FILED

April 12, 2016 Carla Bender NO. 4-15-0550 th 4 District Appellate Court, IL IN THE APPELLATE COURT

OF ILLINOIS

FOURTH DISTRICT

ILLINOIS MUNICIPAL LEAGUE RISK ) Appeal from MANAGEMENT ASSOCIATION, ) Circuit Court of Plaintiff-Appellee, ) Sangamon County v. ) No. 14MR421 The CITY OF GENOA, an Illinois Municipality, ) Defendant-Appellant. ) Honorable ) John M. Madonia, ) Judge Presiding. ______________________________________________________________________________

JUSTICE POPE delivered the judgment of the court, with opinion. Justices Harris and Appleton concurred in the judgment and opinion.

OPINION

¶1 On May 1, 2014, the Illinois Municipal League Risk Management Association

(Association) filed a complaint for declaratory judgment against the City of Genoa (City) and the

Regional Transportation Authority (RTA), seeking a declaration it had no duty to defend or

indemnify the City in a lawsuit brought against it by RTA. On February 2, 2015, the Association

filed a motion seeking judgment on the pleadings. On June 8, 2015, the trial court heard

arguments on the motion. The court granted the Association's motion for judgment on the

pleadings, finding the Association had no duty to defend or indemnify the City in the underlying

suit. The City appeals, arguing the court erred in granting the Association's motion for judgment

on the pleadings. We reverse and remand for further proceedings.

¶2 I. BACKGROUND ¶3 In the underlying case, RTA alleged its claim against the City arose from a "tax

kickback scheme" between the City and Boncosky Oil Company, Inc., and later its successor,

PetroLiance LLC (Company). The City, which was outside RTA's taxing district, agreed to give

the Company part of the sales tax revenue the City received from sales generated by the

Company in exchange for the Company moving its sales office to the City. RTA alleged these

sales were actually occurring in RTA's taxing district, not the City. Because the Company

claimed the City as the site of sale, RTA did not receive tax revenue from an additional tax

required on sales occurring within RTA's taxing district. According to RTA, "[t]his scheme

deprives *** RTA of its portion of sales tax revenues necessary to fund its continued

operations."

¶4 RTA's complaint alleged the Company opened a small sales office in the City,

which began operations on or about June 1, 2006. Although the Company described this office

as "the primary and exclusive point of sale" for the Company, RTA alleged this was "a fiction."

According to RTA's complaint, the "sales office" in the City "had little, if any, decision making

authority and did not conduct the 'business of selling.' " RTA alleged the City "received an

unjustified windfall in sales tax revenue without incurring the expense of providing municipal

services" to the Company.

¶5 RTA's complaint contained two counts. The first count asked for statutory

remedies pursuant to section 8-11-21(a) of the Illinois Municipal Code (Municipal Code) (65

ILCS 5/8-11-21(a) (West 2012)). The complaint alleged the Company entered into the economic

development agreement (EDA) in question after this statute went into effect on June 1, 2004.

According to RTA's complaint:

-2- "By reason thereof, [RTA] has and is suffering loss and

[the City] is liable to [RTA] for damages in the amount of the tax

revenue it was denied as a result of the said EDA, statutory

interest, costs, reasonable attorney's fees, and an amount equal to

fifty percent of the lost tax consistent with 65 ILCS 5/8-11-21."

The second count of the underlying complaint, which named the City and the Company, asked

for damages and equitable relief pursuant to our supreme court's decision in Hartney Fuel Oil

Co. v. Hamer,

,

. In this count, RTA alleged the Company's

activities in the City did not constitute the business of selling by a retailer pursuant to Hartney

and rules promulgated by the Illinois Department of Revenue. Regardless, the Company claimed

the City as the situs of its sales.

¶6 On May 1, 2014, the Association filed its complaint for declaratory judgment,

seeking a declaration it owed no duty to defend or indemnify the City against RTA's complaint

in the underlying case. On February 3, 2015, the Association filed a motion for judgment on the

pleadings.

¶7 In June 2015, the trial court held a hearing on the Association's motion. The

parties agreed Form RMA 4 of the insurance policy was at issue. The Association conceded

RTA was suing the City for a wrongful act. However, it argued the underlying complaint did not

fall within the policy's definition of a "loss." The Association argued fines and penalties

imposed by law are not a "loss" under the policy. Further, according to the Association, RTA

was trying to disgorge ill-gotten gains from the City. The Association argued ill-gotten gains or

stolen goods are uninsurable under Illinois law. The Association stated the City could not have

-3- suffered a "loss" in this case because a "loss is the loss of something which you had a right to

possess to begin with."

¶8 The City argued the underlying case has nothing to do with disgorgement or

restitution because the City never received any of the money to which RTA claims it is entitled.

According to the City, RTA's complaint in the underlying case does not allege the City had

money to which RTA was entitled. The City argued:

"If you read the whole complaint, if you read the whole

complaint and you read the allegations in the light most favorable

to us, it explains that [RTA's] tax is one percent. It explains that—

again, it attaches the RTA Act, so you can read the RTA Act

attached to your complaint. You know what tax [RTA] is

supposed to get. You know what tax the municipality is supposed

to get, and it's pretty clear that they're two different taxes here.

They're two separate taxes.

What the complaint asks for is it asks to be compensated

for the lost revenue, sure it asks for that, but that's damages. That's

compensatory, not restitution, because we don't have what is

[RTA's]. We either have our own, if we prevail in the underlying

suit, we have our own tax money or it's some other municipality's.

We don't have and we never would get [RTA's] tax money."

In response, the Association pointed to paragraph 38 of the underlying complaint, which alleged:

"[The City] received an unjustified windfall in sales tax revenue without incurring the expense of

providing municipal services to [the Company]."

-4- ¶9 After arguments were made, the trial court ruled the underlying complaint did not

allege a "loss" as defined by the insurance policy in question based on the Association's

"disgorgement" argument. As a result, the court granted the Association's motion for judgment

on the pleadings. Further, the court stated—even assuming, arguendo, the complaint alleged a

"loss"— exclusion 12 of the policy would exclude coverage based on the allegations in the

underlying complaint. That provision excluded coverage with regard to "the issuance, collection

or management of proceeds or repayment of taxes by any Members or any agent acting on behalf

of such Members."

¶ 10 This appeal followed.

¶ 11 II. ANALYSIS

¶ 12 In Illinois, the obligation for an insurance company to defend its insured is

broader than its obligation to indemnify its insured. Zurich Insurance Co. v. Raymark Industries,

Inc.,

,

(1987). Our supreme court has stated:

"The duty to indemnify arises only when the insured becomes

legally obligated to pay damages in the underlying action that

gives rise to a claim under the policy. The duty to defend an action

brought against the insured, on the other hand, is determined solely

by reference to the allegations of the complaint. If the complaint

alleges facts which bring the claim within the potential indemnity

coverage of the policy, the insurer is obligated to defend the action.

[Citations.] Thus, the insurer must defend an action even though it

may not ultimately be obligated to indemnify the insured."

(Emphasis omitted.)

-5- Our supreme court has also noted with approval the concept that "[t]he question of coverage

should not hinge on the draftsmanship skills or whims of the plaintiff in the underlying action.

[Citation.]" (Internal quotation marks omitted.) Pekin Insurance Co. v. Wilson,

,

(2010) (quoting American Economy Insurance Co. v. Holabird &

Root,

,

(2008)).

¶ 13 If even one theory in the complaint falls within the coverage provided by an

insurance policy, the insurer has a duty to defend its insured. Pekin Insurance Co. v. Precision

Dose, Inc.,

,

. "[T]he threshold that an

underlying complaint must satisfy to present a claim of potential coverage is low, and for

coverage to exist, the complaint need only present a possibility of recovery, not a probability of

one." American Zurich Insurance Co. v. Wilcox & Christopoulos, L.L.C.,

,

.

¶ 14 This requires courts to interpret the insurance policy at issue. This court has

stated the construction of an insurance contract is a question of law and subject to de novo

review. Country Mutual Insurance Co. v. Hilltop View, LLC,

,

. Clear and unambiguous policy provisions must be given their plain and popular

meaning.

However, ambiguous provisions in a policy will be strictly construed against the

insurer.

" 'In addition, provisions that limit or exclude coverage will be interpreted liberally

in favor of the insured and against the insurer.' "

(quoting American States Insurance Co. v.

Koloms,

,

(1997)).

¶ 15 The trial court in this case granted the Association's motion, finding the

underlying complaint did not allege a "loss" as defined by the policy because RTA was trying to

disgorge money from the City. The City argues the underlying claim potentially falls within the

-6- coverage provided by its policy with the Association, and the trial court erred in granting the

Association's motion for judgment on the pleadings.

¶ 16 The Association argues the trial court correctly granted its motion for judgment

on the pleadings because the underlying complaint against the City does not allege a "loss" as

defined by the policy, considering the remedy RTA sought is uninsurable under Illinois law.

According to the Association, RTA's complaint alleged the City and the Company's agreement

violated section 8-11-21 of the Municipal Code (65 ILCS 5/8-11-21 (West 2012)). The

Association characterizes RTA's complaint as alleging the City was not entitled to collect any

sales tax revenue from the Company's sales and any sales tax revenue the City collected belongs

to RTA. According to the Association, Illinois law does not allow a party to insure itself for loss

of property it has no right to possess.

¶ 17 We disagree with both the trial court's and the Association's characterization of

RTA's complaint and find no merit in the Association's disgorgement and restitution argument.

While RTA's complaint alleges the City "received an unjustified windfall in sales tax revenue,"

RTA does not allege it has any right to the sales tax revenue the City actually received from the

Company's sales. Instead, RTA wants to be compensated for (1) sales tax revenue it claims

should have been included on the Company's sales but was never collected and (2) statutory

damages pursuant to section 8-11-21 of the Municipal Code (id.).

¶ 18 Counts I and II of RTA's complaint sought compensation from the City for

additional taxes RTA claimed should have been collected on the Company's sales but were not.

These additional taxes would have benefitted RTA. Count I sought this and additional money

pursuant to section 8-11-21 of the Municipal Code (id.), and count II asked for the revenue on

equitable grounds.

-7- ¶ 19 Count I specifically alleged the City "is liable for damages in the amount of the

tax revenue it was denied [(emphasis added)] as a result of the said EDA, statutory interest,

costs, reasonable attorney's fees, and an amount equal to fifty percent of the lost tax consistent

with 65 ILCS 5/8-11-21." Count II alleged the Company's actions in the City did "not constitute

the business of selling by the retailer pursuant to Hartney,

,

***

and the Rules" and the company misreported its tax situs as the City. Among other things, RTA

asked the trial court to:

"(f) enter judgment in favor of [RTA] and against

defendants for sales taxes lost to [RTA] from the Retailers' sales

from such date as the Court deems proper;

(g) award plaintiff its costs of suit; and

(h) grant such other and further relief as the Court

deems proper."

¶ 20 Neither of these counts sought restitution or disgorgement of the sales tax money

the City received as a result of the Company's decision to claim the City as the situs of its sales.

Instead, both of RTA's counts sought tax revenue no one ever collected. RTA does not claim it

has any right to the sales tax revenue that was actually collected. In short, RTA is not seeking

restitution from the City or trying to disgorge money from the City that belongs to RTA. As a

result, the Association's reliance on Local 705 v. Five Star Managers, L.L.C.,

,

(2000), Level 3 Communications, Inc. v. Federal Insurance Co.,

(7th Cir. 2001), and Ryerson Inc. v. Federal Insurance Co.,

(7th Cir. 2012), is

misplaced.

-8- ¶ 21 An argument could be made that the statutory penalties called for by section 8-11-

21 of the Municipal Code (65 ILCS 5/8-11-21 (West 2012)) constitute a fine or penalty imposed

by law and, therefore, any damages awarded to RTA pursuant to that statute would not constitute

a "loss" because of how the policy defines "loss." However, the parties do not argue this point,

and we need not decide that issue to rule on this case.

¶ 22 As we stated earlier, if even one theory in the complaint falls within the coverage

provided by an insurance policy, the insurer has a duty to defend its insured. Precision Dose,

Inc.,

,

. "[T]he threshold that an underlying

complaint must satisfy to present a claim of potential coverage is low, and for coverage to exist,

the complaint need only present a possibility of recovery, not a probability of one." Wilcox &

Christopoulos, L.L.C.,

,

.

¶ 23 RTA's complaint in the underlying case contained two counts. The second count

asked for damages under an equitable, not a statutory, theory of relief. As stated earlier, RTA

was seeking to be compensated by the City for sales tax proceeds it claims it should have

received but were never collected by the Company. The City would suffer a "loss" under the

terms of the policy if RTA prevailed on count II of its complaint against the City, considering the

City would have to pay money to RTA that the City never received.

¶ 24 However, this does not end our analysis. In granting the Association's motion for

judgment on the pleadings, the trial court ruled, even if RTA's underlying complaint alleged a

"loss" as defined by the policy, the type of loss alleged was specifically excluded by the

insurance policy. The court cited the following exclusion:

"The following additional exclusions apply only to coverages

provided by this form. The Association shall not be liable to make

-9- payments for 'loss' in connection with any claim made against the

Members based upon or arising out of the following:

***

(12) the issuance, collection or management of proceeds or

repayment of taxes by any Members or any agent acting on behalf

of such Members."

¶ 25 We find this exclusion does not apply in this case. RTA did not allege the City

issued, collected, or managed the tax proceeds at issue. In fact, RTA's complaint alleges the

revenue to which it is entitled was never collected because the Company improperly claimed the

City as the situs of its sales. Further, because the City did not receive any tax revenue which

should have gone to RTA, RTA is not seeking repayment of any taxes from the City. Instead,

RTA is asking the City to make RTA whole for taxes that were never collected by the Company.

As a result, the trial court erred in granting the Association's motion for judgment on the

pleadings.

¶ 26 III. CONCLUSION

¶ 27 For the reasons stated, we reverse the trial court's order granting the Association's

motion for judgment on the pleadings and remand for further proceedings.

¶ 28 Reversed and remanded.

- 10 -