Nederland and the History of TMHA Against Cities

This is part two of my article about local zoning, constitutional takings and what it means for manufactured housing. I love history. And to use the familiar Edmund Burke quote, “Those who don't know history are doomed to repeat it.” Of course you have others like Kurt Vonnegut who say, “We're doomed to repeat the past no matter what. That's what it is to be alive.” Regardless of which quote appeals to you more, to either avoid the mistakes of the past or to be ready when those mistakes inevitably happen again, both are equally good reasons to be familiar with history.

Today’s first history lesson takes us back nearly twenty years to 1996. For those history buffs out there, this was two years before Peyton Manning’s rookie year in the NFL. On December 26, 1996, the United States Court of Appeals for the Fifth Circuit handed out an unfortunate belated Christmas present that year to TMHA and co-plaintiff, Mr. A.J. Waller. It was a contest between Mr. Waller and the City of Nederland. Waller owned a lot within the city with an old house on it. He wanted to raze the old house and replace it with a HUD Code manufactured home. The City of Nederland had an ordinance from 1970 that said no “trailer coach” within the city limits other than in a “duly authorized trailer park.”

I have to assume that the facts being what they were this was by all estimation TMHA’s best shot of winning against a city zoning restriction. I assume this based on what I can see now as objectively strong facts on the side of TMHA and Waller. Not only did the ordinance not say “manufactured home” it didn’t even say “mobile home,” it was for “trailer coaches.”

The case was, as some like to say, the whole enchilada. What I mean by that is that TMHA threw every legal argument it could on why the zoning discrimination for Waller to replace his dilapidated site-built home with a new HUD Code home was improper. TMHA argued:

1. the HUD Code preempted the city ordinance;
2. the ordinance was preempted by state law;
3. the ordinance was in violation of the Dormant Commerce Clause,
4. the ordinance constituted an illegal “takings;”
5. the ordinance was against due process;
6. the ordinance was a denial of equal protection; and
7. the ordinance created a civil cause of action under 42 U.S.C. Section 1983.

No one likes to be reminded of bad memories, and while I’m hesitant to do so here, remembering history is important. It is important in this case because many of the facts of this case are similar to issues still occurring today. Tremendous time and resources were used in efforts for the Nederland case and in another similar case with the City of La Porte, but they both unfortunately resulted in losing outcomes. Both cases petitioned to go to the US Supreme Court, but unfortunately both were denied. Since the US Supreme Court didn’t take up the case we have to live with the ruling of the Fifth Circuit’s opinions. And while we vigorously disagree with the opinions today just as much as we did two decades ago we should at least review the basis the court used to rule.

Federal Preemption

TMHA argued that the HUD Code preempted the city’s local ordinance based on the grounds that the city’s refusal to allow the home because it would not comply with the local building code was preempted by the HUD Code that expressly prohibits state and local governments from having different standards for construction on manufactured homes than the federal standards. For a manufactured home to comply with the city requirements it would violate the federal code mandate. TMHA used a case from 1988 out of Florida that ruled against a city that imposed a city construction standard on a manufactured home based on the city’s safety code. The Eleventh Circuit ruled this violated federal preemption by stepping on the toes of the HUD Code that is specifically about manufactured home safety construction standards. However, in this case the court based its refusal to deem the City of Nederland’s ordinance a violation of preemption not due to safety construction concerns, but rather on “protecting property values.” The court ruled that protecting property values was a valid use of police power and therefore proper for the city to impose.

Takeaway

A city steps over the line if they start imposing or requiring different safety and construction standards as a condition of a manufactured home being allowed, but can, under this ruling, prohibit manufactured homes based on non-construction based rationale such as “protecting property values.” The evidence the city use to support its protection property values argument was testimony of an appraiser that said manufactured homes near site-built homes had an adverse impact on values and that Fannie Mae guidelines require an appraiser to mention in the report the presence of any mobile home or manufactured homes in the neighborhood to the site-built home being appraised.

State Preemption

Here TMHA argued that the “trailer coach” antiquated term was preempted by state definitions of manufactured home and mobile home. The court here disagreed by saying that there was nothing in state law that stopped a city from prohibiting both a manufactured home and a mobile home and in the process of achieving this calling both types of homes a different name. In this case “trailer coach” was interpreted by the court to include both manufactured homes and mobile homes.

Commerce Clause

As a brief aside, it is all too familiar in our industry to hear fellow industry members decrying some local ordinance as “discriminatory.” The basis of this is that everyone knows you can’t discriminate. But the legal basis of discrimination comes from discriminating against what is called a “protected class.” However, housing type or even income level are currently not included as protected classes.

The federal protected classes are limited to race, color, religion, national origin, age, sex, pregnancy, citizenship, familial status, disability, veteran, and genetic information. The reason for going for a protected class argument is all about the level of scrutiny the courts apply to a particular government action. If the action is against a protected class there is a higher level of scrutiny and therefore it is much more likely the government action is going to be struck down. However, outside of a protected class the government burden drops to merely a “rational basis.” This is a low threshold to overcome, as we unfortunately saw in Nederland.

The interesting argument advanced by TMHA in this case was an attempt to get to a higher level of scrutiny applied by the court, but in the context of housing type, which is clearly not an overt protected class. How they went about doing this was to challenge the ordinance based on what is called the “Dormant Commerce Clause.” The basics of the dormant commerce clause is when there is different treatment of in-state and out-of-state economic interests where in-state interests are benefited and out-of-state interests are harmed. Essentially unfair protectionist laws preferring in-state commerce over out-of-state commerce coming into a state.

The courts look at laws to see if they are protectionist measures to unfairly advantage in-state commerce. The test is if a law is protectionist or if it is directed at legitimate local concerns with only incidental impact on out-of-state commerce. If a law is seen as having legitimate local interest and only incidental impact that is not clearly excessively burdensome, then courts apply more flexibility to allowing such a law to remain. Laws that affirmatively discriminate against interstate commerce are subject to stricter scrutiny. It was this higher level of strict scrutiny TMHA was arguing in this case against the city.

The argument was that modular homes were built all in-state whereas manufactured homes were built in and out of state, but that since the city allowed modular homes but prohibited manufactured homes the in-state interests (modular homes) where unfairly advantaged against the out-of-state interests (manufactured homes).

Unfortunately the court did not agree with TMHA’s arguments. The court, referencing a previous case, stated that the mere fact that a law has the effect of benefitting a local industry while burdening an interstate industry does not itself establish discrimination under the dormant commerce clause. The court in Nederland sided with the city because 1) they said it was possible for modular homes to be built out-of-state and brought into Texas; 2) modular homes are built to locally adopted national building codes and are therefore not solely locally determined construction standards; 3) the court disagreed that manufactured homes and modular homes were substitutes in the market, meaning a prohibition on manufactured homes would result in an increase in sales for modular homes; and 4) the court stated insufficient evidence was presented that the incidental burden on out-of-state manufactured home builders clearly exceeded the local benefits to in-state modular builders.

TMHA argued the burden of the prohibition was lost manufactured home sales, but the court rejected this argument by saying that TMHA did not provide proof that the homes built instead of manufactured homes would be provided by only in-state suppliers.

Takings

In determining if a takings has occurred the court referred to precedent cases to set the standard that a taking occurs when an ordinance does not advance a legitimate state interest or denies an owner economically viable use of his land. The court said the city’s interest in preserving property values by not allowing manufactured homes to be place “haphazard[ly]” throughout the city to prevent a decline in property values was a legitimate government interest.

The second standard under a takings claim is a fact-intensive case-by-case examination to determine if the ordinance “frustrates distinct investment-backed expectations” or it completely denies all beneficial use of the property. The court went on to say that there was not a physical invasion by the city on the land nor an interference with an investment expectation. They also said that there was nothing showing a deprivation of all beneficial use of the property or a decrease in the property value as a result of the ordinance. Based on this analysis the court concluded a compensatory taking had not occurred.

Substantive Due Process

This was where TMHA was up against the low scrutiny standard of merely a rational basis. TMHA had the difficult task of trying to argue that the ordinance was “clearly arbitrary and unreasonable, having no substantive relation to the public health, safety, morals or general welfare.” TMHA argued the ordinance was arbitrary and capricious because it was a mere pretext to argue that the city wanted to protect property values. However, since it was at least debatable and the only low standard the city needed to prove was that it could be reasonably conceived to be true that a government decision maker believed the ordinance was enacted to protect property values. With such a low standard, and precisely why the previous arguments were made in an effort to elevate the level of scrutiny, TMHA failed on this point as well.

Equal Protection

TMHA argued under equal protection that the court should apply strict scrutiny. The court disagreed. TMHA tried to elevate housing rights to the equivalent of a traditional suspect or quasi-suspect class (such as race, age, gender, previously listed) deserving higher scrutiny under an equal protection argument. The approach was to argue that housing was a fundamental right and that when noneconomic or noncommercial legislation effects important societal rights, here argued to be the right of housing, that a higher scrutiny should be applied. The court did not agree, and, once again, asserted that only a rational basis test was needed, which the city passed.

Section 1983

There is a provision in federal law that allows a private cause of action when a person is deprived a constitutional right under color of state law. However, this argument was also dismissed as the court found that granting summary judgment on all other basis was correct, therefore there could not be grounds for a Section 1983 finding.

Four Other Cases

City of Brookside Village v. Comeau (1982) – Texas Supreme Court upheld a city ordinance that only allowed mobile homes in mobile home parks. Comeau wanted to put a mobile home on his lot, but the city refused to allow the mobile home pointing to their ordinance that prohibited mobile homes anywhere not inside a mobile home park. The city’s justification for the ordinance was to protect property values and guard against sewage and water problems. The court held that the regulation was not arbitrary and unreasonable and did have a rational basis relationship with a city’s police power to promote public health, safety, morals and general welfare. The court also rejected the federal and state preemption argument by Comeau because the ordinance regulated the location of mobile homes not the construction or installation standards that would be preempted by state and federal law.

City of Freeport v. Joyce Vandergrifft (2000) – Texas Court of Appeals ruled that a city ordinance prohibiting “mobile homes” could not also be applied to manufactured homes because of state law preemption on the definition distinction between mobile homes and manufactured homes. The court distinguished from the Nederland case that said that “trailer coach” did include both manufactured and mobile homes in that Nederland used a single term to include both types of housing, but when using specific state defined and binding terms an ordinance only prohibiting “mobile homes” does not also apply to prohibit manufactured homes.

City of La Porte (1997) - Janet Stevens applied to the City of La Porte to replace a home destroyed by fire with a new HUD Code manufactured home. The city denied her request pointing to a city ordinance, Ordinance 1501, which prohibited manufactured homes in the city’s R-1 residential district, which is where Ms. Stevenson’s property was located. The city told her she could replace her destroyed home with a modular home instead. Again, in La Porte TMHA argued 1) the HUD Code preempted the local ordinance; and 2) that prohibiting manufactured homes while allowing modular homes was a violation of the Dormant Commerce Clause. Relying heavily on their recent Nederland decision the court again did not buy TMHA’s argument that a higher level of scrutiny above a mere rational basis was warranted under the Dormant Commerce Clause or Equal Protection. The court also again dismissed a federal preemption argument by distinguishing that complete prohibition is different that imposing preempted constructions standards. The court held a restriction of location is not an imposition of construction standards.

City of Anahuac v. Wayne Morris (2015) – Texas Court of Appeals court prohibited a city ordinance that required all manufactured home be built to Wind Zone 3 standards from prohibiting a manufactured home built before September 1, 1997 because state law specifically provided that any home built prior to that date was grandfathered and could be installed “without restriction” as it related to wind zone. Court opinion was based on specific state law preemption on wind zone provisions that a city cannot supersede.

Takeaways

Courts have ruled that zoning ordinances are within the police power of cities and review by courts is extremely limited. In order to violate due process a zoning ordinance must be proven to be “clearly arbitrary and unreasonable, having no substantial retail to the public safety, morals, or general welfare.” Zoning ordinances are evaluated on the rational basis test. In order to prevail against a zoning ordinance it must be proven that the facts on which the regulation is based could not be reasonably believed to be true by the government decision makers. In other words, a very steep hill to try and climb legally.