and documentation of all instances in which the client, or a third-party company hired by the client, had sought to collect untimely notice fees; all documentation regarding applications by persons holding governmental housing vouchers; and all documentation involving the application of the client’s minimum-income requirement, or of its requirement that an applicant not meeting such requirement have a guarantor of his/her rent obligations under the lease.

After initial paper production by the client, the OAG insisted upon production of electronic documents as well. The OAG brought a special proceeding in Supreme Court, New York County to compel production of documents by the client. Adam Leitman Bailey, P.C. moved to quash the subpoena on the ground that it represented a fishing expedition, requiring production of a huge number of documents based on a handful of complaints. Supreme Court denied Adam Leitman Bailey, P.C.’s motion, and issued an order compelling the client to produce more documents. Adam Leitman Bailey, P.C. then retained a third-party e-discovery company to collect electronic documents, review them to see whether they fell within the grounds set forth in the subpoena, and produce to the OAG those documents which were responsive. At one point the OAG, frustrated with what it considered the slow pace of production, moved to hold the client in contempt, but Adam Leitman Bailey, P.C. was able to defeat that motion. Ultimately, the client produced hundreds of thousands of pages’ worth of documents to the OAG.

One tactic that the OAG used was to seek, from the court presiding over the subpoena enforcement proceeding, an order tolling the statute of limitations on any possible claims arising from the investigation each time the court extended the time for the client to respond to the subpoena. Adam Leitman Bailey, P.C. ultimately moved to vacate the past tolling orders on the ground that the court could not toll the statute of limitations. There was apparently no caselaw on whether a court could toll the statute of limitations as a condition of extending the time to respond to a subpoena or another discovery demand, but the firm prevailed on that motion, and court vacated its prior tolling orders.

Late in the course of production, the Appellate Division, Third Department held that the NYSHRL’s prohibition of discrimination against persons on the basis of lawful source of income was unconstitutional to the extent that it required landlords to rent to recipients of Section 8 vouchers. This was because regulations of the United States Department of Housing and Urban Development (“HUD”) required landlords accepting payment by Section 8 vouchers to make their properties and records available to search by HUD agents without such agents’ first having obtained a warrant. By requiring landlords to accept Section 8 vouchers, the NYSHRL thus required them to consent to warrantless searches, which violated the Fourth Amendment’s prohibition on searches and seizures without a warrant. This ruling undercut the OAG’s investigation, because it meant that the client could not be held liable for having policies that had a disparate impact on recipients of Section 8 vouchers.

Production by the client was completed a few months ago, and the OAG has not yet brought any claims against the client based on its findings from the investigation. In this instance, Adam Leitman Bailey, P.C. successfully defended its client’s interests before a lawsuit alleging a substantive legal violation could be brought.

Adam Leitman Bailey, Jeffrey R. Metz, and Brandon M. Zlotnick worked on this matter.