United City of Yorkville v. Fid. & Deposit Co. of Md.

2019 IL App (2d) 180230

143 N.E.3d 69

436 Ill.Dec. 574

The UNITED CITY OF YORKVILLE, Plaintiff-Appellant,

v.FIDELITY AND DEPOSIT COMPANY OF MARYLAND; Kimball Hill, Inc.; TRG Venture Two, LLC; and William Ryan Homes, Inc., Defendants

(Fidelity and Deposit Company of Maryland, Defendant and Third-Party Plaintiff-Appellant; TRG Venture Two, LLC, and William Ryan Homes, Inc., Defendants and Third-Party Defendants-Appellees).

The United City of Yorkville, Plaintiff-Appellant,

v.Fidelity and Deposit Company of Maryland; Kimball Hill, Inc.; and TRG Venture Two, LLC, Defendants

(Fidelity and Deposit Company of Maryland, Defendant and Third-Party Plaintiff; TRG Venture Two, LLC, Defendant and Third-Party Defendant-Appellee).

Nos. 2-18-0230

2-18-0231

2-18-0245 cons.

Appellate Court of Illinois, Second District.

Opinion filed March 20, 2019

Rehearing denied April 12, 2019

Thomas G. Gardiner, Michelle M. LaGrotta, and John R. Wrona, of Gardiner Koch Weisberg & Wrona, of Chicago, for appellant United City of Yorkville.

Cornelius F. Riordan and Harold E. McKee, of Schuyler, Roche & Crisham, P.C., of Chicago, for other appellant.

Edward B. Ruff III, Michael P. Turiello, and Scott L. Howie, of Pretzel & Stouffer Chtrd., of Chicago, for appellee TRG Venture Two, LLC.

Adam C. Toosley and Tina M. Bird, of Freeborn & Peters LLP, of Chicago, for other appellee.

PRESIDING JUSTICE BIRKETT delivered the judgment of the court, with opinion.

¶ 1 Defendant Kimball Hill, Inc. (KH), entered into an annexation agreement (Agreement or Annexation Agreement) with plaintiff, the United City of Yorkville (City), concerning a subdivision that KH intended to develop. The Annexation Agreement required, inter alia , that KH complete certain public improvements in the subdivision. Pursuant to the Agreement, defendant and third-party plaintiff, Fidelity and Deposit Company of Maryland (Fidelity), issued surety bonds to KH to secure completion of the improvements. KH went bankrupt before completing the improvements. Before and during the bankruptcy proceeding, defendants and third-party defendants, TRG Venture Two, LLC (TRG), and William Ryan Homes, Inc. (WRH), purchased lots in the subdivision from KH. When TRG and WRH refused the City's demand to complete the public improvements, the City sued them along with Fidelity, which in turn brought third-party complaints against TRG and WRH. Ultimately, the trial court dismissed both the City's complaints and Fidelity's third-party complaints. Fidelity subsequently reached a settlement with the City. The City and Fidelity appeal from the dismissals. For the following reasons, we reverse and remand

¶ 2 I. BACKGROUND

¶ 3 The three consolidated appeals in this case arise from two trial proceedings, Nos. 11-L-30 and 14-MR-90. The City initiated No. 11-L-30 in May 2011 and filed its amended complaint in January 2013. The City named Fidelity, KH, TRG, and WRH as defendants. The City initiated No. 14-MR-90 in May 2014 and filed its amended complaint in January 2015. The City named Fidelity, KH, and TRG as defendants.

¶ 4 A. The City's Complaints

¶ 5 For convenience, we combine into the following single narrative the factual allegations taken from the City's amended complaints.

¶ 6 The subject property is a 300-acre parcel situated partly within the City's corporate limits. The property is platted as a subdivision named Whispering Meadows (subdivision).

¶ 7 On August 12, 2003, the Annexation Agreement was signed by the City and the five record owners of the property. (Copies of the Agreement were attached to the City's amended complaints.) The named parties to the Agreement were the City, the record owners, and KH. The record owners were identified as "Owners" and KH as "Developer." The Agreement made KH responsible for constructing the public improvements for the subdivision and, to that end, required KH to furnish letters of credit or surety bonds to guarantee completion of the improvements. Regarding the Agreement's impact on successor owners and developers, section 22.B of the Agreement states:

"22. GENERAL PROVISIONS.

* * *

B. Successors and Assigns . This Agreement shall inure to the benefit of and be binding upon the OWNERS, DEVELOPER and their successors in title and interest, and upon the CITY, and any successor municipalities of the CITY. It is understood and agreed that this Agreement shall run with the land and as such, shall be assignable to and binding upon each and every subsequent grantee and successor in interest of the OWNERS and DEVELOPER, and the CITY. The foregoing to the contrary notwithstanding, the obligations and duties of OWNERS and DEVELOPER hereunder shall not be deemed transferred to or assumed by any purchaser of a [sic ] empty lot or a lot improved with a dwelling unit who acquires the same for residential occupation, unless otherwise expressly agreed in writing by such purchaser."

¶ 8 On October 1, 2003, the Annexation Agreement was recorded by the Kendall County Recorder.

¶ 9 On October 31, 2003, the record owners conveyed the subdivision to the Whispering Meadows Limited Partnership (Partnership). KHA was initially the Partnership's general partner. Subsequently, Kimball Homes Illinois, LLC (KHI), became the general partner. Eventually, the Partnership merged into KHI.

¶ 10 In February 2005, Fidelity issued four subdivision performance bonds. Each bond identified Fidelity as surety and KH as principal. The bonds described the improvements that KH agreed to undertake in units 1 and 2 of the subdivision. In April 2005 and August 2007, the City agreed to reduce the bonds.

¶ 11 The City alleged that, "[i]n or around 2005," the Partnership "conveyed by warranty deeds certain unimproved lots in Unit 1 and Unit 2 of [the subdivision] to [WRH]." WRH acquired the lots "to develop and improve them with single or multi-family residences for resale."

¶ 12 In 2008, KH, together with its related entities, including KHI, filed a voluntary petition for reorganization under the federal bankruptcy code. Later, the reorganization proceeding was converted to a "liquidating Chapter 11." KHI Post-Consummation Trust (Trust) was KHI's successor in the bankruptcy proceedings. On April 30, 2009, the Trust assigned to TRG KH's status as "Founder" under the "Community Charter for Whispering Meadows" (Charter). The assignment stated that TRG was receiving "all of [KH's] rights, title, interest, duties and obligations in, to and under the [Charter]."

¶ 13 The City further alleged that, "[i]n or around August 30, 2010," the Trust "conveyed by special warranty deed fifty-five unimproved lots in Unit 4 of [the subdivision] to [TRG]." TRG "acquired the lots to develop and improve them with single or multi-family residences for resale."

¶ 14 The City asserted that, when TRG and WRH acquired the lots from the Partnership and the Trust, TRG and WRH became, by operation of the succession clause of section 22.B, successors to KH. As successor developers, TRG and WRH were bound to complete the public improvements required by the Annexation Agreement. The City also alleged that KH's duty to complete the public improvements was a covenant that ran with the land.

¶ 15 As to Fidelity, the City alleged that, when TRG and WRH became successor developers, Fidelity became a surety to those entities for completion of the public improvements.

¶ 16 The City further asserted that TRG and WRH failed to complete the public improvements and, therefore, breached the Annexation Agreement. The City also claimed that Fidelity breached its surety agreements by refusing the City's demand that Fidelity pay out on the bonds or complete the public improvements.

¶ 17 The City's six-count amended complaint in No. 11-L-30 alleged breach of contract. Counts I through IV named Fidelity, count V named TRG, and count VI named WRH.

¶ 18 The City's seven-count amended complaint in No. 14-MR-90 alleged breach of contract and also sought a declaratory judgment. Counts I though IV named Fidelity, and counts V through VII named TRG.

¶ 19 The City's complaints did not attach any documentation of the transfer of subdivision lots to TRG and WRH. Some of those documents were attached to Fidelity's amended third-party complaints while others were provided during motion practice.

¶ 20 B. Fidelity's Third-Party Complaints

¶ 21 Fidelity filed original and amended third-party complaints against TRG and WRH in No. 11-L-30 and against TRG in 14-MR-90. Fidelity's factual allegations were consistent with the City's.

¶ 22 Fidelity attached to its complaints two warranty deeds. The first was dated October 15, 2005, and recorded on November 17, 2005. By that deed, the Partnership, with KHI as its sole general partner,¹ conveyed to WRH a total of 12 lots in units 1 and 2 of the subdivision. The deed stated that the conveyance was subject to "covenants, conditions, restrictions and easements of record." An exhibit to the deed clarified that one of the "covenants" of record was the Annexation Agreement.

¶ 23 The second warranty deed was dated April 30, 2010, and recorded on May 24, 2010. By that deed, the Trust conveyed to TRG 72 vacant lots in units 1, 2, and 4 of the subdivision. The deed stated that the conveyance was subject to the "[c]ovenants, conditions and restrictions of record."

¶ 24 The trial court ultimately dismissed Fidelity's third-party complaints in both cases. Our review of those dismissals is significantly narrowed in several aspects.

¶ 25 First, Fidelity filed an appeal from the dismissal of only its amended third-party complaint in No. 11-L-30. Moreover, Fidelity expressly disavows any challenge to the dismissal of the counts against TRG. Therefore, we are concerned only with its theories of liability against WRH. Fidelity's underlying theory in No. 11-L-30 was that the February 2005 performance bonds made KH the principal obligor—and Fidelity the secondary obligor—for completion of the public improvements specified in the bonds. When WRH received the lots from the Partnership, WRH...