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House v. Felder

decided: July 8, 1988.

EASTER HOUSE, AN ILLINOIS, NOT-FOR-PROFIT CORPORATION, PLAINTIFF-APPELLEE,
v.
THOMAS FELDER, FLORENCE MCGUIRE AND JOAN SATOLOE, DEFENDANTS-APPELLANTS



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 76 C 1170 & 77 C 3121--Brian Barnett Duff, Judge.

Cummings, Cudahy and Kanne, Circuit Judges.

Author: Cudahy

CUDAHY, Circuit Judge.

Defendants in this section 1983 action, employees of the Illinois Department of Children and Family Services ("DCFS"), appeal from a judgment entered on a jury verdict. The jury found that in two separate instances these employees acted under color of state law to deprive Easter House, a Chicago-based adoption agency, of property without due process of law. On the first count, the jury found that during late 1974 and early 1975 the DCFS employees conspired with Millicent Smith, a former Easter House employee, to deprive Easter House of its operating license and to expedite the licensing of Smith's new agency, named Easter House Adoption Agency, Inc. ("Easter House II"), with the intention of transferring Easter House's business to Smith. On the second count, the jury found that two of the state employees again deprived Easter House of property without due process during 1977 and 1978 by conducting unwarranted investigations of its operations.

The trial court denied the defendants' motion for judgment n.o.v. or a new trial. The DCFS defendants then brought this appeal. (Millicent Smith, the sole private defendant remaining in the action by the time of the trial, did not appeal.) The defendants argue that (1) Easter House failed to identify any property interest of which it was deprived under color of state law; (2) section 1983 is not available to the plaintiffs because adequate state law remedies provided all the process that was due; (3) defendants are protected by qualified immunity because none of their actions clearly violated contemporaneous standards of due process; (4) the district court erred in its conspiracy instructions; and (5) the damages awarded on count I are excessive. For the reasons explained below, we affirm on count I as to liability and damages and reverse on count II on the grounds that the investigation infringed no protected property interest.

I.

Easter House claims that its property was taken without due process of law through two distinct conspiracies. The first was a plan by the DCFS defendants and Millicent Smith, Easter House's former Executive Director, to strip Easter House of its license to operate a "child welfare agency" in Illinois and to establish a new agency with an almost identical name under Smith's control. The second was an alleged plot by two of the three DCFS defendants to drive Easter House out of business by harassing it with continuing, unwarranted investigations of its operations. The essential facts surrounding these two episodes will be described separately.

A.

The first conspiracy that Easter House described to the jury proceeded on two fronts simultaneously. While DCFS was delaying the renewal of Easter House's license, it was also assisting in the creation of Easter House II. Events leading up to the delay of Easter House's license renewal began in late November 1974, as the November 30th expiration of Easter House's two-year license approached. The parties agree about most of the facts surrounding the delay in the issuance of Easter House's new license, though they disagree sharply about the inferences that a jury could reasonably draw from those events. Joan Sataloe, a licensing representative assigned to DCFS's Chicago office, prepared a relicensing study which recommended renewal of Easter House's license for the two-year period beginning December 1, 1974. This recommendation was then forwarded to DCFS's main office in Springfield where the licenses are issued.

On December 30, 1974, while Sataloe was on vacation, Smith met at DCFS's Chicago offices with Sataloe's immediate superior, Florence Mcguire, the licensing supervisor for DCFS's central district. According to Smith's testimony, this was her second discussion with McGuire concerning her plans to leave Easter House, the first having occurred at some point prior to December 17th as Smith was preparing the incorporation forms for Easter House II.*fn1 During the December 30th meeting, according to a memorandum from Mcguire to Sataloe written later that day, Smith described the reasons for her growing disenchantment with Easter House and her plans to found Easter House II. Smith reported that she had decided to leave Easter House because Seymour Kurtz, Easter House's owner and president, had altered his longstanding practice of delegating day-to-day management to Smith and started to play a more active role. Smith also stated that Easter House had brought several new people into the operation who answered to Kurtz rather than to her. Smith indicated that she was frustrated by her inability to halt practices of the new employees that she found objectionable, including careless handling of confidential adoption records and telephone solicitation of affluent former clients to increase the number of placements. McGuire's memorandum also recounted vague allegations that Easter House was connected to foreign adoption agencies through which Kurtz had told Smith he expected "to make a million."

Smith, according to the memorandum, indicated that she intended to leave Easter House immediately and disclosed some of the details of her plan. To minimize Kurtz's opposition to the new agency, Smith had concealed her plan from Kurtz. She had arranged for her sister, Pacita Haire, to sign the charter application and had waited for Kurtz's year-end vacation to make her move. To ensure that her leaving would not deprive her of the rewards to which she felt entitled based on her long tenure at Easter House, Smith had resolved to use a name closely resembling Easter House's and to take Easter House's files. Smith reported having removed all the active case files and indicated that she planned to remove the closed files before Kurtz's return.

After the meeting, McGuire called DCFS's Springfield office to request a delay in the mailing of Easter House's renewed license. On the following day, December 31st, Smith wrote to McGuire, Sataloe and Thomas Felder, the Chief of DCFS for the central district. Smith described the prior day's meeting to Satoloe and Thomas Felder and stressed the importance of rapid action on Easter House II's charter application. In her letter to McGuire, Smith indicated that Fran Riley, Easter House's only other trained social worker, had decided to leave Easter House and join Easter House II. Smith also thanked McGuire for withholding Easter House's license. On that same day, Smith wrote to Kurtz resigning her position at Easter House.

After discussing Easter House's situation with McGuire, Felder decided that Easter House's renewed license should be kept on hold at the Springfield office. On January 6, 1975, Felder wrote to Kurtz informing him that the departures of Smith and Riley, Easter House's only trained social workers, had put the agency out of compliance with DCFS's licensing standards and that if Easter House wished to resume operations it would have to reattain minimum standards and reapply for a license.*fn2 At trial, Felder testified that he withheld renewal of Easter House's license under authority of section 8(1) of the Illinois Child Care Act of 1969. 1969 Ill. Laws 105 (current version at Ill. Rev. Stat. ch. 23, para. 2218(1) (1986)). This provision authorized DCFS to refuse to renew the license of an agency that "consistently fail[ed] to maintain standards prescribed and published by the Department." Felder conceded during cross-examination, however, that the suspension was inconsistent with the Illinois Child Care Act and with the Department's regulations and enforcement manual, which set forth various steps that the Department would take to bring a licensee into compliance with minimum standards before revoking or refusing to renew a license.*fn3

Two days after sending the first letter, Felder, on the advice of a DCFS attorney, wrote a second letter to Kurtz informing him that the January 6th letter had been incorrect and that Easter House would have ten days from receipt of the second letter to request a hearing before DCFS's refusal to renew would become final. Felder was advised to extend this request for a hearing because the Illinois Child Care Act of 1969 allowed licensees ten days to request a hearing to contest the Department's proposed revocation or refusal to renew a license. The second letter did not, however, offer to provide the assistance required by the Department's regulations and enforcement manual.

Kurtz did not receive the first or second letters from DCFS until January 21, 1975, because Millicent Smith had directed the Post Office to forward Easter House's mail to Easter House II. On January 22nd, Kurtz wrote to DCFS requesting a hearing and a written statement of charges. During the period between the decision to withhold renewal and Kurtz's response, DCFS received two inquiries about the status of Easter House, one from a lawyer representing prospective clients and one from a social worker interested in applying for the position that Smith had left. Both callers were told that Easter House had no license; the prospective job applicant was further informed that DCFS was in the process of reviewing Easter House's "entire program." Also during this period, Felder wrote to Judge Comerford, then the Chief Judge for adoptions in Cook County, and notified him that Easter House was no longer licensed to make adoption placements.

Within four weeks of receiving DCFS's letters, Kurtz obtained his renewed license. On February 4th, two weeks after he had hired a new Executive Director, Kurtz met with Felder to discuss information that Kurtz had obtained about Smith's new operation (see infra) and the relicensing of Easter House. At that meeting, Kurtz waived the hearing that had been offered in the January 8th letter after Felder assured him that the absence of proper staff was the only barrier to the issuance of Easter House's license. Soon thereafter, Sataloe visited Easter House and approved the new Executive Director's credentials. On February 19, 1975, Easter House received its renewed license to operate as a child welfare agency during the period from December 1, 1974 through November 30, 1975.

While DCFS was acting on Easter House's application to renew its license, it was also acting on charter and license applications for Easter House II. The charter sought by Easter House II was essentially a certificate of incorporation. Child welfare agencies, however, unlike ordinary corporations, were subjected to charter studies by DCFS in addition to the usual processing by the Illinois Department of State. Charter studies for child welfare agencies, according to Felder's testimony, were intended to ensure that new agencies would serve the public interest. Tr. at 112-13 (June 13, 1986). DCFS's charter studies sought to determine, among other things, whether the agency would serve a public need and whether the people forming the agency were reputable. A license, as noted above, certified that the agency conformed with DCFS's minimum standards. The procedures for issuing initial licenses did not differ significantly from the procedures for license renewals.

Easter House II's charter application was submitted to the Illinois Department of State on December 17, 1974, and forwarded to DCFS's Chicago office on January 2, 1975. The charter application listed Pacita Haire, Smith's sister and a complete novice in the adoption field, as the incorporator and Truman Gibson, a Chicago attorney, as the President and Chairman of the Board. On January 6, 1975, Easter House II submitted its license application to DCFS. The Chicago office forwarded its recommendation that a charter and license be issued to Easter House II on February 6, 1975.

At trial, Easter House produced evidence that DCFS's approval of Easter House II's charter and license application had been extremely irregular. The plaintiff showed that the DCFS defendants knew of conduct by Smith that, at a minimum, cast doubt on her fitness. The plaintiff also produced evidence that the charter and license studies were not conducted in accordance with normal procedures.

While Easter House II's application was pending, the defendants learned a great deal about Smith both from their direct interactions with her and from complaints lodged by Kurtz. By the time that the Chicago office of DCFS recommended approval of Easter House II's applications, the defendants knew that (1) Smith had attempted to divert Easter House's mail and telephone calls to her new address, (2) she had insisted for some time (though with some indications of reconsidering) on using a name confusingly similar to Easter House's despite warnings that the similarity could mislead the public, (3) Smith had taken files from Easter House, and (4) she had attempted to place an adopted child with a couple who believed they were still working with Easter House before Easter House II was licensed to act as a child welfare agency.

The first two of these factors were relatively insignificant. Smith's efforts with respect to the mail and telephone service had little practical effect: it appears that none of Easter House's mail was ever delivered to Smith (although it was delayed from reaching Kurtz for a time) and Easter House's telephone service was never interrupted. The defendants acknowledged that they had been concerned that the public would be confused by the similarity of the names for Smith's and Kurtz's agencies. McGuire, Felder and Smith all testified that the defendants had attempted, without success, to dissuade Smith from using Easter House's name for this reason. Easter House II was, however, approved by the Illinois Secretary of State as part of the chartering process. Felder testified that DCFS's legal department had informed him that the agency lacked authority to block a charter or license based on this type of confusion. The letter notifying Smith that her license had been approved indicated that the Department could not block the license on this ground, but nonetheless warned Smith that use of Easter House II could give rise to legal action by Easter House.

Smith's removal of Easter House's files represented a more serious matter, since Easter House was unable to manage its cases, or to arrange for some other agency to manage its cases pending renewal of its license, without the information these files contained. In her letters to Kurtz and her testimony at trial, Smith claimed that she had taken the files to preserve the confidentiality of the records and not to take Easter House's business. A contrary inference could be drawn, however, from Smith's representation to McGuire that, in the words of McGuire's summary, Smith intended to end her association with Kurtz in a way that would not "allow to go down the drain the eleven years of experience and hard work she had put into building up Easter House." At trial, Felder stated that DCFS had believed Smith's professions of concern about confidentiality and took the position that the return of the records was a matter strictly between Kurtz and Smith.

The most serious factor that DCFS overlooked in approving Smith's application was her attempt to place a child with adoptive parents before she was licensed. On February 3, 1975, Kurtz told Felder that he had spoken with a couple that applied to Easter House for an adoption prior to Smith's departure. The couple, who had thought they were still dealing with Easter House, had received the baby from Smith and given Smith a check for $3,000. When they attempted to contact Smith later at Easter House they spoke with Kurtz instead. When Felder confronted Smith with Kurtz's information, she initially denied any knowledge of the matter, but called back fifteen minutes later to admit that she had made the placement. Because the placement was legally invalid, payment on the check was stopped and a court proceeding was arranged to legalize the adoption.

The defendants appear not to have considered this episode as relevant to Smith's fitness to run an adoption agency. Three days after this illegal placement came to light, before the adoption had been legalized, the Chicago DCFS office recommended to Springfield that Smith's charter and license be approved. Defendants point out that Felder brought Smith's action to the attention of the State's Attorney. Felder's letter reporting the matter, however, seems to downplay the incident. It describes the unlawful placement vaguely as "an apparent violation of the Child Care Act"; it identifies the "primary informant" as Smith's former employer, suggesting that the allegation may be inaccurate; it stresses that the adoption was subsequently legalized by the court; and it mentions that DCFS subsequently saw fit to approve Smith's license. The letter does not mention that Smith apparently represented herself as an agent of Easter House to the adoptive parents and biological mother or that she initially denied the incident to Felder. The timing of Felder's letter to the State's Attorney also undercuts its usefulness to the defendants: it was sent on March 20, 1975, more than six weeks after Felder first learned of the attempted placement, but only ten days after Felder and his superior in Springfield received letters from an attorney inquiring on Kurtz's behalf as to DCFS's intended response to Smith's actions.

The jury also heard evidence that DCFS fabricated certain aspects of the charter investigation and prepared the license study after approving Smith's application. The charter study included reports of interviews with Pacita Haire, who was listed as the incorporator, and Truman Gibson, an attorney who assisted Smith with the incorporation and who was listed as the President of Easter House II. However, during the trial, both Haire and Gibson denied having been interviewed by DCFS officials.*fn4 The license study is undated; its text, however, refers to a March 17, 1975 letter from the head of DCFS to the Secretary of State, indicating that it was prepared at least forty-one days after the Chicago office's recommendation had been sent to Springfield.

B.

The second count pertains to DCFS's investigation of Easter House's operations during 1976 and 1977. Easter House showed that Felder and McGuire conducted an intensive investigation of Easter House beginning in late 1976 with McGuire's review of Easter House's application to renew its license. Later, in early 1977, defendants dispatched investigator Tom Howard to undertake a more thorough review. Howard conducted a pretext investigation in which another investigator posed as a prospective parent; he also undertook a thorough review of Easter House's files with particular emphasis on Easter House's dealings with Kurtz's foreign foundations. Howard testified that on three occasions he reported negative results to the defendants and offered his opinion that Easter House was operating legally. Tr. at 770-76 (June 10, 1986). On each occasion, he was instructed to redouble his efforts to find evidence of wrongdoing.

II.

This case has been before this court four times during its twelve-year history. Early in the litigation, the private defendants filed a motion to dismiss. This motion convinced the district court that Easter House had failed to show that the private defendants had acted "under color of state law." The district court therefore dismissed Easter House's charges against the private defendants for failure to state a claim under 42 U.S.C. section 1983. This court reversed in an unpublished order which held that the conspiracy allegations contained in count one of Easter House's complaint made out an adequate claim of action under color of state law. Easter House v. State of Illinois, Dep't of Children and Family Servs., 577 F.2d 747, mem. op. (7th Cir. 1978).

Later, the case was twice dismissed by the district court on grounds that plaintiffs had failed to prosecute their claim. On both occasions, this court issued an unpublished order reversing the dismissal and remanding for further proceedings. Easter House v. State of Illinois, 661 F.2d 938, mem. op. (7th Cir. 1981); Easter House v. State of Illinois, Nos. 83-1729, 83-1747, mem. op. (7th Cir. Sept. 19, 1984).

After this court's reversal of the second dismissal for failure to prosecute, the parties completed discovery and prepared for trial. On May 15, 1986, less than three weeks before the date scheduled for the beginning of the trial, defendants filed a motion for summary judgment asserting that they were protected from Easter House's damage claims by the qualified immunity doctrine set forth in Harlow v. Fitzgerald, 457 U.S. 800, 73 L. Ed. 2d 396, 102 S. Ct. 2727 (1982). The district court immediately rejected the motion as untimely filed. Two weeks later, just one week before the scheduled trial date, this court affirmed the district court's rejection of the summary judgment motion. Easter House v. Leahy, 792 F.2d 143, mem. op. (7th Cir. 1986). We stressed, however, that we were only rejecting the defendants' asserted right to avoid trial on the merits by filing a last minute summary judgment motion. Our decision expressly disclaimed any prejudice to "any immunity defense that [defendants] may have to judgment on the merits." Id. at 2.

III.

Easter House's second count, which seeks damages for DCFS's 1977 investigations, requires relatively little discussion. We will dispose of it first and confine the remainder of our analysis to ...


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