No. 01-1120
THEODORE B. OLSON
Solicitor General
Counsel of Record
RALPH F. BOYD, JR.
Assistant Attorney General
PAUL D. CLEMENT
Deputy Solicitor General
MALCOLM L. STEWART
Assistant to the Solicitor General
DAVID K. FLYNN
ANDREA PICCIOTTI-BAYER
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
QUESTIONS PRESENTED
The brief for the United States will address the following
questions:
1. Whether the Fair Housing Act, 42 U.S.C. 3601 et seq., and
implementing regulations promulgated by the Department of Housing
and Urban Development, establish broader rules of vicarious
liability than would apply under general principles of agency and
corporate law.
2. Whether the court of appeals' judgment in this case, which reversed the district court's dismissal of respondents' suit and remanded the case for further proceedings, should be affirmed.
(I)
IN THE SUPREME COURT OF THE UNITED STATES
No. 01-1120
DAVID MEYER, PETITIONER
v.
EMMA MARY ELLEN HOLLEY, ET AL.
ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
BRIEF FOR THE UNITED STATES
AS AMICUS CURIAE SUPPORTING AFFIRMANCE
INTEREST OF THE UNITED STATES
The Fair Housing Act (FHA), 42 U.S.C. 3601 et seq., prohibits
discrimination in housing on the basis of race, color, religion,
sex, disability, familial status, and national origin. The
Department of Housing and Urban Development (HUD) conducts
administrative hearings in FHA cases and has promulgated
regulations implementing the Act. In resolving the question of
vicarious liability presented in this case, the court of appeals
relied in part on former 24 C.F.R. 103.20 (1999), a HUD regulation
in effect at the time of the discriminatory conduct alleged here,
which defined the class of persons against whom administrative
complaints to enforce the FHA could properly be filed. The
substance of that regulation is retained in current 24 C.F.R.
103.202. In addition, the Attorney General is authorized to file
suit to enforce the FHA when, inter alia, he concludes that a
" pattern or practice" of violations exists. 42 U.S.C. 3614. In
light of the responsibilities exercised by HUD and the Department
of Justice for implementation of the FHA, and the court of appeals'
reliance on HUD's regulations, the United States has a substantial
interest in the question presented here.
STATEMENT
1. The Fair Housing Act (FHA), 42 U.S.C. 3601 et seq., makes it unlawful " [t]o discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin." 42 U.S.C. 3604(b). The Act further provides that " [i]t shall be unlawful 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, color, religion, sex, handicap, familial status, or national origin." 42 U.S.C. 3605(a). The FHA defines the term " person " to include " one or more individuals, corporations, partnerships, associations, labor organizations, legal representatives, mutual companies, joint-stock companies, trusts, unincorporated organizations, trustees, trustees in cases under title 11, receivers, and fiduciaries." 42 U.S.C. 3602(d).
The FHA may be enforced either through the filing of an administrative complaint with the HUD, or through a civil action in federal court. See 42 U.S.C. 3610-3614. At the time of the discriminatory acts alleged in this case, HUD regulations provided the following guidance regarding the filing of an administrative complaint:
(a)A complaint [under the FHA] may be filed [with HUD]against any person alleged to be engaged, to have engaged, or to be about to engage, in a discriminatory housing practice.
(b)A complaint may also be filed against any person who
directs or controls, or has the right to direct or control,
the conduct of another person with respect to any aspect of
the sale * * * of dwellings * * * if that other person, acting
within the scope of his or her authority as employee or agent
of the directing or controlling person, is engaging, has
engaged, or is about to engage, in a discriminatory housing
practice.
24 C.F.R. 103.20 (1999). In 1999, HUD revised its regulations pertaining to administrative complaints. 64 Fed. Reg. 18,538. Under the regulations in their current form, notice that a
complaint has been filed must be served on " any person who directs
or controls, or who has the right to direct or control, the conduct
of another person who is involved in a fair housing complaint." 24
C.F.R. 103.202(b).
2. The plaintiffs in this case (respondents in this Court)
are Emma Mary Ellen Holley, an African-American woman; David
Holley, a Caucasian man; their son, Michael Holley; and Brooks
Bauer, a builder. The complaint alleges that in October 1996, the
Holleys visited the Twenty-Nine Palms, California, office of Triad,
Inc. (Triad), an incorporated real estate firm. (2) The Holleys met
with a Triad salesperson, Grove Crank, and asked about listings for
new houses in the price range of $100,000 to $150,000. Crank
showed them four houses, each priced at more than $150,000. The
next month, the Holleys identified a home that happened to be
listed by Triad. A different Triad salesperson, Terry Stump,
informed the Holleys that the house was listed for $145,000. The
Holleys offered to pay the asking price and to put $5000 in escrow
for the builder to hold the house until April or May of 1997, when
they were to close escrow on the sale of their current home. When
Ms. Holley called the builder (Bauer), he told her that the offer
seemed fair, but that it should go through Triad. Pet. App. 2-3.
Stump subsequently called the Holleys and told them that more
experienced agents in Triad's office, one of whom was later
identified as Crank, felt that $5000 was insufficient to induce the
builder to hold the house for six months. The Holleys decided not
to raise the offer, and Triad never formally presented the offer to
Bauer. One week later, Bauer stopped by Triad's office and asked
Crank about the status of the Holleys' offer. Crank thereupon used
racially derogatory language in referring to the Holleys and told
Bauer that he did not want to deal with them. The Holleys
eventually hired a builder to construct a house for them, and Bauer
later sold his house for approximately $20,000 less than the
Holleys had offered. Pet. App. 2-3.
California law provides that a corporation may not engage in
acts for which a real estate license is required unless the
corporation has designated one of its officers to serve as the
licensed officer/broker of the company. Pet. App. 12-13. " under
California law, a real estate broker is required to exercise
reasonable supervision over the activities of his or her
salespersons, including familiarizing salespersons with the
requirements of federal and state laws relating to the prohibition
of discrimination." Id. at 12. At the time of the alleged acts of
discrimination in this case, petitioner David Meyer was the
designated officer/broker of Triad, as well as the company's
president. See id. at 6. From 1978 until 1995, petitioner was
also Triad's sole shareholder; his ownership of the company since
that time is disputed. See id. at 9-10 n.4.
3. On November 14, 1997, respondents filed suit against Crank
and Triad, asserting a variety of federal and state claims. They
later filed a separate action against petitioner, and the district
court consolidated the two cases. The court subsequently dismissed
as time-barred all claims except the FHA claim. Pet. App. 3-4, 31-32.
With regard to the FHA claim, the district court denied
petitioner's motion to dismiss. Pet. App. 22-25. The court found
that petitioner's status as an officer of Triad provided no valid
basis for holding him personally liable, stating that " any
liability against [petitioner] as an officer of Triad would only
attach to Triad in that [respondents] have not urged theories that
could justify reaching [petitioner] individually." Id. at 23. The
court held, however, that petitioner's status as designated broker
of Triad might provide a basis for imposing personal liability upon
him, and that respondents could recover from petitioner
individually if they could prove that an FHA violation had been
committed by an employee operating under a broker's license held by
petitioner as an individual rather than as a corporate officer.
Id. at 24-25.
The district court subsequently granted petitioner's motion
for summary judgment on the FHA claim. Pet. App. 29-36. The court
stated that "[a] licensed broker under whose license employees
operate may be liable for the discriminatory actions of those
employees." Id. at 33. The court held, however, that
where the license is held by a corporation, the liability
attaches to the corporation and not to the officers of the
corporation who did not engage in discriminatory conduct.
Therefore, the sole issue in this summary judgment motion is
whether [petitioner] holds his broker's license as an
individual or as an officer of Triad, Inc.
Id. at 34.
The district court explained that " [i]n California, both
corporations and individuals have to be licensed to operate as real
estate brokers. If the licensee is a corporation, the license
entitles one officer from the corporation to act as a real estate
broker for the corporation and he must be designated as such on the
license." Pet. App. 35-36. The court concluded that because in
this case " the real estate license was issued to Triad, Inc. with
[petitioner] as the designated corporate officer of Triad, Inc. *
* *, Crank's discriminatory acts are imputed to Triad, Inc. and not
to [petitioner] as an individual. Hence [petitioner] cannot be
held personally liable for Crank's alleged misconduct." Id. at 36.
The district court certified its judgment with respect to
petitioner for immediate appeal pursuant to Federal Rule of Civil
Procedure 54(b). Respondents' FHA claims against Triad and Crank
remain pending in the district court. See Pet. App. 4.
4. The Court of Appeals for the Ninth Circuit reversed the
district court's grant of summary judgment and remanded the case
for further proceedings. Pet. App. 1-16. The court stated that,
" [a]lthough under general principles of tort law corporate
shareholders and officers usually are not held vicariously liable
for an employee's action, the criteria for the Fair Housing Act
[are] different." Id. at 2. The thrust of the court's reasoning was as follows:
Although officers and shareholders of a corporation generally
enjoy immunity from liability for corporate acts, as a matter
of furthering the compelling policy of the FHA and because
this involves a non delegable duty, we conclude that a
corporation and its officers may be held liable for their
failure to ensure the corporation's compliance with the FHA,
whether or not the officers directed or authorized the
particular discriminatory acts that occurred. * * * * The
overriding societal priority of the FHA indicates that the
owner has the power to control the acts of the agent and so
must act to compensate the injured party and to ensure that
similar harm will not occur again. When one of two innocent
people must suffer, the one whose acts permitted the wrong to
occur is the one to bear the burden.
Id. at 6-7 (footnote omitted). The court also relied in part on 24
C.F.R. 103.20 (1999), stating that petitioner's " undisputed
responsibility to supervise Triad's salespersons in real estate
transactions places him squarely within HUD's regulatory history
allowing complaints against any person who has the right to direct
or control the conduct of another in any aspect of the sale of or
provision of brokerage services to the sale of a dwelling." Pet.
App. 14.
SUMMARY OF ARGUMENT
I. A. Under the FHA and HUD's implementing regulations,
questions of vicarious liability are resolved by application of
general agency and corporate law principles. Under those
principles, a master is vicariously liable for torts committed by
his servants within the scope of their employment, as well as for
torts committed outside the scope of employment when the servant is
aided in the commission of the tort by the existence of the agency
relation. The principal is liable in that setting regardless of
whether he knew of or intended the wrongful conduct or was
negligent in preventing it from occurring. While a corporation
generally is a potentially liable " master " under those principles,
an individual corporate officer or supervisor is not. A typical
officer or supervisor does not stand in a principal-agent
relationship to subordinate employees and is therefore not
generally subject to vicarious liability.
B. Neither the FHA, nor HUD's implementing regulations,
reflect an intent to depart from general agency and corporate law
principles in resolving questions of vicarious liability for
violations of the Act. The text of the Act does not articulate
distinct standards for determining the scope of vicarious
liability, nor does it suggest that background agency principles
should be disregarded. The most natural inference is that courts
in FHA cases should follow generally applicable rules of agency and
corporate law. That is the approach this Court has taken in
resolving questions of vicarious liability under Title VII of the
1964 Civil Rights Act. In deviating from traditional agency
principles, the court of appeals misinterpreted former 24 C.F.R.
103.20(b) (1999), a HUD regulation governing administrative
complaint proceedings. Both the text of that rule, and the
agency's contemporaneous explanation of its own regulation, make
clear that HUD intended to incorporate, rather than to depart from,
generally applicable agency principles.
II. Although the court of appeals erred in finding
traditional agency principles inapplicable to the FHA, the judgment
of the court of appeals, reversing the district court's dismissal
of respondents' claims and remanding the case for further
proceedings, should be affirmed. Under generally applicable
principles of agency and corporate law, respondents should have an
opportunity to establish that petitioner is subject to personal
liability under corporate veil-piercing principles. Under federal
common-law principles, a court in determining whether to pierce the
corporate veil considers whether a unity of interests exists
between the corporation and the individual shareholder, whether
corporate formalities have been disregarded, and whether limited
shareholder liability would lead to inequitable results.
Respondents have alleged that petitioner was Triad's sole
shareholder at the time of Crank's discriminatory conduct. Taken
together with petitioner's roles as Triad's president and
designated officer/broker, his status as sole shareholder (if
proved) would suggest that petitioner exercised pervasive control
over the corporation's affairs. Respondents may also be able to
demonstrate that petitioner ignored corporate formalities.
Finally, because Triad appears to be without assets, piercing of
the corporate veil may be necessary to prevent inequitable results.
That is particularly so in light of respondents' allegation that
petitioner negligently performed his responsibilities as Triad's
designated officer/broker.
ARGUMENT
I. UNDER THE FHA AND HUD'S IMPLEMENTING REGULATIONS, QUESTIONS OF VICARIOUS LIABILITY ARE RESOLVED BY APPLICATION OF GENERAL AGENCY AND CORPORATE LAW PRINCIPLES
A. Under Established Principles, A Person's Actual Or Potential Control Over The Conduct Of A Subordinate May Give Rise To Liability, Without Regard To Personal Fault, For The Subordinate's Tortious Or Other Wrongful Conduct
Congress may establish specific rules for indirect liability
under a particular statutory scheme. However, when, as here,
Congress does not address the issue directly, general principles of
agency and corporate law determine the scope of vicarious
liability. Although those principles generally make the
corporation itself liable for the unlawful acts of corporate
employees, those principles generally shield corporate officers and
supervisors from personal liability for the acts of subordinates.
1. Within broad limits, Congress may define the terms under
which persons standing in a responsible relation to an actual
violator of federal law will be subject to specified sanctions.
For example, under the Food Stamp Act and implementing regulations,
a food store can be permanently disqualified from participation in
the food stamp program if its employees " traffic " in food stamp
coupons, even where the store owner and manager have no knowledge
of, and did not benefit from, the trafficking violation. See 7
U.S.C. 2021(b)(3)(B); 7 C.F.R. 278.6(e)(1)(i). The courts have
repeatedly upheld the imposition of liability under this scheme,
rejecting a variety of constitutional and other challenges. See,
e.g., Traficanti v. United States, 227 F.3d 170, 174-175 (4th Cir. 2000); Kim v. United States, 121 F.3d 1269, 1272-1275 (9th Cir.
1997); Bakal Bros., Inc. v. United States, 105 F.3d 1085, 1088-1090 (6th Cir. 1997); TRM, Inc. v. United States, 52 F.3d 941, 944-947 (11th Cir. 1995); Freedman v. Department of Agric., 926 F.2d 252,
254-262 (3d Cir. 1991). If Congress has specified the
circumstances under which persons other than the actual violator
may be held liable for particular statutory breaches, there is no
need to resort to general agency principles.
2. Even where Congress has not addressed the question
directly with respect to a particular cause of action, it is a core
principle of agency law that " [a] master is subject to liability
for the torts of his servants committed while acting in the scope
of their employment," as well as for torts committed outside the
scope of employment where the servant " is aided in accomplishing
the tort by the existence of the agency relation." Restatement
(Second) of Agency § 219(1) and (2)(d). Liability under those
principles does not ordinarily require proof that the employer knew
of or intended the wrongful conduct, or that the employer was
negligent in failing to prevent it from occurring. See, e.g.,
Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 761 (1998)
(explaining that " courts have consistently held employers liable
for the discriminatory discharges of employees by supervisory
personnel, whether or not the employer knew, or should have known,
or approved of the supervisor's actions," and endorsing those
holdings as correct applications of agency principles) (quoting
Meritor Savings Bank, FSB v. Vinson, 477 U.S. 57, 70-71 (1986));
Cantrell v. Forest City Publishing Co., 419 U.S. 245, 253 (1974)
(publisher was liable " under traditional doctrines of respondeat superior" for defamatory article written by employee within the
scope of his employment, even though " there was no evidence that
[the publisher] had knowledge of any of the inaccuracies contained
in [the] article "); Railroad Company v. Hanning, 15 Wall. (82 U.S.)
649, 657 (1872) (" The rule extracted from the cases is this: The
principal is liable for the acts and negligence of the agent in the
course of his employment, although he did not authorize or did not
know of the acts complained of." ).
3. In the corporate context, those principles generally make
the corporation itself liable for the unlawful acts of corporate
employees performed in the course of corporate duties. On the
other hand, an individual corporate officer or supervisor is not
subject to vicarious liability for torts committed by subordinate
employees. See 3A Fletcher Cyclopedia of Corporations, § 1137, at
300 (" an officer who takes no part in the commission of the tort is
not personally liable to third persons for the torts of other
agents, officers or employees of the corporation "). The corporate
entity constitutes the principal, and officers and supervisors are
agents of the principal, as are the subordinate employees. See
Restatement (Second) of Agency § 358, comment a (" The doctrine of respondeat superior does not apply to create liability against an
agent for the conduct of servants and other agents of the principal
appointed by him, even though other agents are subject to his
orders in the execution of the principal's affairs." ); Rosenthal &
Co. v. Commodity Futures Trading Comm'n, 802 F.2d 963, 967 (7th
Cir. 1986) (the doctrine of respondeat superior " is a doctrine
about employers and * * * other principals. It has no application
to a case where A, B's supervisor, is sued because B commits a
tort." ); Jones v. City of Chicago, 856 F.2d 985, 992 (7th Cir. 1988) (citing cases).
The rule that an individual officer or supervisor is not
liable for the torts of subordinates follows from the nature of the
relationships among the employee, supervisor, and corporation.
" agency is the fiduciary relation which results from the
manifestation of consent by one person to another that the other
shall act on his behalf and subject to his control, and consent by
the other so to act." General Building Contractors Assn. v.
Pennsylvania, 458 U.S. 375, 392 (1982) (quoting Restatement
(Second) of Agency §1). An individual corporate officer or
supervisor may have the authority to direct or control a
subordinate employee, but the subordinate does not stand in a
" fiduciary relation " to the officer or supervisor or act " on his behalf." Rather, the subordinate owes a duty of loyalty to the
corporate employer itself rather than to any individual within the
corporate hierarchy.
An individual officer or supervisor, however, still faces
direct liability for the consequences of his own derelictions.
Thus, a person who directs another to perform a tortious or
otherwise wrongful act is generally liable for any resulting harm.
See Restatement (Second) of Agency §§ 212, 344. That principle " is
not dependent upon the law of agency but results from the general
rule * * * that one causing and intending an act or result is as
responsible as if he had personally performed the act or produced
the result." Id. § 212 comment a.
Finally, although an officer or " a shareholder -- even a
single shareholder -- is normally not liable for the torts of the
corporations it holds," Roe v. Sewell, 128 F.3d 1098, 1103 (7th
Cir. 1997); accord United States v. Bestfoods, 524 U.S. 51, 61-62
(1998), there is an important exception to principles of limited
liability. It is a " fundamental principle of corporate law * * *
that the corporate veil may be pierced and the shareholder held
liable for the corporation's conduct when, inter alia, the
corporate form would otherwise be misused to accomplish certain
wrongful purposes." Bestfoods, 524 U.S. at 62.
II.
Neither The Text Of The FHA, Nor HUD's Implementing
Regulations, Reflect An Intent To Depart From General
Agency And Corporate Law Principles Governing Vicarious
Liability
The court of appeals acknowledged in this case that " officers
and shareholders of a corporation generally enjoy immunity from
liability for corporate acts." Pet. App. 6. Relying on " the
compelling policy of the FHA," however, the court nevertheless
" conclude[d] that a corporation and its officers may be held liable
for their failure to ensure the corporation's compliance with the
FHA, whether or not the officers directed or authorized the
particular discriminatory acts that occurred." Ibid. The court
explained that " [t]he overriding societal priority of the FHA
indicates that the owner has the power to control the acts of the
agent and so must act to compensate the injured party and to ensure
that similar harm will not occur again. When one of two innocent
people must suffer, the one whose acts permitted the wrong to occur
is the one to bear the burden." Id. at 7. The court of appeals
also relied in part on former 24 C.F.R. 103.20 (1999), a HUD
regulation, which the court construed to impose potential liability
upon " any person who has the right to direct or control the conduct
of another in any aspect of the sale of or provision of brokerage
services to the sale of a dwelling." Pet. App. 14.
The thrust of the court of appeals' analysis was that, even if petitioner would not be vicariously liable for Crank's alleged
misconduct under generally applicable agency and corporate law
principles, a different and more expansive rule of vicarious
liability applies under the FHA. See Pet. App. 2 (" Although under
general principles of tort law corporate shareholders and officers
usually are not held vicariously liable for an employee's action,
the criteria for the Fair Housing Act [are] different "). Neither
the statutory text and purposes, nor HUD's regulatory scheme,
supports that conclusion.
1. The Text Of The FHA Does Not Reflect Any Deviation From General Principles Of Vicarious Liability.
The court of appeals did not identify any provision of the FHA that manifests a congressional intent to depart from usual rules of corporate and agency law. The Act makes it unlawful "[t]o discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race, color, religion, sex, familial status, or national origin." 42 U.S.C. 3604(b). The Act further provides that " [i]t shall be unlawful 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, color, religion, sex, handicap, familial status, or national origin." 42 U.S.C. 3605(a). The FHA defines the term " person " to include " one or more individuals, corporations, partnerships, associations, labor organizations, legal representatives, mutual companies, joint-stock companies, trusts, unincorporated organizations, trustees, trustees in cases under title 11, receivers, and fiduciaries." 42 U.S.C. 3602(d). The Act does not, however, specifically articulate the standards to be applied to determine whether a particular individual or other legal entity may be held accountable for a particular violation. Nor, more particularly, does the Act address the circumstances, if any, when one person may be individually liable for the violations of another.
Under background principles of agency, there is generally some
scope for such indirect or vicarious liability. See pp. **-**,
supra. It is clear, for example, that Triad, as Crank's principal
and employer, could be held liable for Crank's unlawful actions.
The text of the FHA does not suggest that those background rules
should be disregarded. Indeed, the language of the FHA expressly
contemplates that principals will be held liable for their agents'
actions in some circumstances. By including " corporations,
partnerships, [and] associations," within the definition of
" person[s] " prohibited from discriminating, Congress made clear
that FHA liability may properly be imposed on artificial legal
entities that are capable of acting only through the agency of
others.
By the same token, however, nothing in the FHA suggests that
courts should apply an unusually expansive conception of vicarious
liability in resolving claims brought under the Act. " [A]gainst
this venerable common-law backdrop, the congressional silence is
audible." Bestfoods, 524 U.S. at 62. The most natural inference
is that courts in FHA cases should be guided by generally
applicable rules of agency and corporate law. Cf. id. at 63 (" the
failure of the statute to speak to a matter as fundamental as the
liability implications of corporate ownership demands application
of the rule that in order to abrogate a common-law principle, the
statute must speak directly to the question addressed by the common
law ") (brackets and internal quotation marks omitted).
The court of appeals found a special rule of vicarious
liability to be justified by " [t]he overriding societal priority of
the FHA." Pet. App. 7. Title VII of the 1964 Civil Rights Act
serves analogous purposes in the context of employment, however,
and nonetheless this Court generally has relied on background
agency principles in construing Title VII. See, e.g.,Faragher v.
Boca Raton, 524 U.S. 775, 793-809 (1998); Burlington Industries,
Inc. v. Ellerth, 524 U.S. 742, 754-765 (1998); Meritor Savings
Bank, FSB v. Vinson, 477 U.S. 57, 72 (1986). The Court has
recognized that occasional departures from background rules of
vicarious liability may sometimes be appropriate in order better to
serve Title VII's purposes. See Kolstad v. American Dental Assn.,
527 U.S. 526, 544-546 (1999) (concluding that Restatement's rules
governing employer liability for punitive damages should be
modified so as to encourage employers to adopt antidiscrimination
policies and to educate their personnel, thereby furthering the
purposes of Title VII); Faragher, 524 U.S. at 802 n.3 (Court's task
" is to adapt agency concepts to the practical objectives of Title
VII "); Meritor, 477 U.S. at 72 (" common-law principles may not be
transferable in all their particulars to Title VII "). But the fact
that the FHA furthers the compelling public interest in preventing
and redressing housing discrimination vel non does not suggest a
congressional intent to undertake wholesale revisions of generally
applicable agency and corporate law.
2. HUD's Regulations Incorporate, Rather Than Reject,
Traditional Agency Principles.
a. The court of appeals relied in part (see Pet. App. 4-5,
14-15) on former 24 C.F.R. 103.20(b) (1999), which provided that
administrative complaints alleging FHA violations may be filed
against any person who directs or controls, or has the right
to direct or control, the conduct of another person with
respect to any aspect of the sale * * * of dwellings * * * if
that other person, acting within the scope of his or her
authority as employee or agent of the directing or controlling
person, is engaging, has engaged, or is about to engage, in a
discriminatory housing practice.
The court of appeals construed that regulation to mean that where
an employee violates the Act, any person who " has the right to
direct or control " that employee's conduct is automatically subject
to FHA liability. See Pet. App. 14-15. Such a rule, if it
existed, would apply equally to high-level corporate officers
intimately involved in all aspects of the business such as
petitioner, and to lower-level supervisory employees, even though
individual officers and supervisors are not ordinarily subject to
vicarious liability for torts committed by others because they do
not stand in a principal-agent relationship to the workers they
oversee. See pp. **, supra. The court of appeals' construction of
former Section 103.20(b) is contrary to the text of the rule and to
the agency's contemporaneous explanation of its own regulation.
Former Section 103.20(b) subjected a person authorized to
direct or control the actions of another to potential FHA liability
only " if that other person, acting within the scope of his or her
authority as employee or agent of the directing or controlling
person, is engaging, has engaged, or is about the engage, in a
discriminatory housing practice." 24 C.F.R. 103.20(b) (1999)
(emphasis added). The underscored language is most naturally
construed to incorporate background principles of agency law --
and, in particular, to indicate that one person's actual or
potential control over another provides a basis for FHA liability
only when a principal-agent relationship exists between the two.
Compare Burlington, 524 U.S. at 754 (by including " agents " within
Title VII's definition of " employer," " Congress has directed
federal courts to interpret Title VII based on agency principles" ).
The court of appeals therefore erred in construing the
regulation to establish a blanket rule authorizing the filing of an
administrative complaint " against any person who has the right to
direct or control the conduct of another in any aspect of the sale
of or provision of brokerage services to the sale of a dwelling."
Pet. App. 14. The court of appeals ignored the regulation's
further requirement that the person engaged in a discriminatory
housing practice must have acted " as employee or agent of the
directing or controlling person." Even when a corporate officer or
supervisor is authorized to direct or control the job-related
conduct of a line employee, that worker ordinarily remains an
" employee or agent" of the corporation itself, not of the
individual officer or supervisor. Accordingly, the text of the
regulation, when read as a whole, incorporates traditional agency
principles.
HUD's contemporaneous explanation of the pertinent rule
further clarifies the agency's intent to incorporate, not deviate
from, existing agency principles. In 1988, HUD adopted the
predecessor to former Section 103.20 (then codified at 24 C.F.R.
105.13) as a final regulation. See 53 Fed. Reg. 24,184. In
response to an objection to the proposed rule made by the National
Association of Realtors, HUD stated that
it is not HUD's intent to impose absolute liability on any
principal; the intent * * * was to follow the law enunciated
by the courts in recent Fair Housing Act cases with respect to
the liability of a principal for acts of an agent. Any
defenses that could be raised in court could also be raised by
a respondent to a complaint filed with HUD (see discussion of
§ 105.18). HUD has revised the language of paragraph (b) of
§ 105.13 to provide that a complaint may be filed against a
directing or controlling person with respect to the
discriminatory acts of another only if the other person was
acting within the scope of his or her authority as employee or
agent of the directing or controlling person.
Id. at 24,185. Thus, in identifying the class of persons against
whom administrative complaints could be filed, HUD's intent was to
incorporate an existing body of judicially crafted rules, not to
promulgate new and distinctive standards of vicarious liability.
The 1988 preamble made clear, in particular, that the words " acting
within the scope of his or her authority as employee or agent of
the directing or controlling person " had been added to the final
rule in order to limit the scope of vicarious liability and to
disclaim an " intent to impose absolute liability on any principal."
53 Fed. Reg. at 24,185. (3)
b. In 1999, after the events that gave rise to this suit, HUD
issued revised regulations governing the processing of
administrative complaints under the FHA. See 64 Fed. Reg. 18,538.
The reference to persons exercising actual or potential direction
or control was moved to 24 C.F.R. 103.202, which currently states:
§ 103.202 Notification of respondent; joinder of additional or
substitute respondents.
(a) Within ten days of the filing of a complaint * * *,
the Assistant Secretary will serve a notice on each respondent
by certified mail or by personal service. A person who is not
named as a respondent in a complaint, but who is identified in
the course of the investigation * * * as a person who is
alleged to be engaged, to have engaged, or to be about to
engage in the discriminatory housing practice upon which the
complaint is based may be joined as an additional or
substitute respondent by service of a notice on the person
under this section within ten days of the identification.
(b) The Assistant Secretary will also serve notice on any
person who directs or controls, or who has the right to direct
or control, the conduct of another person who is involved in
a fair housing complaint.
24 C.F.R. 103.202; see 64 Fed. Reg. at 18,541. (4)
Although current Section 103.202 is not limited by its terms
to situations in which a subordinate has " act[ed] within the scope
of his or her authority as employee or agent of the directing or
controlling person " (and is therefore, if anything, broader than
the previous regulation on which the court of appeals relied), the
1999 regulatory amendment was not intended to expand liability or
effect a departure from background agency principles. First, HUD
made clear at the time of the revision that its intent was to
rewrite the pertinent regulations " using plain language " (64 Fed.
Reg. at 18,538), and that the new " rule does not make substantive
changes to the regulations. All procedures and requirements for
filing housing discrimination complaints remain as they are
currently." Id. at 18,539.
Second, HUD's regulations continue to provide (albeit in a
different regulatory subsection than before the 1999 amendments)
that " [t]he respondent may assert any defense that might be
available to a defendant in a court of law." 24 C.F.R. 103.203(a).
That would include a defense that the person sued has committed no
violation of the Act and bears no indirect liability for anyone
else's violation.
Third, current Section 103.202(b) does not say that " any
person who * * * has the right to direct or control, the conduct of
another person," will automatically be liable for the other
person's FHA violations. Rather, it provides that where an
individual is alleged to violate the FHA, "[ t]he Assistant
Secretary will also serve notice" of the complaint on any person
authorized to direct and control the alleged violator. The rule
thus identifies a broad class of persons who may be potentially
liable under the Act, and are therefore entitled to receive notice
of a pending proceeding, rather than articulating a test for
determining actual liability. (5)
c. HUD's regulatory approach is entitled to deference under
the principles announced in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-845 (1984). HUD
is charged by Congress with the administration and enforcement of
the FHA, and the Secretary of HUD is responsible for promulgating
regulations to carry out the purposes of the Act. See 42 U.S.C.
3608, 3612, 3614a. Perhaps the agency could permissibly have
determined, with respect to the scope of vicarious liability under
the FHA, that significant departures from background agency and
corporate law principles were warranted. But, in the absence of
statutory language addressing the question, HUD's decision to
incorporate generally applicable rules of vicarious liability was
surely reasonable. Cf. Edelman v. Lynchburg College, 122 S. Ct.
1145, 1151-1152 (2002) (Equal Employment Opportunity Commission
acted reasonably in adopting " relation back" rule that was
consistent with traditional practice).
FURTHER PROCEEDINGS ARE WARRANTED TO DETERMINE WHETHER
PETITIONER IS SUBJECT TO PERSONAL LIABILITY UNDER CORPORATE
VEIL-PIERCING PRINCIPLES
For the reasons stated above, the court of appeals erred in
construing the FHA and implementing regulations to establish a
distinctively broad rule of vicarious liability. Nevertheless, the
court of appeals' judgment, which reversed the district court's
dismissal of respondents' claims and remanded the case for further
proceedings, should be affirmed. Even under general principles of
agency and corporate law, respondents may be able to establish
petitioner's personal liability for Crank's alleged unlawful
conduct. Accordingly, a remand is appropriate to consider
petitioner's liability, not under a distinct, FHA-specific rule of
vicarious liability, but under traditional principles of agency and
corporate law.
A. The general rule that corporate stockholders are not
personally liable for wrongs committed by the corporation's
employees (see pp. **-**, supra) is subject to well-recognized
exceptions. Thus, under established corporate law principles, " the
corporate veil may be pierced and the shareholder held liable for
the corporation's conduct when, inter alia, the corporate form
would otherwise be misused to accomplish certain wrongful
purposes." Bestfoods, 524 U.S. at 62; accord, e.g., First Nat'l
City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611,
630 (1983) (Court " has consistently refused to give effect to the
corporate form where it is interposed to defeat legislative
policies"). As with the statute at issue in Bestfoods, " [n]othing
in [the FHA] purports to rewrite this well-settled rule."
Bestfoods, 524 U.S. at 63. " [T]he failure of the statute to speak
to a matter as fundamental as the liability implications of
corporate ownership demands application of the rule that in order
to abrogate a common-law principle, the statute must speak directly
to the question addressed by the common law." Ibid. Thus, if
respondents can establish the prerequisites for piercing the
corporate veil, petitioner may be held personally liable for
Crank's alleged FHA violations.
" The alter ego doctrine states that, when the corporation is
the mere instrumentality or business conduit of another corporation
or person, the corporate form may be disregarded." 1 Fletcher
Cyclopedia §41.10, at 568 (1999); see Chicago, M. & St. P. Ry. Co.
v. Minneapolis Civic & Commerce Ass'n, 247 U.S. 490, 500-501 (1918)
(rule that one corporation's ownership of stock in another does not
generally " create the relation of principal and agent or
representative between the two " is inapplicable " where stock
ownership has been resorted to * * * for the purpose * * * of
controlling a subsidiary company so that it may be used as a mere
agency or instrumentality of the owning company or companies "). As
the Tenth Circuit has explained,
the federal common law doctrine of piercing the corporate veil
under an alter ego theory can best be described by the
following two-part test: (i) was there such unity of interest
and lack of respect given to the personalities and assets of
the corporation by its shareholders that the personalities and
assets of the corporation and the individual are indistinct,
and (ii) would adherence to the corporate fiction sanction a
fraud, promote injustice, or lead to an evasion of legal
obligations.
N.L.R.B. v. Greater Kansas City Roofing, 2 F.3d 1047, 1052 (10th
Cir. 1993); accord 1 Fletcher Cyclopedia, §41.30, at 619.
B. Based on the allegations in respondents' complaint and the
evidence adduced to this point, petitioner is potentially subject
to FHA liability under established veil-piercing principles. (6)
1. Respondents may be able to establish the requisite " unity
of interest" between petitioner and Triad. Respondents' complaint
alleged that "[ a]t all times relevant herein, the Triad real estate
firm was owned and operated by [petitioner], who served and
continues to serve [as] its president and designated
officer/broker." J.A. 7. Although petitioner claims to have
transferred ownership of the corporation to Crank in 1995, the
court of appeals found that a genuine factual dispute existed on
that point. Pet. App. 9-10 n.4. It appears to be undisputed that
petitioner continued to serve as the president of Triad, and as the
corporation's designated officer/broker, at the time of the
discriminatory conduct alleged in this case.
"[T]he mere fact that all or almost all of the corporate stock
is owned by one individual or a few individuals will not afford
sufficient grounds for disregarding corporateness." 1 Fletcher
Cyclopedia §41.35, at 665-666. Nonetheless, a plaintiff can more readily establish a basic identity of interests between the
shareholder and the corporation where ownership is concentrated in
a single individual. See, e.g., Easterbrook & Fischel, Limited Liability & the Corporation, 52 U. Chi. L. Rev. 89, 109-110 (1985)
(stating that " [a]lmost every case in which a court has allowed
creditors to reach the assets of corporations has involved a close
corporation," and explaining that while sole ownership of a
corporation does not in itself warrant piercing the corporate veil,
the economic reasons for limited liability for close corporate
shareholders are significantly weakened). " When substantial
ownership of all the stock of a corporation in a single individual
is combined with other factors clearly supporting disregard of the
corporate fiction on grounds of equity and fairness, courts have
been willing to apply the 'alter ego' or instrumentality theory in
order to cast aside the corporate shield and to fasten liability on
the individual shareholder." 1 Fletcher Cyclopedia § 41.35, at
666-668. And if petitioner is ultimately found to have been
Triad's sole shareholder at the time of the alleged violation, his
status as Triad's president and designated officer/broker will
reinforce the inference that he exercised pervasive control over
the corporation's affairs. (7)
b. Respondents may also be able to demonstrate that
petitioner failed to observe corporate formalities. " In order to
avoid the potential for a court to pierce the corporate veil, a
corporation must be sure to observe corporate formalities." 1
Fletcher Cyclopedia § 41.31, at 635. Petitioner has admitted that
between April 1995 and August of 1998, he did not review any Triad
paperwork regarding finalized real estate transactions -- a clear
failure to comply with corporate formalities and state law real
estate requirements. Rec. 27 at 134; Rec. 28 at 8. Respondents
have also alleged that " Triad pays its taxes under [petitioner's]
identification number" (Pet. App. 10 n.4), an allegation that if
proved would indicate that petitioner has failed to treat Triad as
a distinct legal entity.
c. Respondents may also be able to establish that adherence
to the general rule of limited shareholder liability would produce
inequitable results here. In a declaratory judgment action brought
by Triad's insurer, the district court held that Triad's insurance
policy specifically excluded claims of discrimination in the
provision of services. C.A. E.R. 245-259; see Pet. App. 19, 31.
Triad itself appears to be without assets. See 02/02/99 Tr. 30,
39. Unless petitioner is subject to personal liability, therefore,
respondents may be unable to obtain redress for their injuries even
if they prove a violation of the FHA. Although the insolvency of
the corporation does not by itself warrant the imposition of
personal liability on the shareholder, inadequate capitalization is
another relevant factor in determining whether the corporate veil
should be pierced. See, e.g., Anderson v. Abbott, 321 U.S. 349,
362 (1944) (" An obvious inadequacy of capital, measured by the
nature and magnitude of the corporate undertaking, has frequently
been an important factor in cases denying stockholders their
defense of limited liability."). (8)
Finally, in determining whether adherence to the general rule
of limited liability will produce an unjust result, courts will
consider whether the individual shareholder bears some personal
responsibility for the breach with which the corporation is
charged. See Greater Kansas City Roofing, 2 F.3d at 1053 (" the
individual who is sought to be charged with corporate liability
must have shared in the moral culpability or injustice " ). In the
present case, petitioner in his role as designated officer/broker
is alleged to have acted negligently in his training and
supervision of Triad employees. That alleged dereliction may have
been causally linked to the FHA violation for which respondents
seek redress, and it constitutes a breach of the terms under which
Triad was permitted to employ the corporate form in its conduct of
real estate transactions. Petitioner's negligent performance of
his corporate responsibilities, if proved, would further support a
determination that piercing of the corporate veil is appropriate to
prevent an inequitable result.
d. In Bestfoods, this Court noted, but did not resolve, a
circuit conflict on the question whether, in resolving claims under
the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA), " courts should borrow state law, or
instead apply a federal common law of veil piercing." 524 U.S. at
63 n.9. Although the FHA does not specify whether state or federal
common law veil-piercing standards should apply, a uniform federal
standard is appropriate. Cf. Clearfield Trust Co. v. United
States, 318 U.S. 363, 366-367 (1943) (federal courts should
establish uniform federal rules of decision when a federal statute
is silent as to choice of law and overriding federal interests
exist). Unlike (for example) the " custom-made, hand-tailored,
specifically negotiated " government loan at issue in United States
v. Yazell, 382 U.S. 341 (1966), the FHA is a " nationwide act of the
Federal Government, emanating in a single form from a single
source." Id. at 348.
The question whether the corporate veil should be pierced in
this case is one of derivative liability: the effect of veil-piercing would be to treat petitioner as Crank's principal, so that
Crank's alleged discriminatory conduct would be imputed to
petitioner. In resolving issues of vicarious liability under Title
VII, see Ellerth, supra; Faragher, supra, this Court did not
suggest that the liability of an employer for wrongs committed by
the company's employees could turn on state-by-state variations in
the law of agency. Rather, the clear import of the Court's
decisions is that such questions should be resolved through the
application of uniform federal rules. The same approach is
appropriate here.
CONCLUSION
The judgment of the court of appeals should be affirmed.
Respectfully submitted.
THEODORE B. OLSON
Solicitor General
RALPH F. BOYD, JR.
Assistant Attorney General
PAUL D. CLEMENT
Deputy Solicitor General
MALCOLM L. STEWART
Assistant to the Solicitor General
DAVID K. FLYNN
ANDREA PICCIOTTI-BAYER
Attorneys
SEPTEMBER 2002
1. Civil actions to enforce the FHA may be filed either by a private person who is aggrieved by a violation, 42 U.S.C. 3613, or by the Attorney General when, inter alia, he has reason to believe that a " pattern or practice" of violations exists, 42 U.S.C. 3614.
2. Because the district court granted petitioner's motion for
summary judgment, the facts must be construed in the light most
favorable to respondents.
3.
In expressing an intent " to follow the law enunciated by the
courts in recent Fair Housing Act cases with respect to the
liability of a principal for acts of an agent " (53 Fed. Reg. at
24,185), HUD apparently referred to the decisions in United States
v. Youritan Construction Co., 370 F. Supp. 643, 649 (N.D. Calif.
1973), modified as [to] relief and affirmed, 509 F.2d 623 (9th Cir.
1975); Northside Realty v. United States, 605 F.2d 1348, 1353 n.9
(5th Cir. 1979); Marr v. Rife, 503 F.2d 737, 740-742 (8th Cir.
1974); United States v. Northside Realty, 474 F.2d 1164, 1168 (5th
Cir. 1973); Moore v. Townsend, 525 F.2d 482, 485 (7th Cir. 1975);
Johnson v. Jerry Pals Real Estate, 485 F.2d 528, 531 (7th Cir.
1973); Dillon v. AFBIC Development Corp., 420 F. Supp. 572, 579
(S.D. Ala. 1975); and United States v. Real Estate Development Corp., 347 F. Supp. 778, 785 (N.D. Miss. 1972). See 49 Fed. Reg.
40,529 (1984) (notice of proposed rulemaking) (citing cases).
Although each of those cases recognize that principles of
vicarious liability apply to suits under the FHA, the decisions
taken together cannot be said to reflect a judicial consensus
regarding the precise application of those principles. Several of
the cases deal with the liability of the corporate employer rather
than of individual officers or supervisors. None holds in terms
that background rules of agency should be disregarded in
adjudicating claims under the FHA.
4. In the petition for certiorari (at 9-10), petitioner chided
the court of appeals for relying on the superseded former 24 C.F.R.
103.20(b). In their brief in opposition (at 11 n.2), respondents
pointed out that the " direct or control" language previously
contained in former Section 103.20(b) has been moved to a different
regulatory subsection rather than eliminated altogether.
Petitioner nevertheless continues to assert (Br. 20) that the 1999
regulatory amendment " completely abolish[ed] any reference to
liability of 'any person' with 'the right to direct or control the
conduct of another person' with respect to housing as subject to a
claim."
5.
Requiring that notice of a complaint be served on a broad
class of persons makes particular sense in light of the purposes of
the administrative complaint procedure. This Court has described
the complaint procedure under the FHA as " a simple, inexpensive,
informal conciliation procedure, to be followed by litigation
should conciliation efforts fail." Gladstone, Realtors v.
Village of Bellwood, 441 U.S. 91, 104 (1979); see 53 Fed. Reg. at 24,184
(administrative complaint procedures are used " to make a
determination to resolve matters raised in complaints and to try to
eliminate and correct alleged discriminatory housing practices by
informal means " ). Thus, at least in many instances, the point of
the administrative complaint mechanism is not so much to assign
blame for past violations as to devise pragmatic strategies to
ensure compliance with the Act on a prospective basis. For that
purpose it makes particularly good sense to provide notice in the
administrative process to persons (such as supervisors and
individual corporate officers) who are authorized to direct and
control the actual violator, even when their relationship to the
violator may not give rise to vicarious liability for prior wrongs.
6. Petitioner asserts that respondents " have made no claim that
the corporate veil should be pierced, nor did they offer any
evidence to support such a claim." Pet. Br. 19. That is
incorrect. In arguing that petitioner was potentially liable under
the FHA in his capacity as sole shareholder of Triad (Resp. C.A.
Br. 45-46, 56-59), respondents asserted that their " evidence would
show that [petitioner] is the sole shareholder of Triad, and thus
an argument to pierce the corporate veil would be meritorious."
Id. at 59 n.17. And for the reasons stated below, the allegations
of respondents' complaint and the evidence adduced to date provide
sufficient support for a veil-piercing theory to permit this suit
to go forward.
7.
The court of appeals suggested that petitioner's status as
sole shareholder of Triad would, if proved, be sufficient in and of
itself to subject petitioner to personal liability for FHA
violations committed by subordinate employees. See Pet. App. 7-11.
The Seventh Circuit appears to have reached a similar conclusion.
See City of Chicago v. Matchmaker Real Estate Center, Inc., 982 .2d
1086, 1098 (7th Cir. 1993) (" where common ownership and management
exists, corporate formalities must not be rigidly adhered to when
inquiry is made of civil rights violations." ); cf. ibid. (stressing
sole shareholder's pervasive involvement in corporation).
Essentially for the reasons stated at pp. **-**, supra, that
conclusion is erroneous. Neither the FHA nor HUD's implementing
regulations suggest that a distinct, unusually broad rule of veil-piercing applies to claims brought under the Act. Under
established principles, petitioner's alleged status as sole
shareholder is relevant to, but does not obviate the need for, an
analysis of whether to pierce the corporate veil.
8. As one leading treatise explains,
[i]f a corporation is organized and carries on a business
without substantial capital and is likely to have insufficient
assets available to meet its debts, it is inequitable to allow
the shareholders to escape personal liability. The attempt to
do corporate business without providing any sufficient basis
of financial responsibilities to creditors is an abuse of the
separate entity and will be ineffectual to protect
shareholders from corporate debts.Fletcher Cyclopedia § 41.33, at 648-649 (footnote omitted).
