Nekrilov v. City of Jersey City

• Decision Date: 16 August 2022
• Docket Number: 21-1786
• Citation: 45 F.4th 662
• Parties: Gennadiy NEKRILOV; Eugene Nekrilov; Kwan Ho Tang; Jayu Jen; Alan Suen, Appellants v. CITY OF JERSEY CITY
• Court: U.S. Court of Appeals — Third Circuit

45 F.4th 662

Gennadiy NEKRILOV; Eugene Nekrilov; Kwan Ho Tang; Jayu Jen; Alan Suen, Appellants

v.CITY OF JERSEY CITY

No. 21-1786

United States Court of Appeals, Third Circuit.

Argued: November 18, 2021

Filed: August 16, 2022

Joseph Tripodi, James M. Van Splinter [ARGUED], Kranjac Tripodi & Partners, 30 Wall Street, 12th Floor, New York, NY 10005, Counsel for Appellant

Philip S. Adelman, Stevie D. Chambers [ARGUED], Jersey City Law Department, 280 Grove Street, City Hall, Jersey City, NJ 07302, Counsel for Appellee

Before: CHAGARES, Chief Judge, BIBAS and FUENTES, Circuit Judges

OPINION OF THE COURT

CHAGARES, Chief Judge.

Gennadiy and Eugene Nekrilov, Kwan Ho Tang, Jayu Jen, and Alan Suen (together, the "plaintiffs") filed this lawsuit under 42 U.S.C. § 1983 challenging a Jersey City ordinance curtailing the ability of property owners and lease holders to operate short-term rentals. The plaintiffs alleged that, having passed an earlier zoning ordinance legalizing short-term rentals in Jersey City (the "City"), which enticed them to invest in properties and long-term leases, the City violated their constitutional rights under the Takings Clause of the Fifth Amendment, the Contract Clause of Article I, and the Due Process Clauses of the Fifth and Fourteenth Amendments by passing the new ordinance. The new ordinance, they allege, undermined their legitimate, investment-backed expectations and injured their short-term rental businesses. The plaintiffs also moved for a preliminary injunction against the enforcement of the new ordinance. The City moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The District Court granted the motion, dismissed the complaint with prejudice, and denied the preliminary injunction motion as moot. For the reasons that follow, we will affirm the judgment of the District Court.

I.

The plaintiffs are individuals who invest in and operate short-term rentals in Jersey City using online home-sharing platforms. Home-sharing platforms, such as Airbnb, provide a residential alternative to traditional hotels for travelers seeking to rent a spare room or property on a nightly, weekly, or monthly basis.

Steven Fulop was elected Mayor of Jersey City in 2013.¹ One of Mayor Fulop's priorities was to incentivize investment and development in Jersey City. As a part of that effort, in 2015, Mayor Fulop supported the passage of a zoning ordinance, Ordinance 15.137, that affirmatively legalized short-term rentals in Jersey City. Ordinance 15.137 was the first of its kind in the state of New Jersey.

Ordinance 15.137 provided, in relevant part:

1. Short Term Rentals are permitted as an accessory use to a permitted principal residential use in all zoning districts and redevelopment plan areas where residential uses are permitted.

a. The person offering a Dwelling Unit for Short-Term Rental use must be the owner or lessee of the residence in which the Short-Term Rental activity occurs. Short-Term Rental activity may occur in a habitable accessory building located on the same premises as the residence.

b. No person offering a Dwelling Unit for Short-Term Rental use shall be required to obtain any license for such use ... unless such person offers more than 5 separate Dwelling Units for Short-Term Rental use in the City. Any person offering more than 5 separate Dwelling Units for Short-Term Rental use in the City must:

i. obtain a license pursuant to Section 254-82 to offer each Dwelling Unit for Short-Term Rental....

ii. ensure that the Short-Term Rental use is clearly incidental to the principal residential uses permitted in the zone where each such Dwelling United is located....

Appendix ("App.") 161–62. Ordinance 15.137 also mandated that short-term uses of residential properties "shall be conducted in a manner that does not materially disrupt the residential character of the neighborhood." App. 162.

Jersey City issued a press release outlining the goals of the proposed ordinance. The press release explained that although the ordinance would "allow[ ] residents to rent homes for less than 30 days," it also "include[d] several commonsense protections" that would prevent short-term rental operators from "changing the character of the neighborhood." App. 167 (quotation marks omitted). To prevent the formation of informal "Airbnb hotels," the ordinance would also limit the number of properties one user could rent to five.

Mayor Fulop was quoted in the press release and made other public statements in support of the ordinance, describing companies that participate in the "sharing economy" as the "future." App. 102. He also authored an article in the Huffington Post explaining the purposes and benefits of the ordinance. Mayor Fulop noted that home-sharing platforms allow "middle-class folks [to] earn a bit of extra income by renting out their apartments." Id. The ordinance had the support of other Jersey City public officials, several of whom made statements in support of the ordinance. The Jersey City Council unanimously approved the ordinance, and on October 30, 2015, Mayor Fulop signed the ordinance into law.

Following the passage of Ordinance 15.137, Mayor Fulop's relationship with Airbnb purportedly began to deteriorate. In 2016, Mayor Fulop allegedly sought a donation from Airbnb to his reelection campaign. Mayor Fulop attended a fundraiser at Airbnb's San Francisco headquarters in 2017 but still did not receive a donation. In May 2017, Mayor Fulop allegedly sent a number of emails to Airbnb expressing his frustration, and, in response, Airbnb sent a $10,172 contribution to his reelection campaign. Airbnb represented that, following the delay in the donation, the relationship "fractured," and Mayor Fulop began receiving donations from the hotel industry. App. 231.

Two years later, Mayor Fulop's office introduced Ordinance 19-077. Ordinance 19-077 was a significant policy change from Ordinance 15.137. Although it did not ban short-term rentals entirely, it imposed a number of new restrictions. First, short-term rentals in non-owner-occupied rentals were limited to sixty nights per year. If, as of the date the ordinance was adopted, an owner operated two properties, the owner could appoint an agent to reside at the second property without being subject to the sixty-day limit on that property. Second, Ordinance 19-077 banned the subleasing of properties by tenants on a short-term basis. As a result, only those who owned properties could rent on a short-term basis in Jersey City. To facilitate a transition period of approximately eighteen months, Ordinance 19-077 included certain exceptions. It exempted through January 1, 2021, for instance, any short-term rental reservations or bookings that were made before June 25, 2019, the date the ordinance was adopted. In addition, tenants who were subleasing their properties on a short-term basis as of the date of adoption could continue to do so through January 1, 2021, or through the end of the lease, whichever came first.

On June 25, 2019, the Jersey City Council held a special meeting to vote on Ordinance 19-077. Operators of short-term rentals spoke against the ordinance, and Councilman James Solomon and Councilman Jermaine Robinson spoke in favor of the ordinance. Councilman Solomon acknowledged that the ordinance may have a negative financial impact on short-term rental operators but also explained that short-term rentals had a negative impact on union workers in Jersey City. Councilman Robinson expressed hope that investors could recoup some of the money they would lose as a result of the ordinance. The City Council voted 7–2 in favor of adopting the ordinance. On June 28, 2019, Mayor Fulop signed Ordinance 19-077 into law.

Between the passage of Ordinance 15.137 and Ordinance 19-077, the plaintiffs invested in properties in Jersey City to conduct short-term rental businesses. The Nekrilovs purchased two properties, which have monthly mortgage payments of $2,500 and $1,725. The Nekrilovs earned $9,500 and $5,183 per month, respectively, in short-term rental revenue, and allege that they would earn only $3,800 and $1,800 per month in long-term rental revenue. They also invested a total of $100,000 in renovating these properties. The Nekrilovs also entered into seventeen long-term leases with the intention of subleasing on a short-term basis. Tang and Jen purchased one property, which has a monthly mortgage payment of $3,300, and which Tang and Jen spent $40,000 to renovate and furnish. The property earned $4,500 per month in short-term rental revenue and would earn $2,600 in long-term rental revenue. Tang and Jen also entered into two long-term leases and spent $6,600 and $8,900 to furnish the properties. Suen purchased two properties, which have monthly mortgage payments of $2,500 and $3,500. Suen and his mother invested approximately $383,000 into renovating the properties, $40,000 into furnishing the properties, and $130,000 in other costs for the properties. Suen and his mother earned approximately $30,000 in monthly short-term rental revenues from the two properties. At the time of filing the complaint, Suen and his mother had not turned a profit, but they estimated that they would become profitable in the near future.

In December 2019, the plaintiffs filed a complaint seeking a declaratory judgment providing that Ordinance 19-077 is unconstitutional, injunctive relief against enforcement of the ordinance, monetary damages, and attorneys' fees. The complaint asserted four claims: (1) violations of the Takings Clause of the Fifth Amendment; (2) violations of the Contract Clause of Article I; (3) Fifth and Fourteenth Amendments substantive due process claims; and (4) Fifth and Fourteenth Amendments procedural due process claims. The plaintiffs simultaneously filed a motion for a temporary restraining order ("TRO") and preliminary injunction. The City moved to dismiss the complaint for failure to state a claim under Rule 12(b)(6). The District...