Black Bear v. Mid-Central

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2020 S.D. 14

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

****
ALYSSA BLACK BEAR and
KELSEY WALKING EAGLE-
ESPINOSA, Plaintiffs and Appellants,

v.

MID-CENTRAL EDUCATIONAL
COOPERATIVE, A Cooperative Educational
Service Unit; AMERICAN INDIAN INSTITUTE
FOR INNOVATION, a Non-Profit Corporation;
JOANNE FARKE; BRANDON YORK;
PAMELA HAUKAAS; NICOLE BAMBERG;
TIM NEUGEBAUER; DAVID SCHOEMAKER;
TODD REINISH; BILL MATHIS; DAVE
MERRILL; TESS STARR; LLOYD PERSSON;
CARMEN WEBER; JAMES MUNSEN;
RICHARD PETERSON; CHRIS VANDER
WERFF; TAMMY OLSON; TONYA VANEYE;
SHIRLEY PEDERSON; RYAN YOUNGSTROM;
TANYA ALDRICH; CHRIS EYRE; STACY
PHELPS; DANIEL GUERICKE, THE ESTATE
OF SCOTT WESTERHUIS, by and through its
Personal Representative, FIRST DAKOTA
NATIONAL BANK; and THE ESTATE OF
NICOLE WESTERHUIS, by and through its
Personal Representatives GEORGE FISH and
KAREN FISH, Defendants and Appellees.
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MID-CENTRAL EDUCATIONAL
COOPERATIVE, A Cooperative
Education Service Unit, Third-Party Plaintiff
and Appellee,
v.

SCHOENFISH & CO., INC., Third-Party Defendant.
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ARGUED OCTOBER 2, 2019
OPINION FILED 03/18/20
****

APPEAL FROM THE CIRCUIT COURT OF
THE FIRST JUDICIAL CIRCUIT
CHARLES MIX COUNTY, SOUTH DAKOTA

****

THE HONORABLE BRUCE V. ANDERSON
Judge

****

JOHN R. HINRICHS
SCOTT N. HEIDEPRIEM
MATTHEW TYSDAL of
Heidepriem, Purtell
& Siegel, LLP
Sioux Falls, South Dakota

and

STEVEN C. EMERY
Rapid City, South Dakota Attorneys for plaintiffs and
appellants Alyssa Black Bear
and Kelsey Walking Eagle-
Espinosa.

RYLAND L. DEINERT
RENE CHARLES LAPIERRE of
Klass Law Firm, LLP
Sioux City, Iowa

and

SCOTT SWIER of
Swier Law Firm, LLC
Sioux Falls, South Dakota Attorneys for defendant and
appellee Mid-Central
Educational Cooperative.
SAMUEL D. KERR of
Lynn, Jackson, Shultz
& Lebrun, P.C.
Rapid City, South Dakota

and

MICHAEL L. LUCE of
Lynn, Jackson, Shultz
& Lebrun, P.C.
Sioux Falls, South Dakota Attorneys for Joanne Farke;
Brandon York; Pamela
Haukaas; Nicole Bamberg; Tim
Neugebauer; David
Schoemaker; Todd Reinish; Bill
Mathis; Dave Merrill; Tess
Starr; Lloyd Persson; Carmen
Weber; James Munsen; Richard
Peterson; Chris Vander Werff;
Tammy Olson; Tonya Vaneye;
Shirley Pederson; Ryan
Youngstrom; and Tanya
Aldrich.

QUENTIN L. RIGGINS
KATELYN A. COOK of
Gunderson, Palmer, Nelson
& Ashmore, LLP
Rapid City, South Dakota Attorneys for defendants and
appellees American Indian
Institute for Innovation and
Chris Eyre.

TERRY PECHOTA of
Pechota Law Office
Rapid City, South Dakota Attorneys for defendant and
appellee Stacy Phelps.

ERIC J. STEINHOFF of
Lind, Jensen, Sullivan
& Peterson, P.A.
Minneapolis, Minnesota Attorneys for defendant and
appellee Daniel Guericke.
TRUDY A. MORGAN
RICHARD J. RYLANCE, II of
Morgan Theeler, LLP
Mitchell, South Dakota Attorneys for defendant and
appellee The Estate of Scott
Westerhuis, by and through its
Personal Representative, First
Dakota National Bank.

REBECCA L. WILSON of
Myers Billion, LLP
Sioux Falls, South Dakota Attorneys for defendant and
appellee The Estate of Nicole
Westerhuis, by and through its
Personal Representatives
George Fish and Karen Fish.
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GILBERTSON, Chief Justice

[¶1.] Students sued various defendants to recover for lost funding for

services denied to them under the GEAR UP program due to mismanagement and

embezzlement. The circuit court denied summary judgment on several motions by

defendants before finding the students’ claims preempted by federal law and

dismissing the case. The students appeal and the defendants raise multiple issues

by notice of review. We affirm the circuit court’s decision dismissing the students’

case, but do so because the students lack standing to bring their claims.

Facts and Procedural History

[¶2.] The Gaining Early Awareness and Readiness for Undergraduate

Programs (GEAR UP) grant is designed to help underprivileged students

throughout the country graduate from high school, enter, and succeed in post-

secondary education. The U.S. Department of Education, particularly the Secretary

of Education, supervises the program and oversees disbursement of GEAR UP

grants.

[¶3.] The South Dakota Department of Education (SDDOE) received the

grant in 2011 to provide services to low-income Native American students in South

Dakota. SDDOE contracted with Mid-Central Educational Cooperative (MCEC) to

administer the GEAR UP program in South Dakota. MCEC then entered into a

service agreement with the American Indian Institute for Innovation (AIII) for

assistance implementing parts of the program.

[¶4.] In September 2015, it was revealed that Scott Westerhuis, MCEC’s

business manager and AIII’s registered agent and chief financial officer, and his

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wife Nicole had been mismanaging and embezzling funds from MCEC. At that

point, Dr. Melody Schopp, Secretary of SDDOE, told Daniel Guericke, the executive

director of MCEC, that the agreement between SDDOE and MCEC may be

terminated. The next day, Scott Westerhuis took the lives of himself, his wife, and

their four children. 1 A few days later, Schopp sent MCEC a letter verifying

termination of the agreement, explaining that MCEC had failed to successfully

implement GEAR UP, listing the areas where MCEC’s administration was

deficient, and requesting that MCEC and its contractors retain all documents and

information regarding the program.

[¶5.] Alyssa Black Bear and Kelsey Walking Eagle-Espinosa attended

schools that GEAR UP was meant to serve: Todd County High School and St.

Francis Indian School, respectively. They claim to have been denied GEAR UP

benefits in those schools due to the embezzlement from MCEC. Both students now

attend college. In April 2016, the students’ counsel sent a letter to MCEC notifying

them about a potential class action against MCEC, and demanding $2,000,000 plus

attorney fees and expenses to settle the claims. This action commenced in May

2016.

[¶6.] In January 2017, the students filed an amended complaint against

MCEC, AIII, MCEC’s Directors, AIII’s Directors, Daniel Guericke, Stacy Phelps

(MCEC’s director of the GEAR UP program and AIII’s chief executive officer), the

1. The State began a criminal investigation into the missing funds shortly
thereafter.

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Estate of Scott Westerhuis, and the Estate of Nicole Westerhuis. 2 The complaint

brought claims of civil theft against both Westerhuis Estates; breach of contract

against MCEC and AIII; negligent supervision against the MCEC Directors, the

AIII Directors, Phelps, and Guericke; respondeat superior against MCEC and AIII;

and duty to control against the MCEC Directors and AIII Directors. The students

moved to have the case certified as a class action on behalf of similarly situated

students GEAR UP was meant to serve. The students later voluntarily dismissed

the claims against the AIII Directors.

[¶7.] The defendants resisted the students’ request for class action

certification and moved for summary judgment on multiple theories: (1) the

students are not intended third-party beneficiaries of the SDDOE-MCEC or the

MCEC-AIII agreements and cannot enforce them; (2) the students did not comply

with applicable notice requirements; (3) neither MCEC nor AIII can be held

vicariously liable for the Westerhuis’s torts; and (4) the students do not have

standing. A hearing was held in June 2017. 3 The circuit court found for the

students on each issue, certified the class, and denied each motion for summary

judgment.

2. The original complaint was brought by Black Bear only and named only
MCEC as a defendant. In response to the original complaint, MCEC brought
a third-party complaint for indemnification or contribution against
Schoenfish & Co., Inc., which conducted annual audits of MCEC’s books,
including the GEAR UP program.

3. Other topics not at issue in this appeal were resolved at the hearing as well.

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[¶8.] The defendants moved for summary judgment again, this time on

three bases: (1) there is no evidence that any GEAR UP funds were among the

funds misappropriated; (2) the students’ claims are preempted by federal law; and

(3) the students do not have standing. 4 A hearing was held in March 2018 on the

new motions. The circuit court denied the motion on the status of the GEAR UP

funds, finding there were genuine issues of material fact. The circuit court granted

the motion for summary judgment based on preemption, finding no private remedy

available to litigants under GEAR UP. All claims were dismissed based on the

preemption finding.

[¶9.] Black Bear and Walking Eagle-Espinosa appeal, raising one issue:

1. Whether the circuit court erred in ruling that their claims are
preempted by federal law.

By notice of review, the various defendants raise six issues:

2. Whether the circuit court erred in concluding that the
Appellants effectively complied with notice requirements.

3. Whether the circuit court erred in ruling that the Appellants
have standing to bring their claims.

4. Whether the circuit court erred in finding that the Appellants
were intended third-party beneficiaries of the SDDOE-MCEC
and MCEC-AIII agreements.

5. Whether the circuit court erred in finding a genuine issue of
material fact regarding whether MCEC or its executive director
can be held vicariously liable for the torts of Scott and Nicole
Westerhuis.

6. Whether the circuit court erred in finding a genuine issue of
material fact regarding whether GEAR UP funds were missing
or misappropriated.

4. The court did not readdress the standing claim.
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7. Whether the circuit court erred in certifying the lawsuit as a
class action.

Standard of Review

[¶10.] Reviewing a motion for summary judgment requires us to “determine

whether the moving party demonstrated the absence of any genuine issue of

material fact and showed entitlement to judgment on the merits as a matter of law.”

Johnson v. Hayman & Assoc., Inc., 2015 S.D. 63, ¶ 11, 867 N.W.2d 698, 701 (quoting

Brandt v. Cty. of Pennington, 2013 S.D. 22, ¶ 7, 827 N.W.2d 871, 874).

The evidence must be viewed most favorably to the nonmoving
party and reasonable doubts should be resolved against the
moving party. The nonmoving party, however, must present
specific facts showing that a genuine, material issue for trial
exists. Our task on appeal is to determine only whether a
genuine issue of material fact exists and whether the law was
correctly applied. If there exists any basis which supports the
ruling of the trial court, affirmance of a summary judgment is
proper.
Id.

Analysis and Decision

[¶11.] For a court to have subject matter jurisdiction over a case, the plaintiff

must establish standing as an aggrieved person. Cable v. Union Cty. Bd. of Cty.

Comm’rs, 2009 S.D. 59, ¶ 21, 769 N.W.2d 817, 825. “Standing to sue is part of the

common understanding of what it takes to make a justiciable case.” Steel Co. v.

Citizens for a Better Env’t, 523 U.S. 83, 102, 118 S. Ct. 1003, 1016, 140 L. Ed. 2d 210

(1998). To establish standing:

First, the plaintiff must establish that he suffered an injury in
fact—“an invasion of a legally protected interest which is (a)
concrete and particularized and (b) actual or imminent, not
‘conjectural’ or ‘hypothetical.’” Second, the plaintiff must show
that there exists a causal connection between the plaintiff’s
injury and the conduct of which the plaintiff complains. The

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causal connection is satisfied when the injury is “fairly traceable
to the challenged action of the defendant, and not the result of
the independent action of some third party not before the court.”
Finally, the plaintiff must show it is likely, and not merely
speculative, that the injury will be redressed by a favorable
decision.

Cable, 2009 S.D. 59, ¶ 21, 769 N.W.2d at 825-26 (internal citations omitted).

[¶12.] “[E]ach element [of standing] must be supported in the same way as

any other matter on which the plaintiff bears the burden of proof, i.e., with the

manner and degree of evidence required at the successive stages of the litigation.”

Lujan v. Defs. of Wildlife, 504 U.S. 555, 561, 112 S. Ct. 2130, 2136, 119 L. Ed. 2d

351 (1992).

At the motion for summary judgment stage of litigation, a party
resisting the motion based on a lack of standing has a greater
burden than at the motion to dismiss stage of litigation.
“General allegations” suffice at the pleading stage because it is
“presumed that general allegations embrace those specific facts
that are necessary to support the claim.” When a motion for
summary judgment is under consideration, however, “the
plaintiff can no longer rest on such ‘mere allegations,’ but must
‘set forth’ by affidavit or other evidence ‘specific facts,’ which for
purposes of the summary judgment motion will be taken to be
true.”

Cable, 2009 S.D. 59, ¶ 23, 769 N.W.2d at 826 (internal citations omitted).

[¶13.] The students have alleged claims as third-party beneficiaries of the

contracts between MCEC and SDDOE, and MCEC and AIII. They have also alleged

tort claims for theft and negligent supervision and control of various employees and

officers of the various defendants. In resisting summary judgment, the students

submitted affidavits claiming they did not receive all of the educational services

that were part of the GEAR UP program. They also presented facts evidencing

possible theft or mishandling of GEAR UP funds by certain defendants. However,

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these facts are insufficient to show that the students are aggrieved parties who

suffered an invasion of a legally-protected interest, as all of their claims are

premised on their ability to enforce the contracts as third-party beneficiaries. Such

a claim is foreclosed by Sisney v. State, 2008 S.D. 71, 754 N.W.2d 639.

[¶14.] In Sisney, a penitentiary inmate sued the State and a third-party

vendor seeking damages for breach of contract alleging he was a third-party

beneficiary of a contract between the State and the vendor for the provision of food

services at the prison. The contract included language that the services were to be

provided to the State “in a manner that would meet the needs and concerns of the

facilities’ residents, inmates and staff.” Id. ¶ 3, 754 N.W.2d at 642. In affirming the

trial court’s order dismissing the complaint for lack of standing, the Court held that

not every person who receives a benefit from a contract is entitled to enforce it. Id.

¶ 10, 754 N.W.2d at 643. The ability of a third-party to assert rights “requires that

at the time the contract was executed, it was the contracting parties’ intent to

expressly benefit the third party.” Id. However, “even then, not all beneficiaries

qualify: incidental beneficiaries are not entitled to third-party beneficiary status.”

Id. Moreover, when dealing with public contracts, Sisney observed that:

“Government contracts pose unique difficulties in the area of
third-party beneficiary rights because, to some extent, every
member of the public is directly or indirectly intended to benefit
from such a contract.” Therefore, as a general rule, a private
party who contracts with the public government entity does not
open itself to liability at the hands of the public. . . . The right of
enforcement in public contracts can only arise from the plain
and clear language of the contract. Consequently, when a public
contract is involved, private citizens are presumed not to be
third-party beneficiaries.

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Id. ¶ 11, 754 N.W.2d at 644 (emphasis added) (internal citations omitted). 5

[¶15.] Further, the Sisney decision quoted from Drummond v. Univ. of Pa.,

651 A.2d 572, 579 (Pa. Commw. Ct. 1994), which stated that “[t]here must be

language evincing an intent that the party contracting with the government will be

held liable to third parties in the event of nonperformance.” In Drummond,

numerous plaintiffs, representing poor and working families in Philadelphia, sought

to enforce an agreement between the City of Philadelphia and the University of

Pennsylvania requiring the University to provide annual scholarships to low-income

high school students in the city. Drummond concluded the plaintiffs were

incidental beneficiaries of the agreement and lacked standing, as “there is nothing

within the contract to reveal an intention by both the City and the University at the

time the agreements were signed that the University would be liable to members of

the public for nonperformance[.]” Id.

[¶16.] In Sisney, “the contract was a public contract between the State of

South Dakota and [vendor], and the contract did not expressly indicate that it was

intended for [plaintiff’s] direct benefit or enforcement. On the contrary, the contract

reflects that it was made for the express benefit of the State, and the collective

benefit that inmates may have received was only incidental to that of the State.”

5. Plaintiffs attempt to distinguish Sisney because the State contract in Sisney
was with a private vendor, unlike the contract here, which is with an
educational cooperative (MCEC) made up of numerous member schools.
However, the same concern we identified in Sisney regarding potential
expanded liability burdens applies here, in contracts between public entities.
This concern is perhaps even greater in the context of exposing another
taxpayer-funded public entity to liability to a third-party.
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2008 S.D. 71, ¶ 13, 754 N.W.2d at 644. Therefore, we concluded that the inmate did

not have standing to sue under the public contract. Id. ¶ 15, 754 N.W.2d at 644-45.

[¶17.] Here, a review of the agreements at issue shows that they were

entered into for the express benefit of the SDDOE to enable the State to implement

the GEAR UP program. The contract with MCEC was a partnership agreement

between the SDDOE and MCEC in which MCEC agreed to provide consultant

services to the SDDOE, the lead partner responsible for ensuring that the GEAR

UP program would be carried out in accordance with the Higher Education Act and

corresponding federal grant requirements. MCEC agreed to staff various positions

and GEAR UP programs and provide matching funds through cost sharing.

MCEC’s subcontract with AIII was likewise an agreement for employment services.

[¶18.] Additionally, the students have failed to point to any language in the

SDDOE agreement with MCEC, or in MCEC’s agreement with AIII, showing an

intention to allow the public, or the students (individually or as a class), to enforce

the contracts or sue for damages resulting from nonperformance. Therefore, any

benefit the students may have received from the GEAR UP contracts was incidental

to the primary purpose of the contracts, much like the incidental benefits received

by inmates from the state contract at issue in Sisney. Because the students are not

third-party beneficiaries of either contract, as defined in Sisney, they lack standing

to pursue their contractual claims.

[¶19.] The students’ tort claims for theft or conversion of the GEAR UP funds

likewise fail because the students have made no showing that they had any legal

right or property interest in any of the GEAR UP funds purported to have been

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misused or converted. The GEAR UP program did not provide a direct source of

funding to the students or their families. Instead, the program identified the

following goals and objectives: increasing academic performance; increasing high

school graduation rates and participation in postsecondary education; and

increasing student and family knowledge of postsecondary education options,

preparation and financing. These program goals were aspirational and meant to

supplement existing educational programming. Therefore, the students and

families targeted to receive services under the program did not acquire a legally-

protected interest in the funds designated to implement the program.

[¶20.] The students have also failed to show a causal connection between the

alleged wrongdoing (mismanagement, theft, or conversion of GEAR UP funds) and

their alleged injury (loss of educational services). Here, the circuit court appeared

to accept the students’ underlying premise that equated reduced benefits and

services with “perceptible harm.” However, the students have not produced

evidence showing that they suffered a concrete or particularized injury as a result of

not receiving all of the services and/or programs that were to be provided by the

GEAR UP program.

[¶21.] In response to the defendants’ summary judgment motion, the

students submitted two affidavits relevant to the factual showing required to

establish standing. The affidavit from Kelsey Walking Eagle-Espinosa relates that

she used a software program to develop a personal learning plan, but only in middle

school and in ninth grade, rather than through the twelfth grade. Nonetheless,

Walking Eagle-Espinosa states that she “was able to attend the six-week residential

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summer ‘GEAR UP Honors Program’ each of the four years that [she] was in

school.” In a similar vein, she alleges that while she was not aware of a financial

aid workshop provided by the GEAR UP program, she nevertheless obtained

information about applying for financial aid from college representatives visiting

her school. And while she notes that she did not have any ACT or SAT preparatory

courses, it is undisputed that both students attend college. Walking Eagle-

Espinosa’s affidavit does not allege any resulting harm, particularly as it relates to

the identified goals and objectives of the GEAR UP program.

[¶22.] Alyssa Black Bear’s affidavit similarly identifies some GEAR UP

programs and services she did not receive. But Black Bear’s affidavit suggests that

she may not have, at all relevant times, attended schools served by the GEAR UP

program. In particular, she alleges only that she was a student at schools served by

the GEAR UP program for three years: Todd County Middle School in sixth and

seventh grade and Todd County High School only “during her junior year.” Her

affidavit also indicates that while she applied to participate in a summer school

program, her application may have been denied “based upon the income of [her]

mother.” Therefore, even if the lack of services in and of itself could be deemed as a

concrete injury, Black Bear’s affidavit does not support the necessary causal

inference that must be established to connect the purported lack of services with the

actions of Defendants, as opposed to the students’ own circumstances.

[¶23.] On appeal, the students acknowledge in their brief that “the effect of

the loss of GEAR UP funds due to Appellees’ actions and omissions on the efficacy of

the GEAR UP program cannot be known, but can be assumed.” An assumption or

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possibility of a causal connection between the alleged wrong and injury is

insufficient to generate a question of fact. “[W]hen challenging a summary

judgment, the nonmoving party must substantiate his allegations with sufficient

probative evidence that would permit a finding in his favor on more than mere

speculation, conjecture, or fantasy.” Peters v. Great W. Bank, Inc., 2015 S.D. 4, ¶ 13,

859 N.W.2d 618, 624 (internal citation omitted).

[¶24.] Finally, the students have failed to show that a favorable decision by

the Court will redress their claims for loss of past educational services. The

students claim they suffered actual injury because “as members of the cohort to be

served by the GEAR UP grant, misappropriation of GEAR UP grant funds by any

means harmed them.” However, the students ignore the fact that educational

success is driven by numerous factors. While educational programming is certainly

an important factor, there are no guaranteed outcomes. The students have failed to

show, legally or factually, how an award of monetary damages would redress the

alleged past loss of supplemental educational services. “Relief that does not remedy

the injury suffered cannot bootstrap a plaintiff into [court]; that is the very essence

of the redressability requirement.” Steel Co., 523 U.S. at 107, 118 S. Ct. at 1019.

Conclusion

[¶25.] The circuit court incorrectly held that the students had standing to

bring their claims. However, because the students have failed to show standing,

the claims were properly dismissed on summary judgment. Because the students

do not have standing, there is no need to address the parties’ remaining claims.

The circuit court’s grant of summary judgment is affirmed.

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[¶26.] KERN, JENSEN, SALTER, and DEVANEY, Justices, concur.

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