Appellate Court Holds that School District Under State Finance Control Did Not Breach Contract with Third Party

In Innovative Modular Solutions v. Hazel Crest School District 152.5, the First District Appellate Court vacated the trial court’s judgment in favor of Innovative Modular Solutions (IMS) holding that the Hazel Crest School District Finance Authority (the “Authority”) had the power to cancel the contracts between the Hazel Crest School District 152.5 (the “District”) and IMS and to order the District not to pay the contract’s cancellation fees.  The Appellate Court thus affirmed the trial court’s grant of summary judgment in favor of the District holding that the District was not responsible for paying the contract cancellation fees because it was legally impossible for the District to act contrary to the Authority’s orders.

In 2002, the District entered into a five-year lease with IMS for IMS to provide portable classrooms for the District.  As a part of the lease contract, 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 problems, the State of Illinois invoked the “Downstate School Finance Authority for Elementary Districts Law” (the “School Finance Law”) which created and gave the responsibility for all of the District’s finances to the Authority.  Specifically, the State gave the Authority the powers “[t]o make, cancel, modify, and execute contracts, leases, subleases, and all other instruments or agreements.”  Pursuant to the School Finance Law, “no member, officer, employee, or agent of the District may take any action in violation of any valid order of the Authority”, and those who violate the Authority’s orders expose themselves to severe sanctions, including but not limited to administrative discipline, suspension, or removal from office.  The Authority cancelled the District’s leases with IMS in 2004, 2005 and 2006 and directed the District not to pay the cancellation fees pursuant to the terms of the leases.  IMS sought judgment declaring that the Authority lacked the power to cancel contracts except pursuant to the terms of the contract cancellation provisions and sued the District for the cancellation fees.

The Appellate Court held that State law gave the Authority the power to exercise control over the District’s finances and that the District acted in accordance with the School Finance Law in not paying the contract cancellation fees.  Once the State ordered the Authority to take over the District’s finances, the District officers had no authority to act contrary to the Authority’s orders and it would be legally impossible for the District to pay the contract cancellation fees in direct violation of the Authority’s order.