City’s summary judgment reversed and remanded under failure to address Patel due-course-of-law analysis; dismissal of all other constitutional challenges to utility late fee ordinance affirmed

Gatesco Q.M. Ltd d/b/a Quail Meadows Apartments, a Texas Limited Partnership v. City of Houston, 14-14-01017-CV (Tex. App— Houston [ 14th Dist.], October 20, 2016)

In this case the 14th Court of Appeals affirmed-in-part and reversed-in-part the granting of the City’s summary judgment motion in this constitutional challenge to the City utility charging late fees and shutting off a customer’s water service. It’s a 21-page opinion so the summary is a bit long. However, the case is good analysis of constitutional ordinance challenges and the new Patel due-course-of-law test.

Gatesco owns an apartment complex known as the Quail Meadows Apartments. The only available supplier of water for the Apartments comes from the City. Gatesco, a longtime water customer, paid its water bill to the City one day late. The City assessed a ten-percent late fee of $1,020.03 (the “Late Fee”) pursuant to an adopted ordinance. Gatesco did not want to pay the Late Fee and challenged it in an administrative proceeding. Though unsuccessful in this proceeding, Gatesco still did not pay the Late Fee. To avoid having its water shut off, Gatesco obtained a temporary restraining order but the trial court denied Gatesco’s request for temporary injunction. Within two hours Gatesco paid the Late Fee, although the City says Gatesco paid the fee at the wrong location. The City shut off the water to the entire complex 17 minutes after Gatesco paid the fee, but turned the water on later that afternoon. But, because the water had been turned off, the City required a cash security deposit of $35,200.00, an estimate of three months of water bills to turn it back on. After the case went up and back to the court of appeals on a plea to the jurisdiction, the trial court granted the City’s summary judgment motions. Gatesco appealed.

Gatesco first sought a declaratory judgment the Late Fee is an excessive fine under the Texas Constitution. Whether the constitutional prohibition has been violated is a question for the court to decide under the facts of each particular case. Generally, prescribing fines is a matter within the City’s discretion. A fine is not unconstitutionally excessive “‘except in extraordinary cases, where it becomes so manifestly violative of the constitutional inhibition as to shock the sense of mankind.’” This ordinance applies a bright-line, ten-percent late charge to all people paying late, subject to a few exceptions. The charge is proportional to the unpaid amount owed and is thus proportional to the amount of water and sewer services consumed.  The City has discretion to prescribe fees to be assessed for late payment for the City’s water and sewer services with the object of incentivizing timely payment for these services. There are no “extraordinary circumstances” here to justify an excessive fee under the Texas Constitution, so the summary judgment is affirmed in that regard. Gatesco also asserts the Houston Ordinance is an unconstitutional tax. In order to determine whether the Late Fee is a regulatory charge or a tax, the court applies the “primary purpose” test. Under this test, the court does not examine the specific regulatory costs incurred by the City as to this one delinquent payment by Gatesco; instead, its looks at whether the aggregate late fees collected exceeds the amount reasonably needed for regulation. The court examines the regulation as a whole to determine whether the late fees imposed are intended to raise revenue or compensate the reasonable costs for regulation. In analyzing the facts and admissions, the court held whether the City incurred any collection costs before charging Gatesco the Late Fee is not material. The record does not show the fees were unreasonable in relation to overall costs of the system. As a result, the trial court did not err in granting summary judgment on this question. As to Gatesco’s equal protection claims, Gatesco bears the burden of showing that it has been treated differently from others similarly situated and that the treatment is not rationally related to a legitimate governmental interest. The summary-judgment evidence does not address how the City treated similarly situated customers, so the trial court did not error in grating summary judgment.  Next, the City violates federal Substantive Due Process if it exercises its power in an arbitrary and unreasonable way. Since no suspect class or fundamental right is involved, the analysis is under the rational basis test. The summary-judgment evidence does not raise a genuine fact issue as to whether it is not at least fairly debatable that each component of the challenged conduct was rationally related to a legitimate governmental interest. The trial court did not error in granting summary judgment on this issue.

The court, however, utilized a different standard for the substantive-due-course-of-law violation under the Texas Constitution. The court analyzed the Supreme Court’s holding in Patel v. Texas Dep’t of Licensing and Regulation. See 469 S.W.3d 69 (Tex. 2015). The high court held that the proponent of an as-applied challenge to an economic-regulation statute under article I, section 19’s substantive-due-course-of-law protections must demonstrate that either (1) the statute’s purpose could not arguably be rationally related to a legitimate governmental interest; or (2) when considered as a whole, the statute’s actual, real-world effect as applied to the challenging party could not arguably be rationally related to, or is so burdensome as to be oppressive in light of, the governmental interest.  However, since the timing of the Patel opinion is so new, the City’s no-evidence summary judgment evidence did not address or incorporate the “oppressive” arguments or elements, which are essential to a no-evidence determination. Accordingly, the court reversed the trial court’s judgment as to these claims and remanded.  Since the substantive-due-course-of-law claims are remanded, so too must the claim for injunctive relief and attorney’s fees.

If you would like to read this opinion click here. The Panel includes Chief Justice Frost, Justice Boyce, and Justice Jamison. Chief Justice Frost delivered the opinion of the court. Attorneys for the Gatesco are listed as Robert Gaines Gibson and Steven Doyle Poock. Attorneys for the City are listed as Mary Stevenson and Darah L. Eckert.