Innovative Modular Solutions v. Hazel Crest Sch. Dist. 152.5

• Citation: 965 N.E.2d 414
• Decision Date: 02 February 2012
• Docket Number: No. 112052.,112052.
• Parties: INNOVATIVE MODULAR SOLUTIONS, Appellant, v. HAZEL CREST SCHOOL DISTRICT 152.5, Appellee.
• Court: Supreme Court of Illinois

965 N.E.2d 414

INNOVATIVE MODULAR SOLUTIONS, Appellant,

v.HAZEL CREST SCHOOL DISTRICT 152.5, Appellee.

No. 112052.

Supreme Court of Illinois.

Feb. 2, 2012.

As Modified on denial of rehearing March 26, 2012.

Donald J. Kreger and Ruth E. Krugly, of Schiff Hardin LLP, of Chicago, for appellant.

Kenneth M. Florey, Nanci N. Rogers and Scott L Ginsburg, of Robbins Schwartz Nicholas Lifton & Taylor, Ltd., of Chicago, for appellee Hazel Crest School District No. 152.5.

Lisa Madigan, Attorney General, of Springfield (Michael A. Scodro, Solicitor General, and Carl J. Elitz, Assistant Attorney General, of Chicago, of counsel), for appellee Hazel Crest School District School Finance Authority.

Chief Justice KILBRIDE delivered the judgment of the court, with opinion.

¶ 1 This appeal involves the Downstate School Finance Authority for Elementary Districts Law (the Act) ( 105 ILCS 5/1F–1 et seq. (West 2004)), a statutory scheme permitting the creation of a separate entity to manage the finances of a public school district facing financial difficulty. Defendant Hazel Crest School District 152.5 (the District) leased portable classrooms from plaintiff Innovative Modular Solutions (IMS) under contracts including monetary penalties for early cancellation or default.¹ Ultimately, the state invoked the Act to create Hazel Crest School District Finance Authority (the Authority) to manage the District's finances. Thereafter, the Authority canceled the District's IMS leases before expiration. The Authority, however, did not authorize payment of the cancellation fees. Accordingly, the nonpayment of the early termination penalties gives rise to this dispute.

¶ 2 IMS filed a complaint in the circuit court of Cook County against the District and the Authority, seeking a declaratory judgment that the Act permitted the Authority to cancel the leases only in a manner consistent with the contractual language, including the cancellation provisions. IMS also sought a judgment against the District for the amount of the cancellation fees. On cross-motions for summary judgment, the court granted judgment in favor of the District on the cancellation fees, finding it was legally impossible for the District to pay the fees. The court also entered declaratory judgment in favor of IMS, finding that the Authority had to comply with the cancellation terms of the leasing contracts.

¶ 3 On direct appeal, the appellate court affirmed the judgment in favor of the District on the cancellation fees and vacated as moot the declaratory judgment in favor of IMS. 407 Ill.App.3d 143, 150–51, 347 Ill.Dec. 993, 943 N.E.2d 283. For the reasons that follow, we reverse the appellate court's judgment and remand.

¶ 4 I. BACKGROUND

¶ 5 In July 2002, IMS, an Illinois corporation selling and leasing portable classrooms, and the District, an Illinois public school district, entered into four substantively identical lease contracts. Under those leases, IMS leased to the District four modular buildings to serve as classrooms at the District's Palm Academy School, Lincoln Elementary School, Frost Middle School, and Ralph Bunche School. Each lease was for a minimum 60–month term, from 2002 through 2007, and contained penalty provisions for early cancellation or a default by the District.

¶ 6 In October 2002, the District's board of education requested the State Board of Education to create a financial oversight panel for the District because it was suffering a major financial crisis. Ultimately, the State Board certified the District as being in severe financial difficulty and created a financial oversight panel to develop an emergency assistance and financial recovery plan.

¶ 7 In the meantime, the General Assembly enacted the Act's provisions permitting the creation of the Authority to administer the finances of a struggling school district, effective December 6, 2002 ( 105 ILCS 5/1F–1 (West 2004) ). On December 9, 2002, the State Board created the Authority to administer the District's financial affairs.

¶ 8 Central to the issues in this appeal, the Authority was expressly enabled by the Act's provisions "[t]o make, cancel, modify, and execute contracts, leases, subleases, and all other instruments or agreements" for the management of a school district's finances. (Emphasis added.) 105 ILCS 5/1F–25(2) (West 2004). Relying on section 1F–25(2), the Authority mailed IMS letters terminating the District's four separate IMS leases for the modular buildings. Specifically, the leases for the Lincoln and Warren schools were terminated in 2004, the lease for the Frost school was terminated in 2005, and the lease for the Bunche school was terminated in 2006. It is undisputed that all of the leases were canceled prior to the contractually mandated 60–month term, and the District stopped payment on the leases. Nonetheless, the Authority did not authorize payment of the early cancellation fees.

¶ 9 In March 2006, IMS filed a three-count complaint against the District and the Authority. Count I sought a declaratory judgment that the Act permitted the Authority to cancel the leasing contracts only consistent with the terms of those contracts. Count II sought a declaratory judgment that, if the court found that the Act permitted the Authority to cancel unilaterally the existing contracts, the Act violates the constitutional prohibition against impairment of contracts in the United States and Illinois constitutions. Count III sought damages against the District for a breach of the leasing contracts. IMS later amended the complaint to add the Bunche lease claims.

¶ 10 The parties moved for summary judgment. During a May 2008 hearing, the trial court determined that the Authority did not act within the bounds of the Act when it canceled the leases. The court explained that, although the Authority had express statutory power to cancel the District's contracts, the General Assembly intended the Authority to cancel contracts consistent with the contractual terms. The court, however, did not enter judgment on any of plaintiff's counts, and scheduled discovery.

¶ 11 On December 18, 2009, the trial court entered judgment in favor of the District on count III, finding that it was legally impossible for the District to perform the leases without the consent of the Authority. Under section 1F–150 of the Act ( 105 ILCS 5/1F–150 (West 2004) ), the District was prohibited from "[taking] any action in violation of any valid order of the Authority," and District agents who violated the Authority's orders could be subject to discipline, suspension, removal from office, or termination. The court found that because the parties did not contemplate the possibility of a governmental entity preventing the District's performance, the District was excused from performance of the lease contracts under the doctrine of commercial frustration. Accordingly, the court concluded that the District was not liable for any damages to IMS resulting from the early termination of the lease contracts.

¶ 12 On February 22, 2010, on the trial court's own motion, it found that its previous rulings, including the order on December 18, 2009, resolved all the issues in count I and mooted all issues presented in count II.

¶ 13 Plaintiff filed an emergency motion to clarify, however, and on February 26, 2010, the trial court entered a judgment on count I declaring that the Authority acted outside the bounds of the law when it canceled the lease contracts inconsistently with the contractual terms. The court dismissed count II "with prejudice as moot."

¶ 14 On direct appeal, the appellate court affirmed the trial court's judgment in favor of the District on count III, concluding that when the Authority took control of the District's finances under the Act it became "legally impossible for the District to pay IMS the contractually agreed cancellation penalty." The appellate court further found that the judgment on count III rendered the remaining counts moot, and vacated the trial court's declaratory judgment in favor of IMS on count I and affirmed its dismissal of count II. 407 Ill.App.3d at 151, 347 Ill.Dec. 993, 943 N.E.2d 283.

¶ 15 This court allowed IMS's petition for leave to appeal. Ill. S.Ct. Rule 315 (eff. Feb. 26, 2010).

¶ 16 II. ANALYSIS

¶ 17 On appeal, IMS contends that the appellate court's judgment violates the Act's goals, contravenes fundamental principles of contract law, and is unconstitutional. IMS asserts that the Authority's decision to cancel the leases without payment of the cancellation fees was unlawful, making the doctrine of legal impossibility inapplicable because it applies only when the action forming the basis for the alleged legal impossibility is valid.

¶ 18 IMS argues that the Authority's actions in this case were not valid because it was not authorized by the Act to "unilaterally cancel" the lease contracts without payment of the early cancellation penalties. If section 1F–25(2) of the Act ( 105 ILCS 5/1F–25(2) (West 2004)) permits the Authority to "cancel" contracts, the provision should be construed as permitting cancellation only consistent with the terms of the contract.

¶ 19 The District responds that the doctrine of legal impossibility applies here because it could not satisfy its contractual obligations to IMS under the leases when the Authority, the entity exercising sole control over the District's finances under the Act, canceled those leases. The District further responds that this outcome is constitutional and consistent with the plain language of the Act's provisions that permit the Authority to cancel the District's contracts and leases. Moreover, the Act does not allow, let alone require, District officials to prejudge the validity of the Authority's decision to cancel the lease contracts.

¶ 20 Similarly, the Authority responds that section 1F–25(2) of the Act permitted the Authority to cancel the leases and those cancellations were constitutional. Because the Authority's decision to cancel the leases here made...