FCS Advisors, LLC v. State of Missouri

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MISSOURI

CENTRAL DIVISION

FCS ADVISORS, LLC, et al., )

)

Plaintiffs, )

)

v. ) No. 2:17-cv-04089-NKL

)

STATE OF MISSOURI, et al., )

)

Defendants. )

)

ORDER

Pending before the Court is Defendants Doug Nelson and State of Missouri’s Motion to

Dismiss, [Doc. 16], Motion to Abstain [Doc. 17], and Motion to Stay Discovery [Doc. 18]. For

the following reasons, the Motion to Dismiss is granted. Because the Court grants Defendants’

Motion to Dismiss, the Motions to Stay and Abstain are denied as moot.

I. Background1

Plaintiff FCS Advisors, LLC serves as an administrative advisor and/or agent for lenders,

partners, affiliates, and assigns providing assistance to privately held companies in need of

financing. Plaintiff Brevet Direct Lending is one such investment fund. Brevet Direct Lending is

managed by non-party Brevet Capital Management, LLC, its investment manager, and FCS, its

administrative agent. One of Brevet Direct Lending and FCS’s objectives is to assist

companies—particularly minority-owned companies—that seek to positively impact society.

Non-party EngagePoint, Inc. is a Florida Corporation that designs and builds software and

1 The facts are found in Plaintiff’s Complaint. [Doc. 1] For purposes of deciding the Defendants’

Motion to Dismiss, the Court accepts the Plaintiffs’ factual allegations as true and construes them in the

light most favorable to Plaintiffs. See Stodghill v. Wellston Sch. Dist., 512F.3d 472, 476 (8th Cir. 2008).

information technology platforms for health and human services agencies. As relevant to the

Plaintiffs’ Complaint, key members of EngagePoint’s management team are Asian-Indian

Americans.

In January 2013, Missouri issued a request for proposals for the “provision and

implementation of a comprehensive, fully integrated, state-of-the-art automated human services

eligibility, enrollment, and case management system” as part of Missouri’s plan to comply with

the requirements of the federal Patient Protection and Affordable Care Act (ACA). [Doc. 1, pp.

5–6]. The system was meant to integrate various Missouri programs including Medicaid and the

Children’s Health Insurance Programs and interface with those programs and the federal

agencies administering them. EngagePoint submitted a proposal to serve as the primary

contractor for the systems project. Missouri accepted this proposal and awarded EngagePoint the

$147 million contract, which included several phases and extended through June 30, 2018.

EngagePoint began work on the project, which was managed by Defendant Doug Nelson,

then-Commissioner of the Office of Administration. Nelson informed EngagePoint that to

continue with the project, EngagePoint needed to secure additional capital. Thereafter,

EngagePoint sought a $20 million initial credit facility from FCS.2 To evaluate EngagePoint’s

proposal for credit, Brevet Capital Management, on behalf of Plaintiffs, held a conference call

with Nelson on December 5, 2014 as part of its due diligence in determining whether to extend a

credit facility. During the conference call, Nelson represented:

(1) “EngagePoint was performing well on Phase I of the System Project and was

likely to continue working on phases II and III so long as its access to liquidity

improved”;

(2) that “given EngagePoint’s existing involvement with the System Project as

the prime contractor, it would not be necessary for Missouri to solicit bids from

2 A credit facility is a type of loan, specifically “a legally binding agreement to extend funds if

requested at a future date, including a general working capital facility such as a revolving credit facility

for general corporate or working capital purposes.” 12 C.F.R. § 329.3.

other contractors or otherwise issue an RFP for completion of Phases II and III.

Instead, that work would flow naturally to EngagePoint”;

(3) “he was extremely confident that all three phases of the System Project

would be fully funded and would be completed as planned”; and

(4) “as of December 5, 2014, EngagePoint was already performing work on

Phase II.”

[Doc. 1, pp. 13–14]. Plaintiffs state that “[t]he ultimate thrust of Nelson’s statements and

representations . . . was that Missouri’s present intent was to continue to use EngagePoint as the

prime contractor for the System Project and to pay EngagePoint fully for its work.” Id. at 14.

Relying on that information, Plaintiff Brevet Direct Lending issued EngagePoint a credit facility,

while Plaintiff FCS served as administrative agent and servicer of the credit facility.

Plaintiffs allege that, at the time of the December 5, 2014 conference call, Nelson knew

that “work either would cease, or a significant possibility existed that Nelson would soon order

EngagePoint to stop that work,” that EngagePoint would or was likely to be replaced on the

project by IBM, had not yet been paid in full for its completed work, and would be terminated

from the System Project entirely. Id. at 15. Nelson did not disclose any of these facts to

Plaintiffs.

Soon after the credit facility was issued and EngagePoint had used the proceeds to pay

various subcontractors and suppliers that were also working on the state project, Missouri and

Nelson “began to systematically undermine EngagePoint and its work on the state project.”

[Doc. 1, p. 2]. Specifically, against EngagePoint’s recommendation, Nelson elected to license a

software program called Curam directly from IBM, which caused multiple problems due to gaps

in its functionality. Other states using Curam in similar programs reported similar problems.

Although EngagePoint was able to solve Curam’s deficiencies, Missouri terminated

EngagePoint from the project and has refused to pay EngagePoint approximately $37 million

owed for work already completed. As a result, Plaintiffs were required to increase the size of the

credit facility to EngagePoint to more than $60 million, and EngagePoint remains unable to pay

any of it back. Plaintiffs also allege that the Defendants’ conduct was motivated at least in part

by racial animus towards EngagePoint’s Asian-Indian American managers, and FCS’s

association and partnership with them.

Plaintiffs bring this suit alleging in their Complaint, [Doc. 1]:

 Count I: Fraudulent Inducement against Missouri and Nelson in his Official

Capacity, by Brevet Direct Lending.

 Count II: Fraudulent Inducement against Nelson in his Individual Capacity, by

Brevet Direct Lending.

 Count III: Negligent Misrepresentation against Missouri and Nelson in his

Official Capacity, by Brevet Direct Lending.

 Count IV: Negligent Misrepresentation against Nelson in his Individual

Capacity, by Brevet Direct Lending.

 Count V: Unjust Enrichment against Missouri and Nelson in his Official

Capacity, by Brevet Direct Lending.

 Count VI: Racial discrimination claims under 42 U.S.C. §§ 1981, 1983

against Nelson in his Individual Capacity, by Brevet Direct Lending.

 Count VII: Racial discrimination claims under Title VI of the Civil Rights

Act, including 42 U.S.C. § 2000d, against Missouri and Nelson in his Official

Capacity, by Brevet Direct Lending.

 Count VIII: Fraudulent Inducement against Missouri and Nelson in his

Official and Individual Capacities, by FCS.

 Count IX: Negligent Misrepresentation against Missouri and Nelson in his

Official and Individual Capacities, by FCS.

 Count X: Racial Discrimination claims under 42 U.S.C. §§ 1981, 1983 against

Nelson in his Individual Capacity, by FCS.

 Count XI: Racial discrimination claims under Title VI of the Civil Rights Act,

including 42 U.S.C. § 2000d, against Missouri and Nelson in his Official

Capacity, by FCS.

II. Discussion

Defendants move to dismiss under Fed. R. Civ. P. 12(b)(1) for lack of subject matter

jurisdiction and under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can

be granted. Federal courts consider motions to dismiss for failure to state a claim and for lack of

subject matter jurisdiction under the same standard. Vankempen v. McDonnell Douglas Corp.,

923 F. Supp. 146 (E.D. Mo. 1996). “To survive a motion to dismiss, a complaint must contain

sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.”

Zink v. Lombardi, 783 F.3d 1089, 1098 (8th Cir. 2015) (quoting Ashcroft v. Iqbal, 556 U.S. 662,

678 (2009)). “A complaint must do more than allege labels and conclusions or a formulaic

recitation of the elements of a cause of action.” Zink, 783 F.3d at 1098 (quotations omitted).

A. Plaintiffs do not have standing to bring Claims VI, VII, X, and XI.

“[I]f a plaintiff lacks standing, the district court has no subject matter jurisdiction.

Therefore, a standing argument implicates Rule 12(b)(1).” Faibisch v. U. of Minnesota, 304 F.3d

797, 801 (8th Cir. 2002) (internal citation omitted). The party invoking federal jurisdiction bears

the burden of establishing standing. Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992).

The burden corresponds with the degree of evidence required at the relevant stage of litigation.

Id. “At the pleading stage . . . general factual allegations of injury . . . may suffice.” Id.; Iowa

League of Cities v. E.P.A., 711 F.3d 844, 869 (8th Cir. 2013).

The determination of whether a particular plaintiff has standing is a two-part inquiry

involving constitutional and prudential standing considerations. First, to demonstrate Article III

standing, a plaintiff must show: (1) he has “suffered an injury-in-fact”; (2) the injury is “fairly ...

trace[able] to the challenged action of the defendant”; and (3) it is “likely, as opposed to merely

speculative, that the injury will be redressed by a favorable decision.” Balogh v. Lombardi, 816

F.3d 536, 541 (8th Cir. 2016) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61

(1992)). Second, in order to meet the prudential limitations on standing, a plaintiff must

ordinarily “assert his own legal interests rather than those of third parties.” Gladstone Realtors v.

Vill. of Bellwood, 441 U.S. 91, 100 (1979).

Defendants argue that Plaintiffs do not have standing to assert Counts VI, VII, X, and XI

of the Complaint, which allege racial discrimination under 42 U.S.C. §§ 1981, 1983, 2000d.

Plaintiffs allege Nelson’s conduct rendered EngagePoint unable to pay the interest due or meet

the initial maturity obligations of the credit facility and that Nelson’s conduct “was motivated at

least in part by racial animus towards the Asian-Indian members of EngagePoint’s management

team.” [Doc. 1, p. 34]. Defendants contend Plaintiffs lack standing because: (1) Plaintiffs are not

a part of any protected class; (2) there are no allegations of discrimination toward Plaintiffs

based on Plaintiffs’ race; and (3) Plaintiffs are not intended beneficiaries of federal funds for

Medicaid programs that would give them a private right of action under § 1983 or § 2000d.

[Doc. 16, p. 21].

1. Counts VI and X: 42 U.S.C. §§ 1981, 1983

Counts VI and X assert, through 42 U.S.C. § 1983, claims for violations of the “make and

enforce contracts” and “equal benefits” clauses of 42 U.S.C. § 1981. [Doc. 1, p. 34 – 35, 44–45].

Section 1981 states, in relevant part, that “all persons within the jurisdiction of the United States

shall have the same right . . . to make and enforce contracts . . . as is enjoyed by white citizens . .

. .” 42 U.S.C. § 1981(a). The statute defines “mak[ing] and enforc[ing] contracts” as “the

making, performance, modification, and termination of contracts, and the enjoyment of all

benefits, privileges, terms, and conditions of the contractual relationship.” 42 U.S.C. § 1981(b).

Plaintiffs’ § 1983 claim “can survive only if [it] has alleged that he personally has

suffered a direct, nonderivative injury.” Potthoff v. Morin, 245 F.3d 710, 717 (8th Cir. 2001)

(affirming dismissal for lack of Article III standing). A plaintiff “generally must assert his own

legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third

parties.” Warth v. Seldin, 422 U.S. 490, 499 (1975).

Plaintiffs had no rights under the contract between Missouri and EngagePoint. The U.S.

Supreme Court has made clear that, without contractual rights, Plaintiffs cannot bring a claim

under § 1981:

We have never retreated from what should be obvious from reading the text of the

statute: Section 1981 offers relief when racial discrimination blocks the creation

of a contractual relationship, as well as when racial discrimination impairs an

existing contractual relationship, so long as the plaintiff has or would have rights

under the existing or proposed contractual relationship.

Absent the requirement that the plaintiff himself must have rights under

the contractual relationship, § 1981 would become a strange remedial provision

designed to fight racial animus in all of its noxious forms, but only if the animus

and the hurt it produced were somehow connected to somebody’s contract. We

have never read the statute in this unbounded—or rather, peculiarly bounded—

way.

Domino’s Pizza, Inc. v. McDonald, 546 U.S. 470, 476 (2006) (emphasis added).

Even assuming for the purpose of this Motion that Nelson’s actions were motivated at

least in part by racial animus, EngagePoint would have standing to assert that claim, not FCS or

Brevet Direct Lending. EngagePoint has asserted its own breach of contract claims in the

separate suit currently pending in state court.3

Plaintiffs contend a § 1981 claim may be based on a defendant’s interference with the

plaintiffs’ contractual relationship with a third party. [Doc. 43, p. 17]. Plaintiffs cite Harris v.

Allstate Ins. Co., 300 F.3d 1183, 1197 (10th Cir. 2002), which noted “[r]elief is available under §

1981 where a party discriminatorily uses its authority to preclude an individual from securing a

contract with a third party.” The Tenth Circuit affirmed the district court’s dismissal in Harris,

finding the defendant “was not in a position to interfere with plaintiff’s ability to enter into new

contracts as would support a claim under § 1981.” Id. Plaintiffs cite Harris to support their

allegation that “Nelson’s animus for EngagePoint’s Asian-Indian American members impaired

Plaintiffs’ contractual relationships with EngagePoint and deprived Plaintiffs of the

3 Defendants state that there are no allegations of racial animus asserted in the state court suit.

associational, economic, and cultural benefits of working with EngagePoint’s Asian-Indian

American members.” [Doc. 43, pp. 23-24].

Plaintiffs do not allege, however, that Defendants in anyway prevented them from

obtaining a contract with EngagePoint, which the Harris decision itself would require. Harris,

300 F.3d at 1183 (The individual must “show that the party both possessed sufficient authority to

significantly interfere with the individual’s ability to obtain contracts with third parties, and that

the party actually exercised that authority to the individual’s detriment.”). Nothing in Plaintiffs’

complaint alleges Defendants’ racial animus prevented them from securing new contracts.

Instead, Plaintiffs claim that Defendants’ actions harmed a third party’s ability to perform its

duties under an existing contractual relationship. This is not sufficient for Plaintiffs to have

standing to assert a claim under § 1981.

2. Counts VII and XI: 42 U.S.C. § 2000d

In Counts VII and XI, Plaintiffs assert a claim under Title VI of the Civil Rights Act of

1964, including 42 U.S.C § 2000d. [Doc. 1, pp. 36–37, 46–47]. Title VI prohibits discrimination

on the basis of race, color, and national origin in programs and activities receiving federal

financial assistance. Defendants contend that Plaintiffs lack standing to bring this claim because

Plaintiffs were not discriminated against on the basis of their race, and therefore do not have

third party standing under Title VI. See Barrows v. Jackson, 346 U.S. 249, 255 (1953)

(“Ordinarily, one may not claim standing in this Court to vindicate the constitutional rights of

some third party.”).

The U.S. Supreme Court applies a presumption against third-party standing as a

prudential limitation on the exercise of federal jurisdiction. See, e.g., Singleton v. Wulff, 428 U.S.

106, 113 (1976). That presumption may be rebutted in particular circumstances and the rule

against third-party standing is not absolute. Kowalski v. Tesmer, 543 U.S. 125, 129 (2004). For a

third-party to rebut that presumption, “the party asserting the right [must have] a ‘close’

relationship with the person who possesses the right,” and “there [must be] a ‘hindrance’ to the

possessor’s ability to protect his own interests.” Id. at 130.

In this case, while Plaintiffs argue they had a close relationship with EngagePoint, there

is no hindrance to EngagePoint’s ability to protect its own interests. As previously noted,

EngagePoint is involved in another suit pending in Missouri state court and is free to assert these

claims on its own behalf there. It is for EngagePoint to decide whether to do so.

Plaintiffs cite a number of cases they claim “have found that a plaintiff can sue for an

injury based on discrimination against the race of a third party with whom the plaintiff had a

relationship.” [Doc. 43, p. 28]. These cases are distinguishable. In Hallmark Developers, Inc. v.

Fulton Cty., No. 02-cv-01862, 2004 WL 5492706, at *18 (N.D. Ga. Sept. 27, 2004), the

plaintiffs’ alleged their request to rezone an area of land was denied by defendants based on

hostility towards minorities because plaintiffs proposal “would contain affordable housing

opportunities for lower-income persons.” Id. at *3. Thus, the court found “the discriminatory

intent of defendant was really directed at an as yet unidentifiable group of people, i.e., blacks

who might become tenants of the Subject Property. In such a situation, the status of a white

plaintiff as the ‘only effective advocate’ is even more compelling because the black person is as

yet unknown.” Id. at *19. Here, Plaintiffs are not “the only effective advocate” against alleged

racial discrimination.

The court in Kennedy v. City of Zanesville, OH “previously found that non-minorities have

standing to maintain discrimination actions for injuries suffered by them as a result of racially

discriminatory practices against a racial minority.” 505 F. Supp. 2d 456, 494 (S.D. Ohio 2007)

(emphasis in original) (citation omitted). There, sixty-eight individuals and a number of

organizational plaintiffs claimed that the defendants “had a policy, pattern, and practice of denying

public water service to the individual Plaintiffs during the last fifty years because they are African–

American and/or because they reside in a predominantly African–American neighborhood.” Id. at

463. The court found prudential standing was met because “each Plaintiff [was] asserting his or her

own legal interest rather than those of third parties. . . . The white Plaintiffs are not resting on injuries

suffered by their black neighbors; they are instead seeking relief for specific injuries they themselves

suffered: lack of public water service as a result of Defendants’ alleged discrimination.” Id. at 494.

That is not true in this case. Whereas the Kennedy plaintiffs contracted for services with the

defendants, Plaintiffs had no such agreement with Missouri or Nelson. While EngagePoint has not

been able to make payments on its credit facility, Plaintiffs are third-parties to Defendants’ alleged

discrimination and are thus not asserting their own legal interests.

Finally, Plaintiffs urge this Court to look to Title VII cases in order to allow them to sue

for injuries suffered from discrimination against a third-party’s race. [Doc. 43, p. 29]. Plaintiffs

cite an Eighth Circuit case from 1989 to argue they have standing to sue when discrimination

results in the lost benefits of associating with persons of other racial groups. [Doc. 43, p. 29]

(citing Clayton v. White Hall Sch. Dist., 875 F.2d 676, 679 (8th Cir. 1989)). However, even if

Title VII cases should impact Title VI standing, the U.S. Supreme Court has recently revisited

the issue of Title VII standing and Plaintiff’s analogy no longer supports its standing. See

Thompson v. North American Stainless, LP, 562 U.S. 170, 176 (2011).

The Supreme Court acknowledged its earlier dictum in Trafficante v. Metropolitan Life

Ins. Co., 409 U.S. 205 (1972), which broadly interpreted Title VII to “define standing as broadly

as permitted by Article III of the Constitution.” Id. at 209. Using that analysis, a number of

courts—including the Eighth Circuit in Clayton—found prudential standing was satisfied by

“those who were not themselves the objects of discrimination, but were nevertheless injured

‘[by] the loss of important benefits from interracial associations.’” Clayton, 875 F.2d at 679

(quoting Trafficante, 409 U.S. at 209–10).

The Thompson Court found the Trafficante “dictum was ill-considered” and declined to

follow it:

If any person injured in the Article III sense by a Title VII violation could sue,

absurd consequences would follow. For example, a shareholder would be able to

sue a company for firing a valuable employee for racially discriminatory reasons,

so long as he could show that the value of his stock decreased as a consequence.

Thompson, 562 U.S. 176. Plaintiffs’ situation is similar to the Supreme Court’s shareholder

hypothetical, where Plaintiffs are attempting to assert EngagePoint’s rights because the alleged

violation eventually resulted in a pecuniary loss for Plaintiffs. Therefore, even if this Court was

persuaded by Plaintiffs’ Title VII analogy, the cases cited no longer support Plaintiffs’ standing.

EngagePoint would undoubtedly have standing to assert racial animus claims in its

pending state court case, but has elected not to do so. Plaintiffs, conversely, are not a member of

a protected class under Title VI and have not rebutted the presumption against third-party

standing. Therefore, Plaintiffs do not have standing to bring a Title VI claim and Counts VII and

XI are dismissed.

B. Counts I, III, and V, as well as VIII and IX with regard to the State of Missouri

and Nelson in his Official Capacity, are Barred by Eleventh Amendment Sovereign

Immunity.

The Eleventh Amendment to the U.S. Constitution bars federal court actions against a

state or its agencies seeking monetary relief unless the state waives its immunity, or it is

abrogated by Congress. U.S.C.A. Const. Amend. 11; Will v. Michigan Dep’t of State Police, 491

U.S. 58, 66 (1989). “[A]n unconsenting State is immune from suits brought in federal courts by

her own citizens as well as by citizens of another state.” Pennhurst State School & Hosp. v.

Halderman, 465 U.S. 89, 100 (1984) (internal quote omitted). The U.S. Supreme Court has

adopted a strict standard to evaluate claims that Congress or a respective state has abrogated

sovereign immunity. Port Auth. Trans-Hudson Corp. v. Feeney, 495 U.S. 299, 305–06 (1990).

“The Court will give effect to a State’s waiver of Eleventh Amendment immunity only where

stated by the most express language or by such overwhelming implication from the text as will

leave no room for any other reasonable construction.” Id.

Defendants argue the Eleventh Amendment bar applies to all claims against Missouri and

Nelson in his official capacity, Counts I, III, V, and parts of VIII and IX. [Doc. 16, p. 14].

Plaintiffs contend Defendants waived Eleventh Amendment immunity “constructively or

impliedly, through their conduct.” [Doc. 43, p. 9]. Plaintiffs also contend immunity should not

apply to Count V, the unjust enrichment claim.

Plaintiffs allege Missouri waived sovereign immunity by “participat[ing] in a federally

funded program that provided federal financial assistance for up to 90% of the cost of the System

Project.” [Doc. 43, p. 17]. Due to that funding, the System Project is subject to the federal

standards and review requirements administered by Centers for Medicare & Medicaid Services

(CMS). Id. Under 45 C.F.R. Part 16, Missouri may appeal adverse decisions by CMS to the

federal Departmental Appeals Board and final decisions of the Departmental Appeals Board can

be appealed to federal court. Id. Plaintiffs argue this shows Missouri’s consent “to federal

jurisdiction over related disputes when it accepted federal funding.” Id.

While states that accept federal funds are required by statute to waive their Eleventh

Amendment immunity to discrimination claims, Doe v. Nebraska, 345 F.3d 593, 598 (8th Cir.

2003), there are no statutory or constitutional provision, state or federal, showing a Missouri

waiver of suit for the state torts asserted in Counts I, III, V, VIII, and IX of Plaintiffs’ Complaint.

Missouri’s acceptance of federal funding for participation in the Systems Project at issue here

cannot, without more, constitute waiver of sovereign immunity, as case law is clear that a state’s

participation in Medicaid or other federal funding programs is not “sufficient to waive the

protection of the Eleventh Amendment.” Fla. Dep’t of Health & Rehab. Servs. v. Fla. Nursing

Home Ass’n, 450 U.S. 147, 150 (1981); see also In re Innes, 184 F.3d 1275, 1279 (10th Cir.

1999) (“Several Supreme Court decisions provide that neither receipt of federal funds,

participation in a federal program, nor an agreement to recognize and abide by federal laws,

regulations, and guidelines is alone sufficient to waive Eleventh Amendment immunity.”).

Plaintiffs’ primary argument is that Missouri waived sovereign immunity through its

affirmative conduct regarding the systems project. [Doc. 43, p. 18]. For support Plaintiffs first

cite Entergy, Arkansas v. Nebraska, 241 F.3d 979 (8th Cir. 2001). However, in that case the

Eighth Circuit had held in a previous ruling that by entering into a five state compact Nebraska

waived its immunity from suit in federal court brought to enforce the state’s contractual

obligations. Id. at 987. The language of the compact included the following provision: “[T]he

Commission may initiate any proceedings or appear as an intervenor or party in interest before

any court of law, or any Federal, state or local agency board or Commission that has jurisdiction

over any matter arising under or relating to the terms of the provisions of this compact.” Entergy

Ark., Inc. v. Nebraska, 210 F.3d 887, 897 (8th Cir. 2000). As a result of that explicit contractual

language, the Eighth Circuit found Nebraska waived its immunity from suit in federal court.

Plaintiffs cite no such explicit provision here, but rather potential appellate procedures

should Missouri receive an adverse CMS decision.4 Without any explicit provision waiving

sovereign immunity, the Eighth Circuit’s decision in Entergy, Arkansas does not support

Plaintiffs’ argument.

4 Defendants note “[t]here are no adverse CMS decisions at issue in this lawsuit.” [Doc. 44, p. 5].

Plaintiffs also cite In re Innes, 184 F.3d 1275 (10th Cir. 1999) for support that Missouri’s

“affirmative conduct” waived sovereign immunity. [Doc. 43, p. 16]. In that case, the Tenth

Circuit held that a state university waived sovereign immunity by participating in a federal

student loan program contract that required the university to take action in federal court if a

student borrower filed for bankruptcy. Id. at 1283. The court found that when a state is “plainly .

. . on notice that by electing to participate in [a] federally funded program it accepts affirmative

obligations to pursue or defend claims in federal court on the merits,” Eleventh Amendment

waiver necessarily follows. Id.

The federal student loan contract at issue in In re Innes is distinguishable from this case.

There, the participation agreement contract between the university and the U.S. Department of

Education contained explicit provisions requiring federal bankruptcy court jurisdiction: “While

the agreement indicates that KSU must comply generally with the terms and conditions of the

agreement and with applicable federal law and regulations, it also explicitly provides that KSU

‘agrees to perform the functions and activities set forth in 34 CFR [§] 674.’” Id. at 1281–82

(emphasis in original). Section 674 “subjects [the university] to the mandatory stay provisions of

federal bankruptcy law,” requires the university to “file a proof of claim in bankruptcy law,” and

subjects the university to a number of other obligations under federal bankruptcy law. Id. at

1282. The Tenth Circuit thus found that “by including this particular regulation in the contract

KSU necessarily consented to perform certain functions in the federal bankruptcy court pursuant

to § 674.49. . . . To conclude that KSU intended anything other than a waiver would defy logic,

contract law, and the equitable principles of bankruptcy.” Id.

Conversely, Plaintiffs have not brought to the Court’s attention any authorization to enter

into an agreement that waives immunity. Instead, Plaintiffs argue that Missouri’s option to

appeal adverse decisions to an administrative appeals board followed by another option to appeal

an appeals board decision to a federal district court is analogous to the University’s obligation to

perform certain functions in federal bankruptcy court. [Doc. 43, p. 17]. The factual scenarios are

distinguishable and the Court is not persuaded by Plaintiffs’ argument. Further, as at least one

other court of appeals has stated, the U.S. Supreme Court’s decision in Tennessee Student

Assistance Corp. v. Hood, 541 U.S. 440 (2004), “addressed the same situation [as In re Innes]

with different, and broader, reasoning” and reached a different outcome. Fairley v. Stalder, 294

F. App’x 805, 810 n.22 (5th Cir. 2008) (finding a suit was barred by sovereign immunity despite

the plaintiffs’ constructive waiver theory because any such waiver had to be expressly made by

constitutional provision or statute, and no such waiver existed).

Finally, Plaintiffs argue that Missouri’s immunity should not apply to Count V because it

is a quasi-contract claim. [Doc. 43, p. 19]. For support, Plaintiffs cite to a state court case, S & P

Properties, Inc. v. City of University City, which stated “Section 537.600 codifies and limits the

common law of sovereign immunity to only tort actions,” 178 S.W.3d 579, 584 (Mo. Ct. App.

2005), and a federal case that acknowledged the S & P Properties decision, O.S. v. Kansas City

Public Schools. No. 13-0261-CV-W-DGK, 2013 WL 5636664, at *3 (W.D. Mo. Oct. 16, 2013).

Section 537.600 is a Missouri statute that codifies governmental tort immunity, waiving it for

negligent acts or omissions in two specific instances. First, where injuries result from the

operation of a motor vehicle within the course of employment, and second, where injuries are

caused by a condition of public property, and where the plaintiff establishes several elements

demonstrating the danger of the condition. Mo. Ann. Stat. § 537.600 (West).

Missouri has not asserted either its common law or statutory right to sovereign immunity.

It asserts the much broader and constitutionally rooted Eleventh Amendment immunity. Missouri

state court decisions that have interpreted Section 537.600 to imply the state is not immune to

suit in state court when it enters into a contract, or quasi-contract, do nothing to undermine the

Eleventh Amendment’s requirements. A valid waiver must unequivocally demonstrate the intent

to subject the State to suits in federal court. In re Innes, 184 F.3d at 1278. Section 537.600 carves

limited exceptions to immunity with regard to negligence, but nowhere does it waive immunity

to suits in federal court. See Long v. Curators of Univ. of Missouri, No. 920-0814-CV-W-6, 1993

WL 52821, at *3 (W.D. Mo. 1993) (“Sections 537.600.1 and 2 amount to only a general limited

waiver of sovereign immunity. The statute carves two limited exceptions to immunity in

instances of negligence. However, nowhere does the statute indicate an intent to waive immunity

to suits in federal court in particular.”)

O.S. v. Kansas City Public Schools is distinguishable. That case did not deal with a

question of contract versus tort immunity. Rather, the district court acknowledged that the case in

front of it was a tort, and therefore subject to the statute. It then examined whether the facts of

the case fell within the explicit exceptions to tort immunity codified by the statute. Additionally,

though the Eighth Circuit has not addressed Eleventh Amendment immunity and Section

537.600 with regard to contract cases, it has held the statute does not waive immunity in §1983

cases. Williams v. State of Mo., 973 F.2d 599, 600 (8th Cir. 1992). This runs directly contrary to

Plaintiffs proposal that the statute only provides Eleventh Amendment immunity in tort actions.

The “test for determining whether a State has waived its immunity from federal-court

jurisdiction is a stringent one.” In re Innes, 184 F.3d at 1278 (citation omitted). Waiving

immunity “require[s] an unequivocal indication that the State intends to consent to federal

jurisdiction that otherwise would be barred by the Eleventh Amendment.” Id. Missouri has not

made such “unequivocal indication” here, and Defendants are entitled to sovereign immunity on

Counts I, III, and V, as well as VIII and IX with regard to the state of Missouri and Nelson in his

official capacity.

C. Counts IV and IX are barred by Official Immunity.

Defendants argue Count IV and Count IX, which allege negligent misrepresentation

against Nelson in his individual capacity, fail because he enjoys official immunity for

negligence.

Under Missouri law, official immunity “protects public employees from liability for

alleged acts of negligence committed during the course of their official duties for the

performance of discretionary acts.” K.B. v. Waddle, 764 F.3d 821, 824 (8th Cir. 2014) (quoting

Southers v. City of Farmington, 263 S.W.3d 603, 610 (Mo. 2008)). A discretionary act “requires

the exercise of reason in the adaptation of means to an end and discretion in determining how or

whether an act should be done or course pursued.” Id. at 824–25. Public employees do not have

official immunity “for torts committed when they are acting in a ministerial capacity.” Southers,

263 S.W.3d at 610 (Mo. 2008). A ministerial function “is one of a clerical nature which a public

officer is required to perform upon a given state of facts, in a prescribed manner, in obedience to

the mandate of legal authority, without regard to his own judgment or opinion concerning the

propriety of the act to be performed.” Waddle, 764 F.3d at 825 (internal quotes omitted).

Defendants initially argued Count IV and Count IX were barred because Nelson was

acting within the course of his official duties as the Commissioner of the Administration,

speaking based on his knowledge and position as a commissioner, and not intentionally

misleading others (because “negligence by definition is a non-intentional tort”). [Doc. 16, p. 15].

In its Suggestions in Opposition, Plaintiffs do not clearly contest the discretionary

ministerial distinction, but instead argue Nelson is not entitled to official immunity on Count IV

and IX because “Nelson’s representations were made in bad faith and with malice . . . Nelson

either made intentionally false and misleading representations to Plaintiffs or he purposely

concealed and failed to disclose his ignorance of the facts upon which the representations were

based.” [Doc. 43, pp. 22-23]. Plaintiffs also pleaded that Nelson’s objective was “to advance his

own career and standing among various state and private actors, including IBM, at the expense

Plaintiffs and Missouri.” Id. at 22.

In their Reply Suggestions, Defendants argue that because Plaintiff’s allegations are

based on bad faith and malice, Counts IV and IX are not actually claims for negligence but for

intentional wrongdoing, which is duplicative of the fraud claims and should be dismissed. [Doc.

44, p. 7].

Under Missouri law, “[e]ven a discretionary act . . . will not be protected by official

immunity if the conduct is willfully wrong or done with malice or corruption.” Southers v. City

of Farmington, 263 S.W.3d 603, 610 (Mo. 2008), as modified on denial of reh’g (Sept. 30,

2008); see also McCormack v. Douglas, 328 S.W.3d 446, 449 (Mo. Ct. App. 2010). Plaintiffs

point to several cases that have allowed negligence claims to survive a motion to dismiss based

on official immunity by alleging malice. See Carson v. Wayer, No. 4:15-CV-507 RLW, 2015

WL 3440263, at *2 (E.D. Mo. May 27, 2015); Works v. Newton Cty., Mo., No. 11-03034-CV-S-

ODS, 2011 WL 1405081, at *1 (W.D. Mo. Apr. 13, 2011). However, each case Plaintiffs’ cite is

distinguishable in an important way—the absence of separate fraud or intentional tort claims in

addition to negligence.

In Carson v. Wayer, the plaintiff brought a wrongful death action against several state

employees at the St. Charles Rehabilitation Center. No. 4:15-CV-507 RLW, 2015 WL 3440263,

at *1 (E.D. Mo. May 27, 2015). There, the plaintiff’s son had died while in the Missouri State

Department of Mental Health’s custody, and thus she brought three separate claims for negligent

hiring, retention, and supervision, as well as a claim under §§ 1983 and 1988 for due process

violations. Id. Similarly, in Works v. Newton Cty., Mo, the plaintiff brought a wrongful death

action, asserting federal constitutional claims as well as negligence and loss of consortium

claims. No. 11-03034-CV-S-ODS, 2011 WL 1405081, at *1 (W.D. Mo. Apr. 13, 2011). Neither

case included any fraud nor intentional tort claims apart from negligence.

For Plaintiffs to argue bad faith and malice in their negligent misrepresentation claims

means those counts become something more than ordinary negligence. However, in the present

case, that something more is already alleged in separate counts, the fraudulent inducement

claims. Because Plaintiffs brought claims for both negligent misrepresentation and fraudulent

inducement, either the negligence was ordinary and therefore immune, see Southers, 263 S.W.3d

at 610 (“A finding that a public employee is entitled to official immunity does not preclude a

finding that he or she committed a negligent act-because official immunity does not deny the

existence of the tort of negligence, but instead provides that an officer will not be liable for

damages caused by his negligence.”); see also McCormack v. Douglas, 328 S.W.3d 446, 451

(Mo. Ct. App. 2010); Woods v. Ware, 471 S.W.3d 385, 391 (Mo. Ct. App. 2015); Haley v.

Bennett, 489 S.W.3d 288, 294 (Mo. Ct. App. 2016), or it was with bad faith and malice, in which

case it becomes duplicative of fraud.5

As plead, Counts IV and IX alleging negligent misrepresentation are barred by official

immunity.

D. Count II and Count VIII with regard to Nelson in his individual capacity are

insufficient under Rule 9(b)

5 As discussed below, Plaintiffs have not pleaded fraud with sufficient particularity. Therefore, any

claim for negligent misrepresentation also fails if it is also based on an allegation of fraud.

In Counts II and VIII of the complaint, Plaintiffs allege that Nelson fraudulently induced

Brevet Direct Lending to invest in EngagePoint, and FCS to contractually bind itself to act as

administrative agent. [Doc. 1, pp. 23, 38]. Defendants move to dismiss Counts II and VIII under

Fed. R. Civ. P. 12(b)(6) because Nelson’s statements were merely opinions and predictions,

rather than “false statements of present-existing facts,” and because Plaintiffs could not, as a

matter of law, rely on representations contrary to the bargained for contract between

EngagePoint and Missouri. [Doc. 16, p. 15]. Defendants also contend that the complaint lacks

the specificity required under Rule 9(b). Id.

Under Missouri law, a claim for fraud requires the following elements:

(1) a representation, (2) its falsity at the time made, (3) its materiality, (4) the

speaker’s knowledge of the falsity, (5) the speaker’s intent that the statements

should be acted upon by the other party in the manner contemplated, (6) the other

party’s ignorance of the falsity, (7) the other party’s reliance on the perceived

truthfulness of the representation, (8) the right to rely upon the statement, and (9)

damages.

Ryann Spencer Group, Inc. v. Assurance Co. of America, 275 S.W.3d 284, 287 (Mo. Ct. App.

2008). Defendants’ argument is focused on the eighth element, “the right to rely upon the

statement.” Plaintiffs allege that during the conference call, Nelson represented that:

(1) “EngagePoint was performing well on Phase I of the System Project and was

likely to continue working on phases II and III so long as its access to liquidity

improved”;

(2) “it would not be necessary for Missouri to solicit bids from other contractors

or otherwise issue an RFP for completion of Phases II and III. Instead, that work

would flow naturally to EngagePoint”;

(3) “he was extremely confident that all three phases of the System Project

would be fully funded and would be completed as planned”;

[Doc. 1, pp. 13–14]. Plaintiffs state that “[t]he ultimate thrust of Nelson’s statements and

representations . . . was that Missouri’s present intent was to continue to use EngagePoint as the

prime contractor for the System Project and to pay EngagePoint fully for its work.” Id. at 14.

Defendants argue that Plaintiffs had no right to rely on these statements because they are

merely statements of opinion and predictions for the future, rather than misrepresentations of

present facts. “‘Mere statements of opinion, expectations and predictions for the future’ cannot

support a fraud claim.” Arthur v. Medtronic, Inc., 123 F. Supp. 3d 1145, 1150 (E.D. Mo. 2015)

(quoting Stevens v. Markirk Constr., Inc., 454 S.W.3d 875, 881 (Mo. 2015)). This is particularly

true when the statements concern “future actions of an independent third party,” because “[a

plaintiff] is not justified in relying on such representations as a matter of law.” Ryann Spencer

Group, 275 S.W.3d at 290. See also Eureka Pipe, Inc. v. Cretcher-Lynch & Co., 754 S.W.2d

897, 898-99 (Mo. Ct. App. 1988); Shaughnessy, Kniep, Hawe Paper Co. v. Fettergroup, No.

4:14–CV–00233–JAR2015, WL 1456993, at *5 (E.D. Mo. Mar. 30, 2015). However,

“[s]tatements of present intent may be representations of fact which, if false, will support fraud

claims under Missouri law.” Craft v. Metromedia, Inc., 766 F.2d 1205, 1218 (8th Cir. 1985).

Statements such as “performing well,” “extremely confident,” and “likely to continue,”

standing alone are merely expressions of opinion, insufficient to support a claim of fraud. See

Constance v. B.B.C. Dev. Co., 25 S.W.3d 571, 587 (Mo. Ct. App. 2000) (“The generally

recognized distinction between statements of fact and opinion is that whatever is susceptible of

exact knowledge is a matter of fact, while that not susceptible is generally regarded as an

expression of opinion.”); see also, e.g., First Presbyterian Church of Mankato, Minn. v. John G.

Kinnard & Co., 881 F. Supp. 441, 444 (D. Minn. 1995) (“It is certainly true that statements such

as “performing well” or “low risk” are plainly expressions of opinion . . . .”). Even in context,

Plaintiffs could not have relied on the statements as a matter of law. Brevet Direct Lending and

FCS are sophisticated parties. Plaintiffs’ own allegations demonstrate that the teleconference

between Defendant Nelson and Plaintiffs’ representative was only one part—albeit a large one—

of their due diligence in making a sizable loan. [Doc. 1, p. 12]. Additionally, the contract

provided Missouri the right to terminate at any time for its own convenience, without penalty or

recourse, by giving written notice to EngagePoint at least thirty days in advance. [Doc. 1-2, p.

61]. It also stated it could not be modified orally, by any party or non-party. [Doc. 1-2, p. 58].

Therefore, the contract precluded any reasonable reliance on Nelson’s allegedly contradicting

statements. See Martin v. American Family Mut. Ins. Co., 157 F.3d 580, 582 (8th Cir. 1998)

(“[N]o reasonable jury could find the agents’ reliance on the statements was reasonable given the

agency contract language, which says the agencies ‘may be terminated by either party with or

without cause,’ the contract may not be modified except by written agreement, and the written

contract takes precedence over any inconsistent oral statements.”).

Because Plaintiffs have failed to plead sufficient facts to state a claim for fraudulent

inducement, Counts II and VIII must be dismissed.

E. Motions to Stay, Abstain

Because the Court grants Defendants’ Motion to Dismiss, the Motions to Stay and

Abstain are denied as moot.

III. Conclusion

For the foregoing reasons, Counts I, III, and V, as well as VIII and IX, with regard to the

State of Missouri and Nelson in his Official Capacity, of Plaintiffs’ Complaint are barred by the

Eleventh Amendment, Counts II and VIII against Defendant Nelson in his individual capacity

fail to sufficiently plead a claim of fraud, Count IV and Count IX against Defendant Nelson in

his individual capacity are barred by Defendant Nelson’s official immunity, and Plaintiffs lack

standing to assert Counts VI, VII, X, and XI. Defendants’ Motion to Dismiss, [Doc. 16], is

granted. The Motions to Abstain, [Doc. 17], and Stay, [Doc. 18], are denied as moot.

s/ Nanette K. Laughrey

NANETTE K. LAUGHREY

United States District Judge

Dated: _October 16, 2017_

Jefferson City, Missouri