Following oral argument Wednesday morning, the South Dakota Supreme Court will consider whether or not a Charles Mix County court's decision to grant summary judgment to the Mid-Central Educational Cooperative should be overturned.
One of the main points addressed before the court was the issue of who was a beneficiary in contracts that gave federal Gaining Early Awareness and Readiness for Undergraduate Program (GEAR UP) grant dollars to the South Dakota Department of Education, which then allocated the money to MCEC, which was directed to use the money to fund programs in designated schools in 2012.
The defendants, which include MCEC, its directors, the American Indian Institute for Innovation, the estates of Scott and Nicole Westerhuis and five individuals, argued that students such as appellants Alyssa Black Bear and Kelsey Walking Eagle-Espinosa, who previously attended schools intended to have GEAR UP funding, cannot be third-party beneficiaries because contracts were between the U.S. and South Dakota departments of education, making students only incidental beneficiaries who wouldn't be able to claim breaches of contract.
Sam Kerr, one of the attorneys representing Mid-Central's directors, said the Higher Education Act preempts state claims in the case because the money involved was a reimbursement grant held with the federal government at all times relevant to the case.
"The whole structure arrives out of the Higher Education Act," Kerr said. "If there is no private right of action, then you can't very well latch on as a third-party beneficiary."
John Hinrichs, one of the appellants' attorneys, argued instead that the students were entitled to pursue claims as third-party beneficiaries because the grant language specifically says that the intent of the grant is to benefit the students. Hinrichs said the South Dakota Department of Education, not the students, is an incidental beneficiary because the department itself doesn't benefit from the grant dollars.
"There's no case law that says that they should not be considered third-party beneficiaries," he said.
Ryland Deinert, an attorney representing MCEC, said the appellants' claim itself is flawed in that it's based on GEAR UP funding not being available for educational programs. Deinert said that although approximately $1.3 million was found to have been stolen from MCEC, it has never been proven that money was stolen from GEAR UP.
Kerr said the wording in the complaint matters because the appellants are saying that they are pursuing state law claims but are using a federal grant program, which would be regulated by the Higher Education Act, as the basis for their argument.
"The appellants cannot escape their own complaint," he said.
Hinrichs, however, said the students' state law claims can coexist with federal regulations without the two cancelling each other out.
"It's immaterial that the federal government provided the money that was the subject of these various contracts," Hinrichs said.
Deinert said the South Dakota Department of Education has a lawsuit against Mid-Central that's pending in Douglas County and has been informally stayed until Black Bear and Walking Eagle-Espinosa has been resolved.
The case was the sixth and final to be argued before the Supreme Court over Tuesday and Wednesday.
Investigation into MCEC, AIII and GEAR UP began in 2015 when MCEC's business manager, Scott Westerhuis, killed himself, his wife and their children and set their house on fire. Former South Dakota Attorney General Marty Jackley then announced that Scott and Nicole Westerhuis were suspected to have stolen more than $1 million while employed with Mid-Central.
Former MCEC assistant business manager Stephanie Hubers, former AIII CEO Stacy Phelps and former MCEC Executive Director Dan Guericke were all indicted on criminal charges.
In July 2018, Hubers was found not guilty at trial of grand theft and stolen property charges. Guericke pleaded guilty to falsifying evidence and was convicted in September 2018, and Phelps was found not guilty of backdating contracts at trial a month later.