Keystone Montessori School v. Village of River Forest

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

Keystone Montessori School, a )

not-for-profit Illinois )

corporation, )

)

Plaintiff, )

)

)

v. ) No. 18 C 2010

)

Village of River Forest, an )

Illinois municipal )

corporation. )

)

Defendant. )

MEMORANDUM OPINION AND ORDER

Twenty years ago, the Keystone Montessori School, a primary

and secondary school with tax-exempt status under Section

501(c)(3) of the Internal Revenue Code, was looking for a new home

in the Village of River Forest. It reached an agreement with the

River Forest School District to purchase a building formerly used

as a public school, but the Village Board “killed” the sale

because it preferred to develop residences on the site in order to

generate tax revenue.1 The Board steered Keystone instead to a

long-vacant building formerly used for commercial business. But

because the Village’s zoning code precluded Keystone from

1 Unless otherwise stated, the facts recounted here are drawn from

the complaint and its exhibits. Although I take plaintiff’s

allegations as true for present purposes, I do not vouch for their

accuracy.

operating as a school at that site, Keystone submitted a “Request

for Forbearance” asking the Village to withhold strict enforcement

of the zoning code while it applied for a Planned Development

Permit and undertook renovations to bring the site into compliance

with the zoning ordinance. See Compl., Exh. A. In the Request for

Forbearance, Keystone acknowledged the risk that its permit

application might be denied and that it could lose any investments

it made in anticipation of occupancy. Id. at 2.

Keystone began operating at the site under lease in September

of 1998, with renovations underway and its application for a

Planned Development Permit pending. In early October, the Village

informed Keystone that a permit would be granted only if Keystone

agreed not to seek a property tax exemption. On November 23, 1998,

the Village passed Ordinance No. 2797, which granted Keystone’s

Planned Development Permit subject to the condition that Keystone

enter into a certain “Agreement Regarding Property Taxes” with the

Village (the “Agreement”). Compl., Exh. B.2 The Agreement provides

that the property would remain “fully subject to real estate

taxes” throughout Keystone’s use or occupancy of the premises, and

that Keystone would not seek or obtain any property tax exemption.

Id. The Agreement also sets forth the Village’s rights and

remedies against Keystone in the event the property were to become

2 Ordinance 3002 amended the Planned Development Permit in 2003,

but neither the Ordinance nor the parties’ submissions describe

the amendments.

tax exempt. These include the right to declare any Planned

Development Permit authorizing Keystone’s operation on the

premises null and void (which the parties stipulated would render

Keystone’s continued operation at the site a violation of the

zoning code), and the right to recover $100,000 annually, with

interest, for each year the property remains tax exempt. The

Agreement further provides that if Keystone fails to pay this

amount, the Village may sue Keystone for breach of contract and

recover liquidated damages of $500,000. Id. at 2-3.

The Agreement stipulates that in any legal proceeding brought

to enforce the Agreement, the Village is entitled to judgment in

its favor on the pleadings; that any allegations the Village

raises are deemed conclusive; and that the Village is entitled to

the relief it seeks. On top of that, Keystone agrees to “immediate

entry of judgment against it,” explicitly relinquishing any right

to trial by judge or jury “or any other pre-trial procedure”; its

right to engage in discovery or demand the presentation of

evidence; and its right to appeal any judgment that is entered.

Id. at 3. The Agreement provides that the Agreement shall

terminate, and all of Keystone’s obligations to the Village shall

cease, if Keystone transfers title to the property to a non-

related entity in a bona fide transfer and the property ceases to

function as a school. Id. Keystone explicitly represented that its

legal counsel and Board of Trustees had reviewed and approved the

Agreement. Id.

Keystone purchased the property at issue in December of 1998

and has made numerous improvements to the building over the years.

Beginning in 2002, Keystone has sought to amend the Agreement. It

made formal requests to the Village to reduce its tax burden in

2003, 2004, 2007, 2009, and 2011, and it has made repeated

proposals that the school be permitted to obtain a real estate tax

exemption while making certain negotiated payments in lieu of

taxes. The Village has not agreed to any of Keystone’s proposals.

Keystone continues to make payments on its mortgage loan, but its

property taxes for Tax Years 2016 and 2017 are delinquent, and the

property is now in foreclosure. Shea Decl., Pl.’s PI Mem., Exh. 3

at ¶¶ 10, 25. To date, Keystone has paid approximately $1.1

million in real estate taxes.

Keystone filed this action in the Circuit Court of Cook

County on March 6, 2018, and the Village removed on the ground

that I have original jurisdiction over two of Keystone’s claims,

of which it asserts five in total. In Counts I-IV, Keystone seeks

declarations that the Agreement is void because: it contravenes

public policy; it constitutes an unconstitutional condition

because it coerces Keystone into giving up its right to a tax

exemption; it constitutes an illegal zoning contract; and it is an

illegal perpetual contract. In Count V, Keystone asserts that the

Village violated its constitutional right to equal protection by

singling it out as the only Village not-for-profit entity required

to forfeit its right to a property tax exemption. The Village has

moved to dismiss the complaint, and both parties have moved for a

preliminary injunction. I resolve these motions as follows.

I.

The Village seeks to dispose of all of Keystone’s claims at

the threshold on the ground that they are barred by a two year

(for the federal claims) or a five year (for the contract claims)

statute of limitations.3 The Village acknowledges that this

affirmative defense is not ordinarily appropriate for resolution

at the pleadings stage but insists that in this case, it is

obvious from the complaint that Keystone’s claims accrued when the

Agreement was formed on November 3, 1998, and thus expired years

ago.

The Village also seeks dismissal of both constitutional

claims and all but one contracts claim (saving the claim that the

Agreement is illegal as a perpetual contract) under Fed. R. Civ.

P. 12(b)(6). In this portion of its motion, the Village argues

that the allegations supporting the contracts claims and the

“unconstitutional conditions” claim are contradicted by the face

3 The Village devotes several pages to the argument that Keystone’s

contracts claims are subject to a five-year rather than a ten-year

limitations period. But since its limitations theory is premised

on the argument that the claims accrued twenty years ago at

contract formation, the distinction is irrelevant.

of Agreement and that the equal protection claim fails on the

allegations themselves, which reveal a rational basis—the

Village’s desire to obtain tax revenue from Keystone’s property—

for singling out Keystone among Village schools.

Because this case was removed on the basis of original

federal jurisdiction, it makes sense to begin with Keystone’s

federal claims, since if those drop out of the case, the

appropriate course is to remand to state court. RWJ Management

Co., Inc. v. BP Products North America, Inc., 672 F.3d 476, 478

(7th Cir. 2012) (noting “general presumption” that district court

will relinquish supplemental jurisdiction and remand to state

court when federal claims will not proceed).

The unconstitutional conditions doctrine “vindicates the

Constitution’s enumerated rights by preventing the government from

coercing people into giving them up.” Koontz v. St. Johns River

Water Management Dist., 570 U.S. 595, 604 (2013). Accordingly, a

plaintiff invoking the doctrine must plausibly allege that the

government’s coercive conduct caused it to relinquish a right

rooted in the Constitution. In Koontz (as in Nollan v. California

Coastal Comm’n, 483 U.S. 825 (1987), and Dolan v. City of Tigard,

512 U.S. 374 (1994), all of which involved land-use regulation and

feature prominently in Keystone’s argument), the Court examined

whether the conditions a local government imposed on the approval

of land-use permits violated the Constitution’s Takings Clause by

“pressur[ing] an owner into voluntarily giving up property for

which the Fifth Amendment would otherwise require just

compensation.” Koontz, 570 U.S. at 605 (discussing Dolan and

Nollan). To answer that question, the Court applied a two-part

test that considers: 1) whether there is an “essential nexus”

between a legitimate governmental interest and the condition

imposed; and 2) whether there is “rough proportionality” between

the burden on the property owner and the harm the government seeks

to remedy. Id.

Because Keystone’s invocation of the unconstitutional

conditions doctrine fails at the threshold, I need not undertake

the two-part Dolan/Nollan inquiry. The fundamental flaw in

Keystone’s theory is that the right it claims it was coerced into

giving up—the right to seek a tax exemption—is not derived from

the Constitution. As Keystone elsewhere explains, that right is

rooted in the Illinois Property Tax Code. See Pl.’s Resp. to MTD,

at 6. Indeed, asked at oral argument to explain why the

Agreement’s provision requiring Keystone to pay taxes was

unconstitutional, counsel for Keystone responded:

Well, it violates the Illinois constitution, which

allows the legislature to create exemptions. That’s the

Illinois constitution. It gives the legislature that

authority. The legislature has said, schools are exempt.

That’s, I think, an exact quote of the Illinois statute.

So it’s a statute established according to Illinois

constitution, and they’re violating that.

Tr. of 7/12/2018 H’rg at 5:22-6:3. Counsel’s explanation does not

articulate a federal constitutional theory. On its face, it

alleges violation of an Illinois tax statute. Keystone cites no

case in which a court has held that the imposition of a property

tax pursuant to a state tax code effectuates a constitutional

taking. In fact, the law is to the contrary. As the Supreme Court

of Illinois held in Empress Casino Joliet Corp. v. Giannoulias,

896 N.E. 2d 277, 291 (Ill. 2008), “[i]t is well settled that the

takings clauses of the federal and state constitutions apply only

to the state’s exercise of eminent domain and not to the state’s

power of taxation”) (citing County of Mobile v. Kimball, 102 U.S.

691, 703, (1880) (“But neither is taxation for a public purpose,

however great, the taking of private property for public use, in

the sense of the Constitution”)). See also Eastern Enterprises v.

Apfel, 524 U.S. 498, 504 (1998) (Kennedy, J., concurring in

judgment and dissenting in part) (monetary obligations imposed by

statute not subject to a takings analysis), and 554-55 (Breyer,

J., dissenting, joined by Stevens, Souter, and Ginsburg, JJ.)

(agreeing with Justice Kennedy that the Takings Clause was not

applicable and observing, “[i]f the Clause applies when the

government simply orders A to pay B, why does it not apply when

the government simply orders A to pay the government, i.e., when

it assesses a tax?”). In short, because payment of property taxes

does not implicate the Takings Clause, Keystone’s claim that the

Village violated the federal and Illinois constitutions by

conditioning the Planned Development Permit on Keystone’s payment

of property taxes fails as a matter of law.

Keystone’s Equal Protection claim fares no better. The

complaint alleges that Keystone is “the only not-for-profit use in

River Forest that has been required, and is still required, to

forfeit a right to property tax exemption for the ability to

continue operating,” and that the Village targeted Keystone for

unfavorable tax treatment. Compl. at ¶¶ 68-69. But Keystone’s

class-of-one theory, which requires it to allege that it was

irrationally singled out for discriminatory treatment, see Village

of Willowbrook v. Olech, 528 U.S. 562, 564 (2000), is an awkward

fit for its allegations. The complaint acknowledges that absent

the Planned Development Permit, the Village’s zoning ordinance

prohibits the operation of a school on the property Keystone

currently owns and occupies. In other words, by granting the

permit, the Village actually singled out Keystone for favorable

treatment, authorizing it to operate at a location where it was

otherwise prohibited by the Village’s generally-applicable zoning

ordinance. True, the Village made the permit contingent on

Keystone’s commitment to continue paying property taxes. But

Keystone’s allegations do not support its claim that the Village

“targeted” it for less favorable tax treatment than it accorded

other not-for-profit entities. Indeed, nothing in the complaint

suggests that any other not-for-profit operates in an area where

its activities are otherwise prohibited by the Village’s zoning

ordinance, or that it owns and occupies a presumptively tax-

generating property but still exercises its statutory right to a

tax exemption. In short, the complaint does not, on its face,

raise a plausible inference that the Village has treated a

Similarly situated entity differently from how it has treated

Keystone.

Il.

Because I conclude that Keystone has not stated an actionable

federal claim, I dismiss those claims and remand the remainder of

the case to state court. And while I express no opinion on the

merits of Keystone’s contracts claims, I do question the wisdom of

the Village’s apparent insistence upon strict compliance with such

a patently one-sided agreement, regardless of the circumstances

that led to its formation. The parties’ cross-motions for

preliminary injunction are denied as moot.

ENTER ORDER:

Cell ~

-———s«wBlaine E. Bucklo

United States District Judge

Dated: July 17, 2018

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