Jeffrey Lake Dev., Inc. v. Cent. Neb. Pub. Power & Irrigation Dist., Pub. Corp.

JEFFREY LAKE DEVELOPMENT, INC., A NEBRASKA NONPROFIT CORPORATION,AND MIDWAY WILDLIFE & RECREATION CLUB,A NEBRASKA NONPROFIT CORPORATION, ET AL., APPELLANTS AND CROSS-APPELLEES. v. CENTRAL NEBRASKA PUBLIC POWER AND IRRIGATION DISTRICT,A NEBRASKA PUBLIC CORPORATION, APPELLEE AND CROSS - APPELLANT.

No. A-15-277.

NEBRASKA COURT OF APPEALS

June 7, 2016

MEMORANDUM OPINION AND JUDGMENT ON APPEAL

(Memorandum Web Opinion)

NOTICE: THIS OPINION IS NOT DESIGNATED FOR PERMANENT PUBLICATION AND MAY NOT BE CITED EXCEPT AS PROVIDED BY NEB. CT. R. APP. P. § 2-102(E).

Appeal from the District Court for Lincoln County: RICHARD A. BIRCH, Judge. Affirmed.

Steve Windrum, of Malcom, Nelsen & Windrum, L.L.C., for appellants.

David J.A. Bargen, of Rembolt Ludtke, L.L.P., for appellee.

MOORE, Chief Judge, and INBODY and RIEDMANN, Judges.

RIEDMANN, Judge.

INTRODUCTION

This case involves lakeside land owned by the Central Nebraska Public Power and Irrigation District (Central) that lies adjacent to hydroelectric power projects. Central leased portions of this lakeside to Jeffrey Lake Development, Inc. (Jeffrey) and Midway Wildlife & Recreation Club (Midway) for development of private recreational cabins. These leases have been the subject of significant litigation over the past 20 years. The primary issue of the current appeal is the meaning of contractual language setting elevation restrictions for certain types of construction on the leased land. The district court interpreted the language of the lease to prohibit construction of cabins, including subterranean support structures, below stated elevation levels.However, the district court also construed our holdings from prior appeals to allow repair or replacement of nonconforming structures that were the subject of a prior injunction against lease enforcement. Following our review of the record and the parties' arguments, we affirm the judgment of the district court.

BACKGROUND

The leases at issue in this case have been the subject of considerable litigation, reaching the Court of Appeals or the Nebraska Supreme Court at least 6 prior times. We most recently considered the leases between the parties in Jeffrey Lake Dev., Inc. v. Cent. Nebraska Pub. Power & Irrigation Dist., No. A-09-996, 2010 WL 2990040 (Neb. App. July 27, 2010) (hereinafter "Jeffrey VI"). We briefly recount the background of this appeal here, and will discuss additional details of the leases and prior litigation in the analysis section below as needed.

Central entered into leases with Jeffrey and Midway in 1980 and 1981, respectively. The leases are similar, with many identical provisions, and provide for Jeffrey and Midway to lease residential cabin areas and lots above the shorelines of each lake. The leases extend for a primary term of 31 years and contain an automatic renewal provision.

In Jeffrey VI, Central attempted to terminate both leases based in part upon alleged elevation violations of various structures. We determined that because Central had not previously enforced those violations, it was enjoined from declaring a forfeiture of either lease based on any of the alleged violations on which it adduced evidence at trial. Jeffrey Lake Dev., Inc. v. Cent. Nebraska Pub. Power & Irrigation Dist., No. A-09-996, 2010 WL 2990040 (Neb. App. July 27, 2010). However, we determined that Central could enforce future lease violations. Id. The parties now dispute the meaning of the elevation requirements in the leases, as well as the extent of the injunction outlined in Jeffrey VI. Both leases prohibit some types of construction at elevations below a specified "freeboard elevation" -- that is, an elevation somewhat above the high water level of the lakes. This restriction is intended to prevent flood damage that would harm structures and the hydroelectric project.

At trial, Jeffrey and Midway submitted testimony from several of their sublessees to whom Central has denied building permits based on its interpretation of the leases' elevation restrictions. Timothy Dilley testified that he is a sub-leaseholder on Jeffrey Lake. He entered into his sublease in 2010 with the hope of building a retirement home on the property. When Dilley executed the sublease for his lot, the lot contained a garage, an electrical service, a septic system, a well, several hydrants, and a concrete pad approximately 9' wide by 20' long. The lot had previously contained a smaller modular home, but that home had been destroyed and removed from the premises before Dilley obtained his sublease.

Dilley submitted a permit application to Central for retaining walls, a driveway, and a larger septic system to support the house he hoped to build. The proposed septic system would replace the existing, smaller septic system in approximately the same location. Central denied the septic system application because the subterranean tank and drain field proposed by Dilley extend below the Jeffrey Lake lease's freeboard elevation of 2,764 feet above sea level. The Dilleys' permit for a driveway was initially denied, then approved provided that Dilley use fill dirt to raise the elevation of the driveway to 2,764 feet. Central informed Dilley that retaining wall footings also had to be above 2,764 feet in elevation. Central invited Dilley to re-submit conceptualdrawings of the retaining walls, driveway, house, and septic tank, stating that it believed there was a "good chance" everything would be approved, so long as the septic tank and drain field were modified to be constructed entirely above 2,764 feet in elevation. Central employees testified that they believed that alternative locations or alternative septic system types would have met Central's requirements and allowed the Dilleys to build the size of septic system they desired. Central suggested that an above-ground holding tank system recently installed on a lot at Midway Lake might provide an example of a system that would meet elevation and setback requirements. However, Dilley and his sewage contractor testified to their belief that alternative sewage system locations were not feasible and that an above-ground holding tank system would require more frequent pumping and be more susceptible to freezing. Dilley did not submit an amended application to Central.

Dell Shepherd testified that he is a sub-leaseholder at Jeffrey Lake and has been since 1981. In 2013, Shepherd submitted an application for an addition to his cabin and modification of his sewage, heating, and air conditioning systems. His applications were initially approved subject to an elevation inspection. After inspection, Central informed Shepherd that he could not build as proposed because of elevation restrictions in the Central-Jeffrey lease. Central suggested an above-ground holding tank instead of a septic tank to avoid elevation issues. Central also suggested that a slab foundation rather than a block foundation "might be a possibility" for his cabin addition. Shepherd's contractor felt that a slab foundation would be inappropriate because the rest of the cabin was block foundation. Shepherd testified that he was uninterested in submitting a re-application after the denials.

Evidence in the record also reflects that in 2013 Central denied another Jeffrey Lake sub-leaseholder a permit to demolish and replace a home on her lot because of elevation requirements in the lease as well as horizontal setback-from-the-shoreline requirements contained in Central's permitting procedures. We note that the validity of the horizontal setbacks in the permitting procedures are not at issue on this appeal. Evidence in the record also reflects that at least one sub-leaseholder's application to construct an underground sprinkler system was denied because of elevation.

Michael Drain, a Central employee, testified that sub-leaseholders whose permits were denied could submit a new application that includes a variance request. The mechanism to request a variance does not appear in either of the leases, but rather in Central's permitting procedures, which it developed as part of its separate license with the Federal Energy Regulatory Commission (FERC). A provision of the lease requires sublessees to comply with terms of Central's FERC license. Central's permitting procedures on file with FERC allow for new construction of residences at Jeffrey Lake and the Midway Lakes with the lowest living elevation significantly lower than those required by the lease. However, the permitting procedures also state that a more-restrictive condition in a lease will control over a more-permissive condition in the permitting procedures.

In 2013, Jeffrey and Midway filed this action seeking (1) a declaratory judgment interpreting paragraphs 13, 14, 15, and 16 of each of the leases to allow construction of residential cabins and related structures that extend at least in part below the listed elevations, (2) a finding that Central is in breach of its lease, (3) a permanent injunction prohibiting Central from denying applications for construction that comply with this interpretation of the restrictions; (4) and fordamages, attorney fees, and costs. The trial court determined that paragraph 13 prohibited construction of residential cabins and related structures, including subterranean structures such as footings and sewage systems, below the stated elevations. The trial court further found that these elevations do not apply to boat docks and related structures. Additionally, the trial court interpreted the injunction we prescribed in Jeffrey VI to prohibit Central from enforcing elevation restrictions for repair and replacement of the structures at issue in Jeffrey VI, so long as the repair or replacement is of the same type of item in the same location. The trial court also held that the specific language of the elevation restriction in the lease concerning Jeffrey Lake required only that building "generally" complied with the elevation requirement -- that is, slight deviations from the...