Posted by: Patricia Salkin | August 23, 2010

5th Circuit Remands Matter to Resolve Definition of Ambiguous Terms in Zoning Ordinance Relating in Enforcement Matter Against Two Sexually Oriented Businesses

A new zoning ordinance requiring licensing and ‘conduct regulations’ for Sexually Oriented Businesses (SOBs) went into effect in 2007.  The City sought a declaratory judgment to allow enforcement of the new ordinance against two SOBs that were operating under a 1995 agreement which exempted the businesses from certain zoning regulations. The 1995 agreement was the result of a successful constitutional challenge to a zoning ordinance regulating SOBs. The city wanted to avoid a payment of damages to El Paso Entertainment, and agreed to refrain from enforcing the ordinances against the businesses owned by El Paso Entertainment on the condition that the “businesses remain[ed] in operation at their current locations by their current owners and operators.” The City also paid a relatively small money award as a result of the action. After entering into the 1995 agreement, the sole shareholder of the two companies sold his entire interest to a new shareholder. The City alleged in its amended complaint that the 1995 agreement was no longer in effect because there had been a change in ownership since the date of the agreement.  The court rejected a cross motion by the owner/operator of the establishments and granted the City’s motion based on the change of ownership.                                                                                        

In challenging the court’s decision to grant to City’s motion invalidating the 1995 agreement and making the 2007 ordinance applicable to the subject SOBs, El Paso  Entertainment made three arguments.  The first was a challenge to the District Court’s jurisdiction over this matter.  This claim was dismissed, with the court explaining that the court was exercising ancillary jurisdiction, permissible “to secure or preserve the fruits and advantages of a judgment or decree rendered by that court in a prior action”.  Here, the District Court was being asked to potentially secure its previous judgment of non-enforcement of SOB targeted zoning ordinances against the businesses owned by El Paso Entertainment.  Thus ancillary jurisdiction was deemed proper. 

The second challenge to the court’s decision was under a theory of laches, whereby the city failed to terminate the agreement when ownership changed shortly after the agreement was executed, despite having actual notice of the change.  In order to successfully assert this affirmative defense, El Paso Entertainment was required to show that the City unreasonably delayed asserting its rights under the 1995 agreement and that the company made a good faith change in its position, to its detriment based on the City’s delay in asserting its rights.  While the theory of laches usually does not apply to government entities, it is applicable when “justice requires [the application of equitable estoppel], and there is no interference with the exercise of [the City’s] governmental functions.”  The instances in which the application of this theory are permissible are few, and since El Paso Entertainment could not meet the requirements to prove that this type of estoppel had occurred (that the company had changed its position to its detriment based on the inaction of the city), the court did not rule on whether the government  exception applied.  Further, there was a minor discrepancy as to whether the city had notice of the change in stockholders in 1995 or from a 2003 request for a liquor permit. 

To settle the final objection raised by El Paso Entertainment, the court looked to the language of the 1995 agreement.  The agreement stated that the true beneficiary of the agreement was the company that leased the premises on which the businesses were operated; according to the agreement only a change in the leaseholder would function to terminate the agreement.   Also included in the subject agreement was a recitation that the parties agreed that any change to the applicable zoning ordinance, with exceptions, would not effect the agreement.  The section of the zoning ordinance containing the definition of owner and operator was referenced in the 1995 agreement, leading the district court to conclude that these were the proper definitions to apply to the agreement.  Here, the court found that the lower court misinterpreted the agreement as incorporating those definitions when it was really “disavowing” them.  The court instead found the definitions to be ambiguous and looked for outside evidence of the intended definition.  Since the court below determined that the terms were unambiguous, no additional testimony was presented to determine a precise meaning.  For this reason, the circuit court remanded the matter for presentation of further evidence.  Whether the 1995 agreement had been terminated depended on the final interpretation of the terms ‘owner’ and ‘operator,’and while awaiting a decision on the meaning of the ambiguous terms, the Court said that the 1995 agreement would remain in effect. 

City of El Paso, Texas v. El Paso Entertainment, Inc., 2010 WL 2465227 (C.A. 5 (TX) 6/18/2010). 

The opinion can be accessed at:

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