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Tuesday, April 26, 2016

Successor Developer is Primarily Obligated Under Annexation Agreement

The housing decline began almost 10 years ago, but municipalities are still dealing with its impacts today, in the form of vacant properties and buildings and failed developments. In Illinois, a number of prominent developers and builders went bankrupt, leaving behind stalled developments and partially completed public improvements. Some of these developments were secured by letters of credit, which municipalities could draw on to complete or at least secure the public improvements. Others were secured by surety bonds, which proved much more difficult to utilize, leading some municipalities to have to file suit against the surety companies. 

That's what happened in the Village of Montgomery when Kimball Hill, Inc. went bankrupt and the Village sued Fidelity, the surety company that provided the surety bond that secured the public improvements for Kimball Hill's development. Fidelity defended the lawsuit by claiming that Kimball Hill's successor developer, TRG Venture Two, LLC, was primarily liable to the Village for construction of the public improvements. The trial court ruled against Fidelity, and dismissed its third party complaint against TRG. 

On appeal, the appellate court reversed, finding that TRG was primarily obligated to construct the improvements in Village of Montgomery v. Fidelity and Deposit Company of Maryland, 2016 IL App (2d) 150571-U.  First, the court held that the annexation agreement clearly stated that Kimball HIll's successors and assigns were responsible for construction of the required public improvements. Second, the court found a surety relationship between Fidelity and TRG that had arisen "by operation of law" under the analysis of a recent case City of Elgin v. Arch Insurance Co., 2015 IL App (23) 150013.  Under that surety relationship, Fidelity became secondarily liable to TRG, as the successor owner, and had an obligation to construct the public improvements and hold Fidelity harmless for its failure to do so. The fact that TRG didn't sign the surety bond was irrelevant to the court. Finally, the court remanded the case back to the trial court to determine the scope of TRG's indemnity obligations to Fidelity for previous settlement payments it made to the Village.

Post authored by Julie Tappendorf


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