6th Circuit Court of Appeals Finds Municipality Waived the Exhaustion Requirement in a Takings Claim by Removing the Matter to Federal Court

Louis Leonor wanted to open a dental clinic in Rochester, Michigan. The clinic was nearly complete, but the City Rochester issued a stop-work order preventing Leonor from finishing and operating the clinic prompted by an expert’s finding that the clinic did not comply with the conditions of a city permit. That same expert found compliance a few months later after Leonor made corrective changes. Regardless of this, Rochester refused to lift the stop-work order or take an up-down vote on the project unless Leonor waived any legal claims and paid a $40,000 fee. Instead of complying with those conditions, Leonor filed a complaint asserting a regulatory taking, which the district court dismissed on ripeness grounds, citing the lack of a “final decision.”

The record indicated that Rochester appeared willing to consider an amended site plan, but only on the condition that Leonor both waive his right to bring claims against Rochester and pay $40,000 as a penalty for his supposed failure to “reasonably comply” with the SOI standards for rehabilitation. Thus, the Commission’s demands made Leonor choose between “voluntarily” waiving potential claims or forgoing a “final decision.” Additionally, even though the Commission’s primary justification for imposing the stop-work order was Leonor’s purported failure to demonstrate “reasonable compliance,” the Commission never disclosed that the second report justified lifting the ban on the project and never took an up-down vote on the project.

The court found that the Commission leveraged the stop-work order to obtain a waiver of all claims and $40,000; regardless of the constitutionality of the waiver demand, tying the go-ahead to Leonor’s waiver of potential claims supported applying the futility exception. If the exhaustion requirement were to be applied strictly, Leonor’s claim would fail because he never received a judgment from the state court. However, while Leonor sought compensation in Michigan state court, Rochester short-circuited the state litigation process by removing to federal court. The court held that a defendant waives the exhaustion requirement by removing to federal court, and therefore reversed the district court’s dismissal of Leonor’s takings claim for lack of ripeness and remand for further proceedings.

Lilly Investments v. City of Rochester, 2017 WL 56753 (6th Cir. CA 1/5/2017)