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Nebraska Supreme Court: Municipal Ordinance Held Valid to Impose Landlord Guaranty of Utility Services

on Monday, 14 November 2022 in Dirt Alert: David C. Levy, Editor

REO Enters. v. Village of Dorchester, 312 Neb. 792 (2022).

This case concerns a municipal ordinance the Village of Dorchester (“Village”) enacted.  Plaintiff contested a portion of the ordinance requiring a landlord to guarantee a tenant’s utility service.  The Plaintiff challenged the ordinance under several legal theories, including the prohibition of special legislation under Article III, section 18 of the Nebraska Constitution.

A few months after the Village passed the ordinance, REO Enterprises, LLC (“REO”) refused to sign a guaranty for one of its tenant’s utilities services.  REO sued the Village and asked the District Court to declare the ordinance unenforceable.

REO alleged the ordinance was unconstitutional and violated state and federal statutes.  The District Court held the ordinance violated the Equal Protection Clause of the U.S. Constitution and the Nebraska Constitution. The Village appealed.

The Nebraska Supreme Court applied the rational scrutiny standard and upheld the ordinance based on the classification of owners and tenants.  The Court held the ordinance did not violate the Equal Protection Clause. The Court reversed and remanded the case to District Court to resolve REO’s other claims.

On remand, the District Court granted the Village summary judgment on the remaining claims and dismissed the case.  REO appealed.

The Nebraska Supreme Court affirmed and held the ordinance did not violate Article III, section 18 of the Nebraska Constitution.  It found there was substantial difference in circumstance between tenants and owners because:  (i) the administrative and collection costs associated with unpaid utility bills from tenants is more likely higher than owners, (ii) tenants’ connection to the property ends when the lease agreement ceases but an owner’s connection to the property is through a static source making them more easily contacted, and (iii) the landlord, as guarantor, would help the Village minimize collection costs.

The Nebraska Supreme Court also rejected REO’s claim for relief under the federal Equal Credit Opportunity Act; thus, the Village could enforce the ordinance.  Under the Equal Credit Opportunity Act (15 U.S.C. § 1691e(c)), only an “aggrieved applicant” may seek relief.  The Court agreed with the U.S. Court of Appeals for the Seventh, Eighth and Eleventh Circuits that a guarantor may support an application for credit but does not apply for credit and, therefore, is not an “applicant.”

Further, the Nebraska Supreme rejected REO’s remaining claims.  The ordinance did not violate public policy, as there is no doctrine under Nebraska law holding a municipal ordinance can violate public policy.  Because REO failed to plead to the District Court the Village lacked statutory authority to enact the ordinance, the District Court did not err in not addressing the issue.

This case is a good example of the deference courts give municipal acts.   Provided the policy maker can point to some substantial differences in circumstance of the classifications, and the distinction in classifications has some reasonable relation to the objectives of the legislative act, the law likely will remain enforceable.  From the Court’s analysis, this is a relatively easy hurdle for policy makers to overcome.  Conversely, it is a high bar for a party challenging a municipal ordinance on constitutional grounds.

Lastly, the concurring opinion by Justice Papik opens the path to re-examine the application of special legislation prohibition.  Justice Papik contends the original intent of the prohibition on special legislation only applies to the State Legislature and the analysis of special legislation should focus on whether the legislation “singles out a specifically identified party for special treatment.”  REO Enters. v. Village of Dorchester, 312 Neb. 792, 811 (2022) (Papik, J., concurring).  Taken to its conclusion, Justice Papik’s theory would mean municipalities could pass laws directed at a single or very small class of persons.

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