Kohl's Illinois, Inc. v. Marion Cty. Bd. of Revision (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as

Kohl’s Illinois, Inc. v. Marion Cty. Bd. of Revision, Slip Opinion No. 2014-Ohio-4353.]

NOTICE

This slip opinion is subject to formal revision before it is published in

an advance sheet of the Ohio Official Reports. Readers are requested

to promptly notify the Reporter of Decisions, Supreme Court of Ohio,

65 South Front Street, Columbus, Ohio 43215, of any typographical or

other formal errors in the opinion, in order that corrections may be

made before the opinion is published.

SLIP OPINION NO. 2014-OHIO-4353

KOHL’S ILLINOIS, INC., APPELLANT, v. MARION COUNTY BOARD OF

REVISION ET AL., APPELLEES.

[Until this opinion appears in the Ohio Official Reports advance sheets,

it may be cited as Kohl’s Illinois, Inc. v. Marion Cty. Bd. of Revision,

Slip Opinion No. 2014-Ohio-4353.]

Real property taxation—Tax-increment financing—Covenant not to contest

valuation—dismissal of valuation complaint reversed.

(No. 2013-1006—Submitted June 10, 2014—Decided October 8, 2014.)

APPEAL from the Board of Tax Appeals, No. 2011-A-2747.

____________________

Per Curiam.

{¶ 1} In this appeal, we review the holding of the Marion County Board

of Revision (“BOR”) and the Board of Tax Appeals (“BTA”) that the complaint

filed by the property owner (Kohl’s Illinois, Inc. or Kohl’s Department Stores,

Inc., referred to as “Kohl’s”) was “void” because the property at issue was subject

to a tax-increment-financing (“TIF”) agreement that contained a covenant

prohibiting the filing of a complaint. We conclude that any bar to the complaint

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that arises from the TIF agreement is not a jurisdictional restriction and that, as a

result, the beneficiaries of the covenant had the burden to come forward and prove

their entitlement to a dismissal of the complaint. Those persons are the county

commissioners, a party to the TIF agreement, and River Valley Local Schools

Board of Education (“BOE”), which received a financial accommodation through

the TIF agreement.

{¶ 2} Because the beneficiaries did not step forward and shoulder the

burden to prove their entitlement to a dismissal of Kohl’s complaint, we vacate

the BTA’s decision and remand for further proceedings at the BTA.

FACTUAL BACKGROUND

1. The TIF Agreement

{¶ 3} TIF is a method of promoting and financing the development of

real property by directing “ ‘all or a portion of the increased property tax revenue

that may result’ ” from the development to defraying the cost of improvements

that are part of the development. Princeton City School Dist. Bd. of Edn. v.

Zaino, 94 Ohio St.3d 66, 68, 760 N.E.2d 375 (2002), quoting Meck & Pearlman,

Ohio Planning and Zoning Law 704, Section T 15.29 (2000); see also Sugarcreek

Twp. v. Centerville, 133 Ohio St.3d 467, 2012-Ohio-4649, 979 N.E.2d 261, ¶ 6

(“One such law for spurring economic growth is TIF, by which improvements

made to real property are exempted from taxation, and the funds that would have

been applied toward taxes are instead applied toward public improvements that

benefit the property within the area subject to the TIF”).

{¶ 4} R.C. 5709.77 through 5709.81 authorize counties to enter into TIF

arrangements to finance improvements to real property. Pursuant to those

statutes, the Marion County commissioners adopted the TIF resolution in this case

on December 20, 2005.1 In accordance with the statutes, that resolution (1)

1

The evidence concerning the TIF agreement was presented by Kohl’s at the BTA, and is not

otherwise in the record.

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declares “improvements” to specified parcels to be a public purpose, (2) specifies

public infrastructure improvements to be made that benefit those parcels, (3)

authorizes 100 percent tax exemption of the increased property value and requires

the owners of the parcels to make “service payments” in lieu of those taxes

(instead of adding to the public fisc, the payments go into a TIF fund [the

“redevelopment tax increment equivalent fund”] that finances the improvements),

and (4) approves a TIF agreement along with a compensation agreement with the

BOE.

{¶ 5} The resolution outlines the plan for exempting increased value and

substituting service payments into the TIF fund for tax payments. The TIF

agreement is contemplated by the resolution to be in force for 30 years, starting at

the earlier of the first tax year in which increased value is reflected on the tax list,

or tax year 2010.

{¶ 6} The method for recapturing the “tax increment,” i.e., the taxes

attributable to the increased value of the property, is to require the property

owners to pay “service payments” into a TIF fund in lieu of paying property taxes

into the usual public-revenue funds. The TIF fund then finances the public

improvements while making the board of education whole. This redirection of

revenue involves only that amount that would be payable as tax with respect to

the increased value—and the increased value is referred to as the Improvement,

with a capital “I.”

{¶ 7} The parties to the TIF agreement were the county commissioners,

the developer Max A. Findlay, Inc., and other then-current property owners.

Kohl’s also presented a deed showing transfer of the property at issue from the

developer to Kohl’s on February 27, 2006. The TIF agreement was executed

December 21, 2005, one day after the county commissioners passed the TIF

resolution.

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2. The no-contest covenant

{¶ 8} At the heart of this appeal lies the provision in Section 3.1 of the

TIF agreement that “no Owner shall contest the assessed valuations of any

Improvement for real property tax purposes.” Section 3.2, referring to taxes other

than the real property tax, does expressly permit tax contests with respect to those

other taxes.

{¶ 9} The TIF agreement expressly calls for owner covenants to run with

the land, Section 3.4, and to effectuate that provision the Declaration of

Covenants was filed in the public records of the chain of title of the properties

subject to the TIF. The no-contest covenant was thereby expressly intended to

run with the land and bind those, such as Kohl’s, who purchased from the original

owners who signed the TIF agreement.

{¶ 10} Also potentially pertinent is Section 7.3, “Binding Effect,” which

states:

This Agreement shall inure to the benefit of and shall be

binding upon the County, all Owners and the Developer, and their

respective successors and assigns, provided, however, only the

covenants running with the land described in Section 3.4 shall be

binding on Owners subsequent to the Current Owners unless that

subsequent Owner is the Developer, the successor of a Current

Owner of the Developer, or an assignee of this Agreement.

{¶ 11} This provision purports to bind a successor owner to the entire TIF

agreement, based not on the covenant running with the land, but on Kohl’s status

as immediate successor to the developer, which itself was a signatory to the TIF

agreement.

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{¶ 12} Previously mentioned, the “Declaration of Covenants” deserves

further discussion. It contained a précis of the TIF resolution and agreement.

Filed in the county recorder’s office in the chain of title of the TIF properties, the

declaration put purchasers on notice of their provisions—in particular, those

intended to run with the land, such as the no-contest covenant at issue in this case.

{¶ 13} Section 4(c) of the declaration reiterates the no-contest covenant,

and Section 5, headed “Covenants to Run With the Land,” expresses in no

uncertain terms the mutual intent and agreement of the parties to the TIF

agreement that the specified covenants should run with the land and that they

should “be binding to the fullest extent permitted by law and equity, for the

benefit and in favor of, and enforceable by, the County and the School District

against the Property, the Improvements and the Owners.” Also declared is the

intent that the covenants “shall remain in effect for the full period of exemption

provided in accordance with the requirements of the Act [previously defined as

R.C. 5709.77 through 5709.81], the Resolution enacted pursuant thereto and the

Agreement [i.e., 30 years].” Finally, the covenants are to be enforceable by “the

County and the School District” against the “Owner’s successors and assigns”

even if the covenant is not set forth in the deeds to those later grantees.

{¶ 14} The declaration also elaborates as follows:

[T]he County and the School District, and their respective

successors and assigns shall each be deemed a beneficiary of the

covenants provided herein. Such covenants shall run in favor of

the County and the School District * * * without regard to whether

either the County or the School District, has at any time been,

remains or is an owner of any land or interest therein to, or in

favor of, which such covenants relate.

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(Emphasis added.) In other words, the county commissioners and the BOE are

declared to be entitled to enforce the covenant without regard to the usual real-

covenant requirement that a restriction be appurtenant to land held by those

entities.

COURSE OF PROCEEDINGS

{¶ 15} On March 25, 2011, Kohl’s Illinois, Inc. filed a valuation

complaint that challenged the tax year 2010 valuation of a Kohl’s store in Marion

County. The complaint sought a true-value reduction of about $1,590,000, and

the BOE filed a countercomplaint seeking to retain the auditor’s higher valuation.

As grounds for doing so, the BOE’s complaint asserted: “Owner prohibited from

contesting value by TIF agreement.”

{¶ 16} By order dated August 24, 2011, the BOR “dismissed this case due

to the fact that this parcel of property is part of the Legacy Crossing TIF with

Marion County,” and “[a]s part of the TIF agreement complaints against the value

are void until witch [sic] time the TIF agreement has been met.” Kohl’s appealed

to the BTA.

{¶ 17} At the BTA, Kohl’s waived hearing and filed a brief. No other

party appeared.

{¶ 18} As exhibits to its brief, Kohl’s submitted (1) its complaint, (2) the

BOR’s dismissal order, (3) the TIF resolution passed by the Marion County

commissioners, (4) the TIF agreement entered into between the county

commissioners and the original developer/owners, (5) the declaration of

covenants from the TIF agreement that was recorded in the chain of title, and (6)

the deed by which Kohl’s acquired the property from the owners that, along with

the developer, had entered into the TIF agreement with the county commissioners.

{¶ 19} In its brief, Kohl’s advanced the following arguments: (1) the TIF

agreement and declaration of covenants prohibited a tax-valuation challenge “for

the first year that the increase in the assessed value of real property appeared on

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the tax list, which was the tax year 2007” (emphasis sic), along with variations on

that contract-construction theme, (2) the TIF agreement contains conflicting

provisions regarding permissibility of tax-valuation challenges, one in Section 3.1

and one in Section 3.2, thereby creating an ambiguity that should be construed in

Kohl’s favor, (3) the no-contest covenant, if otherwise enforceable, should be

declared void as against public policy, and (4) if the no-contest covenant is

otherwise enforceable, its prohibition violates due-process and property-tax

uniformity.

{¶ 20} In its decision, the BTA rejected Kohl’s primary argument that the

no-contest covenant applied only to 2007, holding that the statutory definition of

“Improvement” was “included to identify the real property that would be subject

to the TIF agreement and does not speak to any limitation on restrictions on filing

real property tax complaints.” BTA No. 2011-A-2747, 2013 WL 2395803, *3

(May 24, 2013). With respect to the allegation of conflict between Sections 3.1

and 3.2, the BTA found that “the provisions that clearly specify prohibitions

against real property tax valuation contests should control over the more general

provision relating to ‘all taxes.’ ” Id. In a footnote, the BTA declined to address

Kohl’s constitutional arguments based on its lack of authority to do so under case

law. Id., fn. 2. Kohl’s public-policy argument was left unaddressed. The BTA

then affirmed the decision of the BOR to dismiss the complaint.

{¶ 21} Kohl’s has appealed. As appellant, Kohl’s is the only party to have

filed a brief before this court.

THE NO-CONTEST COVENANT HAS NOT BEEN SHOWN

TO RAISE A JURISDICTIONAL BAR

{¶ 22} Kohl’s fourth proposition of law points to a fundamental flaw in

the decisions below. Although R.C. 5715.19 authorized a property owner like

Kohl’s to file a valuation complaint, the BOR found that the complaint was

“void” on account of the TIF agreement, and the BTA affirmed. Yet no statute

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was cited, either in R.C. Chapter 5715 or in the TIF legislation, that contravenes

the grant of the right to file a complaint on the grounds of a contractual covenant

in a TIF agreement. To be sure, the TIF statutes directly mandate that a TIF

resolution require owners to pay service payments, but they do not appear to

authorize any impairment of the right to file a complaint.

{¶ 23} The BOR is a creature of statute whose powers are defined by and

dependent upon the pertinent sections of the Revised Code. See Kalmbach

Wagner Swine Research Farm v. Wyandot Cty. Bd. of Revision, 81 Ohio St.3d

319, 322, 691 N.E.2d 270 (1998). It follows that the BOR’s jurisdiction is

controlled by statute, and a complaint that the statutes authorize an owner to file is

not void by virtue of a covenant nowhere prescribed or specifically endorsed by

statute.

{¶ 24} In Kalmbach Wagner, the board of revision had dismissed the

complaint on the grounds that the owner/complainant had declined the board’s

request to produce income and expense statements for the swine-breeding

operation conducted on its real property. The BTA reversed and remanded, and

on appeal we affirmed.

{¶ 25} In doing so, we noted that the enabling statutes for the boards of

revision, R.C. 5715.10 and 5715.11, authorize the hearing of complaints and the

ordering of an increase or decrease in value, but do not generally authorize

dismissals. The court noted that it had affirmed only those dismissals by the

boards of revision that were based on noncompliance with statutory requirements

and that no statute required production of the documents that the board had

requested. Accordingly, the board of revision’s statutory duty had been to

determine value in light of the evidence before it, and the court affirmed the

BTA’s reversal of the dismissal.

{¶ 26} Our decision in Kalmbach Wagner raises two points pertinent to

the present case. First, the case acknowledges that a board of revision is justified

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in dismissing a complaint when a violation of statutory requirements deprives the

board of jurisdiction. See, e.g., Gammarino v. Hamilton Cty. Bd. of Revision, 71

Ohio St.3d 388, 643 N.E.2d 1143 (1994) (dismissal of second-filed complaint

within the triennium, filed in violation of R.C. 5715.19(A)(2)). But jurisdictional

limitations typically relate to the violation of statutory requirements, such as the

March 31 deadline for filing complaints or the prohibition of a second filing

within the triennium. Unless the defect involves violation of a statute, it is

typically not jurisdictional. See Groveport Madison Local Schools Bd. of Edn. v.

Franklin Cty. Bd. of Revision, 137 Ohio St.3d 266, 2013-Ohio-4627, 998 N.E.2d

1132, ¶ 23.

{¶ 27} Here, the BOR statutes make no mention of TIF restrictions, and

the TIF statutes do not acknowledge prohibitions against challenging valuation. It

follows that even if the no-contest covenant is valid and binding on Kohl’s, the

source of its legal force is not statutory, and accordingly, it does not impose a

jurisdictional limitation on the BOR. Therefore, the complaint was not “void” as

found by the BOR and affirmed by the BTA.

{¶ 28} Second, Kalmbach Wagner recognizes that the grounds for a BOR

to dismiss are, apart from jurisdictional defects, very limited. The court

recognized that failure to prosecute can be a ground for dismissal. Kalmbach

Wagner, 81 Ohio St.3d at 322, 691 N.E.2d 270, citing LCL Income Properties v.

Rhodes, 71 Ohio St.3d 652, 646 N.E.2d 1108 (1995). But dismissing for failure

to produce requested documents in Kalmbach Wagner itself was not a valid

ground for dismissal. See also Snavely v. Erie Cty. Bd. of Revision, 78 Ohio St.3d

500, 678 N.E.2d 1373 (1997) (affirming a BTA decision that reversed an

unexplained dismissal by the board of revision).

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THE BURDEN LAY ON THE BENEFICIARIES OF THE COVENANT

TO ASSERT IT AS A DEFENSE AGAINST KOHL’S COMPLAINT

{¶ 29} If the no-contest covenant is valid and binding under contract law

or real-covenant law, it may constitute grounds for dismissal. But the

beneficiaries of the covenant—the county commissioners and the BOE—had the

obligation to come forward and shoulder the burden of advancing the covenant as

a defense against the complaint. Kohl’s was the appellant at the BTA, and neither

the statutes nor the case law places on Kohl’s the burden of establishing that the

covenant did not bar its complaint.

{¶ 30} Indeed, the declaration of covenants makes clear that the county

commissioners and the BOE are the beneficiaries of the covenant and should bear

the burden of proving that it was enforceable against Kohl’s. The allocation of

burden here is analogous to the situation in which one party relies on a settlement

agreement and seeks to enforce it against the other parties: the proponent of the

contract has the burden to show that it is entitled to relief based on the contract.

{¶ 31} It is notable that the county commissioners and the BOE both have

standing to participate in BOR proceedings. R.C. 5715.19(A)(1) (county

commissioners and boards of education are among those entities that may file

valuation complaints) and 5717.01 (entities that may file valuation complaints

may appeal to the BTA). The failure of either to appear at the BTA and defend

the BOR’s application of the no-contest covenant might be construed as a waiver

of the opportunity to do so, but under these circumstances, Kohl’s itself cannot

claim the waiver, because it failed to assert the need for the proponents of the no-

contest covenant to appear. Kohl’s thereby waived any reliance on the claim that

its opponents had waived their opportunity to be heard.

{¶ 32} Moreover, unlike the straightforward waiver of an affirmative

defense in a civil case, the very premise of the BTA’s review lay in the BOR’s act

of applying the no-contest covenant, with the result that the BTA necessarily had

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to decide the issue of the covenant’s validity. Accordingly, the proper course of

action here is to remand to the BTA with the instruction that the county

commissioners and the BOE be afforded the opportunity to argue in support of the

covenant.

KOHL’S ASSERTED GROUND FOR DISREGARDING THE

NO-CONTEST COVENANT LACKS MERIT

{¶ 33} In plain and unambiguous terms, the TIF agreement at Section 3.1

states that “no owner shall contest the assessed valuations of any Improvement for

real property for tax purposes,” expresses the intent that the covenant run with the

land against a successor such as Kohl’s, and asserts that the covenant is

enforceable by the county and the board of education. We conclude that Kohl’s

attempt to find an ambiguity in these terms fails.

{¶ 34} According to Kohl’s, ambiguity arises by virtue of Section 3.2,

which states as follows:

Any Owner may in good faith contest any such tax, assessment or

governmental charge, and in such event may permit such tax,

assessment or governmental charge to remain unsatisfied during

the period of such contest and any appeal therefrom unless in the

reasonable opinion of counsel satisfactory to the Board, by such

action any right or interest of the Board with respect to the

Property, shall be materially endangered, or the Property, or any

material part thereof, shall become subject to imminent loss of

forfeiture, in which event such tax or governmental charge shall be

paid prior to any such loss or forfeiture.

Kohl’s contends that this provision contradicts the categorical requirement that

there be no contest of “the assessed valuation of any Improvement for real

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property tax purposes.” But this argument is devoid of merit, and the BTA

correctly rejected it.

{¶ 35} The no-contest covenant in Section 3.1 by its plain terms addresses

only valuation for property-tax purposes to the extent that it determines the

amount of service payments by setting the value of the Improvement. By stark

contrast, Section 3.2 addresses other taxes and charges that might become a lien

on the property—it is those other taxes and charges that may be contested.

KOHL’S CONSTITUTIONAL CLAIMS ARE PREMATURE

{¶ 36} Kohl’s second and third propositions of law raise constitutional

arguments as a backstop to the contractual and statutory arguments set forth in

propositions one and four. If the no-contest covenant were enforced, says Kohl’s,

that would deprive Kohl’s of its due-process right to challenge the property-value

basis for determining the service payments that it must pay. Moreover, Kohl’s

asserts that permitting the auditor to determine value without the possibility of

challenge would violate the requirement of Article XII, Section 2 of the Ohio

Constitution that property be “taxed by uniform rule according to value.”

{¶ 37} These contentions are premature. “Constitutional questions will

not be decided until the necessity for a decision arises on the record before the

court.” State ex rel. Herbert v. Ferguson, 142 Ohio St. 496, 52 N.E.2d 980

(1944), paragraph two of the syllabus. Quite simply, the enforceability of the no-

contest covenant depends on factors not raised and considered at the BTA. First,

the proponents of applying the covenant did not appear and demonstrate any

statutory basis for applying the covenant to Kohl’s. Second, no argument has

been advanced that the no-contest covenant qualifies as a covenant that runs with

the land under the pertinent case law. Only if the covenant were shown to apply

to Kohl’s under the relevant law would the constitutional questions become ripe

for our consideration.

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CONCLUSION

{¶ 38} For the foregoing reasons, we hold that the no-contest covenant

has not been shown to impose a jurisdictional bar. As a result, the beneficiaries of

the covenant—the county commissioners and the BOE—had the obligation to

come forward and shoulder the burden of advancing the covenant as a defense

against the complaint. They have not done so.

{¶ 39} We therefore vacate the decision of the BTA and remand to the

BTA to conduct further proceedings consistent with this opinion

Judgment accordingly.

O’CONNOR, C.J., and PFEIFER, O’DONNELL, LANZINGER, KENNEDY,

FRENCH, and O’NEILL, JJ., concur.

____________________

Karen H. Bauernschmidt Co., L.P.A., Karen H. Bauernschmidt, and

Stephen M. Nowak, for appellant.

_________________________

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