The popular northeast Minneapolis bar said it's not responsible. The neighborhood said it's intolerable. And now a dispute over late-night yelling, littering and public urinating by people leaving Gabby's Saloon and Eatery is nicking the city big-time.

A failed three-year effort to put limits on the bar is going to cost the city $201,000. That's how much it's paying Gabby's to make a federal lawsuit go away after the bar alleged that the city was trying to drive away black patrons of its hip-hop nights.

"Three years is a long time fighting the city. We've done nothing wrong," bar owner Jeff Ormond said Wednesday.

That's not how the city saw it when it tried to limit the number of patrons the bar could serve and to limit drink specials in response to neighborhood complaints about how patrons behaved after they left. But the Minnesota Court of Appeals slapped down the city, saying it went too far in penalizing the bar for what happened off premises. That denied Ormond due process, the court declared in April.

So now the city is left refunding $26,000 to Ormond in penalties and paying $175,000 of his legal fees. And wondering how it can deal with neighborhood complaints about bar patron behavior without more legal roadblocks. Regulatory staff are brainstorming options that may include going to the State Capitol in search of unspecified changes in the law.

"I think it's frustrating that we're back to square one," said Chris Gams, staff director for the Bottineau Neighborhood Association, the neighborhood where complaints about patron behavior erupted. The area’s council member, Diane Hofstede, pushed for the restrictions on Gabby’s. She said Thursday that the court ruling made clear a settlement was the best course.

But Ormond blames her for the dispute, saying he's gotten along well with previous Third Ward officeholders. "It just blows my mind that one council member can come in and do what she did," he said. "She has never ever stepped a foot in Gabby's. She has no clue what we did in Gabby's."

Hofstede said the bar’s impacts remain “a major concern for us.”

Civil rights accusations

The bar's federal lawsuit last year alleged that the city's enforcement efforts, begun in 2006, were aimed at driving away black patrons on popular hip-hop nights. In return for the $201,000, the bar dropped its lawsuit alleging civil rights, due process and equal protection violations of the law. The city admitted no wrongdoing.

The Appeals Court found that the city went too far in trying to curb disruptions caused by bar patrons by putting restrictions on the bar, which had no license violations. City Attorney Susan Segal said in a statement that given that ruling the city felt its best course was to settle with the bar.

But the financial damage to the city could have been worse. The city initially ordered the bar's occupancy limit cut from 689 to 438 and ordered it to eliminate drink specials. But Council Member Paul Ostrow, a former municipal attorney, insisted that his colleagues stay imposition of those restrictions pending a court ruling, arguing that Gabby's could sue for lost business if the city lost in court.

"They knew this was very shaky ground," said attorney Scott -Harris, who represented the bar, said of the city.

Gams said that complaints still ebb and surge about the Thursday and Saturday night crowds. "I've heard varying reports from the neighbors that sometimes it's bad and sometimes it's not," he said.

The city focused on complaints of littering, public urination, yelling and loud music from cars in the early hours of the morning, and an administrative law judge said the city had proved its case for the sanctions. But the Appeals Court found that the bar was denied due process because it took extensive measures to protect patrons and hadn't broken any laws. It said the bar lacked foreknowledge that the off-premises behavior could provoke city enforcement against the bar.

Gabby's alleged in its federal lawsuit that it had operated under current ownership since 1986 without licensing problems. Ormond said he puts in 80-hour weeks managing the bar, and Harris said that Gabby's hires off-duty police.

Steve Brandt • 612-673-4438