Update: On September 15, 2015 the Supreme Court of Ohio handed down a merit decision in this case. Read the analysis here.
Read the analysis of the oral argument here.
On September 23, 2014, the Supreme Court of Ohio will hear oral argument in the case of Hope Academy Broadway Campus, et. al. v. White Hat Management, LLC, et. al., 2013-2050. The central issue in this case is whether the public community schools ( familiarly called charter schools, which term will be used interchangeably with community schools) or the private education management-company defendants own the school property purchased with taxpayer dollars. Justice O’Donnell has recused himself from the case; Judge John Wise of the Fifth District Court of Appeals will sit in his stead.
The plaintiffs in this case are the governing boards of ten charter schools (“The Schools”). Charter schools are public schools that receive taxpayer funds. They are independent of traditional public school districts, and exempt from certain obligations of traditional public schools. Charter schools are governed by a board, and operate pursuant to a Community School Agreement between the schools and a sponsor approved by the Ohio Superintendent of Public Education. Charter schools are allowed to contract with private educational management organizations to administer the schools’ daily functions. The defendants in this case are various iterations of White Hat Management Companies, which are collectively referred to here as White Hat.
The Schools entered into identical management agreements with separate educational management organizations owned by White Hat. The management agreements between the parties required White Hat to handle day-to-day operations within each school, including the purchasing of furniture, computers, books, and all other equipment. White Hat was paid a “Continuing Fee” based upon the number of students in each school, plus reimbursements for state and federal grants. The management agreements also expressly provided that White Hat would operate as an independent contractor, and not as a partner or a joint venturer with the Schools.
After the original contracts expired, the parties entered into subsequent one-year term agreements beginning in 2007 and ending in 2010, when the Schools filed suit after White Hat refused to provide meaningful information concerning its use of public funds. The Schools contended that they were entitled to all property purchased by White Hat with public funds, without having to pay White Hat for that property. The Schools sought declaratory and injunctive relief and an accounting against White Hat and the Ohio Department of Education.
Pertinent to this appeal, the trial court found that the Schools were entitled only to the personal property in their names under the management agreements, but that White Hat owned the rest, which the Schools would have to buy from White Hat if it wanted that property. The trial court also found that no formal general fiduciary relationship was created by the management agreements.
The Tenth District Court of Appeals affirmed. The appeals court found that the Schools owned only the property that had to be titled in their own names due to the nature of the funding source, and that is the only situation in which White Hat operates as the purchasing agent for the Schools. Otherwise, the funds received by White Hat from the Continuing Fee became its private funds, and property it bought with those funds belong to it. It also affirmed the finding of the trial court that no formal general fiduciary agreement was created by the management agreements.
Key Statutes and Precedent
R.C. 3314.01(B), (A community school may sue and be sued, acquire facilities as needed, contract for any services necessary for the operation of the school, and enter into contracts with a sponsor pursuant to this chapter. The governing authority of a community school may carry out any act and ensure the performance of any function that is in compliance with the Ohio Constitution, this chapter, other statutes applicable to community schools, and the contract entered into under this chapter establishing the school.)
R.C. 3314.024, (A management company that provides services to a community school that amounts to more than twenty per cent of the annual gross revenues of the school shall provide a detailed accounting including the nature and costs of the services it provides to the community school.)
Cordray v. Internatl. Preparatory School, 2010-Ohio-6136. (An officer, employee, or duly authorized representative or agent of a community school is a public official and may be held strictly liable to the state for the loss of public funds.)
Oriana House, Inc. v. Motgomery, 2006-Ohio-1325. (Public funds do not necessarily lose their public character once paid to a private contractor and are still subject to audits by the State.)
Yovich v. Cuyahoga Falls City School Dist. 10th Dist. No. 91-AP-1325 (June 23, 1992)(Once public funds are paid to a private entity, they lose their public character.)
State ex rel. Smith v. Maharry, 97 Ohio St. 272 (1918). (Syllabus ¶ 1: All public property and public moneys, whether in the custody of public officers or otherwise, constitute a public trust fund, and all persons, public or private, are charged by law with knowledge of that fact. Said trust fund can be disbursed only by clear authority of the law.)
Eyerman v. Mary Kay Cosmetics, Inc., 967 F.2d 213 (6th Cir.1992). (Citing the Restatement (Second) of Agency, enumerates the three essential attributes of an agency relationship as: (1) agent must have the power to alter the legal relations between the principle and third parties; (2) agent must be a fiduciary of the principal in matters within the scope of the agency; and (3) the principal must have the right to control the agent’s conduct of matters entrusted to it.)
The Schools raise three issues in this appeal. First, do public funds paid to charter schools by the Ohio Department of Education retain their public character when the Schools pay over those funds to the private management companies that run the Schools? Second, does the nature of the public funds paid to the management companies require those companies to act as purchasing agents on behalf of the Schools? Third, do the management companies that operate the charter schools become the Schools’ fiduciaries?
First, the Schools argue that public funds do not lose their public function just because a private entity has received them. The scope of White Hat’s responsibilities was expansive—the company oversaw every aspect of daily functions within each and every school. White Hat did not provide a discrete or remote service, but was entrusted with carrying out a government function on a daily basis, and received public funds for doing this. Further, since White Hat operates public schools on behalf of the Schools pursuant to the management agreements, White Hat is by definition a “public official.” The Schools concede that White Hat, as a private entity, may earn a profit, but only after it has fulfilled its obligations under the contract, and not immediately upon receipt of the public funds.
Next, the Schools argue that White Hat acted as a purchasing agent for them in the acquisition of furniture, computers, and other personal property. Any property purchased from the Continuing Fee or from grant funds must be titled in the name of the Schools. But as for other personal property, when public funds are used to purchase that property to run a public school, the public school must own the property.
Lastly, the Schools argue that under the terms of the management agreements, White Hat became an agent for the Schools, therefore establishing a fiduciary duty for White Hat to act primarily for the benefit of the Schools. White Hat had the power to bind the Schools to third party contracts, to act on their behalf, and to advance their interests. White Hat’s objective was to help the Schools carry out their statutory purposes. The Schools reposed special trust and confidence in White Hat. And the Schools retained the right to control White Hat’s conduct in regard to matters entrusted to White Hat.
In addition to being a fiduciary pursuant to the management agreements, the Schools argue White Hat owes them a fiduciary duty because White Hat is carrying out a government function on their behalf, making White Hat a “public official.”
White Hat’s Argument
White Hat argues that the charter schools are ultimately governed by their individual school boards—no management company takes that role. Charter schools are allowed to contract with management companies like White Hat to administer the daily functions of the school. As was perfectly permissible, the management agreements shifted all financial risk from the Schools to White Hat. The management agreements expressly required White Hat to buy all the property needed to run the Schools, in its own name, unless a specific funding source required title in the name of the Schools. White Hat has complied with every law required of it, and has violated none.
White Hat asserts that the Schools have changed their argument throughout each stage in litigation, first arguing that White Hat is not allowed to profit from public funds, but now arguing that White Hat can only make a profit after the Schools determine whether White Hat has satisfactorily performed under the Management Agreement. Since this argument was never made below, it is waived
White Hat argues that it is accountable for the funds it received and spent through audit by the state auditor. But White Hat contracted only to run the schools, not to replace the governing boards of the schools. And contracts between private entities and public agencies are governed by the same principles as apply to contracts between individuals.
Next, White Hat denies that it was a purchasing agent, asserting that the management agreements are enforceable under their unambiguous terms, which include a provision for White Hat to incur all costs in operating the Schools, including the purchase of property. In doing so, White Hat took greater risk in purchasing the necessary equipment for schools up front, but gained the ability to provide better management of schools collectively in doing so. The primary argument is that titling property in White Hat’s name allowed for efficiency of operation; White Hat could transfer the property to schools with greater need. The Schools’ “nature of the funding source” exception would defeat that efficiency, by requiring property to remain with a particular school based on the funding which purchased the property.
White Hat argues that under the express provisions in the management agreement, it is clearly an independent contractor. Under Ohio law no fiduciary relationship is created between an independent contractor and the employer unless both understand otherwise, which was not the case here, and a fiduciary relationship cannot be created unilaterally. Further, White Hat had no authority to bind the schools when it purchased the personal property for use in the schools. Additionally, no partnership or joint venture was created between White Hat and the Schools, so no fiduciary relationship was created in that manner.
Finally, White Hat argues it is not a public official. The Schools continued to be governed by public officials – the Department of Education and their own Boards and Sponsors. Contracting with a public entity to administer services to that public agency does not transform the contracting private entity into a public official.
The Schools’ Proposed Propositions of Law
Proposition of Law No. 1: Public funds paid to a private entity exercising a government function, such as the operation of a community school, retain their character as public funds even after they are in the possession and control of the private entity. Although the private entity may earn a profit out of the public funds, such profit is earned only after the private entity has fully discharged its contractual, statutory, and fiduciary obligations.
Proposition of Law No. 2: When a private entity uses funds designated by the Ohio Department of Education for the education of public-school students to purchase furniture, computers, software, equipment, and other personal property to operate a community school, the private entity is acting as a purchasing agent and the property must be titled in the name of the community school.
Proposition of Law No. 3: A private entity that agrees to operate all functions of a community school has a fiduciary relationship with the community school. Although the private entity may earn a profit for the services it provides, it must act primarily for the benefit of the community school.
Amicus Brief in Support of The Schools
The Ohio School Boards Association’s brief supports the position that charter schools are public schools, that White Hat owes a fiduciary duty to Ohio’s taxpayers and the schools it operates, and that White Hat’s management agreements are unconscionable, contrary to public policy. It is beyond the authority of the local boards to give title to assets purchased from the Continuing Fee.
Amicus Briefs in Support of White Hat
Leading Age Ohio filed a brief on behalf of itself and three other groups to support upholding the statutory provisions governing charter schools, enforcing the contracts as written because they are valid, arguing that public policy requires protection of contractual rights, and finding that private entities providing service under contract do not automatically become fiduciaries or agents of a public entity. A private entity with no power to bind a public entity does not become an agent of that entity.
The Ohio Coalition for Quality Education’s brief argues that fees paid from the charter school to the educational management organizations do not constitute public money, but instead are ordinary service fees, therefore the property purchased with those fees is owned by the educational management companies. Additionally, OCQE argues the management companies are independent contractors, not agents, therefore they are not fiduciaries.
Summit Academy Management, LLC argues that payments made to management companies of a charter school do not remain public funds. Management companies are not obligated to title all assets they purchase in the charter schools’ name, and management companies of charter schools are not public officials.
Student Contributors: Austin LiPuma and Rebecca Campbell