Solutions v. Hazel Crest Sch. Dist. 152.5

• Decision Date: 09 February 2011
• Docket Number: 1–10–0642.,1–10–0554,Nos. 1–10–0212,s. 1–10–0212
• Citation: 943 N.E.2d 283,265 Ed. Law Rep. 408,407 Ill.App.3d 143,347 Ill.Dec. 993
• Parties: INNOVATIVE MODULAR SOLUTIONS, an Illinois Corporation, Plaintiff–Appellant and Cross–Appellee,v.HAZEL CREST SCHOOL DISTRICT 152.5, Defendant–Appellee (Hazel Crest School District Finance Authority, Defendant and Cross–Appellant).
• Court: United States Appellate Court of Illinois

407 Ill.App.3d 143

943 N.E.2d 283

347 Ill.Dec. 993

265 Ed. Law Rep. 408

INNOVATIVE MODULAR SOLUTIONS, an Illinois Corporation, Plaintiff–Appellant and Cross–Appellee,

v.HAZEL CREST SCHOOL DISTRICT 152.5, Defendant–Appellee (Hazel Crest School District Finance Authority, Defendant and Cross–Appellant).

Nos. 1–10–0212

1–10–0554

1–10–0642.

Appellate Court of Illinois, First District, Third Division.

Feb. 9, 2011.

Schiff Hardin LLP, Chicago (Donald J. Kreger, Ruth E. Krugly, of counsel), for Plaintiff–Appellant/Cross–Appellee.Lisa Madigan, Attorney General, State of Illinois (Michael A. Scodro, Solicitor General, Carl J. Elitz, Assistant Attorney General), for Defendant/Cross–Appellant.Robbins Schwartz Nicholas Lifton & Taylor, Ltd., Chicago (Kenneth M. Florey, Nanci N. Rogers, Scott L. Ginsburg, of counsel).

[347 Ill.Dec. 994 , 407 Ill.App.3d 143] OPINION

Justice NEVILLE delivered the judgment of the court, with opinion.

In 2002, Hazel Crest School District 152.5 (the District) leased portable classrooms from Innovative Modular Solutions (IMS). The District agreed to pay a cancellation fee if it cancelled the leases before the termination of the lease terms. Later in 2002, due to the District's financial distress, the State invoked the Downstate School Finance Authority for Elementary Districts Law (School Finance Law) (105 ILCS 5/1F–1 et seq. (West 2004)) and gave the Hazel Crest School District School Finance Authority (the Authority) responsibility for the District's finances. In 2004, 2005 and 2006, the Authority cancelled the District's leases with IMS. The Authority did not direct the District to pay the cancellation fees established in the leases, and the District did not pay the fees. In 2006, IMS sued the Authority and the District, seeking a judgment declaring that the Authority could cancel the District's contracts only in accord with the cancellation provisions of those contracts, and seeking a judgment against the District for the amount of the cancellation fees. On cross-motions for summary judgment, the trial court granted a judgment in favor of the District, finding that the Authority ordered the District not to pay the cancellation fees and that the order made performance by the District legally impossible. The court separately granted IMS a judgment declaring that the Authority lacked the power to cancel contracts except in accord with contract cancellation provisions. The Authority appeals from the declaratory judgment in docket numbers 1–10–0554 and 1–10–0642; IMS appeals from the judgment in favor of the District in docket numbers 1–10–0212.

We vacate the declaratory judgment as moot, and we affirm the summary judgment entered in favor of the District. We find that once the State invoked the School Finance Law, which created the Authority and gave the Authority exclusive control over the District's finances, the District was divested of control over its finances and had no statutory authority to pay its debts. Thus, we find that the School Finance

[347 Ill.Dec. 995 , 943 N.E.2d 285]

Law, which empowered the Authority to assume control over the District's finances, made performance by the District legally impossible. Accordingly, given our finding of impossibility, the issue concerning the extent of the Authority's power to cancel the District's leases becomes moot.

BACKGROUND

In July 2002, the District leased portable classrooms from IMS in four separate leases, with each lease pertaining to one of the four schools designated to receive the classrooms. The Palm Academy, Lincoln Elementary School, Frost Middle School, and Bunche Primary School used the classrooms. In each lease, the District agreed to lease the classrooms for a term of five years, with the District agreeing to pay certain amounts if the District cancelled the lease prior to the end of the five year lease term.

Due to the District's financial distress, the State invoked the statute that created the Authority, the School Finance Law (105 ILCS 5/1F–1 et seq. (West 2004)). According to the School Finance Law, the State gave the Authority the power “to exercise financial control over the district and to furnish financial assistance so that the district can provide public education within the district's jurisdiction while permitting the district to meet its obligations to its creditors and the holders of its debt.” 105 ILCS 5/1F–25 (West 2004). The State also gave the Authority all powers “necessary to meet its responsibilities and to carry out its purposes and the purposes of this Article, including * * * [the] powers * * * [t]o make, cancel, modify, and execute contracts, leases, subleases, and all other instruments or agreements.” 105 ILCS 5/1F–25 (West 2004).

On February 18, 2004, the Authority wrote to IMS as follows:

“[T]he Illinois legislature has granted the [Authority] the extraordinary legal power to cancel and/or modify any Hazel Crest lease agreement. [Citation.] Consequently, the [Authority] has directed me to notify you that it is terminating the lease agreements for the modular buildings located at Lincoln and * * * Palm Schools due to the District's inability to make payments under the leases.”

On July 25, 2005, the Authority terminated the lease for Frost Middle School, and on August 31, 2006, the Authority terminated the lease for Bunche Primary School. Although the Authority cancelled the leases, it did not offer to pay IMS the sums due under the lease cancellation provisions, and the Authority did not direct the District to pay those sums.

On March 22, 2006, IMS sued the District and the Authority. In count I, IMS sought a judgment declaring that the Authority could not cancel the leases except in accord with the lease cancellation provisions. In count II, IMS prayed for a judgment declaring the School Finance Law unconstitutional if it permitted the Authority to nullify all of the parties' rights under the District's contracts. In count III, IMS sought damages from the District for breach of the leases relating to the Palm, Lincoln and Frost schools. IMS amended the complaint in January 2007 to add claims related to the Bunche lease.

The parties moved for summary judgment on the complaint. The Authority, in its brief, relied on Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502, 62 S.Ct. 1129, 86 L.Ed. 1629 (1942), as precedent establishing the extent of the State's power to affect the rights of a municipality's creditors without violating the constitutional prohibition against impairing the obligation of contracts. See U.S. Const., art. I, § 10.

[943 N.E.2d 286 , 347 Ill.Dec. 996]

The parties and the court decided to focus first on the issue of whether the School Finance Law gave the Authority the power to nullify all of IMS's rights under the lease agreements. The court characterized the parties' motions as motions for “summary determination of a major issue of law within Count III.” The court said:

“Under the Authority's interpretation [of the School Finance Law], it has unfettered discretion to cancel any contract it wishes at any time without any regard for or protection of the interest of the other contracting party. Thus, if the statute is interpreted as the Authority urges, the statute is unconstitutional. The Court will interpret the statute as it must in the manner that renders it constitutional. The Court will therefore presume that the legislature intended that the Authority abide by the conditions set on cancellation contained in the contracts.”

Accordingly, in its written order dated May 8, 2008, the court held that “the Authority did not act within the bounds of the law when it cancelled the leases at issue[.]” The order set a time frame for beginning written discovery.

In its subsequent motion for summary judgment, the District relied on section 1F–150(c) of the School Finance Law, which provides that “No member, officer, employee, or agent of the district may take any action in violation of any valid order of the Authority.” 105 ILCS 5/1F–150(c) (West 2004). District agents who violate the Authority's valid orders may face administrative discipline, suspension, or removal from office. 105 ILCS 5/1F–150(d) (West 2004). The District claimed that the Authority's decision to cancel the leases with IMS made it legally impossible for the District to perform its duties under the leases, including the duties upon cancellation of the leases. IMS responded that the orders cancelling the IMS contracts did not qualify as “valid order[s]” within the meaning of the School Finance Law because the Authority lacked the power to nullify all of IMS's rights under the leases.

The trial court noted that in its order of May 8, 2008, the court only ruled on the issue of the extent of the Authority's legal power to cancel the leases. The court found that the contracting parties did not contemplate the possibility of the Authority preventing the District from performing its duties under the leases. The court held that because “the Authority's post-contract action and Illinois law prohibited the District's performance of the Lease Agreements, the District was excused from performance under the doctrine of commercial frustration.” The court then addressed IMS's argument:

“[F]inding the District liable herein because the Authority's order was subsequently deemed invalid would require the District to prejudge the validity of every order of the Authority, thereby disrupting the activities of both the Authority and the District. Because such prejudgment would have been inappropriate, the District had no choice but to follow the Authority's order. The District, therefore, is not liable for the termination of the Lease Agreements.”

Accordingly, in a written order dated December 18, 2009, the court entered judgment for the District on count III of the complaint and set the case for a status hearing.

On January 15, 2010, IMS filed a notice of appeal, naming the order of December 18, 2009, as...