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Good News for Apartment Owners from the Supreme Court
by Charles Brown

Most of you apartment owners out there own your property in some type of legal entity such as a Limited Partnership ("LP"), Limited Liability Company (LLC) or a Corporation. The most common form of ownership of apartments that I see in Texas is a Limited Partnership that has a corporation or an LLC as its general partner. However, for the purposes of this article and simplicity sake, let's say that you formed a corporation that owns your apartment property and you are the president, director and sole shareholder of the corporation. What liability do you have personally if an employee of your corporation violates the Fair Housing Act?

Traditionally, your corporation would be legally responsible for the actions of the employees. This is called vicarious liability. However, under traditional legal principals you would not be personally liable for the employee's actions just because you were an officer, director or shareholder of the corporation that owned the apartments. The principal (your corporation) is responsible for the acts of its agents (your employees). But, the officers, directors and shareholders of the corporation are not liable for the acts of the employees absent some special circumstances. This shield from liability is one of the primary reasons that apartments are owned in some type of legal entity. The owners (shareholders) want to avoid being personally liable for the legal obligations of the entity (corporation). If you own the apartment as an individual, you would be personally liable for the acts of your management staff. Your other assets would be at risk for claims arising from the acts of your employees.

If the manager of your apartment community violates the law, your corporation would be legally responsible for the manager's unlawful acts just the same as the manager. In other words, your corporation and the manager would both likely be sued if the manager breaks the law. Traditionally, you would not be personally liable just because you were the officer or shareholder of the corporation if your corporation's employee violates the law.

Does the Fair Housing Act go farther? Does the Fair Housing Act make owners and officers of corporations liable for an employee's violation of the Fair Housing Act even if the owner was not involved in the discriminatory act? This was the question answered by the Supreme Court of the United States on January 23, 2003 in the matter of Meyer vs. Holley. This Supreme Court opinion may help you owners of apartments sleep better at night.

The facts of Meyer vs. Holley are as follows: Mr. and Mrs. Holley, an interracial couple, attempted to buy a house that was listed by Triad, Inc. Triad, Inc. was a real estate corporation in California. David Meyer was president of Triad, Inc. A Triad salesman, Grove Crank, was alleged to have prevented Mr. and Mrs. Holley from obtaining a house for racially discriminatory reasons. The Fair Housing Act prohibits racial discrimination in the sale or rental of a dwelling. The Holleys sued Crank, Triad and Meyer as president and sole shareholder of Triad, Inc. The Holleys claimed that Meyer was vicariously liable for Crank's unlawful acts even though they had not dealt with Meyer. The issue decided by the U.S. Supreme Court in Meyer v. Holley was whether the Fair Housing Act makes the officers or owners of the corporation liable for the unlawful acts of the employees when the officer or owner had nothing to do with the discriminatory activity.

The Supreme Court held that the Fair Housing Act does not create liability for the officers or owners of a corporation for the employee's unlawful acts. The Fair Housing Act does not "go further" than traditional law regarding who is responsible for unlawful discrimination under the Fair Housing Act.

If an apartment manager unlawfully discriminated against someone protected under the Fair Housing Act, the victim of the discrimination can make a claim against the owner of the apartments (usually an entity), the manager, and any other person involved in the unlawful act. The claimant will not be able to sustain a claim against the shareholders, officers and directors of the entity that owns the apartments unless they were personally involved in the discriminatory act.

Even if you educate and train your employees to abide by the Fair Housing Laws, the laws are complex and knowing the difference in lawful and unlawful discrimination is not always easy. Given the Supreme Court's ruling, it is more advisable than ever to own your rental property in some sort of entity. If you are going to purchase rental property, do not put the title to it in your name individually. Form some entity to own the rental units. Get advice from your attorney and accountant about which entity (corporation, LLC, LP etc.) is best for your situation.

Bio:

Charles Brown is an attorney who invests in real estate in the Austin, Texas area. He is Board Certified in Residential and Commercial Real Estate Law by the Texas Board of Legal Specialization. He can be reached at 512-476-8942.