The U.S. Supreme Court has agreed to hear a case testing whether a town redevelopment plan's alleged disparate impact on minorities forms a prima facie claim under the federal Fair Housing Act.

The U.S. Court of Appeals for the Third Circuit so held in Mount Holly v. Mount Holly Gardens Citizens in Action, 11-1507, a decision the town seeks to overturn.

At issue is Mount Holly Gardens, a dilapidated rowhouse community that the town declared a redevelopment zone in 2002. All but about 70 of the original 329 homes have been bought and demolished. A developer has been selected to build townhouses and condominiums in their place.

The Gardens' current and former residents, most of whom have low incomes, say they will not be able to afford the new units. Banding together as Citizens in Action, they tried to stop the redevelopment in state court. But that case was dismissed in 2005 and the Appellate Division affirmed in 2007.

In 2008, Citizens in Action sued in federal court in Camden, claiming the plan violated the FHA. The plaintiffs said the project would have a disparate impact because four out of five residents whose homes were condemned are black or Hispanic.

U.S. District Judge Noel Hillman dismissed the suit on summary judgment in January 2011, finding white, low-income Gardens residents were impacted in the same way as minority residents.

The plaintiffs appealed, and in September 2011 the Third Circuit said Hillman's analysis was faulty.

The appeals panel noted that Hillman failed to consider statistical submissions, such as data showing the project affected 22 percent of the town's black households and 32 percent of its Hispanic households but only 3 percent of its white households.

It held that the plaintiffs' evidence was sufficient to establish a case of disparate-impact discrimination.

Mount Holly's lawyer, James Maley, who heads a firm in Collingswood, said in his petition that Congress expressly intended to exclude disparate-impact claims from the FHA.

A high representation of minorities in a neighborhood might be the result of "a myriad of innocent causes," but in such cases any policy applying to that neighborhood would have a disparate impact on minorities, he said.

Maley says the state and federal courts that have heard the litigation found no evidence of racial animus by officials. He says race should not be a factor in redevelopment decisions, but if the Third Circuit ruling stands, it will become a factor.

In their brief in opposition, the plaintiffs argued that the court does not need to address the disparate-impact claims under the FHA because all 11 courts of appeals that have considered the issue have found the claims cognizable.

The U.S. Department of Housing and Urban Development has similarly concluded that such claims are cognizable, and its view is entitled to deference, the plaintiffs asserted.

And the U.S. Solicitor General's Office submitted an amicus curiae brief that supports maintaining the disparate-impact doctrine in FHA cases.

Kenneth Goldman of South Jersey Legal Services, an attorney for the plaintiffs, says the town recently engaged in settlement negotiations, but he says he's prepared to argue the case. Allowing disparate-impact claims under the FHA "has been bedrock law for over 40 years," he adds.

Mount Holly Gardens homeowners who accepted the town's buyout received $50,000 to $60,000 each, but that was not enough to find comparable housing, and many ended up leaving Mount Holly and becoming renters, Goldman says.

The plaintiffs also are represented by Olga Pomar, also of South Jersey Legal Services, and by David Frederick and Derek Ho of Kellogg, Huber, Hansen, Todd, Evans & Figel in Washington, D.C.

The case has drawn wide interest in the banking and mortgage industries, says John Culhane, a lawyer at Ballard Spahr in Philadelphia who represents financial institutions.

Under a disparate-impact theory, banks can be sued if their rules and practices have a disproportionate effect on low-income borrowers, who also tend to be minorities, he adds.

"I think they took the case because they're prepared to rule that there is no disparate impact doctrine under the Fair Housing Act as it stands," Culhane says. "There would have been no reason for the court to take on the case if it agreed that disparate impact was, in fact, part of the FHA."

The issue has always been a concern for the banking industry, but the Department of Justice has "embraced the doctrine" under President Obama, says Culhane. Under the disparate-impact doctrine, "there's a tremendous opportunity to second-guess anything a bank does," he says.

Charles Toutant is a reporter for the New Jersey Law Journal, a Legal affiliate.