The Ohio Supreme Court issued an important opinion yesterday in a case stemming from ongoing litigation between 10 Cleveland community (charter) schools and their operator White Hat Management (“White Hat”). The case, Hope Academy Broadway Campus v. White Hat Mgt., LLC, centers around who owns the personal property that was purchased with public funds, but used by White Hat in the schools’ daily operations. The OSBA Legal Assistance Fund (LAF) filed an amicus brief in June 2014 in support of the schools.
Case background
In November 2005, the governing board of 10 community schools in Cleveland signed a contract with White Hat Management to operate and manage the schools. In accordance with Ohio law, the state provided funding to the schools based on the number of students enrolled. Under their contracts, the schools paid either 95% or 96% of those public dollars to White Hat. White Hat also collected all local, state and federal grant money awarded to the schools. With these funds, White Hat ran the schools’ day-to-day operations, including hiring staff and buying furniture, computers and other equipment and supplies. As of the 2010-2011 school year, the Ohio Department of Education (ODE) had closed two of the 10 community schools for academic failure, four schools were on academic watch and one was listed in academic emergency. Given the poor performance, the governing authorities of the schools filed a lawsuit against White Hat.
Issues and opinion
The Ohio Supreme Court was asked to weigh in on three issues:
- Are public funds paid to a private entity to operate a community school subject to public accountability after the entity is paid?
In her opinion, Justice Judith Ann Lanzinger stated “the public funds received by a community school from the Department of Education are ‘received or collected’ under color of office. When those funds are transferred directly to an operator, they are also public funds ‘received or collected’ under color of office to the extent that those funds are used to perform a governmental function. While we cannot broadly hold that public funds always retain their status as public funds, a private entity such as White Hat engaged in the business of education is accountable for the manner in which it uses public funds.”
- Is a private entity acting as a purchasing agent for a community school when it uses public funds to buy personal property to operate the community school?
The schools argued that when White Hat used public funds to purchase materials and property for operating their schools, it acted as a purchasing agent for the schools and those purchases were school property, regardless of the name under which the property was titled. In addressing this argument, Justice Lanzinger pointed to language in the contracts between the schools and White Hat that required the property titled in White Hat’s name to transfer to the schools at the end of the contract only if the school bought back the items at a specific rate from White Hat.Justice Lanzinger recognized that “the notion that the schools would knowingly transfer their funds to White Hat for White Hat to purchase the property for itself (and then later require the schools to buy the property back with additional public funds) does not seem supportable but was an agreed-upon term.” In light of the contract language, the court stated the schools would be required to provide additional payment if they wished to obtain the other personal property that White Hat purchased.
- Does a private entity operating a community school have a fiduciary relationship with the school, and must the entity act primarily for the benefit of the school?
White Hat claimed that it had no duties as a fiduciary to the schools because the contracts defined its role as an independent contractor. Justice Lanzinger noted that the “parties’ characterization of their relationship in the contracts is not controlling” and held that because White Hat agreed to act on behalf of the schools to help them carry out their purpose, advance the schools’ interests and operate “all functions” of their day-to-day operations, a fiduciary relationship was created.“It is evident that the schools have granted broad discretion to White Hat, placing special confidence and trust in the management companies and placing them in positions of superiority and influence,” Justice Lanzinger wrote. “These are hallmarks of a fiduciary relationship.”
Concurrences/dissents
The Ohio Supreme Court gives justices who do not agree with either the reasoning or the result of a case the opportunity to write concurring or dissenting opinions. The following summaries are indicative of the different opinions shared and held by the remaining justices of the court.
Justices Sharon L. Kennedy and Judith L. French:
Justice Kennedy and Justice French concluded that under Ohio law, White Hat did not receive public dollars “under color of office.” Therefore, the state funds were no longer public once paid to White Hat, a private entity. They also “emphatically disagreed” with the court’s view that a fiduciary relationship existed between White Hat and the schools and noted that a relationship cannot be unilaterally created and must be established by mutual agreement.
Justice William M. O’Neill:
Justice O’Neill opposed upholding the contracts between the schools and White Hat. “The only part of that contract that was fulfilled was that White Hat thoroughly and efficiently received the $90 million,” he wrote. “There has been no quality education, there has been no safeguarding of public funds and there most certainly has been no benefit to the children.” He stated that the contracts should not have been held enforceable under contract law or public policy because they “permit an operator who is providing a substandard education to squander public money and then, upon termination for poor performance, reap a bonus, paid for by public money.”
Justice Paul E. Pfeifer:
In his dissent, Justice Pfeifer criticized the court’s refusal to recognize White Hat’s fiduciary responsibilities to the school and the intentions of the parties. He concluded that the contract’s terms requiring the schools to pay for the personal property and then pay again if they want to retain ownership of the materials was not only unwise, but also so “extremely unfair” as to make the contract unconscionable.
If you have general questions about either the case or the LAF’s amicus brief, please contact the division of legal services. OSBA thanks Don Mooney, Esq., Ulmer & Berne LLP, who authored the amicus brief on behalf of OSBA and its members.