County of Cook v. Kellogg Company

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

COUNTY OF COOK, a body politic and )

corporate of the state of Illinois, )

)

Plaintiff/Counter-Defendant, )

) 16 C 3399

v. )

) Judge John Z. Lee

KELLOGG COMPANY, a Delaware )

corporation, )

)

Defendant/Counter-Plaintiff. )

MEMORANDUM OPINION AND ORDER

In this diversity case, Cook County (“the County”) has sued Kellogg Company (“Kellogg”)

under Illinois law for unjust enrichment, as well as for a declaratory judgment that the County is

not obligated to provide free steam heat to Kellogg. Kellogg, in turn, has countersued the County

for a declaratory judgment that the County is so obligated and for breach of a covenant running

with the land. The County has moved for summary judgment on its claims. Kellogg has cross-

moved for summary judgment as to the County’s claims, as well as Kellogg’s own declaratory

judgment claim. For the reasons provided below, the County’s motion is denied, and Kellogg’s

motion is granted. Because Kellogg has not moved for summary judgment on its breach-of-

covenant counterclaim, it is the only claim that remains for trial.

Facts1

Prior to December 27, 1973, the City of Chicago (“the City”) owned a municipal heating

plant. Def.’s LR 56.1(b)(3)(C) Stmt. ¶ 1, ECF No. 94. On that date, the City and the County

entered into an agreement entitled, “Contract for the Sale of a Municipal Heating Plant from the

1 The following facts are undisputed unless otherwise noted.

City of Chicago to the County of Cook” (“1973 Agreement”). Pl.’s Ex. 1, 1973 Agreement at 10,

ECF No. 88-1. The County Board of Commissioners approved the 1973 Agreement on December

20, 1973. Id.

At the time of the 1973 Agreement, seventy percent of the steam output manufactured by

the heating plant was used by the County for its existing facilities, while the remaining thirty

percent was used by the City. Id. at 2. The County, however, planned to build and rehabilitate

additional facilities that would require significantly more steam heat. Id. at 1. To service these

additional facilities, the plant needed to undergo the construction of an addition as well as other

improvements. Id. Given this, the City and the County agreed that it would be better for the

County to possess fee title to the plant, rather than the City. Id. at 4.

In pertinent part, the 1973 Agreement provides:

1. The City will sell certain real property as legally described in

Exhibit “A”, to the County and that the County shall in perpetuity,

or so long as the City in its sole discretion may require, furnish steam

heat for the property described in Exhibit “B” presently owned by

the City. The City shall have the right to receive steam heat for the

existing buildings, or any other building which may be constructed

by the City within the complex described in Exhibit “B”.

2. The City, its successors or assigns shall have the right to receive

the same quantity of steam heat servicing the property located on

Exhibit “B” from the County at no cost to the City for as long as the

City in its discretion shall require.

3. The right of the City to receive steam heat from the Municipal

Heating Plant shall be a “covenant running with the land” for the

benefit of those properties delineated in Exhibit “B”.

Def.’s LR 56.1(b)(3)(C) Stmt. ¶ 2.

One of the sixteen properties listed in Exhibit “B” is a building described as “WARE

HOUSE.” Id. ¶ 5; 1973 Agreement, Ex. B. The warehouse is located south of W. 31st Street and

west of Sacramento Avenue in Chicago, Illinois, on a parcel assigned PIN 16-36-100-056-0000

by the County Recorder (“Warehouse Property”). Def.’s LR 56.1(b)(3)(C) Stmt. ¶¶ 6–7.

From 1973 to 2015, the County provided steam heat to the Warehouse Property at no cost.

Id. ¶ 29. During this time, various private entities owned, leased, or otherwise occupied the

Warehouse Property. Pl.’s LR 56.1(a)(3) Stmt. ¶ 31, ECF No. 88. For example, the City subleased

the Warehouse Property to Farley Candy Co. (“Farley”) in 1992, and the sublease was recorded

with the County Recorder. Def.’s LR 56.1(b)(3)(C) Stmt. ¶¶ 9–10. At some point thereafter, the

City conveyed the deed to the Warehouse Property to Farley, which was succeeded by Favorite

Brands International, Inc. (“Favorite Brands”). See id. ¶ 11. Favorite Brands then conveyed the

deed in the Warehouse Property to Nabisco, Inc., and the transfer was recorded with the County

Recorder in 1999. Id. ¶¶ 12–13. Nabisco, Inc. then was succeeded in interest by Kraft Foods

Global Inc. (“Kraft”). Id. ¶ 14.

Finally, in 2005, Kraft entered into an asset purchase agreement with Kellogg. And, as

part of that transaction, Kraft conveyed its fee simple interest in the Warehouse Property to Keebler

Company, a wholly owned subsidiary of Kellogg, by special warranty deed, which was recorded

with the County Recorder in June 2005. Id. ¶¶ 15, 16.

Prior to purchasing the Warehouse Property, Kellogg learned, as part of its due-diligence

inquiry, that the owner of the Warehouse Property is entitled to steam heat free of charge as in past

practice with prior owners. Id. ¶ 17. Not surprisingly, this affected the purchase price. Id. ¶ 19.

To date, neither the City nor Kellogg has notified the County that steam heat is no longer

required at the Warehouse Property. Id. ¶¶ 50–51. Nonetheless, the County ceased providing

steam heat to Kellogg in 2015. Id. ¶ 53. On May 15, 2015, the County sent a letter demanding

payment of $2,116,800 for steam heat the County had provided Kellogg from 2005 to 2015. Pl.’s

LR 56.1(a)(3) Stmt. ¶¶ 70–71.

Legal Standard

Summary judgment is proper when “there is no genuine dispute as to any material fact and

the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). In ruling on a motion

for summary judgment, a court must “view the facts in the light most favorable to the nonmoving

party.” Plumhoff v. Rickard, 134 S. Ct. 2012, 2017 (2014). A district court gives the nonmoving

party “the benefit of conflicts in the evidence and reasonable inferences that could be drawn from

it.” Grochocinski v. Mayer Brown Rowe & Maw, LLP, 719 F.3d 785, 794 (7th Cir. 2013). The

Court must not make credibility determinations or weigh conflicting evidence. McCann v.

Iroquois Mem’l Hosp., 622 F.3d 745, 752 (7th Cir. 2010). “The judge must ask whether a fair-

minded jury could return a verdict for the plaintiff on the evidence presented. The existence of a

mere scintilla of evidence supporting a plaintiff's position is insufficient; there must be evidence

on which a jury could reasonably find for the plaintiff.” Insolia v. Phillip Morris, Inc., 216 F.3d

596, 599 (7th Cir. 2000).

Analysis

I. Whether the County Is Obligated Under a Covenant Running with the Land to

Provide Free Steam Heat to Kellogg

“A covenant is a contract to which the ordinary rules of contract construction apply.”

Chiurato v. Dayton Estates Dam & Water Co., 82 N.E.3d 789, 797 (Ill. App. Ct. 2017). “In

interpreting a covenant, the goal of the court is to give effect to the actual intent of the parties when

the covenant was made.” Neufairfield Homeowners Ass’n v. Wagner, 42 N.E.3d 941, 944 (Ill.

App. Ct. 2015).

“Where the covenants are unambiguous and the intent of the parties can be determined by

the covenants’ explicit provisions, courts should effectuate that intent without relying on extrinsic

aids.” Chiurato, 82 N.E.3d at 797. Where the “operative part of the agreement is clear and free

from ambiguity,” its “clearly expressed stipulations cannot be controlled by but must prevail over

the recitals.” Chi. Daily News v. Kohler, 196 N.E. 445, 451 (Ill. 1935).

Under Illinois law, to determine whether a covenant runs with the land, “a court looks to

whether: (1) the grantee and the grantor intended the covenant to run with the land; (2) the covenant

touches and concerns the land; and (3) there is privity of estate between the party claiming the

benefit and the party resting under the burden of the covenant.” Bank of Am., N.A. v. Cannonball

LLC, 12 N.E. 3d 841, 847–48 (Ill. App. Ct. 2014) (citing Streams Sports Club, Ltd. v. Richmond,

457 N.E.2d 1226, 1230 (Ill. 1983)).

The County apparently concedes the latter two elements and focuses solely on the first,

arguing that the City and the County never intended a covenant for free steam to run with the land.

The 1973 Agreement states, in pertinent part:

1. The City will sell certain real property as legally described in

Exhibit “A”, to the County and that the County shall in perpetuity,

or so long as the City in its sole discretion may require, furnish steam

heat for the property described in Exhibit “B” presently owned by

the City. The City shall have the right to receive steam heat for the

existing buildings, or any other building which may be constructed

by the City within the complex described in Exhibit “B”.

2. The City, its successors or assigns shall have the right to receive

the same quantity of steam heat servicing the property located on

Exhibit “B” from the County at no cost to the City for as long as the

City in its discretion shall require.

3. The right of the City to receive steam heat from the Municipal

Heating Plant shall be a “covenant running with the land” for the

benefit of those properties delineated in Exhibit “B”.

***

14. None of the provisions of the Agreement is intended to or shall

be merged by reason of any deed transferring title to the Property

from the City to the County or any successor in interest, and any

such deed shall not be deemed to affect or impair the provisions and

covenants of the Agreement.

1973 Agreement ¶¶ 1–3, 10, 14.

The County first asserts that, under paragraph 2, Kellogg is not the City’s “successor”

because the City was not acquired by, nor did it merge with, Kellogg. The County relies in part

on a case in which an Illinois appellate court affirmed the trial court’s grant of a motion to compel

arbitration where the defendant corporation was deemed a successor due to its merger with a

corporation that had signed the arbitration agreement. See Robert A. Besner & Co. v. Lit Am., Inc.,

574, N.E.2d 703, 704 (Ill. App. Ct. 1991). But Besner has limited value here, because it did not

involve a municipal corporation or real property.

The County also relies on Venner v. Chicago City Railway Co., 86 N.E. 266, 270 (Ill.

1908), to support its theory that the parties anticipated that another municipal corporation, rather

than a private entity, might acquire the City and become its “successor.” But Venner too is

inapposite. First, the Venner court stated, in 1908, that the City was growing through annexation

of surrounding villages and cities, not that it faced acquisition. Second, nowhere does Venner refer

to any annexing entity as a “successor.”

In the end, the Court is unpersuaded by the County’s crabbed reading of the term

“successor.” In the context of a contract involving real property, such as the 1973 Agreement, the

most natural reading of the term “successor” describes one to whom title to the property is

conveyed. See Kessler v. Palmeri, 3278 N.E.2d 813, 815 (Ill. App. Ct. 1972). Because the City

conveyed the deed to the Warehouse Property to Farley, and, after a series of owners, the deed was

ultimately conveyed to Kellogg, the Court holds that Kellogg is the City’s “successor” to the

Warehouse Property as that term appears in the 1973 Agreement.

Additionally, the County argues that paragraph 3, which states that the “right of the City

to receive steam heat from the Municipal Heating Plant shall be a ‘covenant running with the land’

for the benefit of [the Warehouse Property,]” only obligates the County to provide steam heat to

the building, not to provide it for free. But the intent of the parties “is not determined by viewing

a clause or provision in isolation, or in looking at detached portions of the contract.” Thompson v.

Gordon, 948 N.E.2d 39, 47 (Ill. 2011). Rather, “[a] contract must be construed as a whole, viewing

each provision in light of the other provisions.” Id.

Given the immediately preceding paragraphs, the plain language of paragraph 3 indicates

that the City had the right to convey the Warehouse Property to a successor and that the County’s

obligation to provide free steam heat to the City would inure to the successor’s benefit. Otherwise,

the parties would not have agreed that the County was required to furnish steam heat for the

Warehouse Property “in perpetuity.” See 1973 Agreement ¶ 1. And it is useful to contrast the

County’s obligation to provide steam heat “in perpetuity” with the parties’ recognition that the

impacted properties include those “presently owned” by the City. Id. If the parties had intended

the County’s obligation to end once the City’s ownership ended, the word “presently” would not

be necessary. See Dowd & Dowd, Ltd. v. Gleason, 693 N.E.2d 358, 368 (Ill. 1998) (“Courts will

generally avoid interpretations that render contract terms surplusage [.]”). Nor would the parties

have agreed that “[t]he City, its successors or assigns shall have the right to receive the same

quantity of steam heat servicing the property located on Exhibit ‘B’ from the County at no cost to

the City for as long as the City in its discretion shall require.” 1973 Agreement ¶ 2; see Dorsey v.

St. Louis, A. & T.H.R. Co., 58 Ill. 65, 67 (1871) (“A covenant is said to run with the land when

either the liability for its performance or the right to enforce it, passes to the assignee of the land

itself.”).2

The County also argues that the 1973 Agreement’s liquidated-damages provision evinces

the parties’ intent that the County’s obligation to provide free steam heat would cease after ten

years. According to the County, at the ten-year mark, the City would have recouped the plant’s

value, $3,360,000, in free steam heat. Pl.’s Reply Br. at 13–14, ECF No. 95 (citing the 1973

Agreement). But this argument is belied by the unambiguous language in the 1973 Agreement,

discussed above. What is more, it is inconsistent with the liquidated-damages provision itself.

Paragraph 9 requires the County to pay to the City $3,360,000 in damages (less the aggregated

value of the steam heat service as of the date of default) if the County defaults within ten years and

requires the County to pay to the City “its actual damages, if any,” thereafter. 1973 Agreement ¶

9. If the parties had intended the County’s obligation to expire after ten years, the parties would

not have agreed to require the County to pay any damages after that period.3

For these reasons, the Court denies the County’s motion for summary judgment and grants

Kellogg’s cross-motion as to its request for declaratory judgment.4 The Court declares that the

2 As Kellogg observes, noticeably absent from the 1973 Agreement is any language establishing the

County’s right to cease providing steam heat to the City’s successor or assign in the event of nonpayment.

The parties surely would have included such a provision had they intended that the City’s successor or

assign would have to pay for the steam heat.

3 Furthermore, “[a]s a general principle of contract law, statutes and laws in existence at the time a

contract is executed are considered part of the contract.” Braye v. Archer-Daniels-Midland Co., 676 N.E.2d

1295, 1303 (Ill. 1997). “It is presumed that parties contract with knowledge of the existing law.” Id. It is

thus presumed that the City and County were aware that, “[w]here a covenant runs with the land, the owner

of the land at the time of its breach, whether an immediate or a remote grantee or assignee, may maintain

an action for the breach in his own name against any or all of the covenantors.” 14 Ill. L. & Prac. Covenants

§ 6 (1968).

4 Because the County’s unjust enrichment claim necessarily rises and falls with its declaratory

judgment claim, the Court also denies the County’s motion for summary judgment and grants Kellogg’s

cross-motion as to Count II of the County’s amended complaint.

1973 Agreement obligates the County to provide to Kellogg the same quantity of steam heat that

it had provided to the City during the City’s ownership of the Warehouse Property free of charge,

for as long as the City in its discretion shall require.

II. Whether the County’s Obligation to Provide Free Steam Heat to the City’s Successors

and Assigns under the 1973 Agreement Violates the Illinois Constitution

Next, the County argues that interpreting the 1973 Agreement to require it to provide free

steam heat to Kellogg violates the Illinois Constitution, which provides that “[p]ublic funds,

property or credit shall be used only for public purposes.” Ill. Const., art. VIII, § 1(a). To establish

a violation of this provision, a plaintiff must show “that governmental action has been taken which

directly benefits a private interest without a corresponding public benefit.” Empress Casino Joliet

Corp. v. Giannoulias, 896 N.E.2d 277, 293 (Ill. 2008). The “crucial test is whether the attempted

use of the municipal [funds] subserves the public interest and benefits a private individual or

corporation only incidentally. If the private benefits are purely incidental to the public purposes

of the act, then art. VIII, section 1(a), of the Illinois Constitution is not violated.” O’Fallon Dev.

Co. v. City of O’Fallon, 356 N.E.2d 1293, 1299 (Ill. App. Ct. 1976).

In Empress Casino, the Illinois Supreme Court explained:

This court has long recognized that what is for the public good and

what are public purposes are questions which the legislature must in

the first instance decide. In making this determination, the

legislature is vested with a broad discretion, and the judgment of the

legislature is to be accepted in the absence of a clear showing that

the purported public purpose is but an evasion and that the purpose

is, in fact, private. In the words of Justice Holmes, “a declaration by

a legislature concerning public conditions that by necessity and duty

it must know, is entitled at least to great respect.”

Id. at 294 (internal quotation marks and citations omitted). The Supreme Court continued:

What is a ‘public purpose’ is not a static concept, but is flexible and

capable of expansion to meet the changing conditions of a complex

society. Moreover, the power of the State to expend public moneys

for public purposes is not to be limited, alone, to the narrow lines of

necessity, but the principles of wise statesmanship demand that

those things which subserve the general wellbeing of society and the

happiness and prosperity of the people shall meet the consideration

of the legislative body of the State, though they ofttimes call for the

expenditure of public money. The consensus of modern legislative

and judicial thinking is to broaden the scope of activities which may

be classified as involving a public purpose.

Id. (internal quotation marks and citations omitted).

The County concedes that the 1973 Agreement served a public purpose because, through

it, the City conveyed to the County title to a multi-million dollar plant that provided steam heat to

the County’s existing buildings. The conveyance also enabled the County to upgrade the plant to

provide heat to additional buildings. This, in turn, aided the County in providing additional public

services to its citizens. The public purpose was further served because the 1973 Agreement created

an arrangement that saved the County from having to pay the City $3,360,000 from public coffers.

What is more, the Cook County Board of Commissioners, the legislative body of the

County, reviewed the 1973 Agreement—including the requirement that the County would provide

free steam heat to the City and its successors—and approved it. The Board’s approval of the

agreement deserves “at least great respect.” See id.

Nonetheless, the County argues that the Illinois Constitution categorically prohibits the

County from providing free steam heat to Kellogg, because the benefit to Kellogg is more than

incidental to the public purpose of the 1973 Agreement. The County leans heavily on O’Fallon,

356 N.E.2d at 1299, and Wilmot Mountain, Inc. v. Lake County Forest Preserve District, 859 F.

Supp. 2d 932, 936–37 (N.D. Ill. 2012). But, as Kellogg notes, O’Fallon and Wilmot involved a

private entity’s use of public land for a private purpose, whereas here Kellogg owns the land.

O’Fallon is also distinguishable because the municipality in that case received nothing in return

for the private benefit; by contrast, the County received title to a municipal heating plant in return

for its promise. Compare 356 N.E.2d at 1296 (“[N]o compensation has been paid to the city[.]”),

with Def.’s LR 56.1(a)(3) ¶ 14 (“the City did, in fact, transfer all rights, title and interest in the

Municipal Heating Plant to the County.”). Wilmot is likewise distinguishable because the

governmental action did not create a corresponding public benefit. See 859 F. Supp. 2d at 937.

The County also compares the appraised value of the municipal heating plant in 1973

dollars, $3,360,000, to the estimated $2,116,800 in steam heat it has provided to Kellogg from

2005 to 2015, arguing that this proves that the benefit to Kellogg is more than merely incidental

to the benefit that the public gained under the agreement. Compare Pl.’s LR 56.1(a)(3) Stmt. ¶ 8,

with id. ¶ 71. But these figures alone do nothing to advance the County’s argument, and the County

provides little else. For example, the County does not provide the appraised value of the municipal

heating plant in today’s dollars, as opposed to what it was worth in 1973. Nor does it provide a

valuation of the plant that reflects the upgrades that were made possible by the 1973 Agreement.

The County also has not compared the percentage of total steam heat output that was used by

Kellogg versus the percentage utilized by the County from 2005 to 2015. This information would

be helpful, because Exhibit B to the 1973 Agreement shows that the Warehouse Property was only

one of sixteen City buildings to which the County was required to supply free steam heat. 1973

Agreement, Ex. B. Assuming that approximately the same amount of steam output was required

to heat each building in 1973, the Warehouse Property would have used only one-sixteenth of the

steam used by the City (which in turn was only thirty percent of the heating plant’s total output at

the time). Pl.’s LR 56.1(a)(3) Stmt. ¶ 9. Thus, under these conditions, the Warehouse Property

would have received only 1.87% of the plant’s total steam output.

Given that the County received title to the entire plant as part of the 1973 Agreement, the

Count concludes that the County has not provided evidence from which a reasonable jury could

find that its obligation to provide steam heat free of charge to Kellogg is more than incidental to

the public purpose served by the 1973 Agreement.

III. Whether the 1973 Agreement Is Terminable at Will

The County’s final argument is that the 1973 Agreement is terminable at will because it is

a contract of indefinite duration. “Under Illinois law, perpetual contracts are disfavored, so the

law presumes that such contracts are terminable at will by either party.” Burford v. Accounting

Practice Sales, Inc., 786 F.3d 582, 586 (7th Cir. 2015) (citing Jespersen v. Minn. Mining & Mfg.

Co., 700 N.E.2d 1014, 1017 (Ill. 1998)). “This does not mean that Illinois law forbids parties from

making contracts of indefinite duration; Illinois law merely disfavors them and assumes that most

contracting parties do too.” Id. This presumption “can be overcome if the parties clearly agree to

place limits on when termination may take place.” Id. “An agreement without a fixed duration

but which provides that it is terminable only for cause or upon the occurrence of a specific event

is in one sense of indefinite duration, but is nonetheless terminable only upon the occurrence of

the specified event and not at will.” Jespersen, 700 N.E.2d at 1016.

The 1973 Agreement provides, in pertinent part:

The City has the option to require steam heat for the said facilities

so long as it determines that the steam heat is necessary and

desirable for the operation of the property described on Exhibit “B”,

and that in the event the City notifies the County that the City no

longer requires the said steam heat, the County shall have no further

obligation or liability under the terms of this Agreement.

1973 Agreement ¶ 10.

The 1973 Agreement lacks a fixed duration, but the presumption that it is terminable at

will is rebutted by unambiguous language stating that “in the event the City notifies the County

that the City no longer requires the said steam heat, the County shall have no further obligation or

liability under the terms of this Agreement.” Jd. Accordingly, the Court holds that the 1973

Agreement is not terminable at will and denies summary judgment to the County on this ground.

Conclusion

For the reasons set forth above, the County’s motion for summary judgment is denied , and

Kellogg’s motion for partial summary judgment is granted as to the parties’ claims for declaratory

judgment and as to the County’s claim for unjust enrichment. The Court declares that the 1973

Agreement obligates the County to provide to Kellogg the same quantity of steam heat that it had

provided to the City during the City’s ownership of the Warehouse Property free of charge, for as

long as the City in its discretion shall require. Kellogg’s breach-of-covenant counterclaim remains

for trial. The parties shall be prepared to set dates for the final pretrial conference and jury trial,

as Well as deadlines for the filing of the final pretrial order and motions in limine at the next status

hearing on April 3, 2019, at 9:00 a.m.

SO ORDERED ENTER: 3/19/19

_ fof —

JOHNZLEE —————<“—i_iOC*™S

US. District Judge

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