Claims for Indemnification Preempted by Fair Housing Act and American with Disabilities Act.

(April 2010) By Eric M. Leppo, Associate

For more information, contact Paul Farquharson.

Equal Rights Center, et al. and Archstone Multi-Family Series I Trust v. Niles Bolton Associates, et al, No. 09-1453 (4th Cir. Apr. 19, 2010) Available at
http://pacer.ca4.uscourts.gov/opinion.pdf/091453.P.pdf

In this recent Fourth Circuit Opinion, the Court of Appeals found that a defendant's cross-claim for indemnity and related claims (considered to amount to claims for indemnification) are preempted by federal statute, namely the Fair Housing Act ("FHA"), 42 U.S.C. §§ 3601 et seq. and American With Disabilities Act ("ADA"), 42 U.S.C. §§ 12101et seq.

The Appellant, Archstone is a developer of multi-family housing projects. It hired Niles Bolton to be its architect for several apartment complexes it constructed in the 1990's. In 2004, the Equal Rights Center filed a lawsuit naming Archstone, Niles Bolton and other contractors as defendants. The suit claimed that 71 of Archstone's apartment buildings failed to be designed and constructed to allow access to persons with disabilities, as required by FHA and ADA. Niles Bolton was the architect on at least 15 of the 71 properties involved.

Archstone settled the claim with the Equal Rights Center, agreeing to pay plaintiffs $1.4 million, as well as retrofit all 71 properties to make them FHA and ADA compliant. After settling the action with the Equal Rights plaintiffs, Archstone filed a cross-claim seeking indemnity—both express and implied—and also made claims for breach of contract and professional negligence in an effort to recoup its costs resulting from the Equal Rights Center's lawsuit. Archstone's cross claim contends that the cost to retrofit those sites designed by Niles Bolton was $2.5 million.

The Federal District Court for the District of Maryland dismissed Archstone's indemnification claims, and found the non-indemnification claims to be claims for de factoindemnity. The Court determined that there is no statutory right of indemnification under the FHA and ADA, and that allowing indemnification to Archstone would be antithetical to the purposes of FHA and ADA. Therefore, it declared Archstone could not proceed due to obstacle or conflict preemption.

The Fourth Circuit declared that obstacle preemption exists "where state law stands as an obstacle to the accomplishment and execution and full purposes and objectives of Congress". Freightliner Corp. v Myrick, 514 U.S. 280, 287 (1995). Additionally, conflict or obstacle preemption can exist not only when a state enacts laws, but also in granting or permitting state court claims.

The Fourth Circuit then cited to its conflict preemption precedent, Baker, Watts & Co. v. Miles & Stockbridge, 876 F.2d 1101 (4th Cir. 1989), in which it held that a claim of indemnification was preempted by the Securities Exchange Act of 1933. The court noted the goal of the 1933 and 1934 Securities Exchange Acts was preventive as well as remedial and denying indemnification encourages the reasonable care required by the federal securities provisions.

The Fourth Circuit then observed that the FHA and ADA are regulatory statutes with a purpose of providing clear and forcible standards addressing discrimination against individuals with disabilities, and designed to provide fair housing throughout the United States. "Allowing an owner to completely insulate itself from liability for an ADA or FHA violation through contract diminishes its incentive to ensure compliance with the discrimination laws." Equal Rights Center at *9. The court noted that if a developer can be indemnified for non-compliance with ADA or FHA requirements, the developer simply will not be held accountable for its discriminatory practices, which flies in the face of the objectives of the FHA and ADA.

The Fourth Circuit then went on briefly to conclude that the breach of contract and negligence claims filed by Archstone were de facto indemnification claims. The Fourth Circuit agreed with the district court that Archstone was seeking to recover 100 percent of its losses from Niles Bolton with regard to the Niles Bolton sites, and were therefore merely seeking indemnity. The Court determined that even though these causes of action were not seeking indemnity in name, they were seeking indemnification in practice, and therefore also preempted.