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03/31/94 CERES TERMINALS v. CHICAGO CITY BANK AND

March 31, 1994

CERES TERMINALS, INC., PLAINTIFF, COUNTER-DEFENDANT, APPELLANT, AND CROSS-APPELLEE,
v.
CHICAGO CITY BANK AND TRUST CO. AS TRUSTEE UNDER TRUST NO. 10062. DEFENDANTS, COUNTER-PLAINTIFFS, APPELLEES.



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. THE HONORABLE DAVID J. SHIELDS JUDGE PRESIDING

Rehearing Denied May 13, 1994. Petition for Leave to Appeal Denied October 6, 1994.

Gordon, McNULTY, Cousins* , Jr.

The opinion of the court was delivered by: Gordon

JUSTICE GORDON delivered the opinion of the court:

BACKGROUND

In 1957, the predecessor in interest of appellant Ceres Terminals, Inc. (Ceres) entered into a 20-year lease for approximately 16 acres of waterfront property with the predecessor in interest of defendants-lessors (defendants). Under a renewal clause contained in the lease, Ceres was allowed to extend the lease after the initial 20-year period for four 5-year periods. Under this lease, the amount of rent to be paid during these 5-year periods was to be based on a 5% "net" return of the property's fair market value as determined by appraisers of the parties.

Ceres exercised its renewal option for the period between February 1, 1977, and January 31, 1982. After the parties failed to agree on a fair market value of the land, defendants filed a declaratory judgment action in the circuit court. In 1979, after hearing testimony from three appraisers, Judge Dunne found that the subject property had a fair market value of $1,850,000 for purposes of calculating the rent. In Chicago City Bank and Trust Co. v. Ceres Terminals, Inc. (1981), 93 Ill. App. 3d 623, 417 N.E.2d 798, 49 Ill. Dec. 108, the appellate court affirmed that ruling, stating that that valuation was not against the manifest weight of the evidence.

On September 5, 1979, while the appeal from Judge Dunne's determination was pending, Ceres filed a complaint for declaratory relief seeking a declaration that defendants must perform all necessary maintenance and repairs including repairs to docks and warehouses located on the property. Defendants filed a counter-complaint seeking damages in the amount of the cost of repairs.

On March 20, 1981, defendants informed Ceres that the lease would be terminated as of January 31, 1982, because Ceres had failed to timely renew the lease for the next five-year period (1982-87). In October 1981, Ceres amended its declaratory judgment complaint to add a second count which sought specific performance to enforce the lease renewal option for the next five-year period.

Defendants filed a motion for summary judgment with respect to the second count of Ceres' complaint. On May 10, 1982, the trial court granted summary judgment in favor of defendants on that count finding that Ceres had not exercised its renewal option in a timely manner. Ceres appealed this ruling and in Ceres Terminals, Inc. v. Chicago City Bank and Trust Co. (1983), 117 Ill. App. 3d 399, 453 N.E.2d 735, 72 Ill. Dec. 860, the appellate court affirmed the trial court.

Ceres remained on the subject property after January 31, 1982 (the date the lease expired), while awaiting the trial court's determination on the validity of its attempt to renew the lease for the 1982-87 period. Ceres continued to occupy the property after the trial court entered the May 10, 1982, summary judgment in favor of defendants pursuant to a stay granted by the appellate court. Under that stayorder, Ceres continued to pay rent to defendants during this period and filed a $200,000 appeal bond. Ceres subsequently vacated the property on March 15, 1984, after the appellate court affirmed the trial court's decision and the supreme court denied Ceres' petition for leave to appeal.

In April 1985, defendants filed a motion in which they sought increased rent for the period of the stay (February 1, 1982 to March 14, 1984), claiming that Ceres' monthly rental payments during that period were below the fair rental value of the property. Defendants then filed an amended counter-complaint for damages resulting from Ceres' alleged failure to make certain repairs to docks and warehouses on the property. This was apparently the same relief it sought in its original counter-complaint which the trial court had not yet decided. After a bench trial on these claims, during which appraisal evidence on the property's value was heard, the trial court entered a judgment against Ceres for $151,593.75 in increased rent and $54,500 in damages for repairs to two warehouses on the property. Ceres filed this appeal from that order and defendants cross-appealed.

On appeal, Ceres argues that the defendants should have been barred under the doctrine of judicial estoppel from introducing appraisal evidence of the property's market value because they had previously appeared before the Tax Board of Appeals and represented that the subject property's fair market value was substantially less during the period in question. Ceres also contends that the trial court used the wrong measure of damages in determining its liability for the failure to make the warehouse repairs. In their cross-appeal, defendants argue that the trial court erred in: (1) finding that the annual rental did not include the expense of the applicable property taxes; (2) undervaluing the subject property when determining its fair market value; and (3) awarding increased rent for only 11 acres of the 16 acres Ceres purportedly occupied. For the reasons set forth below we affirm in part and reverse in part.

FACTS

A. Factual History

In 1957, Ceres' predecessor in interest, Overseas Shipping Inc., entered into a lease to occupy approximately 16 acres of real estate located on the shore of Lake Calumet at Stony Island and 130th Ave. (the subject property). This lease was entered into with Manor Real Estate, a subsidiary of Pennsylvania Central Railroad (Penn Central) as lessor, for an initial term of 20 years and included an option to renew for 4 successive 5-year terms. The renewal clause of the lease provided that:

"The Lessee shall have the right at its election to extend this lease of the said premises for four (4) Five (5) year succeeding periods beyond the initial twenty (20) year period at a fair and equitable rate of rental. * * *

If the Lessor and the Lessee are unable to agree upon the rental for any extended five (5) year period, the value of the premises hereby leased shall be appraised and valued * * * and the amount of the rental to be paid by the Lessee for the extended term shall be based on a five percent (5%) net return on such valuation."

In 1975 at a time when Penn Central was in bankruptcy, Manor Real Estate sold the 38-acre tract of land which included the subject property to Calumet Harbor Properties, a partnership comprised of members of the Pinkert family for $1,000,000. The 38 acres were divided into two parcels. The first parcel was approximately six acres in size and did not include any waterfront property. The second parcel covered approximately 32 acres and included the subject property which was at that time being occupied by Ceres pursuant to the 1957 lease Overseas Shipping had entered into with Manor Real Estate. The 32-acre parcel was bisected by a railroad easement with Ceres occupying the property north of the railroad tracks. One-half of this easement, approximately 2.38 acres, covered land which was leased to Ceres. The property occupied by Ceres also contained an 85,000 square foot wooden warehouse and a 55,000 square foot metal warehouse and 1,800 feet of lineal seawall. The property south of the railroad tracks was not waterfront property and did not contain any improvements. With respect to maintenance on the improvement and property taxes, the 1957 lease provided:

"For the second term of said term and each succeeding year until the termination of this lease Lessor shall maintain the exterior of all improvements on the demised premises, it being distinctly understood, however, that Lessee shall continue to maintain the interior of the improvements in a manner as above provided during the term of this lease. Lessor shall also assume and pay all general taxes, special assessments and charges against the demised premises for the second and each succeeding year of the term of the lease, and of any extension or renewal thereof."

In 1975, Calumet Harbor Properties put the property into a land trust with Chicago City Bank and Trust Co. (Chicago City Bank) serving as land trustee and Calumet Harbor Properties as beneficiary. Also in 1975, Calumet Harbor Properties leased out the entire 38 acres to Scrap Corporation of America (Scrap), a company which was also owned and controlled by the Pinkert family. That lease was subject to Ceres' 1957 lease wherein Ceres would still occupy the 16-acre site, but thenceforth would pay its rent to Scrap. The remainingacreage was to be used by Scrap for its metal processing business. In January 1976, Ceres exercised its option under the 1957 lease to renew the lease for an additional five-year term, extending its occupancy until January 31, 1982.

In 1977, the Pinkert family sold 50% of their interest in Scrap to Tang Industries (Tang). Calumet Harbor Properties, acting through Chicago City Bank, then entered into a second lease with Scrap as the lessee for the six-acre parcel and the portion of the 32-acre parcel that was not occupied by Ceres. This was a 40-year lease with an annual rent of $80,000. Under the terms of this lease, Scrap was expressly made liable for all the real estate taxes, maintenance and insurance on the property.

Ceres and defendants could not agree on the proper interpretation of the lease option renewal procedure which was designed to value the property so as to calculate the rental rate for the 1977-1982 period and accordingly defendants filed suit in the circuit court seeking a determination on the proper amount of rent. In 1979, Judge Dunne found the property to be valued at $1,850,000 for the period between 1977 and 1982.

Applying the 5% figure contained in the renewal clause, Judge Dunne calculated Ceres' rent for that period at approximately $7,812 a month. The trial court rejected defendants' claim that Ceres was obligated to pay the property taxes during the 1977-82 period under the renewal clause's "net" lease language. Ceres appealed this ruling and the appellate court affirmed the trial court in Chicago City Bank and Trust Co. v. Ceres Terminals, Inc. (1981), 93 Ill. App. 3d 623, 417 N.E.2d 798, 49 Ill. Dec. 108, concluding that the trial court's valuation of the property was not against the manifest weight of the evidence. With respect to the property tax issue, the appellate court determined that the trial court's refusal to require Ceres to pay the property taxes was supported by the evidence and the lease provision, quoted above, which specifically allocated that burden to defendants during any period in which the lease was extended.

On October 1, 1979, during the pendency of the appeal from Judge Dunne's ruling, Ceres filed this declaratory judgment action seeking a declaration that defendants must perform all necessary maintenance and repairs on the premises, including repairs to docks and warehouses located on the property. The defendants filed a counter-complaint seeking damages in the amount of the cost of repairs.

In March 1981, defendants informed Ceres that they considered the lease to be terminated effective January 31, 1982, because Ceres had failed to timely exercise the renewal option clause for the next five-year period (1982-1987). In October 1981, Ceres amended itsdeclaratory judgment complaint to add a second count which sought specific performance on the lease renewal option for the 1982-87 period.

In December 1981, the Pinkert family sold the remainder of Scrap Corp. to Tang and a subdivision of Tang, National Material Corporation (National Material). In December 1982, the subject property was also sold under an installment contract to National Material for $1.3 million. The last payment on the contract for this sale was made by National Material in 1986.

On February 1, 1982, the trial court entered an order providing that "the acceptance of rent by defendant after January 31, 1982 shall be without prejudice and defendant shall not waive any of its rights by accepting said rent." On May 10, 1982, the trial court entered summary judgment against Ceres on count II of its complaint, finding that Ceres did not exercise its right to renew the lease for the 1982-87 period in a timely manner. The trial court did not rule on count I of Ceres' complaint or defendants' counter-complaint, which both sought damages from the other resulting from the failure to maintain the docks and warehouses located on the property.

After obtaining appropriate Rule 304(a) language on the May 10, 1982, order granting defendants summary judgment on count II, Ceres filed a notice of appeal. In an order entered on July 13, 1982, the appellate court granted a stay pending the appeal of the May 10, 1982, order. Pursuant to that order, Ceres remained on the property, but was required to file an appeal bond in the amount of $200,000. From February 1, 1982, throughout the pendency of that appeal, Ceres continued to pay defendants $7,812 per month in rent. Defendants accepted these payments pursuant to the February 1, 1982, order previously entered by the circuit court.

In 1982 and 1983, defendants filed complaints before the Tax Board of Appeals (Board) seeking reduction of the assessed valuation of the property. To their complaints, defendants attached an appraisal of the property's value completed by Neil Renzi whom they retained for that purpose. This appraisal represented that the fair market value of the 32-acre parcel was $1,020,000. The Board subsequently reduced the assessor's valuation for the entire 32-acre parcel, which was based on a fair market value of $1,579,735, to a valuation based on a fair market value of $1,196,653. *fn1

In August 1983, this court in Ceres Terminals, Inc. v. Chicago City Bank & Trust Co. (1983), 117 Ill. App. 3d 399, 453 N.E.2d 735, 72 Ill. Dec. 860, affirmed the trial court's May 10, 1982, order which granted summary judgment in favor of defendants on count II of Ceres' complaint. In so doing, the appellate court determined that Ceres had failed to exercise its option to renew the lease for 1982-87 period in a timely manner. After the appellate court's mandate issued on January 6, 1984, Ceres sent two more rent payments of $7,812 to National Material which accepted those payments without protest. Ceres subsequently notified National Material that it had vacated the property as of March 15, 1984.

In April 1985, defendants filed a motion for the "enforcement of the judgment and execution on the appeal bond." In their motion, defendants sought increased rent for the period from February 1, 1982, to March 15, 1984, claiming that Ceres' payment of $7,812 per month was below the rental value of the property. Defendants also filed an amended counter-complaint seeking damages from Ceres' for its failure to make certain repairs to the docks, a wooden warehouse, and a metal warehouse which were located on the property. This was the same relief it sought in its original counter-complaint filed in response to count I of Ceres' declaratory judgment action, which was not addressed by the trial court in the original action. A bench trial was held on the issues of the rental value of the property for the period from February 1, 1982, through March 15, 1984, and the damages resulting from the failure to maintain the improvements on the property.

B. Trial Testimony

Neil Renzi testified on behalf of Ceres that he was a real estate appraiser and consultant. He assessed the value of the 32 acres at $1,020,000 as of January 1, 1981, for defendants in connection with their property tax claim. In making that appraisal he considered the highest and best use of the property and analyzed the city and the local neighborhood trends. His appraisal employed the three traditional approaches to property valuation, the cost approach, the sales comparison approach, and the income capitalization approach. He stated that the absolute net rental value of the 32-acre property was estimated at $109,180 per year. Renzi acknowledged his valuation of the property would be affected if 1.5 acres of the property were underwater.

On cross-examination, Renzi confirmed that he considered theproperty's water frontage in assessing its value. He stated that a long-term or onerous lease would affect the market value of the property. Renzi stated that while computing the cost approach valuation, he considered the value of improvements on the land including buildings, a fence, and a rail spur. He concluded that the surrounding property had a relatively stable demand from industrial users. He admitted that he was not aware of Judge Dunne's 1979 valuation of the 16 acres occupied by Ceres at $1,850,000. Later on re-direct, Renzi, after reviewing his appraisal, stated that in analyzing the property he took into account that the property contained a dock.

David Kunkel, an appraiser who worked at the direction of Renzi, testified that he examined the subject property for purposes of preparing that appraisal. He said that he did not remember if any of the property leased to Ceres was underwater when he inspected it and confirmed that he would have noted so in his appraisal. Kunkel said that factor would affect his valuation of the property.

Joel Monarch next testified that he served on the Tax Board of Appeals where he heard and decided appeals from property tax assessments. He stated that in deciding defendants' appeal with respect to the subject property, he did not visit the property, but reviewed the Renzi appraisal which was submitted with the complaint. Monarch confirmed that he recommended that the total assessed value of the property be reduced from $631,894 to $478,661. He explained that in 1983, industrial property was assessed at 40% of its fair market value. He stated that based on this formula, the pre-appeal original fair market value of the property was $1,579,735 and that its value was reduced to $1,196,653 as a result of the appeal.

On cross-examination, Monarch confirmed that his testimony pertained to the land value of the 32-acre tract and that he did not consider improvements when he spoke of it. He averred that to render a fair assessment it was important to bring the assessment into uniformity with the values imposed on similar properties in the surrounding area.

Gary Garside was called next by Ceres. Garside testified that he was the attorney who filed the real estate assessed valuation complaint on behalf of Scrap at the request of Dale Pinkert. He identified the complaint and stated that it contained a figure of $1,020,000 for the entry of the owner's estimate of the fair market value of land and its buildings. Garside said that he arrived at this figure because of Renzi's appraisal, which was also presented to the Tax Board of Appeals.

Kaare Eileraas, a vice-president of Ceres, testified that Scrap was using approximately 20% of the property leased to Ceres for storage of its scrap metal and equipment. Ceres also submitted a letter sentby Eileraas, dated March 26, 1982, complaining of the storage of Scrap material and equipment on property Leased to Ceres and a letter sent by Scrap in response, dated April 2, 1982, acknowledging such use by it of the property. Scrap's responsive letter provided that it would move the equipment off the property, but reminded Ceres that they "frequently provide services for each other without charge in the spirit of good neighbor relations." Ceres also submitted invoices it sent Scrap which sought $52,000 for Scrap's use of land leased to Ceres. The use of a portion of the leased tract was also corroborated by photographic evidence.

Defendants first called Dale Pinkert, who handled the business matters underlying this case on behalf of the Pinkert family and their business entities, Calumet Harbor Properties and Scrap Corporation. Pinkert testified that he considered the following factors relevant when he made his offer to buy the property in 1975: that Penn Central was in bankruptcy and was selling the property off for cash, replacement costs for the dock, that the ports of Chicago were trying to purchase the property, the amount of warehouse space, and the property's access to a deep water port. He stated that in 1975 he obtained an appraisal from Jules ...


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