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City of Hammond v. Herman & Kittle Properties, Inc.

Supreme Court of Indiana

March 15, 2019

City of Hammond, Appellant (Plaintiff)
Herman & Kittle Properties, Inc., Appellee (Defendant) and State of Indiana, Appellee (Intervenor)

          Argued: September 13, 2018

          Appeal from the Marion Superior Court, No. 49D07-1601-PL-531 The Honorable Michael D. Keele, Judge

          On Petition to Transfer from the Indiana Court of Appeals, No. 49A04-1612-PL-2784

          ATTORNEYS FOR APPELLANT Bryan H. Babb Bradley M. Dick Bose McKinney & Evans LLP Indianapolis, Indiana

          ATTORNEYS FOR APPELLEE Steven C. Shockley Russell C. Menyhart Taft Stettinius & Hollister LLP Indianapolis, Indiana

          ATTORNEYS FOR INTERVENOR Curtis T. Hill, Jr. Attorney General of Indiana Thomas M. Fisher Solicitor General Frances H. Barrow Julia C. Payne Deputy Attorneys General Indianapolis, Indiana



         Article 4, Section 23 of the Indiana Constitution forbids special legislation-laws that apply only to a specific class-if a general law can be made applicable. Our case law has underscored two important, but countervailing, points: while the drafters of the 1851 Constitution sought to curb the spread of special legislation throughout the state, special laws are sometimes necessary.

         Our analysis of special legislation begins with the oft-stated presumption in favor of a statute's constitutionality. With that presumption in mind, we then determine whether the statute's proponent has met its burden to show that a general law cannot be made applicable. This burden is met by demonstrating that an affected class has unique characteristics that justify the particular form of differential treatment provided by the special law. Given the overarching presumption in favor of the law's constitutionality, this burden is low-but it is still a burden that the proponent of the law must meet.

         Here, a special law singles out the cities of Bloomington and West Lafayette for preferential treatment. That law is the "Fee Exemption," a provision in Indiana Code section 36-1-20-5 that allows those cities to charge local landlords any amount to register rental properties. All other Indiana localities, meanwhile, are restricted to charging only $5 under another provision-the "Fee Restriction"-found in the same statute. The Fee Restriction was born of legislative concern that rental-registration fees statewide were negatively impacting housing affordability and rental development.

         Unhappy with the special treatment afforded to Bloomington and West Lafayette, the city of Hammond challenged the Fee Exemption as unconstitutional under Article 4, Section 23. Hammond argues that the Fee Exemption is amenable to general applicability throughout the state. The city further argues that the Fee Exemption is not severable from the rest of Indiana Code section 36-1-20-5 and so the entire statute, including the Fee Restriction, must be struck down.

         Both the State and Herman & Kittle Properties-a Hammond landlord-defend the Fee Exemption's constitutionality. They contend that the statute's special treatment is warranted by three characteristics unique to Bloomington and West Lafayette: the cities' high percentage of renter-occupied properties, their large universities that draw young and unsophisticated renters, and their long-running rental-fee programs. But simply pointing to these characteristics is not enough to overcome the burden placed on a law's proponents. The State and Herman & Kittle also needed to establish a connection between the cities' alleged uniqueness and the Fee Exemption-by explaining how the unique characteristics justify that special treatment. Since the law's proponents did not carry their burden here, the Fee Exemption is unconstitutional special legislation that must be struck down.

         Although the Fee Exemption is unconstitutional, the remainder of Indiana Code section 36-1-20-5-including the Fee Restriction-remains in force. This is because, by statute, the absence of a nonseverability clause triggers a presumption in favor of severability that Hammond failed to overcome. Accordingly, the Fee Restriction operates statewide, limiting all political subdivisions' rental-registration fees-including those of Bloomington and West Lafayette-to no more than $5 per rental unit.

         Facts and Procedural History

         In recent years, local programs that charge fees for required inspection or registration of rental units have become a subject of growing legislative interest. As more Indiana political subdivisions began enacting rental-fee programs, some established programs started raising their per-unit fees.

         A flurry of legislative activity to regulate these programs eventually culminated in the current version of Indiana Code section 36-1-20-5. Two provisions of that statute operate in concert to restrict all municipalities from charging more than a $5 rental-registration fee-all except Bloomington and West Lafayette.

         Hammond challenged the "Fee Exemption" provision of Section 36-1-20-5-the part that exempts the two cities from the $5 cap-as unconstitutional special legislation. Before addressing the merits of that claim, we first turn to the relevant facts and complex legislative history that gave rise to the dispute.

         I. Hammond's rental-fee programs

         To protect the public health, safety, and general welfare of the city, Hammond created two programs-an inspection program and a rental-registration program. Both programs charge fees for rental units.

         The inspection program was created in 1961. It authorized city officials to inspect all dwelling units-both owner-occupied and rented. And it specifically required a $5 annual inspection fee for hotels and rooming houses.[1]

         Decades later, in 2001, Hammond created its rental-registration program. That program required owners of rental housing to register their units with the city and to pay a per-unit $5 annual registration fee. The city then increased the fee twice over the next ten years-to $10 in 2004, and to $80 in 2010.

         The eight-fold increase was Hammond's response to the 2010 state constitutional amendment placing caps on property taxes, including a 2% cap on rental properties. That amendment led to substantial savings for landlords but also significantly strained many municipal budgets- especially for municipalities, like Hammond, whose tax bases were shrinking.

         II. Other rental-fee increases and legislative response

         Hammond was not the only municipality to address fiscal restraints by way of rental-unit fees. East Chicago, Griffith, Munster, Nappanee, and Speedway adopted programs to increase rental-fee revenue before the tax caps went into effect. After 2010, Bloomington joined Hammond in raising rates; and Crown Point, Evansville, and Valparaiso started charging rental-unit fees.

         A. House Bill 1543

         In 2011, the year after the tax caps took effect, the General Assembly introduced House Bill 1543, which added a chapter to the Indiana Code: Chapter 36-1-20, "Regulation of Residential Leases." As introduced, the bill included a provision that would have barred a number of rental-unit inspection fees and would have banned political subdivisions from requiring rental-unit registration.

         That provision, however, was left out of the final bill. As enacted, Chapter 36-1-20 allowed cities to collect inspection and registration fees. See P.L. 212-2011, § 1 (codified at Ind. Code § 36-1-20-3 (Supp. 2011)). But the amount collected had to be placed "in a special fund dedicated solely to reimbursing the costs reasonably related to services actually performed by the political subdivision that justified the imposition and amount of the fee." Id. Notably, the new statute applied statewide and did not restrict how much municipalities could charge for rental inspections and registrations. See id.

         B. House Bill 1313

         Two years later, in 2013, the General Assembly introduced House Bill 1313. This bill initially contained a provision barring local inspection and registration fees on rental units. But it too was removed, and the final bill instead placed an approximately one-year moratorium on imposing new, or increasing existing, inspection or registration fees. See P.L. 149-2013, § 1 (codified at Ind. Code § 36-1-20-4 (Supp. 2013)). It also directed that an interim study committee investigate the "regulation of residential leases by political subdivisions." Id. at § 2.

         That fall, the committee heard testimony on the issue. One side was concerned that the fees were becoming too costly, negatively impacting housing affordability and new rental development. Yet others claimed that the fees charged were fair and reasonable, and that they failed to even cover program administration costs.

         Among the fees' defenders were representatives from Bloomington and West Lafayette. A representative from Bloomington testified that its program began in 1961, that renters make up 67% of its housing market, and that the city's program protects the welfare of its citizens and the character of the city itself. West Lafayette representatives explained that the city has had an inspection program since 1976, the number of rental units is increasing, and the "program protects property and assures parents of students that housing is safe."

         C. House Bill 1403

         Several months later, in January 2014, the General Assembly introduced House Bill 1403 to significantly amend Chapter 36-1-20. See P.L. 193-2014, §§ 2-9. In relevant part, the bill included a provision-the "Fee Restriction"-prohibiting a political subdivision from charging rental-registration fees over $5. About two weeks after the bill with the Fee Restriction was first read, a West Lafayette Representative introduced an amendment adding the "Fee Exemption." The Fee Exemption specified that the Fee Restriction would "not apply to a political subdivision with a rental registration or inspection program created before July 1, 1984." Id.

         The Legislative Services Agency issued a fiscal impact statement analyzing the proposed legislation. The statement concluded, "[t]here are 14 cities or towns that have rental inspection programs . . . . Two of those programs, Bloomington and West Lafayette, would not be affected by the proposed changes to the law as they were established prior to July 1, 1984." Ultimately, House Bill 1403 was enacted with both the Fee Restriction and the Fee Exemption. See P.L. 193-2014, § 8 (codified at Ind. Code § 36-1-20-5 (Supp. 2014)).

         In May 2014, Hammond notified Herman & Kittle Properties that it owed around $86, 000 in rental-registration fees and penalties for 2014 on two apartment complexes it operated in the city. Herman & Kittle refused to pay that amount: it cited the recently enacted Fee Restriction and contended that its rental-registration fees would "significantly reduce" after the Fee Restriction went into effect on June 30.

         But Hammond disagreed. So the city filed a complaint, seeking a declaratory judgment that it could continue charging its $80 per-rental fee. It argued that its rental-fee program was not subject to the Fee Restriction's $5 cap because the Fee Exemption applied. Hammond pointed to the fact that it had created its inspection program in 1961-well before July 1, 1984.

         D. House Bill 1165

         While Hammond's lawsuit was pending, the General Assembly introduced House Bill 1165, proposing two notable changes to Chapter 36-1-20: narrowing the Fee Exemption and supplying certain new definitions.

         The bill initially proposed language that would have made the Fee Exemption applicable only to political subdivisions "with a rental registration or inspection program created after July 1, 1977, and before July 1, 1984." This would have removed Hammond from qualifying for the Fee Exemption because its inspection program began in 1961. But it would also have excluded Bloomington, "which began [its program] in the early 1970s," according to the relevant fiscal impact report.[2] Ultimately, the language narrowing the Fee Exemption was taken out.

         Another part of the proposal that would have excluded Bloomington- along with Hammond-from the Fee Exemption was likewise rejected; this part had to do with the definitions of "rental registration or inspection program" and "rental unit." Those definitions determined the scope of the Fee Exemption, which applied only "to a political subdivision with a rental registration or inspection program created before July 1, 1984." The proposal sought to define "rental registration or inspection program" as "a program authorizing the registration or inspection of rental units and no other type of dwelling" (emphasis added). And its definition of rental units did not include rooming houses.

         Since Hammond's program required inspection of rooming houses, it would not qualify for the Fee Exemption under the proposal. But neither would Bloomington's program, because it required inspections and registrations of each "residential renting unit"-a term explicitly defined by the city to include a "rooming house."

         The final bill, though, did not adopt definitions that excluded all programs that inspected rooming houses. Instead, it adopted definitions that excluded Hammond's program-but not Bloomington's or West Lafayette's-from the Fee Exemption. Here's how: The enacted act defined a "rental registration or inspection program" as "a program authorizing the registration or inspection of only rental housing. The term does not include a general housing registration or inspection program or a registration or inspection program that applies only to rooming houses and hotels." P.L. 65-2015, § 1 (codified at Ind. Code § 36-1-20-1.2 (Supp. 2015)).

         This excluded Hammond from the Fee Exemption on two fronts: (1) because it had a general inspection program that permitted the inspection of non-rental housing, and (2) because it required the inspection only of rooming houses and hotels. However, the amended language no longer excluded Bloomington because its program applied only to rental housing. So under the final bill, both Bloomington and West Lafayette qualified for the Fee Exemption, while all other political subdivisions were ...

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