Kankakeeland Community Action Program, Inc. v. Illinois Dept. of Commerce and Community Affairs

• Decision Date: 04 May 1990
• Docket Number: No. 1-87-3487,1-87-3487
• Parties: , 145 Ill.Dec. 507 KANKAKEELAND COMMUNITY ACTION PROGRAM, INC., Plaintiff-Appellant, v. ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS and J.R. Hedges, Director, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

Page 277

557 N.E.2d 277

197 Ill.App.3d 1067, 145 Ill.Dec. 507

KANKAKEELAND COMMUNITY ACTION PROGRAM, INC., Plaintiff-Appellant, v. ILLINOIS DEPARTMENT OF COMMERCE AND COMMUNITY AFFAIRS and J.R. Hedges, Director, Defendants-Appellees.

No. 1-87-3487.

Appellate Court of Illinois,

First District, Sixth Division.

May 4, 1990.

Foss, Schuman, Drake & Barnard, Chicago (George C. Pontikes, of counsel), for plaintiff-appellant.

Neil F. Hartigan, Atty. Gen., Chicago (Robert J. Ruiz, Karen S. Rosenwinkel, of counsel), for defendants-appellees.

Justice RAKOWSKI delivered the opinion of the court:

Plaintiff Kankakeeland Community Action Program, Inc. (KCAP) brought an administrative review action and sought to reverse the decision of defendant Illinois Department of Commerce and Community Affairs (the Department) which terminated federal funds distributed through the Department to three KCAP programs. The circuit court affirmed. Plaintiff appeals.

The issues presented on appeal are: (1) whether the Department's action to terminate grant funding was a violation of constitutional due process or required federal statutory procedure; (2) whether the regulations under which the Department terminated grant funding violate constitutional due process or federal statutes for termination procedure; (3) whether the Department failed to provide proper notice in violation of Illinois statute; (4) whether the Department violated Illinois law by failing to provide adequate discovery; and (5) whether the Department had the authority to order an agency-wide audit at the time it terminated the KCAP grant. We affirm on all issues.

The undisputed facts are that the Department is a grantee of federal funds from the United States Department of Health and Human Services (DHHS). In 1986 and several years prior, the Department entered grant agreements with KCAP for the Illinois Home Energy Assistance Program, the Community Services Block Grant Program, and the Illinois Weatherization Assistance Grant Program. Under these agreements, the Department would grant federal funds to KCAP which, in turn, would use the money to support job training, energy assistance, emergency medical care and other services for the poor.

The weatherization grant could have been funded by either DHHS or the Department of Energy (DOE). According to the "Notice of Grant Award" for that grant, KCAP would receive no money from DOE and $266,452.00 from DHHS.

Each grant agreement provided the Department with the right to audit KCAP "as often as deemed necessary" and to "examine corporate books and records which may be necessary to determine the ability of the grantee to safeguard the funds." The Department also reserved the right to terminate the grant if KCAP failed to comply with the conditions of the grant. Finally, each agreement said: "[p]ayments made to Grantee or recoveries by the Department shall be in accord with the legal rights and liabilities of the parties."

Acting under the requirements of federal and state statutes, the Department reviewed KCAP's books in April, 1985, and began communicating about certain problems in May. Finally, the Department notified KCAP that it would terminate the three grants effective February 3, 1986, unless KCAP sent permission authorizing a public accounting firm to conduct an agency audit scheduled to begin on that date. Since KCAP did not send this permission, the Department terminated funding.

The Department then sent a letter to DHHS requesting that the agency review the termination of the community services block grant under section 676(a) of the authorizing act, the Community Block Services Grant Act (Act). (42 U.S.C. § 9905(a) (1986).) DHHS wrote to the Department stating that under section 675(c)(11) of the Act no CAA funding could be terminated for cause unless notice of such termination had been given and an opportunity for a hearing on the record had been provided. On February 25, 1986, the Department responded by rescinding the termination of this grant, notifying KCAP that the funding had been suspended, and giving KCAP until March 1 to request a hearing pursuant to section 675(c)(11). 42 U.S.C. § 9904(c)(11) (1986).

On February 28, 1986, KCAP requested an administrative hearing. The Department notified DHHS of this development and informed the federal agency that funds to KCAP would be suspended until the hearing. On March 13, DHHS replied stating that it believed section 675(c)(11) of the Act means that funding cannot be stopped until after a notice, hearing, and final review by DHHS. The Department wrote back on March 18 noting the possible liability which the State of Illinois might assume pursuant to section 675(g) if it allowed KCAP to expend monies in violation of state and federal law. (See 42 U.S.C. § 9904(g) (1986).) The Department stated it would not rescind the suspension unless DHHS sent assurances that the State would not be liable for monies misspent by KCAP.

The Department served KCAP with its initial notice of hearing and statement of charges sometime prior to March 28. On April 1, the hearing officer granted KCAP's motion to strike this notice on the grounds that the notice did not comply with the requirements of section 676(a). On April 14, the officer ordered the Department to notify KCAP of the specific charges and cite relevant sections of statutes and Department rules. That order also stated that the hearing date was set for April 24, 1986, by stipulation of the parties.

On April 14, the Department sent a second notice charging KCAP with failure to: (1) permit an audit commissioned by the Department; (2) safeguard grant funds and assure proper expenditures; and (3) assure that KCAP operated under the direction of a properly constituted Community Action Agency Board. The notice also specified the relevant grant provisions, regulations and statutes. On April 15, KCAP made a second motion to strike the notice which was denied.

On April 15, KCAP served a motion for production of documents, requesting the complete Department file on KCAP, the Department plans for the three KCAP grants, and information about the existence of and special conditions for all Energy Assistance Block Grants, Illinois Weatherization Assistance Grants and Illinois Community Services Grants in existence in 1986 for any Illinois Community Action Agencies. This motion was denied.

KCAP renewed the motion at a hearing on April 24. At that time, KCAP admitted that it had draft copies of the state plans for these KCAP grants. The parties stipulated that these were, in fact, the operating plans. The Department argued that the other materials requested lacked relevance to KCAP's case and producing these documents would place a severe burden on the Department. The hearing officer then denied the motion but assured KCAP he would order the production of additional documents if subsequent testimony showed they might be relevant.

Administrative hearings were held on April 24, May 2, and May 9. During the hearings, KCAP claimed that the Code of Federal Regulations for grants under DOE should apply to the procedures for suspending and terminating the KCAP weatherization grant. (See 10 C.F.R. §§ 600.121, 600.122 (1986).) After reviewing the grant contract and hearing testimony about the funding for this grant, the Department decided that DOE code provisions did not apply because the weatherization grant in question was funded entirely by DHHS.

KCAP also asserted that the Department had no authority under statutes in existence at the time, to demand an agency-wide audit of KCAP's books. The hearing officer and Director Hedges found that this authority was implicit in the grant agreement and in federal statutes authorizing the grant.

On June 23, 1986, Hedges issued the final decision which terminated the energy assistance and weatherization grants directly and terminated the community services grant effective upon confirmation of DHHS.

I.

Plaintiff first contends that the Department's action to terminate grant funding without a notice and hearing terminated KCAP's property rights in violation of constitutional due process under the fourteenth amendment and statutory procedure under legislation that authorized the grants.

KCAP contends that the Department violated due process by terminating its funds on February 3, 1986. Therefore, KCAP maintains, this action is invalid.

According to facts in the record, the Department began investigating KCAP in April, 1985, and notified KCAP about problems in May. Finally, on January 26, 1986, the Department notified KCAP it would terminate funds on February 3 unless KCAP sent permission for an audit scheduled to begin on that date.

Subsequently, the Department acknowledged that it could not terminate funds without notice and the opportunity for a hearing. On February 25, the Department rescinded the grant termination, suspended funds, and notified KCAP that it had until March 1 to request a hearing.

KCAP has also argued that Federal Code provisions for the suspension of weatherization grants under the Department of Energy apply. However, the grant funding document clearly states that this particular grant was funded solely by DHHS and the record contains no evidence to the contrary. Therefore, we agree with the hearing officer that DOE Code provisions do not apply.

Three days of hearings were held in April and May followed by a decision to terminate funds announced on June 23, 1986.

In sum, KCAP did not receive a notice and hearing before funds were terminated on February 3, 1986. KCAP bases its constitutional claim on that undisputed fact. KCAP ignores another undisputed fact, namely, that the Department corrected this error by serving notice and holding the hearings which resulted in a second termination on June 23. In effect KCAP is suggesting that once the Department makes any procedural error while attempting to terminate a grantee for cause, then the Department...