Hall v. Board of Education

Citations: 48 Ill. App. 3d 834; 363 N.E.2d 116; 6 Ill. Dec. 587; 1977 Ill. App. LEXIS 2668Docket: No. 76-58

Court: Appellate Court of Illinois; May 5, 1977; Illinois; State Appellate Court

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Plaintiffs, who are Chicago residents and parents of children in the Chicago public schools, initiated a lawsuit against the Board of Education of the City of Chicago and the City of Chicago in the Cook County circuit court. They sought injunctive and equitable relief, demanding that the Board of Education, acting as trustee, calculate and account for the rental income from Midway Airport land for the years 1969 to 1974, based on a lease stipulating a rental rate of 6 percent of the property's true cash value as appraised. They also requested the City to pay rent calculated in this manner for the period from January 1, 1975, to December 31, 1980.

After a bench trial, the court ruled in favor of the defendants, concluding that the plaintiffs did not meet their burden of proof. Key issues for review included whether the Board of Education failed to fulfill its duties as trustee regarding judgment and care in managing the Midway Airport property, whether it acted with undivided loyalty, and whether the trial court erred in admitting valuation evidence from the defendants.

The Board of Education holds the Midway Airport property, approximately 600 acres, in trust. The property was leased to the City in 1931 for airport use, with the lease set to expire on December 31, 1980. Rental terms specified a flat rate per acre plus a percentage of the City's gross annual receipts for the first 20 years, transitioning to a system based on a decadal appraisal for subsequent years. The 1970 supplemental agreement deferred the appraisal until 1975, establishing a temporary rental amount. Improvements made to the airport, such as terminal buildings and runways, would revert to the Board upon lease termination. Historical rental amounts varied significantly, reflecting changes in airport revenues.

Rental amounts for the years 1967 to 1973 were as follows: 1967, *68,000; 1968, *142,500; 1969, *193,000; 1970, *232,500; 1971, *243,000; 1972, *245,000; and 1973, *231,000. Plaintiffs allege that the Board violated its fiduciary duty as a trustee by not adequately investigating the Midway land's value and failing to act with undivided loyalty to the trust. They reference a letter from Joseph McMahon, the Board's real estate division head, to Frank M. Whiston, indicating that a rental appraisal was necessary but would likely exceed the City's budget. A Board resolution from August 26, 1970, noted the City's request to defer the appraisal for five years to allow for Midway's revitalization, which was adopted with a 9-1 vote. Dr. Bernard Friedman, who opposed the resolution, estimated the Midway property was worth between $20 million and $40 million and argued that the Board's duties were solely to the school system, not the airport.

The plaintiffs assert that the Board's focus on Midway Airport's economic stability breached its legal obligations, citing case law that mandates trust property be used exclusively for the beneficiaries. They reference Prescott Community Hospital Com. v. Prescott School District No. 1, which states that school districts exist solely to promote education and cannot enter contracts for non-educational purposes. The plaintiffs claim the burden of proof lies with the Board to demonstrate good faith in its dealings, arguing that the lease to the City constituted self-dealing. However, they do not provide case law to support the assertion that the City is the Board's alter ego, which diminishes their argument's strength. Additionally, they mention Article VII, section 10 of the 1970 Illinois Constitution, which allows local governments and school districts to contract with each other and the State for cooperative services and functions.

The Board cooperated with the City to revitalize Midway Airport by postponing the revaluation appraisal, aiming for greater long-term benefits instead of immediate profits. The Midway lease's termination on December 31, 1980, is imminent, and the City's revitalization efforts, which included tripling the rent, directly benefited the public school system. Redeveloping the property for alternative uses would necessitate significant infrastructure improvements and take at least five years. The Board's strategy to maintain Midway as a profitable entity until it fully reverts to their ownership in 1980 was deemed advantageous, avoiding the risk of property deterioration and financial burdens. The decision to delay revaluation was a carefully considered business choice, supported by reports indicating that maintaining the airport was preferable until a third major airport could be established. Previous assessments noted that the existing lease restricted future property use and marketability, with no immediate alternatives suggested. Testimonies revealed that the lease's terms and historical rental data were discussed extensively by the Board’s real estate committee, which ultimately approved the continuation of the percentage of gross rental arrangement, despite opposition from certain members.

Frank Whiston, the Board president recognized for his expertise in real estate, was among those voting to maintain the 'percentage of gross' rental structure. Gerald Sbarbaro, the real estate committee chair since 1970, testified that most Board members lacked real estate valuation expertise and relied heavily on the Real Estate Research Corporation for guidance, typically adhering to its recommendations. Notably, neither the Corporation's report nor other reviewed documents provided a valuation for Midway Airport. During a committee meeting on November 21, 1974, discussions emphasized a recent Federal Aviation Administration study relevant to Midway's future, prompting the Board president to engage with federal officials about Midway's prospects. 

The City collaborated with the Board, yielding significant financial advantages, including the addition of a railroad right-of-way and over $15 million in capital improvements funded by various governmental sources between 1968 and 1970. Additional benefits included funds from the City's income tax, financial support for school programs, pension contributions, and various municipal services provided at no cost. The plaintiffs alleged that the Board improperly agreed to defer a property appraisal, leading to lower rental income than what could be achieved from a 6 percent valuation. They argued the land's value was as high as $40 million based on an informal estimate, which was contested. At trial, the plaintiffs' appraisal expert, Wayne L. Mahnke, assessed the minimum land value at $15 million, excluding costs for runway removal and suggesting potential uses ranging from an industrial complex to a shopping center.

Defendants' valuation experts, John Lydon and John McNamara, were unable to determine the 'true cash value' of a property due to its special use zoning. However, McNamara estimated that the highest and best use of the airport, disregarding current zoning, would be for single-family R-2 development, valuing the property at nearly $4,000,000 after accounting for approximately $5,500,000 in costs to remove existing runways and facilities. He asserted that industrial or commercial uses would not yield higher returns due to the abundance of similar tracts nearby. This created a factual dispute regarding the property's best use and valuation, which the court resolved in favor of the defendants.

Plaintiffs argued that the court erred by admitting evidence related to the special use value theory, claiming that the lease language required appraisals to exclude current zoning considerations. They also contested the relevance of testimony from airport consultant Howard Diemler regarding the impracticality of the percentage of value method for rent determination. However, the review of the record indicated that this evidence did not significantly impact the litigation outcome.

The defendants' witnesses initially stated they could not assess the property's 'true cash value' due to zoning; nevertheless, McNamara provided an independent valuation excluding zoning factors. The court upheld that it would not interfere with legislative actions unless shown to be arbitrary or unjust. The Board had the authority to enter into the lease and acted in good faith to maximize long-term benefits. The court found no allegations of fraud or corruption, and after a thorough review, concluded that the judgment was not against the manifest weight of the evidence. Consequently, the judgment of the Cook County circuit court was affirmed.