The entrance to the Heritage Point subdivision on Dexter-Chelsea Road. An investment group sued the City of Chelsea alleging breach of contract over what it said was the city's failure to provide adequate water and sewer service for the development.

Lisa Allmendinger | AnnArbor.com

Chelsea Investment Group LLC sued the city and former City Manager Mike Steklac in 2006 claiming breach of contract when problems with the city’s sewer and water system halted the building of additional phases of the Heritage Pointe subdivision along Dexter-Chelsea Road.

In September 2008, Circuit Court Judge David Swartz awarded the investment group about $2.8 million in damages plus interest and taxes. Swartz also ruled that Steklac was entitled to governmental immunity on the claim of gross negligence.

The city appealed the decision to the Michigan Court of Appeals, claiming it didn’t breach its agreement with the investment group and contesting the amount of damages.

On April 27, 2010, the appeals court upheld a majority of the lower court decision but said the interest needs to be recalculated. The city then appealed the case to the Supreme Court.

On Dec. 20, 2010, the Supreme Court refused to hear the appeal.

"Finding the words to emphasize our disappointment and frustration with the verdict is virtually impossible," said City Manager John Hanifan via e-mail. "The city was dealing with this issue for more than five years and it's a bitter consolation that there is closure to the process."

Hanifan said the Chelsea City City Council will decide at its next regular council meeting on Jan. 25 "the specific strategy to pay the judgment" but the city "won't raise taxes" to do it.

The city manager said the city will "likely use a combination of fund balance and judgment bonds." Chelsea Investment Group bought 157 acres on a land contract in 2000 and agreed to pay $5 million for the property. In May 2004, the investment group and Pulte Land Company signed a purchase agreement to build a development with 352 single-family homes in several phases.

According to the suit, the developer had finished the first phase of the development in August 2004 and was ready to begin construction of the second phase in May 2005 when “the city informed him that the wastewater treatment plant lacked sufficient capacity for the development.”

Several months later, according to the suit, the city learned it had a water capacity issue, and subsequently the Michigan Department of Environmental Quality issued a moratorium on any development in the city until the issues were resolved.

Chelsea had installed a $10 million water treatment plant and a reverse osmosis system and experienced numerous problems with the new system including malfunctioning membranes and pumps. The suit states that the development agreement between the plaintiff and the city stipulated that the city would expand the existing water capacity “in sufficient time so as not to interfere with or delay the development of the property.” The suit claims that the city didn’t provide those utilities in a timely fashion, which caused Pulte to terminate its agreement with the investment group, and pull out of the project, costing the investment company revenue.

The city’s appeal contends it was able to provide access to sewer and water capacity within “a reasonable time,” and did not break its contract with the developer.

In March 2006, the city resolved its water and sewer issues and the state lifted the moratorium, but the investment group claimed it lost money when it sold some of the undeveloped lots to another builder at a lower price.

View Heritage Pointe in a larger map

Lisa Allmendinger is a reporter with AnnArbor.com. She can be reached at lisaallmendinger@annarbor.com. For more Chelsea stories, visit our Chelsea page.