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Court News Ohio

Court Decides Charter School Case

Image of a classroom full of computers (ABBPhoto/Thinkstock)

A contract between 10 Cleveland charter schools and their management company requires the schools to buy back computers, equipment, and furniture that they want to keep, the Ohio Supreme Court determined.

Image of a classroom full of computers (ABBPhoto/Thinkstock)

A contract between 10 Cleveland charter schools and their management company requires the schools to buy back computers, equipment, and furniture that they want to keep, the Ohio Supreme Court determined.

The Ohio Supreme Court today ruled in a case stemming from ongoing litigation brought by 10 Cleveland charter schools against the companies that operated and managed them.

The Supreme Court determined that an entity managing the daily operations of a charter, or community, school is an “operator” within the state’s community-school law, is performing a governmental function, and has a fiduciary relationship with the school it operates.  When the operator uses public funds to buy personal property, such as computers, software, office equipment, and furniture, to use in the school, this fiduciary relationship comes into play, the court held.

Writing for the court, Justice Judith Ann Lanzinger first noted that although sponsors are regulated, current law is largely silent on the duties of an operator and does not restrict the content of contracts between schools’ governing authorities and their management companies. In this case, the contract between the schools and the management company, referred to as White Hat, allowed White Hat to title property in its own name and later required the schools to buy back the personal property they wanted to keep when the contract ended. The court concluded that the provision is enforceable and returned the case to the trial court for an inventory of the disputed property and its disposal according to the contract.

Justices’ Votes
The court split on various aspects of the decision. Chief Justice Maureen O’Connor and visiting Judge John W. Wise, from the Fifth District Court of Appeals, agreed with the court’s judgment, or the outcome of the ruling for the parties. They also concurred, along with Justice William M. O’Neill, with the three statements of law made in Justice Lanzinger’s case syllabus. (Judge Wise replaced Justice Terrence O’Donnell, who recused himself in the case.)

Justices Sharon L. Kennedy and Judith L. French agreed with the court’s decision upholding the contract’s buy-back conditions and with one part of the syllabus related to the definition of “operator,” but dissented on the other issues.

Justice Paul E. Pfeifer fully dissented from the court’s opinion. Justice O’Neill dissented from upholding the contract between White Hat and the schools, concluding the contract defies public policy and is not enforceable.

Case Background
Although commonly known as charter schools, the General Assembly named them “community schools” in the 1997 act that created the education alternative in Ohio. The Ohio Supreme Court ruled in 2006 that the community-school legislation is constitutional and that community schools are part of the state’s public school system.

In November 2005, the governing board of each of the 10 Cleveland community schools signed a contract with one of 10 education-management organizations, owned by for-profit companies White Hat Management and WHLS of Ohio, to operate and manage the schools. The initial contracts ended June 30, 2007, but automatically renewed for one year until 2010 unless cancelled.

The state provided per-student funding to the schools, which paid either 95 or 96 percent of those public dollars to the White Hat organizations. 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 locating buildings, hiring staff, and buying furniture, computers, and other equipment and supplies.

As of the 2010-2011 school year, two of the 10 community schools had been closed by the state education department for academic failure, four were on “academic watch,” and one was listed in “academic emergency.”

Given the poor performance, the governing authorities of the now-closed schools filed suit against White Hat in May 2010. White Hat had claimed it owned all the personal property it purchased for the schools with the public funds. Part of the schools’ complaint challenged whether White Hat was entitled to that property. Following decisions in the trial and appeals courts, the schools asked the Ohio Supreme Court to review the case.

Public Funds
Justice Lanzinger determined that White Hat meets the statutory definition of a community-school “operator” because it is an organization that manages a community school’s daily operations pursuant to a contract with the school’s governing authority.

Citing the court’s 2010 decision in Cordray v. Internatl. Preparatory School, Justice Lanzinger determined that White Hat is the “duly authorized representative or agent” for the schools in a broad range of functions.

“The public funds received by a community school from the Department of Education are ‘received or collected’ under color of office,” she wrote. “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. Free, public education, whether provided by public or private actors, is historically an exclusive governmental function.” 

Purchases for Schools
The computers, furniture, equipment, and other personal property used in the schools are needed for the schools to give children an education, Justice Lanzinger noted. However, she pointed out, the contracts require in multiple places that property titled in White Hat’s name may transfer to the school at the end of the contract only if the school buys back the items at a specific rate from White Hat. The company titles property to the schools only when a funding source mandates that White Hat purchase property in the schools’ names.  

“Unless there is ‘ ‘fraud or other unlawfulness involved, courts are powerless to save a competent person from the effects of his own voluntary agreement,’ ’” she reasoned, quoting two earlier rulings from the court. “The schools were represented by their own legal counsel, and they agreed to the provisions in the contracts. They may not rewrite terms simply because they now seem unfair.”

White Hat’s Obligations
While 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 stressed that the way parties describe their relationship is not controlling before a court. White Hat agreed to provide crucial functions to the schools and to advance the schools’ interests.

“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,” she wrote. “These are hallmarks of a fiduciary relationship.”

“While it appears that a fiduciary relationship was created by the conduct of the parties, we cannot say whether a fiduciary duty was breached based on the record before us,” she continued. “The issue of unconscionability also invites further exploration in this case, but we may not consider issues not properly raised before us. The legislature has enacted statutes that take a laissez-faire attitude toward operators of community schools. We leave it to the General Assembly to determine whether public policy requires stiffening of the regulatory scheme governing these matters.”

The ruling affirmed the Tenth District Court of Appeals’ determination that, based on the contract, the schools must buy property titled in White Hat’s name if they wish to retain it. However, the Supreme Court’s decision reversed the appeals court’s judgment that White Hat had no fiduciary relationship with the schools.

Justice Kennedy’s Views
In her part concurrence, part dissent joined by Justice French, Justice Kennedy concurred with the court’s syllabus on the definition of an operator and also agreed that the contract’s buy-back provisions are enforceable as written. However, she dissented from Justice Lanzinger’s opinion on all other issues.

Justice Kennedy 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. In her view, the Hope Academy and Life Skills schools were the community schools’ governing boards, which subcontracted the schools’ daily operations to White Hat, an independent contractor. In that role, White Hat was hired to operate schools and was not an agent of the governing boards.

She “emphatically disagree[d]” with the court’s view that a fiduciary relationship existed between White Hat and the schools. She noted a fiduciary relationship cannot be unilaterally created and must be established by mutual agreement. Neither occurred here, she explained.

Justice Kennedy would have affirmed the entire judgment of the Tenth District.

Justice Pfeifer’s Dissent
In his dissent, Justice Pfeifer viewed the court’s interpretation of the contract as “overly restrictive,” failing to recognize White Hat’s fiduciary responsibilities to the school and the intention of the parties. He further concluded that the court should not uphold the contract.

“The contracts require that after the public pays to buy those materials for a public use, the public must then pay the companies if it wants to retain ownership of the materials,” he wrote. “This contract term is not merely unwise as the opinion would have us believe; it is extremely unfair, so unfair, in fact, as to be unconscionable. … The contract term is so one-sided that we should refuse to enforce it.”

Justice O’Neill’s Opinion
While Justice O’Neill concurred with the court’s three statements of law in the syllabus, he dissented from the court’s opinion and judgment in the case. He specifically took issue with upholding the contracts between the schools and White Hat. He emphasized that White Hat was entrusted with more than $90 million in public funds from 2007 to 2010 and had obligations to Ohio taxpayers and to parents of the children who attended the community schools it ran.

“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 concluded that the contracts are not 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.”

“Refusing to uphold the buy-back provision of this contract is neither judicial activism nor rewriting the parties’ contract in order to provide a more equitable result,” he reasoned. “Rather, it is the application of existing statutes and Supreme Court of Ohio case law to prevent theft of public property.”

2013-2050. Hope Academy Broadway Campus v. White Hat Mgt., Slip Opinion No. 2015-Ohio-3716.

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