NOT RECOMMENDED F OR F ULL-TEXT PUBLICATION F ile Nam e: 13a0800n.06 No. 12-2277 UNITED STAT ES COURT OF AP P EALS F OR THE S IXTH CIRCUIT

J ON JON’S I

NC., VI CTORI A CERRI TO, MASOUD SESI , NANCY HA KI M, Plaintiffs-Appellants,

v. CI TY OF WARR EN, Def endant- Appellee

. ) ) ) ) ) ) ) ) ) ) ) ON AP PEAL FR OM T HE UNI TED STATES DI STRI CT COURT FOR THE EAS T ERN DI STRI CT OF MI CHI GAN

BEFORE: K

EITH , WHITE , and S TRANCH, Circ uit Jud ges. HELE NE N. WHITE , Circuit Judge. Pl a in ti f f s - A p p e ll a n ts Jo n Jo n ’ s I

n c . , V ictoria Cerrito, Masoud Sesi, and Nanc y Hakim (collec tively , “Plaintiffs”) broug ht suit ag ainst the City of Warren, Michig an (“the City ”), alleg ing that they wer e denied equal protec tion of the law and substantive due proce ss on the basis of their rac e, that the City violated their rig ht to fre e speec h and association, and that it denied them substantive and proce dural due proce ss throug h its enfor ceme nt of a liquorcontrol st atute. The district court held that Plaintiffs’ cla ims were ba rre d by res judicata based on

a decision of the Macomb County Circuit C o u rt o n appea l from the Z oning Boa rd of Appea ls (“ ZBA ”) for t he C ity

. Be cause the M ichig an courts construed Plainti ffs’ case solely as an ap p ea l from t h e ZBA ’s decision and did not acknow ledg e or consider Plaintiffs’ constitutional claims ag ainst the City , we REVERSE and REMAND f or fur ther proc eeding s.No. 12-2277

Jon Jon’ s Inc. v . City of W

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I. J on J on’s I nc. (“Jon J on’s”) is a “g entlemen’ s club” in Warren, Michig an. Victoria Cerrito has owned J on J on’s for 25 y ear s, but s o l d a p ortion of her business (9%) to Masoud Sesi on Dec ember 1, 2008. Sesi owns a “g entleman’ s club” in Detroit and has 20 y ear s of experience in the adult-ente rtainment industry

. Cerrito pla nn e d to r e n o v a

te Jo n Jo n’s and eventua lly sell the rema inder of the business to Sesi. I n April 2009, Cerrito obtained tentative approva l from the L iquor Control Commi ssion to sell the remainder of J on J on’s s tock t o Sesi. Ho we v er , final approval of the s ale require d approva l of the Warre n City Council. Plaintiffs alleg e that City Councilman Mark L iss led a “ra cist smear campa ign ag ainst Sesi” with the i ntent to bar the transfe r o f J o n J o n ’s t o Sesi, by cre ating a website “ca tering to the m ost repug nant rac ial stereoty

pes” and sug g esting that Sesi was involved in international sex traff icking

. Plaintiffs alleg e that this activity was desig ned to incite anti-Ara bic sentiment ag ainst Sesi and that Sesi withdrew his applica tion from the City Council’s consideration as a re sult. Following Sesi’s withdrawa l, Cerrito dec ided to sell J on J on’s to N ancy Hakim. Plaintiffs

asser t that the Warren City Police Depa rtment and the L iquor Control Commi ssion investigated and approve d Hakim on April 2 , 2 0 1 0 , ag ain nece ssitating the approva l of the Warren City Council. After the City Council tabled the motion to approve the stock transfe r three times, on April 27, 2010,

a leg al repr esenta tive for Hakim assure d the City Council tha t the transfe r would eliminate Sesi a s

a minority share holder of J on J on’s. He further ag ree d t o p l ac e a written restric tion on the stock

cer tificates stating that Sesi would never be a share holder in J on J on’s, and ag ree d that Hakim would

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Jon Jon’ s Inc. v . City of W

arren voluntarily relinquish her adult-ente rt ai n m en t permit if Sesi later beca me a share holder in the company . Despite these conce ssions, the City Council reje cted a motion to approve the transfe r of J on J on’s stock to Hakim. On June 7, 2010, Plainti ffs filed suit in Macomb Count y Circuit Court challeng ing the City Council’s failure to a pprove the transfe r of J on J on’s stock; the City remove d the ca se to the Easte rn District of Michig an on June 24. I n lat e 2008 or ear ly 2009, J on J on’s had soug ht a zoning varia nce for the purposes of installing a walk-in cooler and incre asing the roof heig ht of t h e building. The reque sts wer e approve d at a public hear ing, and J on J on’s beg an the renovations. The parti es d i s p u t e whether zoning approva l was obtained for all renovations. On Aug ust 18, 2 0 1 0 , the City ’s Chief Z oning I nspector informed J on J on’s that i t h ad l o s t its nonconfor ming use status due to the unapprove d

renova tions. J on J on’s appea led the decision to the Z oning Bo ar d o f Appea ls (“Z BA ”), and on October 6, 2010, the C i t y fi l ed a state-c ourt action in Macomb County Circuit Court, seeking a decla ratory judgme nt that by making unauthorized chang es to its nonconfor ming sexually -oriente d business, J on J on’s had exti ng uished its lawful nonconfor ming use zoning status. On November 12, 2010, Plaintiffs filed a counter claim ag ainst the City , challeng ing the denial of Hakim’s application and alleg ing the same violations of its constitutional rig hts that had been raised in the instant action. On J anuar

y 5, 2011, the Z BA aff

irmed the Chief Z oning I

nspector’ s decision. Plaintiffs amende d their counter claim to include an appea l of the Z BA ’s decis i o n , an d t he Macomb County Circuit Court stay ed discovery in the state court litigation pending the court’s resolution of J on J on’s appea l

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of the Z BA decision. The parties jointly moved t o s t ay t h e i n stant fede ral action, and the district court issued a

stay on J une 2, 2011. The Macomb County Circuit Court issue d an o p i n i o n on Fe bruar y 23, 2012 aff

irming the Z BA ’s decision that J on J on’s had lost its status as a nonconfor ming use. The court rec og nized that the action was orig inally filed by the City for decla ratory judgme nt, but noted that “[i] n light of the fac t that the amende d counter -complaint raises an appea l, the Court deem s it appropriate to consider this matter solely as an appeal and revie w it as s uch

. The resolution of the a ppeal will dispose of all other issues/moti ons.” (empha sis added)

. The court found that: “Jon J on’s, acting unilatera lly , g rea tly expanded its construction projec t under the umbrella of limit ed varia nces. The Court is not prese nted with a minor oversig ht; rathe r, the conduct complained of, and the deg ree of deviation by J on J on’s, is substantial, intentional and flag rant[,] ” and deter mined that J on J on’s had lost its lawful nonconfor

ming use status. The court conclude d its opinion by noting that “Jon J on’s has waived any additional constitutional arg uments and the arg ument rela tive to alleg ed bias by failing to previously raise them,” and i s s u ed an order closing the case . Plaintiffs filed a timely claim of appea l in the Michig an Court of Appe als. The Michig an Court of Appea ls reje cted the claim of appea l on the basis that an appea l from

a circ uit court’ s review of a Z BA ’s decision is by leave only

. See Mich. Ct. R. 7.203 (ame nded 2013). Plaintiffs then filed an application for leave to appea l, arg uing that the Z BA ’s decision was the product of a pattern of unconstitutional hara ssment by municipal officia ls direc ted at Plaintiffs. Plaintiffs fra

med their appea l as an appea l from the circ uit court’s revie w of the Z BA ’s decision, but

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arren arg ued that the C i t y ’s alleg ed discrimination in connec tion with their attempted liquor license transfe r established a “g ood faith basis” for their acc usation that the Z BA was biased as part of the City ’s pattern of discrimination ag ainst Plaintiffs. The C o u rt o f Appea ls denied Plaintiffs’ application for

lack of merit on J anuar

y 31, 2013. I n the meantime, following the entry of the Macomb County Circuit Court judgme nt aff irming the Z BA , the City moved for summary judgme nt in the fede ral suit on May 5, 2012. The district court held that res judicata barr ed Plaintiffs’ claims in fede ral court g iven that the state court issued a final decis i o n o n the merits, the fede ral suit was a subsequent action betwee n the same parties, the issues in the fede ral suit had been raised in the state court action, and the cause s of action

wer e identica l. This appeal f ollows. II. “We revie w de novo a district court’s application of the doctrine of res judicata.” Bragg v. Flint Bd. of

Educ. , 570 F.3d 775, 776 (6th Cir. 2009). “F eder al courts must g ive the same prec lusive ef fect to a state-c ourt judgme nt as that judgme nt rec eives in the rende ring state.” Abbott v. Michigan , 474 F.3d 324, 330 (6th Cir. 2007). As the party moving for summary judgme nt, the City bear s the burden of proving res judicata. Id. at 331. Michig an takes a broad view of res judicata that bars a subsequent action when: “(1) the prior action was decide d on the m er i ts, (2) both actions involve the same parties or their privies, and (3) the matter in the second case was, or could have been, resolved in the first.” Buck v. Thomas M. Cooley Law Sch. , 597 F.3d 812, 817 (6th Cir. 2010) (interna l quotation marks omitted). “Res judicata bars not only claims alread y l i t i gat ed, but also

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Jon Jon’s Inc. v. City of Warren every claim arising from the same transaction that the parties, exercising reasonable diligence, could have raised but did not.” Id. (internal quotation marks omitted). Michigan circuit courts are empowered to review decisions by a ZBA: Any party aggrieved by a decision of the zoning board of appeals may appeal to the circuit court for the county in which the property is located. The circuit court shall review the record and decision to ensure that the decision meets all of the following requirements: (a) Complies with the constitution and laws of the state. (b) Is based upon proper procedure. (c) Is supported by competent, material, and substantial evidence on the record. (d) Represents the reasonable exercise of discretion granted by law to the zoning board of appeals. Mich. Comp. Laws § 125.3606(1). Plaintiffs argue that because the circuit court was acting as an appellate court to the ZBA, it did not have jurisdiction to reach issues that were not considered by the ZBA including the constitutional claims raised by Plaintiffs. Plaintiffs argue that it was impossible to bring their claims alleging a violation of their constitutional rights in connection with the City Council’s denial of approval of the transfer of Jon Jon’s stock before the ZBA because the ZBA is not granted jurisdiction to review liquor license denials. Further, because the circuit court reviewed Plaintiffs’ case solely as an appeal from the ZBA’s decision, it lacked jurisdiction to decide their constitutional claims. Plaintiffs cite Houdini Properties, LLC v. City of Romulus , 743 N.W.2d 198 (Mich. 2008), as support for their argument. In Houdini , the plaintiff acquired real estate that was zoned in a way

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Jon Jon’s Inc. v. City of Warren that prohibited the erection of billboards. Id. at 199 (Corrigan, J., dissenting). The plaintiff 1 challenged the designation before the ZBA, which denied his application for a variance. The plaintiff appealed the ZBA’s decision to the circuit court and also filed a separate civil action in circuit court, seeking damages for alleged constitutional violations. The circuit court affirmed the ZBA’s denial of a variance and then granted summary judgment to the City on the plaintiff’s civil suit on the basis of res judicata. Id. at 199 200. The Michigan Supreme Court held that a ZBA lacks jurisdiction to consider constitutional claims, and that because a circuit court reviewing a ZBA’s decision is confined to the record and decision of the ZBA, the circuit court is similarly barred from ruling on constitutional issues presented in an appeal from a ZBA’s decision. Id. at 198 99. Thus, res judicata does not apply to a plaintiff’s constitutional claims arising from the same facts. Id. The court issued this ruling despite the fact that the plaintiff had argued its constitutional claims before the ZBA and the circuit
court. Id. at 199 200. See Whitmore Lake 23/LLC v. Ann Arbor Charter Twp. , No. 294696, 2011 WL 1600507, at *5 (Mich. Ct. App. April 28, 2011) (“[T]he ZBA appeal and plaintiffs[’] other circuit court claims proceeded, as they must, on separate tracks.”) (per curiam) (unpublished). The City attempts to distinguish Houdini , arguing that in Houdini , the state circuit court was not simultaneously confronted with both an administrative appeal from a ZBA and separately-pled counterclaims seeking relief on constitutional claims related to the administrative appeal at the same point in time. This, indeed, would be a crucial distinction had the Michigan courts treated Plaintiffs’

The Houdini majority’s decision does not contain any factual background. 1 - 7 -No. 12-2277

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case as involving an appea l and a separ ate civil counter claim. I nstead, the Macomb County Circuit Court stated that it was viewing “this matter solely as an appe al an d re v i ew[ing] it as such.” (emphasis added)

. So viewed, the circ uit court was without jurisdiction to consider Pl ai n t i ff s ’ constitutional claims as part of Plaintiffs’ a ppeal f rom the Z BA ’s dec ision. Significa ntly , the Michig an Court of Appea ls also construed Plaintiffs’ case as inv o l v ing solely the circ uit court’s re view of the Z BA ’s decision, and reje cted Plaintiffs’ claim of a ppeal f or lack of jurisdiction, citing Mich. Ct. R. 7.203, which states: “The court [of appea ls] has jurisdiction of an appea l of rig ht filed by an ag g rieve d party fr o m . . . [ a] final judgme nt or final order of the circ uit c ourt

. . . except a judg ment or orde r of the c ircuit court . . . on a ppeal f rom any other court

o r t ribunal.” Id. Thus, the M ichig an C ourt of Appeals acc epted the circ uit court’s statemen t t h at

“ the Court dee ms it appropriate to c onsider this matter solely as an appeal and revie w it as such ” and trea ted the appea l as solely from the circ uit court’s appellate jurisdiction, and not also from the circ uit court’s dispositi on of Plaintiffs’ other counter claims. Plaintiffs’ subsequent application for leave to appea l from the circ uit court’s revie w of the Z BA ’s decision was denied for lack of merit. I f the Michig an Court of Appea ls ha d considere d Plaintiffs’ case as involving both a n appea l from the circ uit court’s revie w of the Z BA ’s decision and as an appea l from the circ uit court’s dismiss al of Plaintiffs’ constitutional c laims, it could not ha ve dismissed Plainti ffs’ e ntire appe al for la ck of jurisdiction beca

use parties in Michig an have a rig ht to appea l a final judgme nt or order of a circ uit court, unless the judg ment or orde r is from an appea l f rom another tribunal, such as the Z BA

. Id. Thus, Plaintiffs’ constitutional claims against the City wer e not adjudicate d on the merits by the Maco m b C o u nty Circuit Court, and the Michig an C ourt of Appeals did not rec og nize or consider - 8 -No. 12-2277

Jon Jon’s Inc. v. City of Warren Plaintiffs’ separate constitutional claims against the City. Because the Michigan courts would not treat the Macomb Circuit Court’s decision affirming the ZBA as a res judicata bar to Plaintiffs’ constitutional claims, the district court erred in dismissing Plaintiffs’ constitutional claims on this basis. See Get Back Up, Inc. v. City of Detroit , 878 F. Supp. 2d 794, 807 08 (E.D. Mich. 2012). 2 III. Accordingly, we REVERSE the district court’s decision.

The City argues that regardless whether the state court explicitly considered Plaintiffs’ 2 constitutional claims regarding the transfer of Jon Jon’s liquor license, its determination that its opinion “resolves the last pending issue and closes the case” is entitled to res judicata. See Pittman v. Mich. Corrs. Org. , 123 F. App’x 637, 640 (6th Cir. 2005); Sheppard v. Dist. of Columbia , 791 F. Supp. 2d 1, 7 8 (D.D.C. 2011). The City also contends that to the extent Plaintiffs argue that the circuit court erred, an erroneous judgment by the state court does not prevent res judicata from operating. Miller v. Nat’l City Bank of New York , 166 F.2d 723, 726 (2d Cir. 1948). However, as discussed above, Houdini makes clear that a decision on appeal from a ZBA does not operate as res judicata as to constitutional claims arising from the same factual circumstances, and the Michigan Court of Appeals construed Plaintiffs’ appeal as arising solely from an appeal from the ZBA’s decision. Thus, the circuit court did not issue a decision on the merits of Plaintiffs’ constitutional claims, and the district court erred in concluding otherwise. - 9 -