The police department is also the party who was legally responsible for those goods at the time, so obviously the defendant's case would be against the police department. The department is the one who was wronged by the officer, so they are the ones who have cause against him personally.

The defendants could make a reasonable case against both the officer who stole the property out of police custody and the police department that failed to protect it. The former for theft and failure to return the property to its owner, and the latter for negligence. I believe the term is "jointly and severally liable"?

The police department has its own separate claim against the officer, of course, for the costs they have incurred (separate from the value of the stolen property, which wasn't theirs to begin with) as a result of the officer's actions.

But from what I understand the department doesn't have the allegedly stolen property - the officers themselves do. Which is why the (innocent, I might add) individuals are left without recourse for action undertaken by government agents.

Certainly in many other contexts, the parent organization has been found responsible for negligent or illegal behavior by their employee for civil damages. That's one of the reasons for drug testing and background checks.