Skip to Main Content
Blogs | November 30, 2015
4 minute read

The State Boundary Commission lacked authority to divide liabilities between township and new city, says COA

Every now and then, territory is annexed from one municipality to another, or new cities and villages are born; when that happens, the State Boundary Commission is generally responsible for reviewing and approving these divisions of territory.  It is not, however, responsible for adjudicating the division of assets and liabilities that occurs by operation of law under the Home Rule City Act when a new city incorporates, according the Court of Appeals' recent decision in Sylvan Township v. City of Chelsea, No. 323663.  The Court further held that, under the Home Rule City Act, only the properties taxable for the liability at issue could be factored into the ratio for division.  Thus, because Michigan law prevented Sylvan from taxing territory inside the pre-existing Village of Chelsea for the bond-contract liability at issue, only the territory incorporated into the City from outside the village boundaries could be considered in determining the ratio for division.

When a new city incorproates from township territory under the Home Rule City Act, MCL 117.14, the Act states that the new city assumes a pro rata share of the township's liability, depending on the assessed value of the "taxable" proeprty taken out of the township.  In September 2000, several electors petitioned for incorporation of Chelsea as a home rule city from territory in Sylvan Township, the Village of Chelsea, and Lima Township.  Sylvan opposed Chelsea’s petition.  In July 2001, Sylvan entered into agreements with Washtenaw County for the issuance of $12.5 million in bonds to cover the construction of water and sewerage systems.  In October 2001, representatives from Chelsea, Sylvan, and Lima Township entered into a joint settlement agreement. As part of the settlement, Chelsea agreed that it would annex less territory from Sylvan and Sylvan agreed to no longer oppose the incorporation of Chelsea as a home rule city.  In May 2002, the Boundary Commission approved the incorporation petition, and in March 2004 the village and specified areas from the adjacent townships became the City of Chelsea.

In May 2012, Sylvan defaulted on its payments of the refunded bonds because revenue from special assessments supporting the bonds fell short.  When Chelsea refused to contribute to the payments, Sylvan sued Chelsea for declaratory relief in March 2014, asserting that Chelsea was liable for a proportionate share of Sylvan’s liabilities under the bond contracts.  After some discovery, Chelsea moved for summary disposition, arguing that Sylvan’s claim shoudl be barred because Sylvan did not raise the issue earlier, in the State Boundary Commission, and because it waived its claim in the settlement agreement entered in that proceeding.  The trial court granted the motion on the basis of res judicata and equitable estoppel, raising other grounds not asserted in Chelsea's motion.  Sylvan appealed.

The Court of Appeals reversed all of the trial court’s grounds for summary disposition, vacated the decision, and remanded for further proceedings.  Specifically, the Court noted that Sylvan’s claim was not barred by res judicata because it could not have been resolved by the State Boundary Commission; the Commission had no authority to make an equitable division of the assets or determine liabilities arising from Chelsea’s incorporation as a city.  Additionally, the Court held that Sylvan was not equitably estopped from asserting its claim because there was no evidence to show that Sylvan induced Chelsea to believe that it would not assert its rights under the Home Rule City Act.  On the other hand, the Court held that the record was not sufficiently developed to rule on the defenses of laches and the statute of limitations. 

Finally, acknowledging that Michigan Supreme Court precedent held that property taken from a village in a township is ordinarily included in calculating the ratio for division, the Court of Appeals held otherwise in this case, explaining that MCL 123.742(2) prohibited the Township from taxing village territory to pay off the bond-contracts at issue.   For that reason, the Court of Appeals instructed the trial court to order that the proportion of the bond-contract liability that Chelsea must assume, if any, would be calculated without including any portion of the land formerly encompassed by the Village of Chelsea.

Disclaimer:  Warner’s Appellate and Supreme Court practice represented the appellant, Sylvan Township.