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Innovative Modular Solutions, An Illinois v. Hazel Crest School District 152.5

February 9, 2011

INNOVATIVE MODULAR SOLUTIONS, AN ILLINOIS )
PLAINTIFF-APPELLANT AND CROSS-APPELLEE,
v.
HAZEL CREST SCHOOL DISTRICT 152.5, DEFENDANT-APPELLEE HAZEL CREST SCHOOL DISTRICT FINANCE AUTHORITY,
DEFENDANT AND CROSS-APPELLANT



Appeal from the Corporation, Circuit Court of Cook County.No. 06 CH 05767

The opinion of the court was delivered by: Honorable Barbara A. McDonald,

Judge Presiding.

JUSTICE NEVILLE delivered the judgment of the court, with opinion. Presiding Justice Quinn and Justice Steele concurred in the judgment and opinion.

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 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 (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.

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 ...


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