59th and Ashland, LLC v. State of Illinois, Illinois Department of Central Management Services

59TH AND ASHLAND, LLC, Claimant, v. STATE OF ILLINOIS, ILLINOIS

DEPARTMENT OF CENTRAL MANAGEMENT SERVICES, Respondent.

Opinion filed August 22, 2012

Supplemental opinion filed January 14, 2013

RONALD DAMASHEK, for Claimant

LISA MADIGAN, Attorney General (MARTIN BURZAWA, Assistant Attorney

General, of counsel), for Respondent.

Contracts- Penalty Provisions- Penalty provisions in contracts are inherently

not applicable against the State of Illinois.

Contracts- Liquidated Damages- A liquidated damages provision is not

enforceable unless the amount so fixed is a reasonable forecast of just

compensation for the harm that is caused by the breach and the harm is

incapable or very difficult of accurate estimation.

ORDER

Judge Peter J. Birnbaum

THIS MATTER is before the Court on Claimant’s July 24, 2009 Motion for Summary Judgment against the Respondent, the State of Illinois, Department of

Central Management

Services (“CMS”).

On August 6, 2009, Respondent responded to Claimant’s Motion for Summary Judgment.

Subsequently, on December 12, 2011, this Court entertained oral argument regarding the Motion for Summary Judgment.

Nature of the Claim

Claimant, 59th & Ashland LLC, was formed on July 2, 2002 and its members were Samih Jaber, Fysl Mohamed, and Ali Ata.

The ownership interest of these three members was accurately disclosed to Respondent, CMS, upon entering Lease Number 5833 to use Claimant’s 40,000 square foot building located at 1642 W. 59th Street, Chicago IL.

Claimant alleges Respondent failed to pay rent and occupancy charges since June 2008 for the Illinois Department of Human Services’ use of this property.

In the fall of 2008, Claimant unsuccessfully attempted to evict Respondent from the property based on a service of a 5-day notice for non-payment of rent in a 2008 Eviction Action (08 M1 726697).

That case was dismissed for lack of jurisdiction and was the subject of appeal as to the issue of possession (2008 Appeal: 08-3633).

The Lease between the parties had a ten-year term, which was [*201] cancelable by Respondent after five years.

During the 2008 Eviction Action, Respondent served Claimant with a notice terminating the Lease at the end of its first five-year term beginning on February 1, 2009.

The Illinois Department of Human Services, however, continued to occupy the space.

In 2009, Claimant filed a second eviction action against the State in the Circuit Court of Cook County (09 M1 704534).

Claimant’s Petition was granted, but the Circuit Court gave the Illinois Department of Human Services until August 31, 2009 to vacate the property.

The

Illinois Department of Human Services and Respondent, CMS, filed a Notice of Appeal (09-1612) on jurisdictional grounds which is pending before the First District Appellate Court.

The Illinois Department of Human Services vacated the property on August 31, 2009.

In the case filed with this Court, Claimant seeks monetary relief of $1,522,833.18 for rent from June 2008 through August 31, 2009.

Under the Lease, rent was scheduled to be paid on June 2008 at $67,666.67; July 2008-June 2009 at $69,033.33; and July 2009-June 2010 at $70,400.00.

The $1,522,833.18 amount calculated from the lease schedule and Claimant multiplied the amounts due in accord with the Illinois Forcible Entry and Detainer Act, holding that a tenant may be liable for double the amount of rent scheduled to be paid under the lease. ILCS 5/9-203.

Section 9-203 states in pertinent part:

Holding over after notice.

If any tenant gives notice of his or her

intention to quit the premises which are held by him or her, at a time

mentioned in such notice, at which time the tenant would have right

to quit by the lease, and does not accordingly deliver up possession

thereof, such tenant shall pay to the landlord or lessor double the rent

or sum which would otherwise be due, to be collected in the same

manner as the rent otherwise due should have been collected.

Lastly, Claimant seeks permission to withdraw its claim for additional consequential damages as a result of a mortgage foreclosure action instituted against Claimant without prejudice to its right to pursue those alleged damages in the future.

Respondent contends that double rent is not recoverable from the State and in support cites Illinois State Trust Company v. Board of Trustees of Southern Illinois University, 39 Ill.Ct.Cl. 1 (1986).

On the issue of damages, Respondent argues that the liquidated damages clause of the Lease provides for a 25% reduction in the amount of rent owed as a stipulated amount.

The pertinent clause states in part:

It is acknowledged that in the event of such a material breach by the

Lessor its assigns, transferees, or other successors in interest, Lessee

shall be entitled to immediately terminate this Lease and vacate the

demised premises.

In the Alternative, Lessee may elect to declare the [*202]

material breach but retain possession for the balance of any term

remaining and as liquidated damages and not as a penalty to reduce

rental payments and other charges due hereunder by twenty-five

(25%) for the entire term of this Lease, including any extensions

thereto or periods of holdover, or until the material breach is

cured by full and complete disclosure, whichever comes first.

The foregoing reductions represent a reasonable endeavor by the

parties hereto to estimate a fair compensation for the foreseeable

losses to Lessee that might result from such breach. (Emphasis

Added)

Specifically, Respondent argues this liquidated damages provision controls in the specific instance, as it alleges Claimant committed a material breach of the disclosure terms of the lease in that it failed to properly disclose to the Illinois Department of Central Management Services the various changes in ownership of the 59th & Ashland LLC from the time of the initial disclosure when Lease Number 5833 was executed up to the time Samih Jaber acquired 100% ownership in 59th & Ashland LLC.

Additionally, Respondent argues that Claimant violated a State statute, alleging that Ali Ata improperly held an ownership interest in 59th & Ashland LLC while concurrently holding the position of Executive Director of the Illinois Finance Authority, none of which was disclosed to Respondent.

Thus, Respondent argues it is entitled to liquidated damages in the amount of $913,669.63, representing 25% of the amount due under the lease from inception until the disclosure of Samih Jaber acquiring a 100% interest in 59th & Ashland LLC was made on August 12, 2008.

Claimant responds that the liquidated damages 25% set-off from the scheduled rent due under the Lease is improper as the initial disclosures of the onethird ownership interests of Samih Jaber, Faysel Mohmmd and Ali Ata, was sufficient as these three owners continuously owned the Building either directly or indirectly since the commencement of the Lease.

Additionally, it argues that when Jaber became the sole owner of 59th & Ashland LLC, in August of 2008 he completed a disclosure from reflecting this 100% ownership and disclosed to Respondent all information known to him regarding the prior ownership interests.

Lastly, Claimant

argues Respondent has no right to the liquidated damages 25% rent reduction because it allegedly constitutes an unenforceable penalty as stated in section 356 of the Restatement (Second) of Contracts (1981):

(1)

Damages for breach by either party may be liquidated in the

agreement but only at an amount that is reasonable in the light of the

anticipated or actual loss caused by the breach and the difficulties of

proof of loss.

A term fixing unreasonably large liquidated damages is

unenforceable on grounds of public policy as a penalty.

Under this language, Claimant argues that Respondent admits that the liquidated damages clause is an unenforceable penalty provision because its decision to not pay rent rests fully with Claimant’s alleged failure to comply with the disclosure provisions of the Lease.

Additionally, it argues the 25% figure is [*203] arbitrary and could have been easily set at 10%, 15%, or some other amount, thus making the provision unenforceable as the parties cannot estimate damages resulting from non-disclosure prior to noncompliance.

Claimant further alleges there are only limited situations in which Respondent can measure its monetary damages as a result of non-disclosure, none applicable here, rendering the liquidated damages clause unenforceable.

Analysis

Double Rent

Following the oral argument held before this Court, Claimant was afforded the opportunity to distinguish its double rent claim as a statutory cause of action pursuant to the Forcible Entry and Detainer Act.

735 ILCS 5/9-203.

Claimant

argues that the double rent provision is applicable to the State, resulting in double the monthly rent damages in the amount of $1,522,833.18.

However, penalty provisions in contracts are inherently not applicable against the State of Illinois.

Illinois Power Co. v. State, 30 Ill. Ct. Cl. 506, 508 (1975).

This Court will look to the contract to see the nature and purpose of fixing the amount of damages to be paid.

If it appears Claimant seeks a penalty or relief in derogation of eh common law to be applicable to the State, the named statute must specifically and clearly named the State is liable.

City of Springfield v. Allphin, 82 Ill. 2d 571, 413 N.E.2d 394 (1980).

Double the monthly rent is a contract penalty provision and its penalty against the State would be prohibited.

Illinois State Trust Co. v. Boart of Trustees of Southern Illinois University, 39 Ill. Ct. Cl. 1 (1986).

Thus, Claimant’s claim for double monthly rent is DENIED.

Liquidated Damages

A liquidated damages provision is not enforceable unless the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach and the harm is incapable or very difficult of accurate estimation.

Bauer v. Sawyer, 8 Ill. 2d 351 (1956). This Court agrees with Respondent that the ownership interests from the time of initial disclosure to the time Samih Jabber acquired ownership in 59th & Ashland LLC were not properly disclosed to Respondent.

Most

importantly, this Court agrees that Ali Ata improperly held an interest in 59th & Ashland during the time he held the position of Executive Director of the Illinois Finance Authority.

This position failed to be properly disclosed to Respondent.

This Court does not lightly consider these failures of disclosure.

59th & Ashland wantonly and with apparent disregard, failed to properly disclose ownership interests through the actions or omission of its members.

The specific terms of the lease gave 59th & Ashland disclosure options it could make a full disclosure of ownership interests and, failing that, the lessee was entitled to a twenty-five percent reduction in the rent.

This Court finds that 59th & Ashland was aware of the consequences of its actions pursuant to the lease and thus, the twentyfive percent reduction for nondisclosure is reasonable given the public policy surrounding disclosure and ethics requirements in State contracts.

Court of Claims precedent establishes the State’s authority to withhold funds s liquidated damages.

[*204] Specifically, in Davinory v. State, 44 Ill. Ct. Cl. 268 (1991), the Court held the Illinois Department of Transportation, pursuant to the liquidated damages clause of its construction contract with Claimant, was justified in withholding $38,640.00 from Claimant for failure to complete a pump station project within 160 days.

The

Davinroy Court held that the record supported the withholding as Claimant had been given numerous warnings of his impending failure to complete the project on time and was informed of the consequences of that failure.

The citizens of the State of Illinois have been subjected to multiple insults, humiliations and incalculable damage as a result of the many instances of misconduct that occurred during the administration under which Mr. Ali Ata held a significant position of power.

The record reflects that Mr. Ata pled guilty to public corruption charges that include, but are not limited to, his misconduct specifically related to the lease agreement that is before the Court.

One of the fundamental ways the State seeks to assure honesty and fairness in its business dealings is to require a disclosure of ownership interest.

Those disclosure laws are designed to assure that public officials do not misuse their positions to procure a personal economic benefit.

Here, Mr. Ata failed to disclose his financial interest at a time in which his position of power in State government was undeniably relevant to his personal business interests.

The State needs a remedy to redress this type of misconduct.

Without a reasonable statement of damages the disclosure rules would be nothing more than a toothless tiger.

A 25% penalty for non-disclosure on these facts is fair and reasonable because of the damages the State incurred as a result of the misconduct.

Lastly, as this Court has concluded that Respondent is entitled to setoff for liquidated damages based on the twenty-five percent rent setoff, it must calculate the date of disclosure.

We find the applicable date to be when Samih Jaber provided Respondent with a detailed disclosure of all information claimed to be in his possession or control regarding the ownership of Claimant to be August 12, 2008.

Thus, Respondent is entitled to a setoff for liquidated damages from the effective date of lease until the August 2008 disclosure.

The parties have submitted stipulated rent calculations which provide numbers for various scenarios argued herein.

Based on this Court’s findings and the stipulated rent calculations, Claimant is entitled to rent due from June, 2008 through August, 2009 in the stipulated amount of $1,0343,133.29.

However, Respondent is due a setoff from the rent due in the form of liquidated damages of 25% of the gross rental amounts due from the date of lease inception until August 12, 2008.

The

parties have stipulated that this liquidated damage amount is $913,669.63.

Thus, Claimant is due $120,463.66.

Therefore, the Court finds that Claimant’s Motion for Summary Judgment is granted in favor of Claimant in the amount of $120,463.66 as full disposition of this claim.

[*205] However, the question of entering an award remains before the Court.

This

Court cannot enter an award unless sufficient funds lapsed in the appropriations designated to pay for this rental obligation.

As explained in Graham, O’Shea and Hyde v. State, 44 Ill.Ct.Cl. 175, 177 (1992) and the cases cited therein:

In breach of contract claims, whether the claims are before us on their

merits or for approval of a settlement, it is this Court’s policy to limit awards

so as not to exceed the amount of funds, appropriated and lapsed, with which

payment could have been made.

To do otherwise, i.e., to award money for

debt incurred beyond the sum allotted by the General Assembly, would be

tantamount to making a deficiency appropriation.

The appropriation of State

funds for governmental operations is the constitutional prerogative of the

General Assembly.

It is this Court’s duty to uphold that process and advise

the General Assembly.

Therefore, before entering an award for Claimant or making a recommendation to the General Assembly, the Court needs additional information.

It is hereby ordered that Respondent shall file, within 21 days within the filing of this Opinion, a Departmental Report which includes fiscal information regarding the amount of funds that lapsed in the appropriations designated to pay for the underlying rental obligation related to this case, so the Court can determine the amount that can be awarded.

ORDER

THIS MATTER is before the Court following its August 22, 2012, Order granting Claimant’s Motion for Summary Judgment against the Respondent, the State of Illinois, Department of Central Management Services (“CMS”).

This Court ordered Respondent to file a Departmental Report including fiscal information regarding the amount of funds that lapsed in the appropriations designated to pay for the underlying rental obligation related to this case.

On

September 7, 2012, Respondent filed a Departmental Report indicating that funds are available for satisfaction of the amount found due in this Court’s August 22, 2012, Summary Judgment Order.

On October 2, 2012, the attorney’s for Claimant, Stahl, Cowen, et al., filed a Motion to Enforce Attorney’s Lien Judgment.

Counsel has attached a Cook County Circuit Court Order indicating that they are entitled to receive the first $33,383.61 out of the proceeds of any recovery in this proceeding.

This Court finds that Stahl, Cowen, et al. has a legitimate, first lien priority attorney’s lien against the recovery in this proceeding.

IT IS HEREBY ORDERED that Claimant is awarded $120,463.66 as full disposition of this claim, payable as follows:

[*206] 1. $33,383.61 is payable directly to Stahl, Cowen, Crowley, Addis, LLC, in

satisfaction of its first lien priority attorney’s lien;

2. The remainder, $87,080.05, is payable to Claimant, 59th and Ashland, LLC.