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The City of Elgin v. Arch Ins. Co.

Court of Appeals of Illinois, Second District

December 10, 2015

ARCH INSURANCE COMPANY, Defendant Fidelity and Deposit Company of Maryland, Defendant and Counterplaintiff-Appellant; TRG Venture Two, LLC, Defendant and Counterdefendant-Appellee

          Modified upon denial of rehearing February 10, 2016

         Appeal from the Circuit Court of Kane County. No. 12-MR-53. Honorable David R. Akemann, Judge, Presiding.

         Burke and Spence, Justices concurred in the judgment and opinion.



          [¶1] This case grows out of the real estate crash of 2008. In 2003, the plaintiff, the City of Elgin (City), entered into an agreement with a developer, Kimball Hill, Inc., whereby Kimball Hill agreed to develop certain property as a residential planned development and to make various improvements to the property (including sewers, water lines, and streets) at its own expense, and the City approved the development and agreed that it would annex the property into the City (Annexation Agreement). Kimball Hill obtained bonds guaranteeing its performance under the Annexation Agreement from two of the defendants, Arch Insurance Company (Arch) and Fidelity and Deposit Company of Maryland (Fidelity). After selling some homes as improved parcels, Kimball Hill went bankrupt. The remaining property was sold in bankruptcy to the defendant TRG Venture Two, LLC (TRG). After TRG refused the City's demands that it complete the improvements required by the Annexation Agreement, the City sued TRG, Arch, and Fidelity. Fidelity filed a counterclaim against TRG essentially alleging that TRG should be held primarily liable for the improvements and that Fidelity was entitled to indemnification or reimbursement to the extent that Fidelity was held liable to the City. The trial court dismissed the counterclaim for failure to state a claim upon which relief could be granted. After all of the other claims were settled or resolved, Fidelity appealed this dismissal. We affirm in part and reverse in part, and remand.

         [¶2] BACKGROUND

          [¶3] The following facts are drawn from the allegations of the complaint and counterclaim, and the exhibits thereto. In reviewing the grant of a motion to dismiss brought pursuant to section 2-615 of the Code of Civil Procedure (Code) (735 ILCS 5/2-615 (West 2012)), we take all well-pled allegations as true. Kanerva v. Weems, 2014 IL 115811, ¶ 33, 383 Ill.Dec. 107, 13 N.E.3d 1228. In July 2003, the City and Kimball Hill entered into the Annexation Agreement. Kimball Hill was identified in the agreement as the " Owner" or " Developer." In it, Kimball Hill undertook to (among other things) construct the public improvements necessary to serve the development, including the storm and sanitary sewers, water mains, and streets. The Annexation Agreement had a term of 20 years, and expressly (and repeatedly) stated that the obligations under the agreement constituted covenants that would run with the land, and that the agreement would be binding on any successors and assigns of " all or any part of" the property, as well as on any " successors in title of the Developer." Paragraph 45 of the Annexation Agreement also stated that the sale or conveyance of any portion of the property during the 20-year term would release the Developer from all obligations and responsibilities relating to the sold or conveyed portion, and that those obligations and responsibilities would be assumed by the purchaser or grantee.

          [¶4] Under the Annexation Agreement, Kimball Hill was required to obtain bonds guaranteeing its performance. It obtained those bonds from Arch and Fidelity. Between July 2004 and December 2005, Fidelity issued six bonds securing the performance of various aspects of the work in the total amount of approximately $1.4 million. The bonds identified Kimball Hill as the principal obligor with the duty to perform and the City as the obligee (the entity to which the funds would be paid in the event of nonperformance). Each bond stated that, " WHEREAS, the City of Elgin's approval of that development is conditioned upon the completion of the following improvements within that development," unless the principal obligor " construct[ed] the improvements herein described and [paid] the cost of such construction, *** and [saved] the Obligee harmless from any loss cost or damage by reason of its failure to complete said work," then Fidelity would either complete the improvements itself or pay the City the cost of those improvements, up to the amount of the bond.

          [¶5] In April 2008, Kimball Hill went bankrupt. At that point, a number of homes had been built and had been sold to individual homeowners in four of the six " neighborhoods" of the development. The other two neighborhoods were still unplatted and unimproved. Overall, in the words of the trial court, " significant outstanding improvements remain[ed] unfinished." In 2010, TRG bought Kimball Hill's interest in the development, including the two vacant unplatted neighborhoods and 174 vacant homesites and 8 " outlots" in the partially-developed neighborhoods, from a trust that handled the bankruptcy estate. Thereafter, TRG refused to make the remaining improvements required under the Annexation Agreement.

          [¶6] In January 2012, the City sued TRG, Arch, and Fidelity. The City alleged that, as the successor to Kimball Hill under the Annexation Agreement, TRG was responsible for completing the improvements, and that, to the extent that TRG was unwilling or unable to do so, the two sureties were liable on the bonds they had issued.

          [¶7] Fidelity filed an answer and affirmative defenses, and also filed a three-count counterclaim. Count I was titled " Repayment/Reimbursement/Indemnity," and alleged that TRG was primarily responsible for completing the improvements under the Annexation Agreement, while Fidelity was only secondarily liable. Because this performance was the matter guaranteed by the bonds, Fidelity asserted that TRG had a " common law and implied contractual duty to repay and reimburse" any amounts Fidelity was required to pay on the bonds as well as any costs Fidelity incurred in defending itself. Count II was titled " exoneration" and asserted that, as " de facto principal" on the bonds, TRG had stepped into the shoes of Kimball Hill and owed Fidelity a duty under the bonds to protect Fidelity from loss. Count III, titled " Quia Timet," sought to require TRG to deposit collateral with Fidelity in an amount sufficient to protect Fidelity from any loss.

          [¶8] Following some initial discovery, all of the parties filed various dispositive motions. As relevant here, the City filed a motion for partial summary judgment against each defendant, seeking a declaration of liability. Fidelity filed a motion for summary judgment against the City and TRG on its first affirmative defense, arguing that the sale of the property to TRG had discharged Kimball Hill's liability under the Annexation Agreement and therefore discharged Fidelity's obligations under the bonds. TRG filed two motions to dismiss the City's complaint pursuant to section 2-615 of the Code: the first argued that TRG had no obligations under the Annexation Agreement, while the second argued separately that the City had failed to join all necessary parties by failing to join the individual homeowners who had purchased lots in the development.

          [¶9] On December 4, 2013, the trial court issued a memorandum order regarding the motions that had been filed. It first held that the Annexation Agreement constituted a covenant running with the land, and thus its validity was not impaired by Kimball Hill's bankruptcy. However, the Annexation Agreement had been discharged as to Kimball Hill by Kimball Hill's sale of its remaining property to TRG. The sureties, Arch and Fidelity, argued that this discharge of Kimball Hill also operated to discharge their duties, because the liability of a surety arises from the same conduct as the liability of the principal, and the release of the principal also releases the surety. The trial court agreed, finding that the Annexation Agreement did not contain any reservation of rights through which the City could enforce the agreement against the sureties even after the discharge of the principal. Thus, the City could not proceed against Arch and Fidelity under the Annexation Agreement.

          [¶10] However, the trial court then held that the City could seek payment from Arch and Fidelity under the bonds they had issued, because those bonds constituted contracts separate from the Annexation Agreement. In so holding, the trial court adopted the City's argument along the following lines. In December 2003, Kimball Hill purportedly conveyed its interest in the development to " Waterford Limited Partnership." (Kimball Hill was the general partner of this limited partnership, which was one of the affiliated entities involved in the Kimball Hill bankruptcy in 2008.) A warranty deed for the conveyance was recorded on January 14, 2004. Because the Annexation Agreement provided that the sale of the development property discharged Kimball Hill's obligations and imposed those obligations on the purchaser, the trial court reasoned that Kimball Hill owed no further performance under the Annexation Agreement after January 2004. Nevertheless, the sureties issued bonds guaranteeing Kimball Hill's performance, all of which were issued after that date. Further, the bonds did not expressly refer to the Annexation Agreement. Thus, the trial court held, the bonds represented new contracts that were separate from the Annexation Agreement, and the City could seek payment under the bonds even if Kimball Hill, Arch, and Fidelity were not obligated under the Annexation Agreement.

          [¶11] On the basis of this holding, the trial court denied the sureties' dispositive motions and granted the City's motion for partial summary judgment as to the sureties' liability under the bonds. Fidelity, the appellant here, has not appealed from this order.

          [¶12] As to TRG's liability to the City, the trial court held that the Annexation Agreement bound TRG as a subsequent purchaser of land within the development, and TRG was subject to the terms and obligations of the Annexation Agreement. Nevertheless, the trial court granted TRG's motions to dismiss the City's complaint against TRG. The trial court's sole comment relating to this dismissal was that not " all of those in the same situation" as TRG were joined as parties. Presumably, this comment indicated that the trial court believed that the individuals who had purchased homes in the development were indispensable parties to the suit. However, the trial court did not elaborate on its reasoning for this conclusion.

          [¶13] Shortly after the trial court issued its December 2013 order, Fidelity filed an amended counterclaim against TRG, adding a fourth count alleging unjust enrichment. TRG moved to dismiss the amended counterclaim pursuant to section 2-615 of the Code, arguing that the counterclaim should be dismissed for failure to name all necessary parties (the individual homeowners who purchased improved lots) and that TRG could not be liable to Fidelity on the bonds, because it was not a party to the bonds and had no relationship to Fidelity. On May 29, 2014, the trial court granted TRG's motion and dismissed the counterclaim with prejudice. The record does not contain any insight into the trial court's rationale.

          [¶14] The case proceeded to trial in September 2014. The City settled its claim against Arch in October, and later reached a settlement with Fidelity as well. In December, the trial court entered an agreed dismissal order in which the City voluntarily nonsuited its claims against TRG and TRG retained all rights and defenses, thereby disposing of all remaining issues. Fidelity filed ...

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