Cornelius v. LaCroix

• Decision Date: 12 February 1988
• Docket Number: 86-1463,Nos. 87-1402,s. 87-1402
• Citation: 838 F.2d 207
• Parties: Isaac J. CORNELIUS and Cornelius Contractors Corp., Plaintiffs-Appellees, v. David B. LaCROIX and Milwaukee Metropolitan Sewerage District, Defendants-Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 207

838 F.2d 207

56 USLW 2496

Isaac J. CORNELIUS and Cornelius Contractors Corp., Plaintiffs-Appellees, v. David B. LaCROIX and Milwaukee Metropolitan Sewerage

District, Defendants-Appellants/Cross-Appellees.

Nos. 87-1402, 86-1463.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 7, 1987.

Decided Jan. 14, 1988.

As Amended on Denial of Rehearing Feb. 12, 1988.

James H. Petersen, Milwaukee Metropolitan Sewerage Dist., John Jorgensen, Office of Corp. Counsel, Milwaukee, Wis., for defendants-appellants/cross-appellees.

Mark M. Camp, Pfannerstill & Camp, Wauwatosa, Wis., for plaintiffs-appellees.

Before CUMMINGS, CUDAHY and MANION, Circuit Judges.

CUDAHY, Circuit Judge.

This case presents a different aspect of the problems presented in Baja Contractors, Inc. v. City of Chicago, 830 F.2d 667 (7th Cir.1987). That recent case held in part that a certified minority business enterprise ("MBE") probably had a property interest in retaining MBE status during the period granted by the certification. Id. at 677. Not all MBE programs are alike; thus, although we apply Baja Contractors we reach a contrary result, reversing the district court's determination that plaintiff Cornelius Contractors Corp. ("Cornelius") had a property interest in MBE status.

I.

The facts are laid out in Judge Gordon's opinion on various post-trial motions. See Cornelius v. LaCroix, 631 F.Supp. 610, 616-17 (E.D.Wis.1986). ¹ Defendant Milwaukee Metropolitan Sewerage District (the "District"), established an MBE policy in 1978, the stated purpose of which was "to ensure that small minority and women's business enterprises will be allowed the maximum feasible opportunity to compete for contracts and subcontracts." District's Appendix at 282. The policy required prime contractors to increase the participation of MBEs in District projects. The policy statement defined an "MBE" as "a business, at least 51 percent of which is owned and controlled by minority group members or women." Id. (emphasis added). The "control" provision required the minority owners to exercise actual day-to-day management.

Prior to July 1982, the District had no formal MBE certification process. The District did, however, allow firms to register as purported MBEs. The District then published a list of businesses that filed the registration forms. The list was published to help prime contractors locate possible MBEs for their projects. It contained the following disclaimer:

The attached list of contractors is for informational purposes only. It is a list of contractors who have indicated to the District that they come within the definition of a Minority Business Enterprise and that they are interested in performing work for the District either directly or as subcontractors. Its inclusion does not imply the endorsement or approval of the Metropolitan Sewerage District or of the county of Milwaukee or either of its Commissions, the Department of Natural Resources, [or] the Environmental Protection Agency in any way of any of the firms listed or even that they are minority business enterprises.

District's Opening Brief at 9.

In 1981, plaintiff Cornelius filed a registration form that effected its automatic inclusion in the directory. Cornelius was fifty-one percent owned by Isaac Cornelius, a Native American. Four white male principals of Super Excavators, Inc., a prime contractor, owned the other forty-nine percent. The five stockholders comprised Cornelius' board of directors. Each director had one vote and decisions were made by majority vote.

Cornelius benefited greatly from the MBE program. The company's gross receipts increased twentyfold over a three-year period. By early 1983, eighty percent of Cornelius' work was on projects where prime contractors listed it as an MBE. Super Excavators was usually the prime contractor on those projects. The District accepted prime contractors' bids without challenging the use of Cornelius to satisfy the prime contractors' MBE requirements.

In July 1982, the District revised its MBE policy, requiring an extensive certification process "to reduce the potential for fraud and abuse." District's Appendix at 285. On October 15, 1982, the District began implementation of this new process by sending a letter to all contractors that had registered as MBEs or had been used as MBEs on past contracts. The letter informed contractors that prior registrations were no longer effective and invited them to apply for MBE certification under the new procedures. District's Appendix at 279.

Cornelius applied for certification in November 1982. While the application was pending the District continued to allow prime contractors to use Cornelius as an MBE on projects. After an exchange of information, the application was completed on January 24, 1983.

On March 17, 1983, the District sent Cornelius a letter denying MBE certification. District's Appendix at 281. The letter gave two reasons for the denial. First, Isaac Cornelius was the only minority person among the five board members. Because the company was governed by majority vote, the white directors effectively "controlled" Cornelius. Second, the principal business administrator was one of the white board members. Arguably these factors were in violation of the requirement that minority members exercise actual management. The letter stated that Cornelius could "contest these findings" until April 17, 1983, but it did not outline the procedures for review. Finally, it stated that, unless challenged, the denial would be in effect until September 17, 1983, after which time Cornelius would be free to reapply.

The March 17 letter is the basis of Cornelius' claim. Instead of seeking review by the District, Cornelius instituted this action under 42 U.S.C. Sec. 1983 (1982) ² alleging that the District and its employees and agents deprived Cornelius of its property without due process of law. ³ Liability and damages were tried to a jury; the court reserved the question of equitable relief. The jury found for Cornelius on the due process claim. It awarded compensatory damages of $20,000 each against the District and two individual defendants, James Estes and David La Croix. ⁴ The jury also awarded punitive damages of $50,000 against Letha Harmon, $5,000 against La Croix, and $45,000 against Estes. The district court set aside the punitive damage assessments against La Croix and Harmon. It also ordered a partial remittitur of the compensatory damages assessed against the District and La Croix. ⁵ Cornelius rejected the remittitur; the compensatory damage issue was retried to the court, which awarded $24,997.05 in total compensatory damages against La Croix and the District. See Cornelius v. La Croix, 646 F.Supp. 1106, 1110 (E.D.Wis.1986). The court also granted injunctive relief. Cornelius, 631 F.Supp. at 625-26.

The District and La Croix appeal the denial of judgment notwithstanding the verdict ("JNOV") as to liability and with respect to the damage awards against them. The District also appeals the injunction. Cornelius cross-appeals, arguing that the punitive damage awards against Harmon and La Croix are supported by the evidence, and that the District should be liable for Estes' damages.

II.

To establish a due process violation, Cornelius must meet two requirements. First, it must show that it has a property interest. Second, it must show that it was deprived of that interest without due process of law. See Baja Contractors, 830 F.2d at 675-76. The first prong is dispositive here. We hold that Cornelius had no protectible property interest in MBE status prior to March 1983; so we reverse the judgment as to liability and damages. We also reverse the injunction and reject Cornelius' cross-appeal.

The due process clause of the fourteenth amendment does not create property rights. Rather, it protects property interests defined by "existing rules or understandings that stem from an independent source such as state law." Board of Regents v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 2709, 33 L.Ed.2d 548 (1972). The Supreme Court in Roth explained, in somewhat abstract language, the distinction between "property" and mere expectation:

To have a property interest in a benefit, a person clearly must have more than a unilateral expectation of it. He must, instead, have a legitimate claim of entitlement to it. It is a purpose of the ancient institution of property to protect those claims upon which people rely in their daily lives, reliance that must not be arbitrarily undermined.

Id. The key phrase in that passage is "legitimate claim of entitlement." Cornelius has a property interest in a benefit if the company is legitimately entitled to that benefit. See Baja Contractors, 830 F.2d at 676.

This circuit has on occasion been guided by Judge Hufstedler's definition of "legitimate claim of entitlement." See Geneva Towers Tenants Org. v. Federated Mortgage Investors, 504 F.2d 483, 495-96 (9th Cir.1974) (Hufstedler, J., dissenting) ("An entitlement is a legally enforceable interest in receiving a governmentally conferred benefit, the initial receipt or termination of which is conditioned upon the existence of a controvertible and controverted fact."). As reformulated by this court, the rule states that "a legitimate claim of entitlement is created only when the statutes or regulations in question establish a framework of factual conditions delimiting entitlements which are capable of being explored at a due process hearing." Eidson v. Pierce, 745 F.2d 453, 459-60 (7th Cir.1984). More plainly, it means "an entitlement that stands or falls on the application of rules to facts." Scott v. Village of Kewaskum, 786 F.2d 338, 339-40 (7th Cir.1986).

In a practical sense, "property is what is securely and durably yours under state ... law as distinct from what you hold subject to so many conditions as to make your interest meager, transitory, or uncertain." Reed v. Village of Shorewood, 704 F.2d 943,...