Malcolm Eaton Enterprises v. State of Illinois

OPINION

SPRAGUE, C.J. [*217] Claimant, Malcolm Eaton Enterprises, Inc. (hereinafter referred to as MEE) provides a variety of residential, behavioral and therapeutic services to mentally ill and developmentally disabled individuals residing in this state. In particular, MEE provides what is known as Community Integrated Living Arrangements (CILA) to individuals, and in certain cases, the cost of the services provided by MEE are reimbursed by the State of Illinois. The issue in this case concerns the contract between MEE and the State of Illinois to provide CILA services, and whether as a result of the failure on the part of the State of Illinois to provide a quarterly review, MEE was paid an appropriate rate for the services it did delivered to its consumers.

Essentially, three principal issues must be answered in the course of resolving this dispute. First, a determination must be made whether the State of Illinois made a contractual commitment to adjust on a quarterly basis the rate payable to MEE for the individuals who were assigned to MEE as a result of the downsizing of the State of Illinois-operated Singer Mental Health Facility (“Singer”). The second issue is whether the State of Illinois breached that commitment, and the third and final issue is whether MEE suffered damages as a result of that breach.

This claim stems from the downsizing of Singer Mental Health Facility. In late 1992 and early 1993 the State made a budgeting decision to downsize the Singer Facility. The Director of the Department of Mental Health and Developmental Disability, Jess McDonald, asked Art Dykstra to help in the downsizing of the Singer Facility. Art Dykstra was the president and CEO of Trinity Services and had a reputation for getting things done. Art Dykstra approached John Becker who was the president and executive director of MEE about helping with the Singer downsizing. Director McDonald also visited Mr.

Becker and urged him to get involved.

Director McDonald informed Mr. Becker that they need MEE’s help in downsizing Singer. Mr. Becker was also informed that he would get was needed in terms of financial resources to serve the difficult clients that would be leaving Singer. Director McDonald assured Mr. Becker and MEE’s Board of Director that MEE would not be harmed in the process.

In order to accommodate individuals who would be assigned from Singer to MEE the Board of Directors of MEE established a foundation to purchase and manage the new facilities they had to acquire to house the people coming from Singer. MEE also had to purchase equipment and vehicles, and further deal with personnel needs.

The way people were assigned from Singer to MEE was not a typical situation. According to Mr. Dykstra, the assignment of consumers generally occurs in one of two ways. The first of the two ways is when a person or a family approaches the CILA provider directly to select a CILA provider and works with the PAS agency to make sure the consumer is qualified for the specialized services which may be provided by a CILA. The second way agencies typically receive placements are through case coordinations. A local [*218] agency may send information to a CILA provider on a particular individual.

After that, the documentation is reviewed and the consumer is interviewed and a determination is made whether he or she would be a good match in the particular residence which has an opening. In a typical setting, a CILA has what is known as “funded capacity”. In practical terms this means that, if a provider has a home of four people and are receiving monies from the Department of Mental Health and Developmental Disabilities for those four individuals, and someone leaves, the CILA provider has the ability to fill that bed through the departmental mechanisms described by Mr. Dykstra in his testimony. Capacity is important to providers because, you can’t build a budget if you don’t know how many people you are going to serve. Funded capacity is a topic of conversation between CILA providers in the state. At the time of the assignment of the consumers in the Singer downsizing to MEE, it did not have complete clinical information on all of the individuals. Mr. Dykstra remembered a couple of occasions where he looked at the documentation which MEE had received after the person had been moved into their site. At times, the information pertinent to an assessment of whether the individual was proper for placement was not contained in the materials forwarded to MEE. Mr. Dykstra was angry at that process because it frustrated the ability of MEE to establish a rate or to have complete information concerning the behaviors at issue with a particular consumer. For example, one consumer “liked to break glass and cut himself”. MEE did not learn of these behaviors until after the consumer moved in. This individual had to be returned to Singer. This behavior “totally traumatized” MEE staff. If MEE had received full information from the state concerning various consumers assigned to MEE in the Singer downsizing, it might have been able to negotiate a different initial rate.

Critical mass is a concept that is important to CILA’s. Colette Croze in 1990 was the Deputy Director for Community Development. She submitted answers to frequently asked questions in May of 1990 concerning the CILA program (see Exhibit 11). Critical mass, as referenced in the testimony opinion of Mr. Dykstra, the testimony of Mr. Becker and in the written answer of the State of Illinois’ own representative, Ms. Croze, reflect a sufficient funding level based on the number of consumers which allows a CILA provider to operate at minimal capacity and provide required services to its consumers. Although MEE was promised fourteen consumers coming from the Singer downsizing, only twelve were placed. After receiving these oral assurances, but before the award letter, MEE acquired housing stock, purchased equipment and hired staff.

The reduction of two individuals did not allow MEE to meet its critical mass requirements and placed a tremendous financial burden on the MEE budget.

The MEE CILA budget, as expanded by the Singer downsizing, was built on the concept of a critical mass of consumers assigned to the program and an anticipated financial recovery of $50,000 per individual. MEE had to take out loans in order to acquire the homes, make the capital acquisitions and hire the staff necessary to take care of the Singer participants.

[*219] MEE did not enter the Singer downsizing process as early as other providers. The individuals at the Willow South and Willow North units were “very involved folks, who were dually diagnosed.” At the time the last two providers (MEE and Kreider) became involved in the process, the less involved consumers at Singer had already been assigned. Even at that point, four lessinvolved individuals were also removed from the mix leaving Kreider and MEE with the more problematic consumers. As a result of the process, MEE eventually had to serve four much more difficult people from Singer than were originally proposed under the “2 + 12 agreement at $50,000 per person.” The agreement to receive “2+12” is evidenced by Exhibit 9. Unlike MEE, Kreider pulled out of the process and MEE became essentially “the last hope” for a successful conclusion for the Singer downsizing program. Mr. Becker corroborated Mr. Dykstra’s testimony concerning the need for critical mass for funding purposes and being able to provide necessary services. All of the Singer downsizing consumers, except one, were dually diagnosed and required significant services from MEE. The last one was a fire-starter, and his records indicated the need for psychiatric testing for possible mental illness. The quarterly review process would have allowed MEE to deal with the critical mass issue and seek an adjustment of the rate. A commitment was made by the State of Illinois for fourteen Singer consumers to be assigned to MEE (Exhibit 9). Of the initial placement, one individual died of natural causes and three other men had to be returned to Singer because they could not be served in the community as a result of the severity of their behaviors and only one of those individuals was replaced. Of the 12 consumers, only one of those was replaced.

MEE continued to request replacement assignments to address a budget problem described colorfully by Mr. Becker as a “hole growing in our budget the size of Cincinnati”. While the State initially was “pushing” MEE to take more people, it was harder to get the State to find replacements when individuals had to be returned to Singer. The State acknowledged responsibility to replace those individuals in conversations Mr. Becker had with Mr. Carmody and Mr.

Holliday.

MEE did not have all the necessary information or the persons to be transferred from Singer to determine an accurate rate for them. MEE was never quite sure if the consumers they had selected based on the packets of information were the individuals who actually were going to move into MEE residences. It was the responsibility of Singer personnel to provide pertinent clinical information in the packets of the Singer consumers on a timely basis to MEE. MEE did not have complete clinical information regarding the individuals who might be assigned to MEE at the time. At times, MEE was learning pertinent information about the individual consumers after they had moved in. Those documents would not be received from Singer until thirty or sixty days later. In some instances, MEE was not informed of necessary behavior programs, and in other medication regimens had to be changed. MEE finally accepted an interim rate for the Singer consumer with the idea that it would be reviewed and reconsidered at a Quarterly Review based on the actual [*220] expenses that MEE’s CILA program experienced at a later time. MEE was informed in January of 1993 or December of 1992 that a new cost over standard manual was being developed. One of the situations for which cost over standard would be appropriate would be the transfer of individuals moving from a state institution to a community setting.

MEE did not receive the initial $50,000 rate that had been requested in discussions with Department Director McDonald and instead agreed to an interim rate of $45,386. Mr. Becker agreed on behalf of MEE to an interim rate based upon the promise of a Quarterly Review. Mr. Becker received March 5, 1993 correspondence from Eranell McIntosh-Wilson in which it was said that MEE would receive twelve individuals from Singer at the rate of $45,386. The letter did not indicate the identities of the individuals, and as of March 5, 1993, neither MEE nor the State were quite sure who all of the individuals were who would be assigned to MEE. In Ms. McIntosh-Wilson’s March 5, 1993 letter the State committed to a CILA special rate which was assigned a quarterly review status. The quarterly review process was to be initiated by notice from the Division of Department Disabilities approximately thirty days prior to the scheduled date of review. During the entire time of the relationship, MEE never received any such notice from the Department. When Mr. Bengel was setting the rate for MEE for the Singer consumers, he also did not have all of the programmatic information he wanted. MEE could only have been provided information by Singer in the rate setting process, as it was the facility serving those individuals. MEE submitted budgets to the State of Illinois based only upon the information they had at the time. Although the State of Illinois said budgets on alternative formats were acceptable, it pressured MEE to submit the same information in a different format. MEE complied. A rate for the twelve Singer consumers in the March 5, 1993 award letter was set at $45, 386.00 with a Quarterly Review “attached”.

MEE executed the Fiscal Year 1994 Grant Agreement (the “Grant Agreement”), which was signed many months prior to the Singer downsizing.

The Grant Agreement does contain the total reimbursement cap for the PPO CILA program. The Grant Agreement does not contain the number of consumers assigned to MEE. Exhibit 2, which is the McIntosh-Wilson letter, is by the admission of the witness for the State of Illinois, “a commitment to fund people”. Exhibit 2 is an award letter which provides details of the contract. No Department witness was able to describe what was and what was not part of the contractual arrangement between MEE and the State of Illinois. The Grant Agreement refers to a “grantee’s capacity” and changes in capacity may be accomplished by the State of Illinois in a writing. The Grant Agreement does not refer to how many COS consumers would be assigned to MEE.

Claimant’s Ex. 2, the award letter, reveals the capacity of the CILA program at MEE which was increased by 12 in the letter. There is a difference between terminating an individual from receiving services at MEE and amending capacity. MEE never received a notice amending the capacity of MEE. The Grant Agreement does not state a time when the State of Illinois [*221] would fund CILA services provided to specific consumers. The Grant Agreement does not identify how much MEE would receive for any individual consumer. No Grant Agreement for MEE for any fiscal year ever contained a specific reference to an annual rate paid for a specific consumer. The amounts to be paid to MEE for any specific Singer downsizing consumers were found in Exhibit 2. The only document which contains the agreement on the part of the State of Illinois to pay a stipulated rate for the twelve Singer consumers was Exhibit 2, and that it also one of several documents which also contains the requirement of a Quarterly Review.

The only document which concerns rate setting during the relevant time frame is the Cost Over Standard Procedures Manual (the “COS Manual”). (State Ex. 28) Specific funding amounts were not incorporated into the COS Manual. The parameters never made it past the draft stage and are no longer available as they “crashed” on the computer of Mr. Bengel. No State of Illinois witness could testify to any methodology for setting cost parameters. The COS Manual states that there were “major problems” with the cost-over standard parameters. The COS Manual also states that the cost-over-standards were never tested in the field. The cost-over-standard manual parameters had not been updated to reflect two raises in the minimum wage, increased utility costs or inflation. After testifying that the Department never exceeded the parameters, Mr. Bengel admitted that there were times for other CILA providers when the parameters were exceeded. There is nothing in the COS Manual which states that the parameters are maximums which cannot be exceeded.

As a result of not receiving quarterly reviews that should have lead to rate increase MEE proved damages of $302,061. The damages were proven by showing the difference of what the State of Illinois paid MEE’s successors FY95 and what MEE received in FY94 for all of the transferred consumers. The difference between the MEE rate and the successor rate for the MEE COS consumers was $104,568. The difference between the MEE rate and the successor rate for MEE PPO consumers was $197,490.

It is clear to the court that part of MEE’s contract with the State was to have a quarterly review that should have adjusted the rates MEE received upward. No quarterly review was ever held. The actual contractual obligations are found in a series of documents including the Grant Agreement between the parties and various award letters which contain essential and material terms, such as rate and the number of consumers who would be assigned to MEE. One of the award letters issued to MEE was introduced as evidence as Exhibit 2.

While the State may argue that it only can be bound by a legal document signed by the Director, that statement is not an accurate statement of the law. The argument that the Grant Agreement constitutes the only contract between the parties fails for both legal and practical questions. On the practical side, the Grant Agreement omits multiple material and necessary terms. For example, the Grant Agreement does not contain the cost over standard rate for Singer consumers, the number of consumers assigned to MEE or the amount of the “grantees capacity”. No contractual arrangement to provide CILA services [*222] would be meaningful or could ever be construed without these terms. The omission of these material terms signals clearly that the Grant Agreement does not represent the entire written arrangement between the parties. In fact, the Grant Agreement even makes reference to the fact that changes in capacity for a CILA provider may be accomplished by the State of Illinois in writing.

The full scope of the arrangement is defined by other legal documents authored by key employees at the State of Illinois, including Ms. Eranell McIntosh-Wilson, who at the time relevant to the dispute was the Associate Director of the Division of Developmental Disabilities of the State of Illinois.

Exhibit 2, which is a sample of an award letter, adds the material terms which were missing from the Grant Agreement. That document includes the rate to be paid to MEE and the number of consumers who would be assigned to MEE.

This also is the document which contains the requirement of a mandatory quarterly review.

The award letters, and in particular Exhibit 2, clearly are part of the contractual arrangement. Not only are the award letters the documents which disclose the most important terms of the arrangements, the number of consumers assigned, the price, and how that price is adjusted, but they are also authored by the Associate Director of the Division of Developmental Disabilities. Those letters are also copied to the PASSAR Agents as well as a variety of managers within the Department of Mental Health and Developmental Disabilities. Ms.

McIntosh-Wilson clearly had the authority to act on behalf of the State of Illinois, and if she did not have that authority, that fact was not established in the hearing by the State of Illinois. In any event, MEE established an evidentiary basis that it could rely on the written commitments made by her.

MEE’s appropriate reliance on that authority is supported by case law.

When the state entrusts an employee with apparent authority to act, a party is entitled to rely on that representation of authority. Genie Construction Company, Inc. v. State of Illinois, 51 Ill. Ct. Cl. 153 (1999). In that case, the contractor had received two contracts to repaint bridges in several counties. Soon after it began work on one contract, it became clear that the contractor would have to remove all the old paint before repainting, a task not contemplated by either party prior to contract execution. The parties thus modified one of the contracts to include and provide compensation for this additional work. When the contractor began work on the second contract, it ran into the same problem. A state - employed bridge inspector authorized this additional work just as he had under the first contract. This time, however, the State of Illinois refused to pay for the additional work and the contractor sued. The State of Illinois claimed the inspector did not have proper authority to bind the State of Illinois to this additional work. The Court of Claims dismissed this notion and found that the contractor had to pass inspection from this employee in order to be paid. The fact that the inspector failed to get a supervisor approval for this additional work was not chargeable to the contractor and the court determined that the inspector had apparent authority to bind the state.

[*223] The facts in the present matter are even more compelling than those found in Genie, id. Here, MEE was dealing with the Associate Director, and there was testimony that the award letters were necessary for payment. In Genie, the Court of Claims had to deal with after the fact modifications of the arrangement. In this case, Ms. McIntosh-Wilson actually was setting certain of the material terms of the arrangement itself prior to the time that the services were rendered. She also was the individual who routinely would sign these award letters on behalf of the state. The state did not produce a single witness indicating that Ms. McIntosh-Wilson lacked authority to bind the State of Illinois, nor did the State put on any parole evidence at the hearing of this matter concerning the fact that the terms contained in Exhibit 2, and in particular the requirement for a quarterly review, were not obligations of the State of Illinois.

There is no question that the obligations found in Exhibit 2, and in particular the requirement of quarterly review, were clear and precise and made by the individual who routinely made these commitments constitutes the actual contract. It is clear that the State of Illinois had an obligation to provide a quarterly review which it did not.

CONCLUSION

The State breached its contract by not providing quarterly review to MEE. As a result of said breach MEE was damaged $302,061.

It is therefore ordered that Malcolm Eaton Enterprises, Inc. is awarded $302,061.