". . . . TIMES . . . ."

I wonder if the Author Charles Dickens was in Chicago in 1859 when he wrote his classic A Tale of Two Cities. In the first chapter of that book he wrote, "it was the best of times, it was the worst of times." Dickens' comment reflects the legal climate in which municipal officials in Illinois and other states operate in today. A recent case of the First District Illinois Appellate Court points out that, in some ways, this is the worst of times.

Kinzer v. City of Chicago
_ Ill. App. 3d _, _ N.E.2d _,
_, Ill. Dec. _ (1st Dist., 1988)

There is a time honored principle in Illinois municipal law that dates back to at least the turn of the century which states that absent an intent to defraud, the municipal official is not personally liable for actions taken in the expenditure of public funds. Unless an official can be shown to have attempted to obtain some type of personal benefit for himself, the general rule of thumb has been that the officer would not be held personally liable, but rather would be liable in his official capacity under a bond or other security that was posted to assure faithful performance of the duties of the office. This case has turned that principle upside down.

Phyllis C. Kinzer is "a taxpayer of the City of Chicago" that, with the support of the Better Government Association of Chicago, filed suit against numerous city officials including Mr. Daniel Grim, the Comptroller, of the municipality. This action arises from the creation and expenditure of a special fund within the accounts of the City of Chicago for the operation of the annual Chicagofest.

In 1978, Chicagofest was financed by receipts from the Hotel Operators' Tax levied by the City which had been deposited in the Hotel Operators' Tax Fund. According to paragraph 8-3-14 of Chapter 24, the monies were to be used for the promotion of tourism. Additionally, pursuant to that statute, expenditures from the Fund were made at the discretion of the Mayor. To properly account for the receipts and expenditures of Chicagofest, the Comptroller created a separate fund within the County records of the City of Chicago to track the receipts and expenditures. In 1978 and 1979 funds were transferred from the Hotel Operators' Tax Fund to the Chicagofest Fund to provide the necessary "seed money" to operate the festival. In 1979, however, after a profitable Chicagofest, the profits were not transferred back to the Hotel Operators' Tax Fund. In subsequent years, until the filing of the Complaint, other tourists activities such as Taste of Chicago and Autumn Fair were financed from the Chicagofest Fund. During this same period, the Chicagofest and other entertainment activities sponsored by the Mayor's Office of Special Events and paid for from the Chicagofest Fund accrued significant deficits.

In 1982, Kinzer brought the action seeking declaratory and injunctive relief and a return to the City of funds expended for the festivals. The Complaint was filed against the operator of the festivals, the City of Chicago, former Mayor Jane Byrne and other City and festival operator employees. The initial Complaint alleged that the contracts with the festival operator and the expenditures made in accordance with those contracts were illegal because there had been a failure to appropriate money for these activities. In February of 1983 the City agreed to a permanent injunction in which the City stipulated that it would not enter into additional contracts for festivals or expend further funds for

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this purpose in the absence of prior appropriations by the City Council.

After a series of procedural maneuvers, and two years later, Kinzer filed her fourth Amended Complaint in which she requested that the Defendant city officials and others be ordered to return to the City the festival expenses paid out of the Chicagofest Fund. In addition, she asked for a declaration of the court that the contracts were void and for injunctions necessary to enforce the declaration. The Complaint alleged that the City had illegally expended $28,000,000 with a loss to the City of $7,000,000.

Finally in August of 1986, the trial court ruled in favor of the Comptroller (Grim) and the City of Chicago and certified its order disposing of the action against these two defendants in order that it could be immediately appealed. The remaining defendants are, apparently, still contesting the case in the trial court. From the order in favor of Grim and the City of Chicago, Kinzer appealed to the First District Appellate Court. The Appellate Court reversed the decision of the trial court and, in so doing, ruled against Grim and the City of Chicago. In its opinion, the court focuses on two issues presented to it by the appeal.

The first issue considered by the court is the creation, operation and appropriation of the Chicagofest Fund. The consideration of this issue by the court commences with two statements of law that are applicable to all municipalities.

"The parties are in agreement on the general rule that a municipality may not spend funds without their having been appropriated by its governing body... there is an exception to the requirement of an appropriation, however, for expenditures made out of special funds."

The parties had previously agreed that the City Council had not appropriated funds into the Chicagofest Fund, however, there was sharp disagreement on whether or not the fund was a "special fund" which qualified under the exemption from appropriation. The court holds that the Chicagofest Fund was "not a special fund because it was not legally created, but is instead one devised solely for the administrative convenience of the Comptroller. The City was not required to establish such a fund, nor did the City Council authorize its creation." In support of its conclusion, the court cites the case of DeKam v. City of Streator, 316 Ill. 123, 146 N.E. 550. (1925). In that case, the Illinois Supreme

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Court pronounced that a special fund must be provided for by law and also that any expenditure from that special fund be legally authorized. In other words, for the expenditures made by the City of Chicago from the Chicagofest Fund to be lawful, the expenses would have had to have been from a fund that was authorized by ordinance with the specific types of expenditures to be made from the fund also authorized by action of the City Council. The court also cites other Illinois cases which have held that, in the absence of a lawfully created special fund, the funds on deposit in such a fund are considered to be general or corporate revenues and can only be spent by prior appropriation of the funds. Therefore concluding its discussion of this issue, the court rejects Grim's contention that administrative officials may invent a special fund and legally recognize it as a special fund.

"In effect, Grim urges us to overrule, or at least ignore, the well-established rule that in order to be valid the special fund must be authorized by law. Yet, it is clear that if we adopt this approach, we would not only be enabling, we would be encouraging municipalities to circumvent with great facility the commendable requirement that in order to expend general funds they must first be duly appropriated. If that were to be the case, there would be no end to the number of funds that a city could proliferate for any number of controversial programs in order to avoid the appropriations process."

The court then succinctly states its holding

"(S)ince general revenue was spent to pay the subject expenses without an appropriation, the law was undeniably violated whenever such payment was paid . . . (s)ince the City was not legally obligated to keep (the Chicagofest Fund) separate from the General Fund and general revenue was at risk, the City was legally required to appropriate money to pay the subject expenses . . . (a)ny payments made on the contracts, . . . were unequivocably void given that such expenditures violated the statutory requirement of payment from appropriated funds."

The consideration of the first issue is clearly a restatement of well-settled Illinois municipal law. However, the extension of the remedy for violation of this principle by the court is the troublesome and dangerous portion of the opinion.

Once again, the court begins by stating well settled

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principles of municipal law. First, that a taxpayer has an interest in public funds and may enforce that interest by a taxpayer action. Second, that this right is not limited by the Illinois statutes, specifically Chapter 24, paragraph 1-5-1 which codified the case law on taxpayers' actions. Third, that taxpayers' actions are generally in the form of declaratory or injunctive relief. However, the court then cites a 1926 case, Hays v. Martin, 240 ILL. App. 340, (1926), for the proposition that "constituents of a taxing body may also resort to such action to recover, on behalf of the governmental entity, public funds which have been expended unlawfully." It is on this obscure case that the court bases its decision to permit recovery of improperly expended funds from a municipal official. A careful reading of the Hays' case leads to a conclusion which is contrary to that found by the court in Kinzer. In Hays, an Illinois Appellate Court was faced with the possibility of an unlawful diversion of public funds to the benefit of a private individual, the County Clerk of White County, Illinois. It was not faced, as in this case, with an improper expenditure of funds to a third party by an administrative official. Unlike the instant case, the Hays' case sought an accounting of funds collected by the County Clerk and a recovery of those funds which were unlawfully retained by the County Clerk personally, not in his official capacity as the County Clerk. Certainly, there would be no argument that the officials in the Kinzer case would be liable to the taxpayers and to the municipality if the proceeds of the Chicagofest Fund had been expended in a manner that resulted in those funds being paid to them individually. However, no allegation is shown in the opinion that any personal benefit accrued to any of the defendants. (It may be that the Court felt, since the vendor who was paid by Chicago had taken bankruptcy, that someone should pay.)

The danger that the court exposes the individuals to is compounded by the interpretation of the Tort Immunity Act given in the opinion. The court holds that since the action was not filed in tort, the Tort Immunity Act does not apply. In so holding the court states "Kinzer's taxpayers suit seeks to assert a cause of action which has its origins in equity, a branch of our jurisprudence which, needless to say, evolved long before the 1965 passage of the Tort Immunity Act." What this statement ignores is that many other branches of law which are apparently within the scope of the Tort Immunity Act, but not torts, also predate the passage of the Tort Immunity Act. It is as if the court read the title of the Act without looking at the purpose or operative provisions of the Act. No provision of the Tort Immunity Act states that the immunities contained in the Act are applicable only to "tort" actions but rather says "the purpose of this Act is to protect local public entities and public employees from liability arising from the operation of government. It grants only immunities and defenses." In fact, no provision of the Act, either specifically or by implication, limits its operation to tort actions. However, all of these facts and the provisions of the Tort Immunity Act are ignored by the court in its opinion. Rather, it chooses to hold that "Grim must be

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held strictly liable for his violations of the applicable rule of law."

The City of Chicago and Grim are both seeking to appeal the case to the Illinois Supreme Court. Hopefully the Illinois Supreme Court will consider the case and point out the fallacies of the reasoning of the Appellate Court. A failure to do so could result in unfettered personal liability to municipal officials even when those officials are acting in good faith. Additionally, the decision will leave the status of immunity of public employees in a confused and tangled state.

The ancient Chinese had a curse that said, "May you live in interesting times." Undoubtedly, Mr. Grim, after reading this opinion, must feel that he lives in interesting times. •

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