The Inclusive Communities Project Inc v. Texas Department of Housing and Community Affairs et al

Filing 178

MEMORANDUM OPINION AND ORDER. Following a summary judgment decision and a bench trial, the court finds that plaintiff has proved its disparate impact claim under the Fair Housing Act, but it otherwise finds in favor of defendants. Within 60 days of the date this memorandum opinion and order is filed, defendants must file their remedial plan. Plaintiff may submit objections within 30 days after the remedial plan is filed. If objections are filed, the court will establish any necessary additional procedures by separate order. (Ordered by Chief Judge Sidney A Fitzwater on 3/20/2012) (Chief Judge Sidney A Fitzwater)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
THE INCLUSIVE COMMUNITIES
PROJECT, INC.,
Plaintiff,
VS.
THE TEXAS DEPARTMENT OF
HOUSING AND COMMUNITY
AFFAIRS, et al.,
Defendants.

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§ Civil Action No. 3:08-CV-0546-D
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MEMORANDUM OPINION
AND ORDER
This lawsuit challenging the Texas Department of Housing and Community Affairs’
(“TDHCA’s”) allocation of Low Income Housing Tax Credits (“LIHTC”) in the Dallas
metropolitan area requires the court to decide whether plaintiff has proved that TDHCA
intentionally discriminated based on race, in violation of the Equal Protection Clause of the
Fourteenth Amendment and 42 U.S.C. § 1982, or that TDHCA’s allocation decisions had a
disparate racial impact, in violation of §§ 3604(a) and 3605(a) of the Fair Housing Act
(“FHA”). Following a summary judgment decision and a bench trial, and for the reasons that
follow,1 the court finds that plaintiff has proved its disparate impact claim under the FHA,
1

The court sets out in this memorandum opinion and order its findings of fact and
conclusions of law. See Fed. R. Civ. P. 52(a)(1). Although the court has carefully
considered the trial testimony and exhibits, this memorandum opinion and order has been
written to comply with the level of detail required in this circuit for findings of fact and
conclusions of law. See, e.g., Century Marine Inc. v. United States, 153 F.3d 225, 231 (5th
Cir. 1998) (discussing standards). The court has not set out its findings and conclusions in

but it otherwise finds in favor of defendants.
I
A
This is an action by plaintiff The Inclusive Communities Project, Inc. (“ICP”) against
defendants TDHCA and its Executive Director and board members in their official capacities
under the FHA, the Fourteenth Amendment (actionable under 42 U.S.C. § 1983), and 42
U.S.C. § 1982. ICP is a non-profit organization that seeks racial and socioeconomic
integration in the Dallas metropolitan area.

In particular, ICP assists low-income,

predominately African-American families who are eligible for the Dallas Housing
Authority’s Section 8 Housing Choice Voucher program (“Section 8”) in finding affordable
housing in predominately Caucasian,2 suburban neighborhoods. Because under the LIHTC
program a development that receives tax credits cannot refuse housing solely because a
person is using a Section 8 voucher, it is important to ICP where the developments are
located in the Dallas metropolitan area.
This lawsuit arises from TDHCA’s allocation of LIHTC in the Dallas metropolitan
area. Under § 42 of the Internal Revenue Code (“I.R.C.”), the government provides tax

punctilious detail, slavishly traced the claims issue by issue and witness by witness, or
indulged in exegetics, parsing or declaiming every fact and each nuance and hypothesis. It
has instead written a memorandum opinion and order that contains findings and conclusions
that provide a clear understanding of the basis for the court's decision. See id.
2

In this memorandum opinion and order, the term “Caucasian” means white persons
who are neither Hispanic nor Latino.
-2-

credits that a state distributes to developers through a designated state agency. See id.
TDHCA is the agency designated by the Texas Legislature to administer the program in
Texas. See Tex. Gov’t Code Ann. § 2306.053(b)(10) (West 2008) (“The department may .
. . administer federal housing, community affairs, or community development programs,
including the low income housing tax credit program.”). Developers apply to TDHCA for
tax credits, which can be sold to finance construction of a housing project.
TDHCA issues two types of LIHTC: 4% tax credits3 and 9% tax credits. The 9% tax
credits are distributed on an annual cycle and are generally oversubscribed. Certain federal
and state laws dictate, at least in part, the manner in which TDHCA can select the
applications that will receive 9% tax credits. First, I.R.C. § 42 requires that the designated
state agency adopt a “Qualified Allocation Plan” (“QAP”) that prescribes the “selection
criteria.” See id. at § 42(m)(1)(A)-(B).4 The QAP must include, inter alia, certain selection
criteria, see id. at § 42(m)(1)(C),5 and preferences, see id. at § 42(m)(1)(B);6 otherwise,
3

It appears that the actual name of 4% tax credits is “Tax-Exempt Bond.” See Tr. 2:12
(referring to P. Ex. 125 at 60 and noting that the term “Tax-Exempt Bond Developments” is
“4% tax credits.”); P. Ex. 1 at 19; P. Ex. 125 at 28. The court will use the terms “4% tax
credit” and “4% tax credits” because the parties and TDHCA appear to do so. See P. Ex. 490
at 17 (“[T]he non-competitive, or the 4 percent credits, as you’ll normally hear us refer to
them in the Board meetings . . . [are] allocated with private activity bonds.”); see also, e.g.,
Tr. 4:11-15.
4

ICP also calls the selection criteria the 9% point scoring and ranking system. This
may result from the fact that Texas law obligates TDHCA to score and rank applications
against selection criteria that prioritize certain criteria. See Tex. Gov’t Code Ann.
§ 2306.6710(b) (West 2001).
5

I.R.C. § 42(m)(1)(C) provides, in relevant part:
-3-

“zero” housing credit dollars will be provided, see id. at § 42(m)(1)(A). Second, the Texas
Government Code regulates how TDHCA administers the LIHTC program. The Code
requires TDHCA to adopt annually a QAP and corresponding manual. Id. at § 2306.67022.7
The selection criteria set forth in a qualified allocation plan must
include—
(i) project location,
(ii) housing needs characteristics,
(iii) project characteristics, including whether the project
includes the use of existing housing as part of a community
revitalization plan,
(iv) sponsor characteristics,
(v) tenant populations with special housing needs,
(vi) public housing waiting lists,
(vii) tenant populations of individuals with children,
(viii) projects intended for eventual tenant ownership,
(ix) the energy efficiency of the project, and
(x) the historic nature of the project.
Id.
6

I.R.C. § 42(m)(1)(B) provides, in relevant part:
[T]he term “qualified allocation plan” means any plan— . . .
which . . . gives preference in allocating housing credit dollar
amounts among selected projects to-(I) projects serving the lowest income tenants,
(II) projects obligated to serve qualified tenants for the longest
periods, and
(III) projects which are located in qualified census tracts (as
defined in subsection (d)(5)(C)) and the development of which
contributes to a concerted community revitalization plan[.]

Id.
7

Section 2306.67022 was amended in 2011. It now requires TDHCA to adopt a QAP
and corresponding manual only biennially, with the discretion to do so annually. See Tex.
Gov’t Code Ann. § 2306.67022 (West 2011). The court refers to the 2001 version, instead
of the 2011 amended version, because the parties rely on the 2001 version. And the court
-4-

It also sets out how TDHCA is to evaluate applications. TDHCA must first “determine
whether the application satisfies the threshold criteria” in the QAP. Id. at § 2306.6710(a).
Applications that meet the threshold criteria are then “score[d] and rank[ed]” by “a point
system” that “prioritizes in descending order” ten listed statutory criteria (also called “abovethe-line criteria”), which directly affects TDHCA’s discretion in creating the “selection
criteria” in each QAP. Id. at § 2306.6710(b).8 The Texas Attorney General has interpreted

is primarily relying on the statute to provide a basic understanding of the Texas LIHTC
program during the period that preceded the filing of this lawsuit. As of the date of this
memorandum opinion and order, it appears that it is still the TDHCA’s practice to adopt a
QAP annually. See Ds. Dec. 7, 2011 Br. 13 (“The TDHCA administers its LIHTC program
through a unique, legislatively-mandated QAP re-written each year.”).
8

The ten statutory criteria are:
(A) financial feasibility of the development based on the
supporting financial data required in the application that will
include a project underwriting pro forma from the permanent or
construction lender;
(B) quantifiable community participation with respect to the
development, evaluated on the basis of written statements from
any neighborhood organizations on record with the state or
county in which the development is to be located and whose
boundaries contain the proposed development site;
(C) the income levels of tenants of the development;
(D) the size and quality of the units;
(E) the commitment of development funding by local political
subdivisions;
(F) the level of community support for the application, evaluated
on the basis of written statements from the state representative
or the state senator that represents the district containing the
proposed development site;
(G) the rent levels of the units;
(H) the cost of the development by square foot;
(I) the services to be provided to tenants of the development;
-5-

this provision to obligate TDHCA to “use a point system that prioritizes the [statutory]
criteria in that specific order.” Tex. Att’y Gen. Op. No. GA-0208, 2004 WL 1434796, at *4
(2004). Although the Texas Government Code does not mandate the points to be accorded
each statutory criterion, “the statute must be construed to require [TDHCA] to assign more
points to the first criterion than to the second, and so on, in order to effectuate the mandate
that the scoring system ‘prioritiz[e the criteria] in descending order.’” Id. (quoting Tex.
Gov’t Code Ann. § 2306.6710(b)(1) (West 2004)). And while TDHCA can consider other
criteria and preferences (also called “below-the-line” criteria), it “lacks discretionary
authority to intersperse other factors into the ranking system that will have greater points
than” the statutory criteria. Id. at *6 (citation and internal quotation omitted). Once TDHCA
adopts a QAP, it submits the plan to the Governor, who can “approve, reject, or modify and
approve” it. Tex. Gov’t Code Ann. § 2306.6724(b)-(c) (West 2001). Once approved,
TDHCA staff review the applications in accordance with the QAP, underwrite applications
in order “to determine the financial feasibility of the development and an appropriate level
of housing tax credits,” id. at § 2306.6710(b)(1)(A) & (d), and submit their recommendations
to TDHCA. See id. at § 2306.6724(e). TDHCA then reviews the staff recommendations and

and
(J) whether, at the time the complete application is submitted or
at any time within the two-year period preceding the date of
submission, the proposed development site is located in an area
declared to be a disaster under Section 418.014[.]
Tex. Gov’t Code Ann. § 2306.6710(b) (West 2007).
-6-

issues final commitments in accordance with the QAP. See id. at § 2306.6724(e)-(f).
The 4% tax credit, on the other hand, is a non-competitive program, available to
applicants on a year-round basis. See P. Ex. 1 at 19, 46. The federal government provides
states private activity bonds, see I.R.C. §§ 42 and 142, that are distributed in Texas by
several issuers, including TDHCA. Developers can apply to TDHCA for a 4% tax credit to
be allocated in addition to a bond, particularly the multifamily housing bond. In awarding
the tax credit, TDHCA “reviews the application for threshold, eligibility and then the
development is underwritten.” P. Ex. 1 at 20; see also Tex. Gov’t Code Ann. § 2306.67021
(West 2001) (providing that, with the exception of § 2306.6703 regarding eligibility,
subchapter 2306 DD (i.e., from § 2306.6701-.6723) “does not apply to the allocation of
housing tax credits to developments financed through the private activity bond program”).
In particular, applications for the 4% tax credit are not subject to scoring under the selection
criteria. See P. Ex. 125 at 64 (the 2008 QAP, for example, relieves 4% tax credit applications
or “Tax-Exempt Bond Developments” from certain sections of the QAP, including § 50.9(I)
regarding “Selection Criteria.”); see also Tr. 4:12 (“[4% applications] do[] [not] go through
a competitive scoring model where the Board makes a decision on a particular group of
projects at any given time.”) If a developer seeks a multifamily bond allocation from
TDHCA, it applies to TDHCA, which reviews the application and submits it to the Bond
Review Board (“BRB”), a separate agency, for the final determination of whether to issue
an underlying bond.

-7-

B
ICP alleges that, despite federal and state laws governing the QAP, TDHCA is
permitted under Texas law to exercise discretion in making final decisions regarding the
allocation of both 4% and 9% tax credits. It maintains that TDHCA uses this discretion to
make housing and financial assistance for housing construction unavailable because of race,
in violation of §§ 3604(a) and 3605(a) of the FHA. ICP also alleges that TDHCA has used
race as a factor in allocating tax credits under the LIHTC program, in violation of the
Fourteenth Amendment and of § 1982, which requires that defendants give all United States
citizens the same right to lease property as Caucasian citizens.
In a prior opinion in this case, the court addressed the parties’ cross-motions for
summary judgment. See Inclusive Cmtys. Project, Inc. v. Tex. Dep’t of Hous. & Cmty.
Affairs, 749 F.Supp.2d 486 (N.D. Tex. 2010) (Fitzwater, C.J.) (“ICP II”). It held that ICP
was entitled to partial summary judgment establishing the prima facie case component of its
claims under the FHA, § 1982, and the Fourteenth Amendment (actionable through § 1983).
Id. at 500 (FHA) and 502 (§ 1982 and Fourteenth Amendment (actionable through § 1983)).
Because ICP had met this burden, defendants were obligated with respect to ICP’s
FHA claim (which was limited to a disparate impact claim, id. at 498 n.10) to prove that
TDHCA’s actions were in furtherance of a compelling government interest that was bona
fide and legitimate, and that there were no less discriminatory alternatives. Id. at 503. The
court held that defendants had not met their summary judgment burden of establishing that
TDHCA’s actions furthered a compelling government interest. In particular, they did not
-8-

establish that TDHCA could not comply with both I.R.C. § 42 and the FHA. Id. at 504.
Concerning ICP’s intentional discrimination claims under § 1982 and the Fourteenth
Amendment (§ 1983), the court held that defendants had met their burden of producing
evidence of a nondiscriminatory reason for their actions, id. at 506, but that ICP had
“presented sufficient evidence that defendants’ proffered reason is pretextual to require a
trial.” Id.
The parties presented this case in a bench trial that commenced on August 29, 2011
and concluded on September 1, 2011. The court granted the parties’ requests that they
present their closing arguments by written submissions. The final submissions were filed on
December 21, 2011.9

9

The parties have lodged numerous objections to the testimony and exhibits. Many
objections are immaterial because the court did not rely on the evidence in question when
making its decisions on the merits, or the court relied on the evidence for a limited purpose
that is unaffected by whether the objection is well taken. In a bench trial, it is permissible
for the court to hear evidence that it later determines is inadmissible or immaterial to its
decisions on the merits. See Harris v. Rivera, 454 U.S. 339, 346 (1981) (holding that, in a
bench trial, the court is presumed capable of hearing otherwise inadmissible evidence and
disregarding that evidence when making decisions). Regarding the evidence on which the
court did rely in reaching its decision, the principal objections appear to challenge the
relevance of certain evidence and the qualifications of certain witnesses to give expert
testimony. The court overrules the relevance objections that are related to the evidence on
which the court has relied in reaching its decision. The court concludes that the evidence is
relevant, within the meaning of Fed. R. Evid. 401, to whether defendants’ actions violated
the FHA, the Fourteenth Amendment, and/or § 1982. To the extent the parties challenge the
admissibility of witnesses who were offered as experts, the court holds that the party offering
the testimony has either satisfied the requirements for expert testimony under Fed. R. Evid.
702 or that the witness was testifying based on personal knowledge as a fact witness rather
than offering scientific, technical, or other specialized knowledge.
-9-

II
The court considers together ICP’s claims for intentional discrimination under the
Equal Protection Clause of the Fourteenth Amendment (actionable under § 1983) and § 1982.
A
The Equal Protection Clause of the Fourteenth Amendment “prohibits intentional
racial segregation in government-assisted housing.” ICP II, 749 F.Supp.2d at 501 (citing
Banks v. Dall. Hous. Auth., 119 F.Supp.2d 636, 638 n. 3 (N.D. Tex. 2000) (Kaplan, J.)). “To
state a claim under § 1983, a plaintiff must (1) allege a violation of rights secured by the
Constitution or laws of the United States and (2) demonstrate that the alleged deprivation was
committed by a person acting under color of state law.” Id. (quoting Moore v. Dall. Indep.
Sch. Dist., 557 F.Supp.2d 755, 761 (N.D. Tex. 2008) (Fitzwater, C.J.), aff’d, 370 Fed. Appx.
455 (5th Cir. 2010)). Section 1982 “prohibits all racial discrimination, private as well as
public, with respect to property rights.” Id. (quoting Evans v. Tubbe, 657 F.2d 661, 663 n.
2 (5th Cir. Unit A Sept. 1981)) (internal quotation marks omitted). “To prove claims under
§ 1982 and the Equal Protection Clause, ICP must demonstrate discriminatory intent, not
merely discriminatory effect.” Id. (citing City of Cuyahoga Falls v. Buckeye Cmty. Hope
Found., 538 U.S. 188, 195 (2003)); see also Hanson v. Veterans Admin., 800 F.2d 1381,
1386 (5th Cir. 1986) (noting that although FHA claim requires only showing of
discriminatory effect, § 1982 claim requires finding of intentional racial discrimination).
ICP has not introduced direct evidence of intentional discrimination. Discriminatory
intent can be proved, however, by circumstantial evidence. See Vill. of Arlington Heights v.
- 10 -

Metro. Hous. Dep’t, 429 U.S. 252, 266-68 (1977); Jim Sowell Constr. Co. v. City of Coppell,
61 F.Supp.2d 542, 546-47 (N.D. Tex. 1999) (Fitzwater, J.) (listing non-exhaustive guiding
factors, including (1) the discriminatory effect of the official action, (2) the historical
background of the decision, (3) the specific sequence of events leading up to the challenged
decision, (4) departures from the normal procedure, (5) departures from the normal
substantive factors, and (6) the legislative or administrative history of the decision). When
a plaintiff does not present direct evidence of discrimination, the burden-shifting method of
McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973), applies. ICP II, 749 F.Supp.2d
at 500. The court granted partial summary judgment in ICP II, holding that ICP had
established a prima facie case of discriminatory intent. Id. at 502. The court recognizes that
the “McDonnell Douglas formula . . . is applicable only in a directed verdict or summary
judgment situation, and is not the proper vehicle for evaluating a case that has been fully tried
on the merits.” Kanida v. Gulf Coast Med. Pers. LP, 363 F.3d 568, 575 (5th Cir. 2004)
(internal quotation marks omitted) (quoting Powell v. Rockwell Int’l Corp., 788 F.2d 279,
285 (5th Cir. 1986)). But the court as trier of fact can consider ICP’s prima facie showing,
and defendants’ explanation for their challenged conduct, when deciding whether ICP has
proved intentional discrimination. “The existence of the prima facie case, together with
evidence that defendants’ proffered explanation for its challenged conduct is pretextual, is
sufficient to find intentional discrimination.” ICP II, 749 F.Supp.2d at 498 (citing Reeves
v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 147 (2000)). And “the strength of the
prima facie case can be relevant in determining whether defendants’ proffered explanation
- 11 -

for their actions is in fact pretextual.” Id. (citing Prejean v. Radiology Assocs. of Sw. La.
Inc., 342 Fed. Appx. 946, 950 (5th Cir. 2009) (per curiam)).
B
ICP alleges that TDHCA intentionally discriminates based on race by
disproportionately approving LIHTC in predominantly minority neighborhoods and
disproportionately denying LIHTC in predominantly Caucasian neighborhoods. As noted,
ICP has not offered direct evidence of discriminatory intent; instead, it relies on
circumstantial proof, including evidence that TDHCA’s justifications for the discriminatory
impact of its LIHTC decisions are pretextual.
ICP failed to prove by a preponderance of the evidence that TDHCA intentionally
discriminates based on race in its LIHTC decisions. Without discussing the trial evidence
in punctilious detail, see supra note 1, the court finds that TDHCA offered evidence of its
obligation to create the selection criteria of each QAP in accordance with governing federal
and state law. TDHCA also introduced proof that its staff are responsible for initially scoring
applications according to the QAP and presenting recommendations for TDHCA’s approval
or denial. Multiple witnesses credibly testified that, in making decisions, TDHCA does not
act with intent to discriminate.
Moreover, ICP did not prove that TDHCA intentionally discriminates when exercising
its limited discretion. ICP asserts that TDHCA can in its discretion ignore the selection
criteria made mandatory by the Texas Legislature by issuing forward commitments to 9%
tax credit applications and by approving 4% tax credit applications, and that this discretion
- 12 -

is used to intentionally discriminate. The court finds that TDHCA offered credible evidence
of nondiscriminatory reasons for approving or denying every application that ICP alleges was
improperly approved or denied.10 For example, ICP maintains that TDHCA intentionally
discriminated in denying a 4% tax credit to the Primrose at Stonebrook project located in a
majority Caucasian area. The court finds that TDHCA denied this application because the
proposed project consisted of only three-bedroom units, and that in 2004 TDHCA was using
its limited 4% tax credit allocations for projects that had a mix of different size units so that,
among other reasons, single mothers could afford units in the development.11
ICP also failed to prove that TDHCA withheld its discretionary authority with the
intent to perpetuate a disparate impact. In fact, there are several instances when the TDHCA
Board attempted to use its limited discretion to deconcentrate LIHTC developments in highminority areas and encourage development in “high opportunity areas” preferred by ICP and

10

Although the court finds below, see infra § III(C), that TDHCA could have used its
discretion to issue forward commitments in order to decrease the disparate impact of its
decisions, ICP did not prove by a preponderance of the evidence that TDHCA intentionally
discriminates on the basis of race when deciding whether to make a forward commitment.
11

The court finds that other challenged examples were also approved or denied for
nondiscriminatory reasons. For instance, the Chaparral Townhomes project was a 9% tax
credit applicant that scored well enough to receive LIHTC, but TDHCA denied the
application because the developer was a former TDHCA board member who had in the past
received four LIHTC allocations. In response to recent criminal charges against a former
TDHCA board member and pressure from the Texas Legislature to spread tax credits among
developers, TDHCA determined that it should avoid the appearance of impropriety and
adhere to the Legislature’s request by not awarding tax credits to a former board member
who had received LIHTC on four prior occasions. The credits were given instead to a
developer who had never received LIHTC.
- 13 -

other organizations. For example, in 2003, TDHCA board member Shadrick Bogany stated
during a Board meeting that he was “tired” of the Board’s approving LIHTC projects in a
manner that led to the concentration of LIHTC projects in high-minority areas. Shortly
thereafter, the Texas Legislature responded to concerns about the concentration of LIHTC
in high-minority areas by amending the statutes that governed the LIHTC program, and those
changes were implemented by TDHCA in the 2004 QAP. The new rules sought to
deconcentrate housing by imposing certain limitations on LIHTC project concentrations,
such as the one mile/one year rule, the one mile/three year rule, and the twice per capita rule.
The one mile/one year rule prevents TDHCA from approving two LIHTC projects within one
linear mile of each other within the same allocation year in counties with populations
exceeding one million. The one mile/three year rule prevents TDHCA from approving an
LIHTC project that is within one linear mile of the same type of LIHTC project built within
three years preceding the new project application, unless the local government votes
specifically to allow the construction. And the twice per capita rule requires developers who
propose a project in a municipality or county that contains more than twice the state average
of units per capita supported by LIHTC to obtain a resolution from the municipality or
county approving the new development.
Moreover, TDHCA independently took steps to deconcentrate LIHTC projects in
high-minority areas. After ICP’s President testified before TDHCA in 2004 and requested
that, as part of the selection criteria, TDHCA give four additional points to projects that
further fair housing goals, TDHCA changed the 2005 QAP to include the granting of points
- 14 -

to projects in “high opportunity areas,” and it increased from four to seven the requested
points for certain “high opportunity area” categories.12 These changes, along with evidence
of other TDHCA attempts to deconcentrate LIHTC projects in high-minority areas,
demonstrate that TDHCA did not intentionally discriminate by withholding its discretionary
authority to perpetuate a discriminatory impact. And there are other examples of how
TDHCA attempted to address the concentration issue, such as the 130% basis boost given
for projects in high opportunity areas. See Ds. Nov. 9, 2011 Br. 23-28 (addressing trial
evidence regarding several examples).
ICP has failed to prove that TDHCA used the inclusive capture rate13 to intentionally
discriminate by steering developers to propose LIHTC projects in high-minority areas. The
inclusive capture rate is not part of the 9% selection criteria, but is instead used during the
underwriting process to ensure that projects are financially feasible.14 The inclusive capture
rate is calculated by comparing the supply of units in a given area to tenant demand for lowincome housing in the area. ICP alleges that the use of the inclusive capture rate leads to
concentrations of LIHTC projects in high-minority areas because that is where a

12

In response to a complaint to the Governor by Representative Robert Talton that
granting seven points for developments in certain high opportunity areas encouraged
development in high-income areas rather than low-income areas where the housing was
needed, the Governor rejected the 2005 QAP. After TDHCA lowered the seven point
categories to four points, the Governor approved the QAP.
13

TDHCA no longer uses the term “inclusive capture rate.” It renamed and simplified
the formula.
14

A project will not be allocated LIHTC until it passes the underwriting analysis.
- 15 -

disproportionate number of low-income housing tenants live; thus if a developer wants to
increase the chances of passing the underwriting analysis, it will propose a project in a highminority area. The court finds that TDHCA uses the inclusive capture rate to measure the
financial feasibility of a proposed development, not to intentionally discriminate based on
race. Financial feasibility is of great concern to TDHCA because LIHTC allocated to
projects that fail are largely lost; those lost credits in most instances cannot be allocated to
other projects. Thus if a LIHTC project fails, Texas loses low-income housing units that
would otherwise have been constructed and available.
Finally, ICP failed to prove that TDHCA’s justifications for the prima facie showing
of disparate impact are pretextual. Again, the court need not explain its reasoning for
rejecting each of ICP’s arguments. See supra note 1. These two are illustrative.
ICP posits that one of TDHCA’s asserted justifications for the disparate impact—that
TDHCA does not control the locations of LIHTC projects because developers choose
them—is pretextual because TDHCA, through the use of the inclusive capture rate, steers
developers to propose projects in high-minority neighborhoods. According to ICP, the
inclusive capture rate has this effect because the rate TDHCA requires for a project to pass
the underwriting analysis effectively dictates that a high number of low-income tenants must
live in the area of the proposed development. As the court has already discussed, however,
TDHCA uses the inclusive capture rate during the underwriting process as a measurement
of a project’s financial feasibility. ICP has therefore failed to prove that TDHCA’s

- 16 -

justification that developers choose the LIHTC sites is pretextual.15
ICP also maintains that TDHCA’s justification that developers choose project sites
is pretextual because TDHCA uses a less demanding inclusive capture rate for elderly
projects, which typically have fewer minority residents, than for non-elderly projects, which
typically have more minority residents. ICP contends that this results in steering only nonelderly projects into high-minority areas. The court finds from the credible evidence,
however, that TDHCA used different rates because, inter alia, the turnover rate in elderly
units is much lower than in non-elderly units, thus requiring a lower inclusive capture rate
to ensure the financial feasibility of the project. Accordingly, the court finds that TDHCA’s
justification that developers choose project sites is not pretextual.
Because ICP has failed to prove by a preponderance of the evidence that TDHCA
intentionally discriminates on the basis of race when allocating LIHTC, the court finds that
it has failed to prove its intentional discrimination claims under the Fourteenth Amendment
(actionable under § 1983) and § 1982.

15

TDHCA does influence the locations of the LIHTC projects by selecting which
projects are awarded LIHTC. To the extent TDHCA’s contention that developers choose the
location of LIHTC projects is not in all respects precise, this inaccuracy does not belie an
attempt by TDHCA to conceal discriminatory intent.
- 17 -

III
ICP also alleges that defendants are liable under §§ 3604(a) and 3605(a) of the FHA
based on a claim for disparate impact.
A
“The [FHA] prohibits discrimination in the provision of housing.” Artisan/Am. Corp.
v. City of Alvin, Tex., 588 F.3d 291, 295 (5th Cir. 2009). Section 3604(a) of the FHA makes
it unlawful, inter alia, to “make unavailable or deny, a dwelling to any person because of
race[.]” Section 3605(a) provides that it is unlawful, inter alia, “for any person or other
entity whose business includes engaging in residential real estate-related transactions to
discriminate against any person in making available such a transaction, or in the terms or
conditions of such a transaction, because of race[.]” A “residential real estate-related
transaction” includes providing financial assistance for the construction of a dwelling. Id.
§ 3605(b).
In ICP II the court held that ICP was entitled to summary judgment establishing that
it had made a prima facie showing of disparate impact. See ICP II, 749 F.Supp.2d at 499500. In particular, the court relied on evidence that, “from 1999–2008, TDHCA approved
tax credits for 49.7% of proposed non-elderly units in 0% to 9.9% Caucasian areas, but only
approved 37.4% of proposed non-elderly units in 90% to 100% Caucasian areas.” Id. at
499.16 Because ICP has made this showing, the burden has shifted to defendants to prove by

16

The court relied on other evidence as well, including the “Talton Report,” a report
of the House Committee on Urban Affairs prepared for the House of Representatives, 80th
- 18 -

a preponderance of the evidence that their actions were in furtherance of a legitimate
governmental interest. See Huntington Branch, NAACP v. Town of Huntington, 844 F.2d
926, 939 (2d Cir. 1988) (citing Resident Advisory Board v. Rizzo, 564 F.2d 126, 149 (3d Cir.
1977)), aff’d in part, 488 U.S. 15 (1988); Rizzo, 564 F.2d at 149.17 To meet this burden,

Texas Legislature, and a study by the U.S. Department of Housing and Urban Development.
See ICP II, 749 F.Supp.2d at 500.
17

The Fifth Circuit has not yet adopted a standard and proof regime for FHA-based
disparate impact claims. The circuits that have done so have adopted at least three different
standards and proof regimes. In ICP II this court essentially followed the approach of the
Second Circuit in Huntington Branch, 844 F.2d 926, although, unlike Huntington Branch,
the court did not engage in a process of balancing factors identified in Metropolitan Housing
Development Corp. v. Village of Arlington Heights, 558 F.2d 1283 (7th Cir. 1977). See ICP
II, 749 F.Supp.2d at 503. The approach taken in ICP II was consistent with that found in
other decisions of this court. See, e.g., AHF Cmty. Dev., LLC v. City of Dallas, 633
F.Supp.2d 287, 304 (N.D. Tex. 2009) (Fitzwater, C.J.) (“Once the plaintiff has made out a
prima facie case of discriminatory effect . . . the burden shifts to the defendant to prove a
compelling government interest.”) (internal quotation omitted) (citing Dews v. Town of
Sunnyvale, Tex., 109 F.Supp.2d 526, 532 (N.D. Tex. 2000) (Buchmeyer, C.J.)).
It appeared that the Supreme Court might clarify this unsettled area of the law. After
this case was tried, and while the parties were making post-trial submissions, the Court
granted certiorari in Gallagher v. Magner, 619 F.3d 823 (8th Cir. 2010), cert. granted, 132
S.Ct. 548 (U.S. Nov. 7, 2011) (No. 10-1032), and cert. dism’d, ___ S.Ct. ____, 2012 WL
469885 (U.S. Feb. 14, 2012), to decide two questions: “Are disparate impact claims
cognizable under the Fair Housing Act?” and “If such claims are cognizable, should they be
analyzed under the burden shifting approach used by three circuits, under the balancing test
used by four circuits, under a hybrid approach used by two circuits, or by some other test?”
Petition for Writ of Certiorari at i, Magner v. Gallagher, 2011 WL 549171 (Feb. 14, 2011)
(No. 10-1032). On February 14, 2012 this court entered an order deferring its decision in this
case until Magner was decided. Feb. 14, 2012 Order at 1. But the Supreme Court dismissed
the petition the same day this court entered its order. Magner v. Gallagher, ___ S.Ct. ____,
2012 WL 469885 (Feb. 14, 2012).
Absent controlling authority of the Supreme Court or the Fifth Circuit, the court will
apply the law of the case, as set out in ICP II, and allocate to defendants the burden of proof
regarding ICP’s disparate impact claim because ICP has satisfied its burden of establishing
a prima facie case. The court will not, however, require that defendants prove a compelling
- 19 -

defendants must prove two essential elements. First, they must prove that their interest is
bona fide and legitimate. Second, they must prove there are no less discriminatory
alternatives, meaning that “no alternative course of action could be adopted that would
enable that interest to be served with less discriminatory impact.” See Dews v. Town of
Sunnyvale, Tex., 109 F.Supp.2d 526, 565, 568 (N.D. Tex. 2000) (Buchmeyer, C.J.); see also
Huntington Branch, 844 F.2d at 939; Rizzo, 564 F.2d at 149. “[In] the end there must be a
weighing of the adverse impact against the defendant’s justification.” Huntington Branch,
844 F.2d at 936; see also Gashi v. Grubb & Ellis Prop. Mgmt. Servs., Inc., 801 F.Supp.2d
12, 16 (D. Conn. 2011) (“After the defendant presents a legitimate justification, the court
must weigh the defendant’s justification against the degree of adverse effect shown by the
plaintiff.”).18

governmental interest rather than a legitimate governmental interest, despite the use of the
compelling standard in ICP II. See ICP II, 749 F.Supp.2d at 503; see also AHF Cmty. Dev.,
633 F.Supp.2d at 304 (“Once the plaintiff has made out a prima facie case of discriminatory
effect . . . the burden shifts to the defendant to prove a compelling government interest.”)
(internal quotation omitted). Because defendants maintain that the court should apply a
legitimate governmental interest standard absent Fifth Circuit precedent that requires the
higher compelling governmental interest, and because the result of today’s case is the same
under the legitimate governmental interest standard, the court opts to decide the claim under
the lower standard.
18

Some courts balance objectives in order to determine whether a discriminatory
impact violates the FHA. See, e.g., Vill. of Arlington Heights, 558 F.2d at 1290 (examining
“(1) how strong is the plaintiff's showing of discriminatory effect; (2) is there some evidence
of discriminatory intent, though not enough to satisfy the constitutional standard of
Washington v. Davis; (3) what is the defendant's interest in taking the action complained of;
and (4) does the plaintiff seek to compel the defendant to affirmatively provide housing for
members of minority groups or merely to restrain the defendant from interfering with
individual property owners who wish to provide such housing”). This court has not adopted
- 20 -

B
1
Defendants assert that they acted in furtherance of a compelling, or at least legitimate,
governmental interest: the awarding of tax credits in an objective, transparent, predictable,
and race-neutral manner, in accordance with federal and state law.19 Defendants point out that
the Texas Legislature, likely in response to the indictment and conviction of a TDHCA board

this approach. See Langlois v. Abington Hous. Auth., 207 F.3d 43, 51 (1st Cir. 2000)
(rejecting balancing approach adopted by Village of Arlington Heights because “we do not
think that the courts’ job is to ‘balance’ objectives, with individual judges deciding which
seem to them more worthy” and “to have federal judges make such policy choices is
essentially to impose on them the job of making decisions that are properly made by
Congress or its executive-branch delegates; and the balancing approach is in tension with the
course taken by the Supreme Court and Congress under Title VII where a standard of
justification is constructed and applied”) (emphasis in original).
19

As one of their asserted interests, defendants contend that they seek to award tax
credits in a race-neutral manner. But a disparate impact claim does not require proof of
discriminatory intent. See, e.g., Homebuilders Ass’n of Miss. v. City of Brandon, Miss., 640
F.Supp.2d 835, 841 (S.D. Miss. 2009); Arbor Bend Villas Hous., L.P. v. Tarrant Cnty. Hous.
Fin. Corp., 2005 WL 548104, at *12 (N.D. Tex. Mar. 9, 2005) (Means, J.). And although
facially neutral, a policy or practice can still violate the FHA because of its discriminatory
impact. See Homebuilders Ass’n, 640 F.Supp.2d at 841 (“[A] discriminatory effect claim
challenges neutral policies that create statistical disparities which are equivalent to
intentional discrimination”.); Luckett v. Town of Bentonia, 2007 WL 1673570, at *6 (S.D.
Miss. June 7, 2007) (“To succeed on [an FHA disparate impact claim], the plaintiff must
identify a policy or practice that is facially neutral in its treatment of different groups but that
in fact falls more harshly on one group than another and cannot be justified by business
necessity.”) (citing Int’l Bhd. of Teamsters v. United States, 431 U.S. 324, 335 n.15 (1977));
Owens v. Nationwide Mut. Ins. Co., 2005 WL 1837959, at *13 (N.D. Tex. Aug. 2, 2005)
(Sanders, J.) (“To establish a [prima facie] case supporting a disparate impact or effect claim
related to the discriminatory provision of insurance under § 3604 [of the FHA], a plaintiff
must prove that a specific facially neutral policy or practice created statistical disparities so
great as to be ‘functionally equivalent to intentional discrimination,’ thereby disadvantaging
members of a protected group.”) (citing cases).
- 21 -

member for bribery in connection with the LIHTC program, amended the Texas Government
Code in 2001 and 2003 to provide the now-existing mandatory statutory requirements for the
issuance of tax credits under the LIHTC program. According to TDHCA, these amendments
were adopted for the purpose of creating an objective and transparent system, and TDHCA
acts with these goals in mind. Although defendants rely principally on the foregoing
interests, they also posit that the public interest is served by ensuring that tax credits are
awarded to developments that will provide quality, sustainable housing for low-income
individuals, and by providing the public an opportunity to participate in creating the QAP in
an open and transparent manner, thereby enabling the LIHTC program to represent different
policy viewpoints, in compliance with public expectations.
Defendants also maintain that, because of the strict requirements of federal and state
law, TDHCA has only limited discretion, found in its ability (1) to modify strictly the belowthe-line criteria, and not the statutory above-the-line criteria, and (2) to “forward commit”
by awarding tax credits from the following year’s allocation of tax credits to a 9% tax credit
application that would not otherwise succeed due to its low score under the selection
criteria.20 According to defendants, forward commitments have been used sparingly, with

20

To the extent defendants are arguing that their discretion is limited because they do
not select the location of their projects, defendants are misconstruing the issue in this case.
As the court noted in ICP II, “ICP does not complain of the distribution of low-income
housing in general; ICP challenges the allegedly discriminatory actions of TDHCA in
disproportionately denying tax credits to proposed developments in Caucasian
neighborhoods. TDHCA does control the approval or denial of applications actually
submitted.” ICP II, 749 F.Supp.2d at 496.
- 22 -

only three made in 2003 to 2007 in the region that includes Dallas. Defendants also maintain
that this discretion cannot be used in a manner that subverts federal and state law; otherwise,
it would render meaningless the intent of the Legislature in creating an objective, transparent,
and predictable system.
Defendants also note TDHCA’s actions in response to the Housing and Economic
Recovery Act of 2008 (“HERA”). Before the enactment of HERA, states were limited to
awarding 30% basis boosts only to developments located in qualified census tracts or
difficult development areas.

But after HERA, states were permitted to choose the

developments to receive the boost. TDHCA exercised this authority in the 2009 QAP to
target developments in “high opportunity areas.” A “high opportunity area” is defined as:
an area that includes:
(A) existing major bus transfer centers and/or regional or local
commuter rail transportation stations that are accessible to all
residents including Persons with Disabilities; or
(B) a census tract which has an [Area Median Gross Income
(“AMGI”)] that is higher than the AMGI of the county or place
in which the census tract is located; or
(C) a school attendance zone that has an academic rating of
“Exemplary” or “Recognized” rating (as determined by the
Texas Education Agency) as of the first day of the Application
Submission Acceptance Period; or
(D) a census tract that has no greater than 10% poverty
population according to the most recent census data (these
census tracts are designated in the 2010 Housing Tax Credit Site
Demographic Characteristics Report).
P. Ex. 127 at 6-7. Defendants suggest that this change “is likely to have a positive effect in
increasing the number of LIHTC developments in [high opportunity areas].” See Ds. Dec.
21, 2011 Reply Br. 3.
- 23 -

In addressing the second prong—which requires proof of no less discriminatory
alternatives—defendants assert that “[t]here is no alternative that would serve the interest[s]
with less discriminatory effect than the racially-neutral objective scoring system that is now
in effect (and has been since 2003).” Ds. Dec. 21, 2011 Reply Br. 6. They criticize ICP’s
requested relief of establishing a set-aside for projects in high opportunity areas, suggesting
that this remedy cannot qualify as a less discriminatory alternative because it would conflict
with governing law and contravene Regents of University of California v. Bakke, 438 U.S.
265 (1978).
Defendants next compare the justification against the resulting harm. They assert that
ICP’s claim of injury is diminished by evidence that over 5,600 affordable, Section 8 housing
units, although not necessarily LIHTC units, are available; a significant number of LIHTC
units are located in Walker Target Area Tracts;21 developments in high opportunity
neighborhoods have suffered high vacancy rates, such as 9.5% and 14.28%; and if the court
were to broaden its comparison of approval rates from 0% to 9.9% and 90% to 100%
Caucasian areas, as relied upon in its summary judgment opinion, see ICP II, 749 F.Supp.2d
at 499-500, it would better illustrate the alleged impact, since TDHCA approved tax credits
for 42.5% of proposed non-elderly units in 0% to 19.9% Caucasian areas and 50.0% for 80%

21

The term “Walker Target Area Tracts” is defined in the Settlement Stipulation and
Order in Walker v. U.S. Department of Housing and Urban Development, No. 3:85-CV1210-R, at 4 (N.D. Tex. Mar. 8, 2001) (Buchmeyer, C.J.). A qualifying census tract
“according to the most recent decennial census, (i) has a black population at or below the
average black population of the City of Dallas, (ii) has no public housing, and (iii) has a
poverty rate at or below the average for the City of Dallas.” Id.
- 24 -

to 100% Caucasian areas, and approved tax credits for 39.8% of the 0% to 29.9% and 48.6%
for 70% to 100% Caucasian areas. Thus they argue that the harm to ICP cannot outweigh
the substantial interests served by TDHCA.
2
ICP contends that defendants are presenting only interests that are furthered by the
application of the Texas Legislature’s mandatory statutory requirements, in particular the
selection criteria that apply only to the 9% tax credits. It asserts that the action that must be
justified is the disproportionate approval of tax credits for non-elderly developments in
minority neighborhoods, the issue giving rise to the FHA discriminatory impact claim. ICP
also posits that the Texas Legislature’s mandatory selection criteria cannot be the cause of
the discriminatory impact because the impact did not significantly increase after the
implementation of the framework in 2003, and the 4% tax credits, which are not subject to
the mandatory selection criteria, nonetheless contribute to the discriminatory impact. Last,
ICP argues that defendants have not presented evidence regarding whether there are less
discriminatory alternatives and, therefore, have failed to satisfy their burden.
C
The court will assume that defendants’ proffered interests are bona fide and legitimate.
See Huntington Branch, 844 F.2d at 939 (deciding to consider second prong first “[f]or
analytical ease”). The court will therefore focus on whether defendants have met their
burden of proving the second of the two essential elements: that there are no other less
discriminatory alternatives to advancing their proffered interests, i.e., that “no alternative
- 25 -

course of action could be adopted that would enable that interest to be served with less
discriminatory impact.” Dews, 109 F.Supp.2d at 532.
Defendants have not presented arguments regarding the second element. Instead, they
rely on the conclusory assertion that “[t]here is no alternative that would serve the interest[s]
with less discriminatory effect.” Ds. Dec. 21, 2011 Reply Br. 6. They then criticize ICP’s
requested set-aside remedy. But even assuming that defendants’ criticism of this remedy is
correct, the fact that one possible alternative course of action is not viable does not prove that
there are no other less discriminatory alternatives that could be adopted that would enable
the interest to be served with less discriminatory impact.
Defendants have also failed to prove by a preponderance of the evidence that
allocating tax credits in a nondiscriminatory and nonsegregative manner would impair any
of the asserted interests. Cf. Huntington Branch, 844 F.2d at 940 (noting that two of town’s
reasons for refusing to rezone plaintiff’s site were that it was inconsistent with defendant’s
housing assistance plan and zoning ordinance, and rejecting these interests because the town
simply relied on the existence of the plan and zoning ordinance without presenting evidence
indicating why building the project would impair the interests sought to be advanced by the
plan and zoning ordinance). Nor is there a basis for finding that TDHCA cannot allocate
LIHTC in a manner that is objective, predictable, and transparent, follows federal and state
law, and furthers the public interest, without disproportionately approving LIHTC in
predominantly minority neighborhoods and disproportionately denying LIHTC in

- 26 -

predominantly Caucasian neighborhoods.22
TDHCA also retains certain limited types of discretion that can be relied on to address
the discriminatory impact. Defendants have not proved that, in using this discretion,
TDHCA has adopted the least discriminatory alternative to further the legitimate
governmental interest. Regarding the selection criteria of each QAP, which applies only to
the 9% tax credits, defendants maintain that TDHCA has discretion only in modifying belowthe-line criteria. They posit that this discretion is limited in that the points accorded to
below-the-line criteria cannot exceed the lowest-ranked statutory above-the-line criterion,
and the Governor must approve of the QAP. Although TDHCA contends that it has added
certain below-the-line criteria with the purpose of affirmatively furthering fair housing goals
(e.g., providing a score enhancement for projects located in a “high opportunity area,” see
Ds. Nov. 9, 2011 Br. 25), defendants have not proved that these criteria are the least
discriminatory alternatives, and that TDHCA cannot add other below-the-line criteria that
will effectively reduce the discriminatory impact while still furthering its interests.23 For

22

Similarly, at the summary judgment stage, the court held in ICP II that defendants’
proffered compelling governmental interest—adherence to I.R.C. § 42—was insufficient
because “[d]efendants . . . failed to establish that TDHCA cannot comply with § 42 in a way
that has less discriminatory impact on the community” and that “TDHCA cannot comply
with both § 42 and the FHA.” ICP II, 749 F.Supp.2d at 504.
23

The “Talton Report,” a report of the House Committee on Urban Affairs prepared
for the House of Representatives, 80th Texas Legislature, also concluded that TDHCA and
the BRB“disproportionately allocate federal [LIHTC] funds and the tax-exempt bond funds
to developments located in impacted areas (above average minority concentration and below
average income levels)” and similarly recommended that TDHCA, BRB, and the legislature,
among other things, “consider adding provisions to the QAP and the bond rules that give
- 27 -

example, in the 2010 QAP, an application could receive four points under the “Development
Location” below-the-line criterion if its proposed development site was located within one
of six geographical areas: (1) “an Economically Distressed Area; a Colonia; or a Difficult
Development Area”;24 (2) a county that has received an award within the last three years

significant point scoring and/or set-aside of credits for affirmatively furthering assimilation
outside of impacted areas.” P. Ex. 1 at 48-49.
24

An “Economically Distressed Area” is defined as:
an Area in which:
(A) Water supply or sewer services are inadequate to meet
minimal needs of residential users as defined by Texas Water
Development Board rules;
(B) Financial resources are inadequate to provide water supply
or sewer services that will satisfy those needs; and
(C) An established residential subdivision was located on June
1, 1989, as determined by the Texas Water Development Board.

P. Ex. 127 at 6. A “Colonia” is defined as:
A geographic Area that is located in a county some part of
which is within 150 miles of the international border of this
state, that consists of 11 or more dwellings that are located in
close proximity to each other in an area that may be described
as a community or neighborhood, and that: (§2306.581)
(A) Has a majority population composed of individuals and
families of low-income and very low income, based on the
federal Office of Management and Budget poverty index, and
meets the qualifications of an economically distressed Area
under §17.921, Texas Water Code; or
(B) Has the physical and economic characteristics of a colonia,
as determined by the Department.
Id. at 5. A “Difficult Development Area” is an area “specifically designated by the Secretary
of HUD at the time of Application submission.” Id. at 52.
- 28 -

from the Texas Department of Agriculture’s Rural Municipal Finance Program or Real Estate
Development and Infrastructure Program; (3) “a census tract which has a median family
income . . . that is higher than the median family income for the county in which the census
tract is located”; (4) “an elementary school attendance zone of an elementary school that has
an academic rating of ‘Exemplary’ or ‘Recognized,’ or comparable rating” and “[t]he . . .
Development will serve families with children”; (5) a “census tract . . . which . . . has no
greater than 10% poverty population” and “the development will expand affordable housing
opportunities for low-income families with children outside of poverty areas”; and (6) “an
Urban Core.”25 P. Ex. 127 at 52-53. In other words, the “Development Location” criterion
is a “menu option” where an applicant need only fulfill one of the six to receive the four
points; fulfilling more than one would still result in four points. Thus even assuming that the
third, fourth, and fifth options could reduce the asserted discriminatory impact, as suggested

25

An “Urban Core” is defined as
[a] compact and contiguous geographical area that is located in
a Metropolitan Statistical Area within the city limits of a city
with a population of no less than 150,000 composed of adjacent
block groups in which at least 90% of the land not in public
ownership is zoned to accommodate a mix of medium or high
density residential and commercial uses and at least 50% of such
land is actually being used for such purposes based on high
density residential structures and/or commercial structures
already constructed.

P. Ex. 127 at 12.
- 29 -

by defendants,26 an applicant could instead opt for the first one, which covers “Economically
Distressed” locations and could further exacerbate the discriminatory impact. Further, even
if an applicant satisfied the third, fourth, or fifth option, it could receive four points at most
because the QAP does not permit the award of four points for each option. Similar to how
TDHCA made the below-the-line criterion “Developments in Census Tracts with No Other
Existing Same Type Developments Supported by Tax Credits” its own criterion worth six
points, TDHCA can further reduce the discriminatory impact by converting the types of
development locations suggested to reduce the discriminatory impact into its own scoring
items.27
Moreover, although defendants maintain that TDHCA’s discretion in creating the
selection criteria is limited to adopting below-the-line criteria, it appears that this discretion
is actually broader. It appears to extend to the authority to choose the number of points to

26

This is based on defendants’ underlying assumption that “there’s a known
association between race and income and poverty levels in Texas,” as Mary Whiteside, Ph.D.
testified at trial and stated in her initial and second reports. See, e.g., Tr. 2:161; Ds. Ex. 224
at 1-4; Ds. Ex. 225 at 4. ICP raised numerous objections against the use of her testimony and
reports. See, e.g., P. Nov. 9, 2011 at 20-22; Tr. 2:162. Because the court relies on her
testimony and expert reports to support ICP’s disparate impact claim (i.e., to suggest that the
evidence supports the existence of less discriminatory alternatives), it need not resolve ICP’s
objections before relying on this evidence in this context.
27

To the extent defendants argue that TDHCA’s discretion in reducing the
discriminatory impact is restricted by the requirement of gubernatorial approval of QAP
changes, and they rely on a specific instance when the Governor in fact rejected a QAP
change, there is no evidence that the Governor would decline to approve a change necessary
for TDHCA to comply with a federal court order directing defendants to remedy a violation
of the FHA.
- 30 -

be accorded each above- and below-the-line criterion, so long as the priority of statutory
above-the-line criteria is maintained and the Governor approves. This suggests that TDHCA
can accord more points to below-the-line criteria that reduce the discriminatory impact, as
long as the points do not exceed the lowest above-the-line criterion, while still furthering
TDHCA’s interests. For example, given that the lowest above-the-line criterion, “Declared
Disaster Areas,” was worth seven points in the 2010 QAP, below-the-line critiera that
assisted in reducing the discriminatory impact could have been allotted six points while
respecting the priority of the statutory above-the-line criteria. A proposed development that
falls within the guidelines of one of the “Development Location[s]” that could reduce the
discriminatory impact is worth only four points. See P. Ex. 127 at 52-53. In comparison, the
“Community Revitalization” below-the-line criterion awards six points. See id. at 51. To
satisfy the “Community Revitalization” criterion, the proposed development must “use . . .
an Existing Residential Development” and “propose[] any Rehabilitation or any
Reconstruction that is part of a Community Revitalization Plan.”

Id.

Because

“Rehabilitation, (which includes reconstruction) or Adaptive Reuse” serves as its own belowthe-line criterion separate from the “Community Revitalization” criterion and is worth three
points, an applicant fulfilling the “Community Revitalization” criterion appears to be eligible
for a total of nine points. See id. Given the trial evidence of the connection between race
and income, communities seeking revitalization are potentially high-minority areas. Thus
the criteria “Community Revitalization” and “Rehabilitation (which includes reconstruction)
or Adaptive Reuse” may exacerbate the discriminatory impact, especially since the
- 31 -

“Development Location” criterion is only worth four points and barely offsets nine points.
Additionally, despite questioning from ICP concerning how more points could be allocated
to above-the-line statutory criteria so that below-the-line criteria (in particular, criteria that
would reduce the discriminatory impact) could also be given more points and result in greater
weight in comparison to total points available, defendants do not address this area of
discretion. Thus defendants have failed to prove that TDHCA has adopted the least
discriminatory alternative that will still advance its interests.
Defendants have also failed to prove that forward commitments could not have been
used in a less discriminatory manner while still advancing TDHCA’s legitimate
governmental interests.28 Defendants contend that forward commitments are sparingly used
and suggest that this is so because TDHCA must be careful not to use them in a way that
would thwart legislative intent that the system be objective, transparent, and predictable. The
fact that this authority is granted to TDHCA and that it has used it in certain circumstances
suggests that it can be applied while still advancing TDHCA’s interests. And even if it is
sparingly used, this does not address the disputed issue whether forward commitments have
been used in the least discriminatory manner. For example, Fairway Crossing, one of the
three applications that defendants state received a forward commitment from 2003 to 2007,

28

Defendants maintain that Governor Rick Perry (“Governor Perry”) modified the
2012 QAP to eliminate forward commitments. Assuming arguendo that this is true,
defendants have still failed to prove that, during the time when forward commitments were
available, TDHCA approved them in the least discriminatory manner, while still advancing
its proffered interests.
- 32 -

is alleged by ICP to be located in a 0% to 9.9% Caucasian area. See P. Ex. 157 at 3.
Although defendants assert that “[t]his project scored high enough to be awarded credits,”
see Ds. Nov. 9, 2011 Br. at 10 n.8, it is not necessary for the development to score well under
the selection criteria for it to be awarded a forward commitment. And it remains unclear
whether a forward commitment to another application that year could have reduced the
discriminatory impact while advancing TDHCA’s interests.
Although TDHCA selected “high opportunity areas” to be the recipient of the 30%
basis boost, the definition of “high opportunity areas” suggests that further steps can be taken
to reduce the discriminatory impact while still promoting TDHCA’s legitimate governmental
interests. A high opportunity area includes an area that has a major bus or rail station, a
census tract with a higher AMGI than the tract’s county or place, a school attendance zone
with an academic rating of “Exemplary” or “Recognized,” or a census tract with no greater
than 10% poverty rate. See P. Ex. 127 at 6-7. As an example, were TDHCA to require an
applicant to meet all four criteria rather than just one to receive a basis boost, this would
appear to reduce the discriminatory impact.
TDHCA also has discretion under at least one QAP that can be used to reduce the
discriminatory impact of LIHTC. Section 50.10(a)(2) of the 2008 QAP authorized TDHCA,
in considering staff recommendations for both 4% and 9% tax credits, to “not rely solely on
the number of points scored by an Application” under the QAP and to “take into account, as
it deem[ed] appropriate,” certain listed discretionary factors, including location, proximity
to other low-income housing developments, and other good causes as determined by
- 33 -

TDHCA.29 See P. Ex. 125 at 60-61; Ds. Ex. 14 at 60-61; see also Tr. 2:10, 12.30 This

29

It is unclear whether Governor Perry eliminated this authority in the 2012 QAP. See
Ds. Dec. 7, 2011 Br. 6-7 (noting that Governor Perry eliminated TDHCA’s ability to “waive
internal rules,” without clarifying which internal rules). Even assuming that Governor Perry
eliminated this area of discretion, the court concludes, at it does supra at note 28, that
defendants have failed to prove that TDHCA used this discretion, when it was available, in
the least discriminatory manner, while still advancing its proffered interests.
30

Section 55.10(a)(2) of the 2008 QAP provided, in relevant part:
In making a determination to allocate tax credits, the Board shall
be authorized to not rely solely on the number of points scored
by an Application. It shall in addition, be entitled to take into
account, as it deems appropriate, the discretionary factors listed
in this paragraph. . . . If the Board disapproves or fails to act
upon an Application, the Department shall issue to the Applicant
a written notice stating the reason(s) for the Board's disapproval
or failure to act. In making tax credit decisions . . . , the Board,
in its discretion, may evaluate, consider and apply any one or
more of the following discretionary factors: . . .
(A) The Developer market study;
(B) The location;
(C) The compliance history of the Developer;
(D) The financial feasibility;
(E) The appropriateness of the Development’s size and
configuration in relation to the housing needs of the community
in which the Development is located;
(F) The Development’s proximity to other low-income housing
Developments;
(G) The availability of adequate public facilities and services;
(H) The anticipated impact on local school districts;
(I) Zoning and other land use considerations;
(J) Any matter considered by the Board to be relevant to the
approval decision and in furtherance of the Department’s
purposes; and
(K) Other good cause as determined by the Board.

P. Ex. 125 at 60-61; Ds. Ex. 14 at 60-61.
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suggests that, despite an application’s score under the selection critiera, TDHCA was
authorized under the 2008 QAP to take into account factors such as “location” of
developments or “other good causes” in the award of tax credits. Because defendants have
not addressed whether TDHCA used the least discriminatory means while still furthering its
interests in exercising this discretion, the question remains whether it has been used in a
manner that would reduce the discriminatory impact.31
Accordingly, because defendants have failed to meet their burden of proving that there
are no less discriminatory alternatives, meaning that no alternative course of action could be
adopted that would enable TDHCA’s interest to be served with less discriminatory impact,
the court finds in favor of ICP on its discriminatory impact claim under the FHA.

31

Although ICP contends that the allocation of 4% tax credits also results in a
discriminatory impact, defendants do not address whether TDHCA has adopted the least
discriminatory alternative to further its legitimate governmental interests as to the 4% tax
credits. Defendants stress their limited discretion in changing the mandatory selection when
the 4% tax credits are not bound to scoring under that criteria. Four percent tax credits are
non-competitive and reviewed solely for “threshold, eligibility, and then . . . underwrit[ing],”
P. Ex. 1 at 20. And unlike the mandatory selection criteria, it does not appear that the Texas
Government Code similarly limits TDHCA’s discretion in choosing the threshold criteria.
Cf. Tex. Gov’t Code Ann. § 2306.6702(a)(15) (West 2003) (defining “Threshold criteria” as
“criteria used to determine whether the development satisfies the minimum level of
acceptability for consideration established in the department's qualified allocation plan”);
id. at § 2306.6710(a) (requiring TDHCA to “determine whether the application satisfies the
threshold criteria required by the board in the qualified allocation plan”). This leaves
TDHCA greater discretion in adding criteria that could reduce the discriminatory impact.
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IV
The court considers next defendants’ contention that ICP’s FHA claim is barred by
the statute of limitations.
A complaint under the FHA is timely when it is filed within two years after the
occurrence or termination of an alleged discriminatory housing practice. See 42 U.S.C.
§ 3613(a)(1)(A). If a plaintiff challenges “an unlawful practice that continues into the
limitations period, the complaint is timely if filed within [two years] of the last asserted
occurrence of that practice.” Havens Realty Corp. v. Coleman, 455 U.S. 363, 380-81 (1982)
(emphasis added); § 3613(a)(1)(A); see also Pecan Acres Ltd. P’ship I v. City of Lake
Charles, 54 Fed. Appx. 592, 2002 WL 31730433, at *1 (5th Cir. 2002) (per curiam).
ICP’s FHA claim is founded on an unlawful practice: TDHCA’s disproportionate
approval of tax credits for non-elderly developments in minority neighborhoods, and,
conversely, its disproportionate denial of tax credits for non-elderly housing in
predominantly Caucasian neighborhoods. ICP has presented evidence from 1999 to 2008
to support this unlawful practice. Thus even assuming that the violation terminated in 2008,
it is clear that ICP’s lawsuit was timely filed on March 28, 2008. Defendants have failed to
prove their limitations defense by a preponderance of the evidence.
V
Finally, TDHCA relies on the affirmative defense of Eleventh Amendment immunity.
TDHCA asserts that it is an arm of the State of Texas and is therefore entitled to Eleventh
Amendment immunity.
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TDHCA bears the burden of proving that it is entitled to Eleventh Amendment
immunity. See Skelton v. Camp, 234 F.3d 292, 297-98 (5th Cir. 2000). Such immunity is
proper if “a suit is really against the state itself.” Id. at 297 (citing Laje v. R.E. Thomason
Gen. Hosp., 665 F.2d 724, 727 (5th Cir. 1982)). To make this determination courts weigh
numerous factors, such as:
(1) whether state statutes and case law characterize the agency
as an arm of the state; (2) the source of funds for the entity; (3)
the degree of local autonomy the entity enjoys; (4) whether the
entity is concerned primarily with local, as opposed to statewide,
problems; (5) whether the entity has authority to sue and be sued
in its own name; and (6) whether the entity has the right to hold
and use property.
Vogt v. Bd. of Comm’rs Orleans Levee Dist., 294 F.3d 684, 689 (5th Cir. 2002) (citations
omitted). “The most significant factor in assessing an entity’s status is whether a judgment
against it will be paid with state funds.” Id. (brackets and citations omitted).
The Fifth Circuit has previously held that a predecessor agency of TDHCA—the
Texas Housing Agency—is not an arm of the state. See Tex. Dep’t of Hous. & Cmty. Affairs
v. Verex Assur., Inc., 68 F.3d 922, 926-28 (5th Cir. 1995), overruled on other grounds by
Mullins v. TestAmerica, Inc., 564 F.3d 386, 413 n.19 (5th Cir. 2009).32 TDHCA does not
specifically address any of the Vogt factors or argue that the factors relied upon in Verex
should be assessed differently. Thus much of the analysis in Verex is uncontested. For

32

Although the analysis in Vogt and Verex is not identical, the Fifth Circuit relies on
many of the same factors when determining whether an agency is an arm of the state for the
purposes of Eleventh Amendment immunity. Compare Vogt, 294 F.3d at 692-96 with Verex,
68 F.3d at 926-28.
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example, TDHCA can sue and be sued in its own name, see Tex. Gov’t Code Ann.
§ 2306.053(b), has the right to hold and use property, see § 2306.174, and is funded primarily
by the federal government and by borrowing private capital that is not debt against the State
of Texas, see P. Ex. 162 at 78-83; P. Ex. 381 at 13. Moreover, TDHCA’s funds, excluding
appropriations for the Texas Legislature, are maintained outside of the state treasury. See
Tex. Gov’t Code Ann. § 2306.071. Even though two factors weigh in TDHCA’s favor
(TDHCA is concerned with statewide problems rather than local problems and does not have
local autonomy), the court finds that these factors do not outweigh the ones that favor finding
that TDHCA is not an arm of the state. See Verex, 68 F.3d at 928 (holding that even though
Texas Housing Agency was concerned with statewide rather than local issues, it was not an
arm of the state). The court therefore finds that TDHCA has not met its burden of proving
that it is entitled to Eleventh Amendment immunity.
VI
As ICP recognizes in the Pretrial Order, it is appropriate to afford TDHCA an
opportunity to present a plan to remedy its violation of the FHA. Accordingly, TDHCA must
submit a remedial plan that sets out how it will bring its allocation decisions into compliance
with the FHA. This remedial plan need be no “more intrusive than is necessary to remedy
proved [FHA] violations.”

Rizzo, 564 F.2d at 149 (holding that Supreme Court’s

admonitions that federal equitable belief be carefully tailored to proven constitutional
violations is “no less forceful” when applied to statutory violations). The court encourages
the parties to work cooperatively in formulating a remedial plan so that as many potential
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objections as possible can be resolved before the plan is submitted to the court for
consideration and approval.
*

*

*

For the reasons explained, the court finds in favor of ICP on its disparate impact claim
under the FHA and otherwise finds in favor of defendants. Within 60 days of the date this
memorandum opinion and order is filed, defendants must file their remedial plan. ICP may
submit objections within 30 days after the remedial plan is filed. If objections are filed, the
court will establish any necessary additional procedures by separate order.
SO ORDERED.
March 20, 2012.

_________________________________
SIDNEY A. FITZWATER
CHIEF JUDGE

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