Much of the necessary systems are there just waiting to be merged. Face Poser would let you edit individual expression charts for each character and modulate between those emotions on the fly. The scripting system could block out every place that the characters might need to be and what they could do when they got there.
Having done this, I would shift the focus from large levels with lots of movement to small sets packed with detail. Imagine what you could do with over 1,000 well-made models in a few small rooms. Up the level of detail on the character-models, too.
I'd get together some soap opera actors; They're used to spitting out tons of lines within a very small time constraint, and doing such a thing over and over. Record enough dialogue for several "episodes".
Each episode would be similar to Facade. Maybe start a series called "Condos," following the lives of several young professionals in the same condominium complex. Some couples, some singles, a good mix.
The strength of the dialogue system in Facade was its handling of branching paths. It was a very organic shift toward different end-states. Covered up the seams, so to speak.
My goal would be a bi-weekly or monthly participatory episode, in which you can enter a character and interact with "scenes". Scenes could be setup in such a way that they would alter depending on the revelations of the previous scene. You could also, if you wanted, just set up cameras and watch, not interacting at all.
The physics system of Hammer could even be used to great effect. Dropping your wineglass could elicit surprise from your hosts.
This would be a game. But you'd have to adjust your conception of what that means. Sure, you could do your best to kill everyone and "break the game" and then bitch and moan about how you weren't given freedom to do anything -- but keep your complaints to yourself.
This type of game would be (and in Facade's case, is) a close cousin of an improv game that I remember fondly from theatre (of course I did theatre in high school).
The improv game's core rule is that you never reject the information you are fed. This means that if someone says to you, "Nice sunny day," you don't say, "No it isn't."
Interactive Drama demands a similar mindset. You can't expect the game to be completely reactive to every little whim you suddenly think up. You have to be reactive to the game - more so than it is to you.
Or not. Lament that it didn't know what you were talking about when you discuss your Master's thesis. But then again, I don't know what the fuck you're talking about, either.
Oh, and I'm not trying to imply that I didn't enjoy Facade's art design. Seeing it in action was great, watching that static picture I'd been seeing for months move and talk and emote was magical.
I just really like Half-Life 2's art style. I would never dare call it realistic (blasphemy), but it is stylized in such a way that evokes everyday life but still firmly grounds its world in fantasy.