City’s Renege On Economic Development Loan Insightful On Employment Issues

By Jonathan Wall

What does a case involving a city council’s refusal to go forward with an economic development loan have to do with employment law?  Plenty!  In Woods v. City of Greensboro, ___ F.3d ___, 2017 WL 174898 (4th Cir. May 5, 2017), a 4th Circuit panel relied heavily on employment law and again indicated that weighing facts has no place in a Rule 12(b)(6) determination.

Here, Michael and Ramona Woods were encouraged to apply for an economic development loan of $300,000, to be paid back over 10 years. They sought the funds for “Watcha Cookin’,a situational comedy to be produced by their company, BNT Ad Agency, LLC. The Woods believed a successful production in Greensboro could establish the city as a production center for entertainment produced by and primarily for black audiences. Their loan was approved by the Greensboro City Council with a second mortgage on the Woods’ primary residence. Later, it was discovered that a home equity line of credit existed on the property.  A resolution was raised which would allow the economic development lien to be in a third position. Despite acknowledging that the city had been in a third position in the past and that the property had sufficient equity to satisfy all three loans in the event of any default, plaintiffs alleged that the city council revoked the previous loan authorization.

The Woods and their company sued the city and council members, alleging breach of contract and violations of 42 U.S.C. § 1981, 1983, and 1986, and the Equal Protection and Due Process Clauses.  The Woods contended that race had been a contributing factor in the council’s decision to revoke the loan. The U.S. District court disagreed, granting defendants’ motion to dismiss. The court reasoned that the discrimination laws protected persons, not organizations, and the Woods therefore lacked standing. Alternatively, the court determined plaintiffs could not prove discrimination because they had failed to allege the existence of “valid comparators.” Further, the court said, plaintiffs could not prove intentional discrimination because the initial resolution was approved, in part, because of plaintiffs’ race. BNT appealed the dismissal.

In a split decision, the 4th Circuit reversed. The court noted that it had adopted “imputed racial identity” to establish standing in Carnell Const. Corp. v. Danville Redev. & Housing Auth., 745 F.3d 703 (4th Cir. 2014).  The court rejected the argument that the business had to be certified as minority owned – as had been the case in Carnell – in order to enjoy civil rights protections.  Here, BNT was understood to stand for “Black Network Television,” and all the shareholders and officers were minorities. As such, BNT had set forth sufficient facts to establish imputed racial identity, which confers § 1981 standing, the court held.

Turning to the Rule 12(b)(6) argument, the court noted that in an employment case, Swierkiewicz v. Sorema, N.A., 534 U.S. 506 (2002), the U.S. Supreme Court had held that “an employment discrimination plaintiff need not plead a prima facie case of discrimination to survive a motion to dismiss.”  Id. at 515.  The Court balanced that principal with the Iqbal/Twombly jurisprudence established in McCleary-Evans v. Maryland Dep’t of Transp., 780 F.3d 582 (4th Cir. 2015).  In McCleary-Evans, the 4th Circuit held that while a plaintiff need not plead a prima facie case, a plaintiff must still “allege facts to satisfy the elements” of the relevant cause of action to satisfy Iqbal/Twombly.

Here, the court found ample allegations that race may have played a role in the defunding decision.  A June 2012 “Disparity Study for the Minority/Women Business Enterprise Program” found that of $92.4 million in economic development incentives, less than $200,000 – of 0.2 percent – was disbursed to minority businesses, despite the city’s 40 percent minority population. The court noted that the city’s equity position was still sufficient whether it was second or third in line, and that the city had approved loans with a third position to other nonminority applicants.

The court also determined that inquiry into whether defendants’ nondiscriminatory reason for the action would be premature, as it concerns the burden-shifting analysis under McDonnell-Douglas and not 12(b)(6) standards.   Allegations that the city had backed out of other loans to minority organizations while facilitating nonminority loans were relevant, the court reasoned, rejecting the trial court’s conclusion that those loans involved “invalid comparators” and were therefore uninstructive. Such determinations involved fact-finding and weighing, moving beyond the mere common-sense plausibility analysis appropriate for a 12(b)(6) inquiry. Imposing unique burdens or stereotypical expectations on an individual based on his or her “membership in a protected group is illicit discrimination, even if the defendant does not discriminate consistently against every woman or minority under all conditions.” Woods at *10.

Finally, the court noted that discrimination claims are “particularly vulnerable to premature dismissal because civil rights plaintiffs often plead facts that are consistent with both legal and illegal behavior, and civil rights cases are more likely to suffer from information-asymmetry, pre-discovery.”  Id.

Jonathan Wall is a partner with Higgins Benjamin, PLLC, and a former chair of the NCBA Labor & Employment Law Section.