Statement of Facts

In 1913, a piece of property located in Ottawa County was platted. The platted property was named the First Addition to Port Sheldon Beach ("First Addition"). Immediately to the north of this property is a platted area known as Port Sheldon Beach ("PSB"). The lower courts have found that a categorical taking occurred when plaintiffs were not allowed to build a home on First Addition Lots 1-3, which are adjacent to Lake Michigan.

Defendant’s pertinent claim is that the lower courts should not have found a categorical taking. Defendant argues the lower courts should have considered additional properties that the plaintiffs own in the First Addition including (at least) lots 15-17, which are both immediately to the east of lots 1-3 and separated from lots 1-3 by Helena Ave. The inclusion of these lots would change the "denominator parcel," which would thereby prevent a finding of a categorical taking. To provide the proper context to this issue, a brief history of the plaintiffs’ various ownership interests in both the First Addition and PSB is necessary.

In 1974, plaintiffs William and Anne Heaphy bought lot 132 in PSB. This purchase made them members of the Port Sheldon Beach Association ("Association"). The Association was created under the Summer Resort and Parks Association Act, MCL 455.1 et seq. Most of the Association’s members were summer residents. Thus, it is only during the summer months that a quorum exists to do Association business.

In 1985, plaintiffs used their pension money to acquire 20 lots known as the "Swearinga property." According to plaintiffs, at that time there was "an ongoing effort by the Association to acquire undeveloped Association [property] and [other] nearby property to preserve and protect the property from development." Plaintiff’s Plaintiffs’ Response to Application for Leave to Appeal at 1. The Swearinga property had come onto the market in the winter and Plaintiffs’ intent was to hold the property until the Association could act to repurchase it in the summer of 1986. When plaintiffs acquired the property, the acquisition was with a grant giving the Association the right to purchase the property if plaintiffs’ carrying costs and interest were paid. Plaintiffs contend "[t]he acquisition method had been utilized in the past with other undeveloped properties." Id.

The twenty-lot Swearinga property included First Addition Lots 1-2, 15-17, and 26-28. It also included PSB Lots 148-158. In the summer of 1986, plaintiffs sought to sell the Swearinga property to the Association. The members of the Association voted to approve the sale, but a successful legal challenge was filed by a dissenting member. At a later meeting to reconsider the purchase, those in favor of the purchase were one vote short of meeting the necessary two-thirds threshold.

Over the next decade, plaintiffs and the Association continued to negotiate. In 1995, while the negotiations were still ongoing, the Legislature passed the Sand Dune Management and Protection Act (SDMPA), MCL 324.35301-26, which placed limits on the development of "critical dune areas."

Plaintiffs and the Association reached an agreement in 1997, which was modified in 2000. Plaintiffs received PSB Lots 164 and 165, which are located across the street from their home in PSB (located on lot 132), along with First Addition Lot 3. In return, plaintiffs gave the Association PSB Lots 148-158. There was a no-development deed restriction placed on PSB Lots 164-165, and a restriction that allowed only a single home to be built on the combined First Addition Lots 1-3.

Plaintiffs then contracted to sell First Addition Lots 1-3, but on the contingency that a building permit could be obtained. In December 2001, plaintiffs filed an application with MDEQ for an exemption from the dune-protection regulations. According to plaintiffs, this application included a mistaken reference to PSB Lot 166, which has never been owned by plaintiffs. Plaintiffs contend that application was only supposed to include First Addition Lots 1-3.

MDEQ denied the permit in part on the basis that a home did not need to be built on First Addition Lots 1-3 since a home could be built on PSB Lot 166. Plaintiffs began an administrative appeal and disclosed the erroneous inclusion of PSB Lot 166 at a prehearing and offered to reinitiate the application process. Defendant indicated that was unnecessary since plaintiffs owned PSB Lots 164-165; therefore, even though plaintiffs would not have included PSB Lots 164-165 in their application, MDEQ belief was that these lots constituted an alternative home site and building on First Addition Lots 1-3 was viewed as unnecessary. Therefore, MDEQ stated plaintiffs did not need to reinitiate the petition process, since MDEQ employees’ believed MDEQ had a valid reason for denying the permit. At this time, MDEQ did not mention First Addition Lots 15-17. On January 9, 2003, MDEQ affirmed its rejection of plaintiffs’ request to build on First Addition Lots 1-3.

An action was filed in the Court of Claims and was transferred to Ottawa Circuit Court. Ottawa Circuit Court Judge Calvin L. Bosman presided. Here, defendant for the first time claimed that First Addition Lots 15-17 could be considered part of the denominator parcel (as well as any other property that plaintiffs owned in the First Addition or PSB). On April 28, 2004, the trial court entered an opinion that held that under the SDMPA defendant properly denied plaintiffs’ permit request. But Judge Bosman also held that First Addition Lots 1-3 constituted the denominator parcel, and that parcel had been taken in its entirety, which entitled plaintiffs to compensation since it constituted a "categorical taking."

On August 10, 2004, Judge Bosman entered an opinion that awarded plaintiffs $1,160,000 for First Addition Lots 1-2. No compensation was provided for First Addition Lot 3 because it was acquired after the passage of the SDMPA. Plaintiffs filed a motion for reconsideration regarding lot 3, since in Palazzolo v Rhode Island, 533 US 606 (2001), the United States Supreme Court had held that the fact that a regulation was enacted before an owner obtained the property in question does not prevent a taking claim. On September 15, 2004, Judge Bosman granted plaintiffs’ motion for reconsideration. In light of Palazzolo, he held that plaintiffs could be compensated for First Addition Lot 3, despite the fact that plaintiffs acquired it after the enactment of the SDMPA. Plaintiffs’ judgment was increased to $1,740,000 so as to include the value of First Addition Lot 3.

On April 18, 2006, the Court of Appeals affirmed. The Court of Appeals rejected MDEQ’s argument that the denominator parcel should have included First Addition Lots 15-17:

Lots 1-3 are properly regarded as the denominator parcel. In applying for a permit, these lots were joined together as a single parcel. Lots 15-17 were treated by plaintiffs as a separate building site. There is no question that were it not for the SDPMA, Lots 1-3 would constitute a separate, suitable building site having no connection to the other lots owned by plaintiffs, including Lots 15-17.

Slip opinion at 3.

On July 13, 2006, defendant filed the instant application. Plaintiffs responded. Defendant filed a reply, and plaintiffs filed a surreply.