FCS Advisors, LLC v. Missouri

• Decision Date: 16 October 2017
• Docket Number: No. 2:17-cv-04089-NKL,2:17-cv-04089-NKL
• Parties: FCS ADVISORS, LLC, et al., Plaintiffs, v. STATE OF MISSOURI, et al., Defendants.
• Court: U.S. District Court — Western District of Missouri

FCS ADVISORS, LLC, et al., Plaintiffs, v. STATE OF MISSOURI, et al., Defendants.

No. 2:17-cv-04089-NKL

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MISSOURI CENTRAL DIVISION

October 16, 2017

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 andinformation 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 fromother 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 thecredit 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 containsufficient 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) Plaintif...