The Heidi Grp. v. Tex. Health & Human Servs. Comm'n

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THE HEIDI GROUP, INC., Plaintiff, v. TEXAS HEALTH AND HUMAN SERVICES COMMISSION; et al., Defendants.

No. A-22-CV-294-RP

United States District Court, W.D. Texas, Austin Division

January 31, 2023

TO THE HONORABLE ROBERT PITMAN UNITED STATES DISTRICT JUDGE:

REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE

MARK LANE, UNITED STATES MAGISTRATE JUDGE.

Before the court are the Official State Defendants' Motion for Judgment on the Pleadings (Dkt. #2), the Individual State Defendants' Motion for Judgment on the Pleadings (Dkt #3), Defendant Phyllis Everette Morgan's Motion for Judgment on the Pleadings (Dkt. #21), and all related briefing.^[1] Having considered the parties' written submissions, the pleadings, the relevant case law, as well as the entire case file, the undersigned submits the following Report and Recommendation to the District Court.

I. Background

A. Factual Background^[2]

Plaintiff The Heidi Group, Inc. (“Heidi”), filed its Complaint in state court against Texas Health and Human Services Commission (“HHSC”); Cecile Erwin Young in her official capacity as Commissioner of HHSC; the Office of the Inspector General for HHSC (“OIG”); Sylvia Kauffman in her official capacity as Inspector General of the OIG; Dirk Johnson in his official capacity as Chief Counsel of OIG and in his individual capacity; Jennifer Kaufman in her official capacity as Director of Internal Affairs (formerly Senior Counsel) of OIG and in her individual capacity; Gaylon Dacus in his official capacity as Senior Investigator for OIG and in his individual capacity; Phyllis Everette Morgan, a former Heidi employee; and several Jane/John Does.^[3]Defendants timely removed under federal question jurisdiction.

In 2016, after Texas defunded health providers that provided abortion services, Texas, through HHSC, implemented two new state-funded programs to provide healthcare services to indigent Texas women: Healthy Texas Women “(HTW”) and Family Planning Program (“FPP”) (collectively, “Programs”). Compl. ¶¶ 5.03, 6.04. Heidi, founded by Carol Everett, contracted to be a provider under the Programs. Id. at 6.05. However, Heidi did not plan to directly provide care; instead, Heidi planned to serve as an umbrella for a network of independent pro-life clinics and providers. Id. Neither Everett nor Heidi had ever operated as state contractor, but they were assured the State would provide assistance in operating under the new Programs. Id.

Things did not go smoothly for Heidi/ Contrary to its expectations, and despite “substantial encouragement and assistance” from Assistant HHSC Commissioner Lesley French, Heidi “encountered substantial resistance from the HHSC employees assigned to work with it in implementing the Programs.” Id. ¶ 6.09. Heidi recognizes that part of the problem within HHSC may been caused by the newness of the Programs, and even HHSC did not know how they should be administered. Id. But, Heidi primarily blames the “swamp, which subsequently seized on technical non-compliance issues [with the contracts or Programs] to attempt to destroy Heidi” because of Heidi's pro-life beliefs. Id. ¶ 6.10.

In August 2017, HHSC renewed both of Heidi's contracts, but the issues continued. Heidi describes that “[h]elp did not arrive until April 2018 when HHSC deployed auditors from its Fiscal Monitoring Unit (“FMU”) to review Heidi's activities, which was a standard contract management practice at HHSC.” Id. ¶ 6.11. A new HHSC Contract Manager for Heidi arrived with the auditors, questions were finally answered, and procedures were able to be implemented. Id.

The FMU auditors reviewed the operations of HEIDI over the period of September 1, 2017 through April 13, 2018. Id. ¶ 6.12. An Initial FMU Report was issued July 12, 2018, and a nearly identical Final FMU Report was issued October 12, 2018. Id. These Reports noted several accounting and documentation issues. Id. ¶ 6.13. After the Initial FMU Report, HHSC renewed^[4]both contracts in July 2018. Id. ¶ 6.18.

In September 2018, the Texas Observer published a critical article on Everett and Heidi, including factually false allegations. Id. ¶ 6.20. Heidi alleges portions of the false information was provided by HHSC personnel. Id. The Dallas Morning News reprinted the article later that month. Id. The next month, HHSC terminated both of Heidi's contracts for “convenience” and referred the contracts to OIG for a formal investigation. Id. ¶¶ 6.22, 6.35. Heidi alleges that Assistant HHSC Commissioner Lesley French “confirmed to Everett that there had been an internal plot for Heidi to fail.” Id. ¶ 6. 23. Moreover, an HHSC spokesperson publicly treated the contract terminations as if they were “for cause,” noting issues that had been addressed when the contracts were renewed. Id. ¶ 6.24.

Defendant Phyllis Morgan was Heidi's Program Director from September 2017 until her termination in July 2018. Id. ¶¶ 6.25-.26. After her termination, Morgan repeatedly accessed Heidi's electronic drop box files, including correspondence, accounting records, and reports, and provided those documents to OIG. Id. ¶¶ 6.26-28. Morgan's access to Heidi's files was discovered in May 2019, and Heidi's administrator deleted her access. A police investigation was opened, and Morgan was arrested, but the County Attorney did not pursue prosecution. Id. ¶¶ 6.29-.30.

OIG continued its investigation into Heidi, including collecting documents twice from Heidi, but it did not interview Everett during the investigation. In November 2019, OIG released its 2019 OIG Final Report, which “rubber-stamp[ed]” the earlier FMU Reports, and concluded that Heidi owed over $1.5 million for the period in question^[5] and noted the investigation was being expanded to cover the entirety of the contracts' duration. Id. ¶¶ 6.44-.45, 6.49.

In December 2019, OIG began a new 19-month audit of Heidi that encompassed the full contract period for both of Heidi's contracts. Id. ¶¶ 6.51, 6.53. Unlike the earlier audit, this audit included meetings with Heidi and Everett, who were able to respond to questions and issues raised by the auditors. Id. ¶ 6.54. On July 30, 2021, OIG released the new 2021 OIG Audit Report, which concluded that Heidi only owed a total of $136,755.42 in unallowable or inadequately supported costs. Id. The 2021 OIG Audit Report expressly stated that the OIG auditors “did not find evidence of fraud during the course of this audit or during its investigation” and acknowledged that the causes underlying its assessment included poor “contract oversight” by the state Id. ¶¶ 6.54-.54.

Heidi brings suit asserting a myriad of claims against a host of defendants. The claims will be discussed more below, but generally Heidi sues its former employee Morgan, HHSC, OIG, and various state employees in their official capacities, and some state employees in both their official and individual capacities. The Official State Defendants have moved for judgment on the pleadings. Dkt. #2. The Individual State Defendants have also moved for judgment on the pleadings. Dkt. #3. Finally, Morgan has moved for judgment on the pleadings. Dkt. #21. The motions will be taken up in turn.

II. Standard of Review

“A motion for judgment on the pleadings under Rule 12(c) is subject to the same standard as a motion to dismiss under Rule 12(b)(6).” Ackerson v. Bean Dredging LLC, 589 F.3d 196, 209 (5th Cir. 2009). When evaluating a motion to dismiss for failure to state a claim under Rule 12(b)(6) the complaint must be liberally construed in favor of the plaintiff and all facts pleaded therein must be taken as true. Leatherman v. Tarrant Cnty. Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164 (1993); Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). Although Federal Rule of Civil Procedure 8 mandates only that a pleading contain a “short and plain statement of the claim showing that the pleader is entitled to relief,” this standard demands more than unadorned accusations, “labels and conclusions,” “a formulaic recitation of the elements of a cause of action,” or “naked assertion[s]” devoid of “further factual enhancement.” Bell Atl. v. Twombly, 550 U.S. 544, 555-57 (2007). Rather, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Id. at 570. The Supreme Court has made clear this plausibility standard is not simply a “probability requirement,” but imposes a standard higher than “a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The standard is properly guided by “[t]wo working principles.” Id. First, although “a court must ‘accept as true all of the allegations contained in a complaint,' that tenet is inapplicable to legal conclusions” and “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. at 678. Second, “[d]etermining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. Thus, in considering a motion to dismiss, the court must initially identify pleadings that are no more than legal conclusions not entitled to the assumption of truth, then assume the veracity of well-pleaded factual allegations and determine whether those allegations plausibly give rise to an entitlement to relief. If not, “the complaint has alleged-but it has not ‘show[n]'-‘that the pleader is entitled to relief.'” Id. at 679 (quoting FED. R. CIV. P. 8(a)(2)).

III. Official State Defendants' Motion

Against the Official State Defendants, Heidi asserts claims for state and federal constitutional violations, including equal...