On Wednesday, February 28, 2024, the United States District Court for the Eastern District of Louisiana issued a fifty-five-page ruling, upholding the constitutionality of the City of New Orleans’ Residential Short-Term Rental regime. In short, the Court held that the city’s RSTR regime was constitutional, with the small exception that usufructuaries and trust beneficiaries that are persons and not companies cannot be excluded from the RSTR lottery. 

Background

           The underlying Hignell lawsuit was filed on November 22, 2019 and attacked the City’s previous STR ordinances. Those issues were briefed and appealed, on August 22, 2022, the U.S. Fifth Circuit Court of Appeal, found that the City’s prior homestead exemption requirement was an unconstitutional violation of the Dormant Commerce Clause. Following that ruling, the City issued a moratorium on the issuance of Residential STR permits. Then, on March 23, 2023, the Council passed the laws at issue in the Court’s most recent ruling.

           The Hignell plaintiff then amended her lawsuit to challenge the new lottery-based RSTR regime. On August 31, 2023, the Court issued a temporary restraining order prohibiting the City from enforcing the challenged RSTR ordinances. The City then took the expansive position that it was enjoined from enforcing any STR laws during the pendency of the injunction. The injunction was continued on September 27, 2023. The injunction, and uncertainty, has hung over the market ever since.

Analysis

Wednesday’s ruling was on cross motions for summary judgments filed by the Plaintiffs, Hignell and Marquardt and the Defendant, the City of New Orleans. Marquardt’s claim – that her RSTR permit was subject the of an unconstitutional taking – was consolidated with Hignell’s claim on September 12, 2023. The Court’s ruling with respect to Hignell’s motion and the City’s response are most significant. The Opinion, signed by Senior United States District Judge Ivan L.R. Lemelle, largely upheld the City’s ordinances and its power to regulate STRs. On several evidentiary issues, the opinion appears to give the City the benefit of the doubt. The Court held as follows:

• Because Hignell had not raised her argument that the City lacked the power to regulate the duration of residential use (short-term as opposed to long-term) when she amended her complaint or when she briefed her motion, Hignell had effectively waived that argument.
• The Court held that the City had the power to regulate the duration of residential use. 
• The Court held that the on-premises operator requirement violates neither the Commerce Clause nor the Equal Protection Clause. 
• The Court held that usufructuaries and trust beneficiaries are entitled to participate in the lottery – provided they are natural persons and not companies like LLCs or Corporations. 
• The Court rejected the argument that the prohibition against juridical persons holding RSTR licenses violated the Commerce Clause, Due Process, Equal Protection, and the First Amendment.
• The Court upheld the use of the residential STR lottery.
• The Court quickly dispelled First Amendment concerns. 
• The Court held that the prohibition against juridical persons survived the rational basis review that was called for when weighing potential violations of due process and equal protection. 
• The Court dispensed with constitutional challenges based on STR insurance requirements compared to those for Hotels and Bed & Breakfasts. 
• The Court rejected the argument that prohibition against STRs in certain neighborhoods was arbitrary and capricious. 
• Finally, the Court rejected Hignell’s Fourth Amendment and due process claims involving the requirement that RSTR owners provide tax information and guest registration records and submit to warrantless searches. 
• Turning to the claims of Marquardt, the Court held that because the City had instructed her to cancel listings in violation of the Takings Clause, she was likely entitled to three days’ worth of lost profits. The Court held that issue for another day. 
• The Court’s ruling can generally be summarized in its own words: “We are essentially being asked to nullify a municipality’s recognized efforts to maintain its residential character by preventing the operation of STRs by corporate entities in residential neighborhoods. Unquestionably, in our opinion, the municipality may restrict such uses without violating fundamental constitutional principles.” 

What’s Next

            The Court did not affirmatively end the injunction against the enforcement of the city’s rules in its ruling, but it did deny Marquardt’s “request for an extension of existing injunctive relief orders beyond their current deadlines.” Observers expect that the City’s STR Department will advise the public of its position on the injunction in the coming days.

           It is unclear whether the City Council intends to proceed with an ordinance that it has postured that would ban all RSTRs, now that its prior regime has been largely upheld. Because that statute was introduced as a sort of nuclear option in the event that the City lost at Court, it appears unlikely.