Legal case studies in this issue:

• Landlord in a pickle when one tenant needs emotional support dog and another is highly allergic.  
• Discrimination on the basis of sex includes homosexuals and transgender persons.  
• CFPB may continue to operate but Director can be removed at will by President.  
• Governor’s stay-at-home order triggered force majeure clause in commercial lease.  
• Sloppy contract in sale of company did not include explicit transfer of commissions.  

Research and analysis by Lisa Harms Hartzler,
Sorling Northrup Attorneys

Landlord in a pickle when one tenant needs emotional support dog and another is highly allergic.

Cohen v. Clark, Supreme Court of Iowa, No. 182173 (June 30, 2020), involved an action by a tenant against her landlord for breach of her lease and for breach of the implied covenant of quiet enjoyment. The plaintiff was severely allergic to cat and dog dander and specifically sought an apartment that prohibited pets. Another tenant, who signed an identical lease, moved into plaintiff’s building and subsequently requested permission to have an emotional support dog. His psychiatrist provided a statement that such an accommodation was needed.

The landlord surveyed the other tenants in the building to determine whether allowing an emotional support dog for another tenant would be problematic. Plaintiff responded that she suffered severe allergic reactions to dogs and her health would be endangered. Landlord found itself in a quandary and contacted the Iowa Civil Rights Commission for guidance. The ICRC advised Landlord that the emotional support dog had to be allowed. Landlord then did what it could to mitigate the harm to Plaintiff. It assigned separate stairwells for use by the two tenants and installed an air purifier in Plaintiff’s apartment. Still, Plaintiff’s life was a misery of allergic attacks for the next year, including swollen sinuses and a swollen throat.

Iowa’s law prohibits discrimination against another person in the terms, conditions, or privileges of rental of a dwelling because of that person’s disability. “A refusal to make reasonable accommodations in rules, policies, practices, or services, when the accommodations are necessary to afford the person equal opportunity to use and enjoy a dwelling” constitutes unlawful discrimination. The statute also provides landlords with a safe harbor in refusing a tenant’s requested accommodation if the tenancy “would constitute a direct threat to the health or safety of other persons or … would result in substantial physical damage to the property of others.”  The law is nearly identical to federal law.

While both state and federal law allow for the consideration of the accommodation’s effects on third parties in the reasonable accommodation determination, neither explains how to consider these effects in practice. “Generally speaking, determining whether a situation presents a reasonable accommodation involves a highly fact-specific inquiry and requires balancing the needs of both parties.”

The court found that both tenants had a right to the enjoyment of their apartments. “The right to physical well-being does not trump the right to mental well-being and vice versa.”  However, one party must win out over the other in the specific facts of each case.

The court concluded that, in this case, the landlord’s accommodation of the emotional support dog was not reasonable because the tenant with pet allergies had priority in time and the dog’s presence posed a direct threat to her health. It also concluded that the tenant suffering allergic attacks was entitled to recover on her claims of breach of lease and breach of the covenant of quiet enjoyment and remanded the case for an award of her requested damages of one month’s rent. A “breach is a breach” regardless of the good faith efforts of the landlord or its reliance on the informal advice provided by the ICRC. The court emphasized that its holding was based on the specific facts of the case and was not a one-size-fits-all test.

Discrimination on the basis of sex includes homosexuals and transgender persons.

Bostock v. Clayton County, Georgia, 140 S.Ct. 1731 (2020) involved three different cases consolidated by the U.S. Supreme Court. All three alleged violations of Title VII of the 1964 Civil Rights Act. In the first case, a child welfare advocate was fired for “conduct unbecoming” a county employee after he began participating in a gay softball league. In the second, a skydiving instructor was fired days after he mentioned he was gay. And in the third case, a funeral home employee who presented as male when hired was fired when she informed her employer that she intended to live and work full-time as a woman.

Justice Gorsuch, one of the conservative appointees on the Court, wrote the decision holding that an employer violates Title VII by firing an individual for being homosexual or being a transgender person. Title VII makes it “unlawful … for an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin.”

The Court explained that an employer who fires an individual for being homosexual or transgender fires that person for traits or actions it would not have questioned in members of a different sex. “Sex plays a necessary and undisguisable role in the decision, exactly what Title VII forbids.” The statute makes clear that an individual employee’s sex is “not relevant to the selection, evaluation, or compensation.”

The Court acknowledged worries about how Title VII may intersect with religious liberties but noted that Congress included an express statutory exception for religious organizations and, further, that other statutes also offered protections for religious freedoms in employment situations. However, none of the employers in the three cases before the Court argued that compliance with Title VII would infringe their own religious liberties in any way. Consequently, the Court left it to other employers in other cases to “raise free exercise arguments that merit careful consideration.”

CFPB may continue to operate but Director can be removed at will by President.

In Seila Law LLC v. Consumer Financial Protection Bureau, 140 S.Ct. 2183 (2020), the CFPB issued a civil investigative demand for documents to Seila Law to determine whether it had engaged in unlawful acts or practices in the advertising, marketing, or sale of debt relief services. The law firm refused, claiming the statute creating the CFPB was unconstitutional. It argued that the statute violated the separation of powers because Congress usurped the President’s executive powers by providing that the Director could not be removed by him at will. The Supreme Court agreed but found that the faulty provision could be separated from the rest of the statute.

The Court first discussed the history of the CFPB. In the wake of the 2008 financial crisis, Congress established the CFPB as an independent regulatory agency tasked with ensuring that consumer debt products are safe and transparent. It transferred the administration of 18 existing federal statutes to the CFPB, including the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Truth in Lending Act. It enacted a new prohibition on “any unfair, deceptive, or abusive act or practice” by certain participants in the consumer-finance sector and authorized the CFPB to implement that broad standard and the 18 pre-existing statutes placed under the agency’s purview through binding regulations.

The Court found that in organizing the CFPB, Congress deviated from the structure of nearly every other independent administrative agency in the country’s history. Instead of placing the agency under the leadership of a board with multiple members, Congress provided that the CFPB would be led by a single director, who serves for a longer term than the President and cannot be removed by the President except for inefficiency, neglect, or malfeasance. As a result, the CFPB Director has no boss, peers, or voters to report to but wields vast rulemaking, enforcement, and adjudicatory authority over a significant portion of the U. S. economy. “Such an agency lacks a foundation in historical practice and clashes with constitutional structure by concentrating power in a unilateral actor insulated from Presidential control.”

The Court concluded that agency may continue to operate, but its Director must be removable by the President at will.

Governor’s stay-at-home order triggered force majeure clause in commercial lease.

In In re Hitz Restaurant Group, 68 Bankr Ct. Dec. 221 (U.S. Bankruptcy Court, N.D. Ill. 2020), a commercial landlord asked a bankruptcy court to require the tenant-restaurant to continue to pay rent after the tenant filed a bankruptcy petition. The Bankruptcy Code requires a debtor in possession of nonresidential property to continue to perform all obligations under an unexpired lease until it its assumed or rejected under bankruptcy procedures. Payment of rent is automatically assumed to be “actual and necessary” to preserving the bankruptcy estate.

In this case, the force majeure clause in the lease provided that performance by a party would be excused if it was “prevented or delayed, retarded or hindered by governmental action or inaction, orders of government…” but it also said that “lack of money shall not be grounds for Force Majeure.”  The tenant argued that its obligation to pay any post-petition rent was excused by this force majeure clause when the Governor of Illinois issued an executive order on March 16, 2020, requiring all businesses offering food or beverages for consumption to suspend on-premises service.

“Under Illinois law, a force majeure clause will only excuse contractual performance if the triggering event cited by the nonperforming party was in fact the proximate cause of that party’s nonperformance.”

The bankruptcy court held that the force majeure clause was triggered by the Governor’s executive order. The order was clearly a governmental action and order, it unquestionably hindered the tenant restaurant’s ability to perform its obligations, and it was the proximate cause of the tenant’s inability to pay rent, at least in part, because it prevented the tenant from operating normally. The court rejected as specious the landlord’s arguments that the executive order did not close banks or prohibit tenant from writing a check. It also rejected the assertion that tenant’s “lack of money” was not a valid excuse under the lease. The court said tenant did not claim a lack of money—it claimed the Executive Order shutting down its on-premises services was the proximate cause of its inability to generate revenue and pay rent. Finally, the landlord unsuccessfully argued that tenant could have gotten a Small Business Administration loan. The court said nothing in the force majeure clause required a party to borrow money to counteract an adverse governmental action.

Nevertheless, the court did not let the tenant off the hook entirely. The executive order did not prohibit, and in fact encouraged, restaurants to perform carry-out, curbside pick-up, and delivery services. Therefore, “to the extent that Debtor could have continued to perform those services, its obligation to pay rent is not excused” by the force majeure clause. The court held that “the Debtor’s obligation to pay rent is reduced in proportion to its reduced ability to generate revenue due to the executive order.” While it needed more information, it tentatively concluded that the tenant owed 25 percent of the rent due, which was based on the square footage of the kitchen compared to the total premises.

Sloppy contract in sale of company did not include explicit transfer of commissions.

In Pierce Realty Inc. v. Pierce, NO. 2018CA01677COA (Miss. Ct. App., June 2, 2020), Dennis was a licensed real estate broker in Mississippi who owned 100 percent of Pierce Realty Inc. Dennis’s brother, Darian, was a licensed real estate salesperson who worked for the company. Dennis and Darian’s relationship deteriorated over the years. Dennis believed he was carrying Darian and Darian believed he did all the work while Dennis reaped the financial rewards. They eventually agreed they could no longer work together.

Darian had a short document prepared in which Dennis stated he “does hereby sell, transfer and assign unto Darian A. Pierce all 100 shares of stock in Pierce Realty, Inc.”  The document further provided that Dennis would no longer have any ownership interest in the company and that Darian was the sole and only shareholder, owning all of the issued and outstanding shares.

Over the years, Pierce Realty had received commissions from Microtel and 180Fitness for helping them find tenants. Those payments immediately stopped after the stock transfer, as Dennis had the commissions transferred to other companies he controlled. Darian was furious and sued his brother for breach of contract and a myriad of other claims. His basic argument was that the sale of the entire company implied the transfer of the leasing commissions.

It should be noted that in Mississippi a real estate salesperson cannot directly receive commissions. Nevertheless, this case does not turn on Darian’s inability to earn or retain the commissions because he was not a licensed real estate broker. Nor did it matter that Darian claimed the document was a contract and Dennis claimed it was merely a gift to his brother.

Rather, the court determined that the document signed by Dennis and Darian only purported to transfer the shares of the company. It did not explicitly include the transfer of any commissions nor did it list any contracts obligating the payment of commissions to the agency or any other assets. As a contract, the document was unenforceable because the material terms were not sufficiently definite beyond the 100 shares of stock to be transferred. As a gift, it was evident that Dennis did not intend to transfer the commissions, only the stock in the company. Summary judgment in favor of Dennis was affirmed.