Campus v. White Hat Mgmt., L. L.C.

• Decision Date: 15 September 2015
• Docket Number: No. 2013–2050.,2013–2050.
• Citation: 46 N.E.3d 665,2015 Ohio 3716,145 Ohio St.3d 29
• Parties: HOPE ACADEMY BROADWAY CAMPUS et al., Appellants, v. WHITE HAT MANAGEMENT, L.L.C., et al., Appellees.
• Court: Ohio Supreme Court

145 Ohio St.3d 29

46 N.E.3d 665

2015 Ohio 3716

HOPE ACADEMY BROADWAY CAMPUS et al., Appellants,

v.WHITE HAT MANAGEMENT, L.L.C., et al., Appellees.

No. 2013–2050.

Supreme Court of Ohio.

Submitted Sept. 23, 2014.

Decided Sept. 15, 2015.

I. Introduction

{¶ 1} This contract dispute is a portion of ongoing litigation initiated by appellants, ¹ the governing boards of ten Cleveland community schools, commonly called "charter schools" (collectively, "the schools"). The defendants-appellees are private for-profit companies White Hat Management, L.L.C., and WHLS of Ohio, L.L.C., and ten subsidiary companies (collectively, "the companies")² that operated and managed the schools (collectively, "White Hat"), pursuant to contracts with each school. The State Board of Education was also named in the complaint. The schools ask us to decide the ownership of personal property used by White Hat in the schools' daily operations. White Hat claims the right to retain the disputed property unless the schools make certain payments to the management companies as set forth in the contracts.

{¶ 2} Although, as will be seen, the wisdom of the buy-back term can be questioned, we hold that the term is enforceable and that this case must be returned to the trial court for an inventory of the property and its disposition according to the contracts. We rule narrowly on the issues before us, leaving public-policy matters to the General Assembly.

II. The Background of the Litigation

{¶ 3} As permitted by statute, see R.C. 3314.03, the governing authority of each school entered into an individual management agreement (collectively, "the contracts") in November 2005 with one of the ten named education-management organizations owned by White Hat. Each contract was substantially identical.

{¶ 4} Under the contracts, White Hat was paid either 95 or 96 percent of the revenue-per-student funding that the school received from the state of Ohio Department of Education pursuant to R.C. Title 33 and other applicable statutes. This fixed amount, sometimes characterized as a per-pupil payment, was known in the contract as the "Continuing Fee." In addition, all federal, state, and local government education grants were to be paid to White Hat.

{¶ 5} In return, White Hat agreed to provide all functions relating to the provision of the White Hat educational model and the day-to-day management and operation of the schools. The schools retained the right to perform their own accounting, financial reporting, and audit functions, but White Hat was responsible for most other aspects of the operation of the schools, including providing a facility, meeting all staffing and academic needs, and purchasing all furniture, computers, books, and other equipment.

{¶ 6} The various management contracts ran from November 1, 2005, until June 30, 2007, and provided for automatic renewal thereafter for consecutive one-year terms through June 30, 2010, unless terminated for cause. The schools did not perform well under White Hat's management. Of the ten original schools, as of the 2010–2011 school year, two Hope Academies had been shut down by the Department of Education due to academic failure and three were on "academic watch"; one of the Life Skills Centers was on academic watch and a second was on "academic emergency" (one step away from shut-down). This poor performance caused the schools to raise several issues, including how White Hat spent the money it received to operate the schools. Financial information revealed that White Hat spent money to purchase buildings ultimately owned by or renovated for the benefit of its own affiliates. According to the schools, although White Hat used part of the continuing fee to purchase personal property for use in the schools, it improperly titled that property in its own name.

{¶ 7} The governing authorities of the schools filed the instant lawsuit on May 17, 2010, after White Hat refused to provide further information concerning the use of allegedly public funds. The complaint sought declaratory and injunctive relief, an accounting, and damages for breach of contract and breach of fiduciary duty. As part of their allegations, the schools disputed White Hat's claim of entitlement to all property White Hat purchased using public funds. Specifically, the schools challenged the operation of Section 8.a.i of the contracts, which stated that the schools could retain personal property owned by White Hat after termination of the contracts only by "paying to [White Hat] an amount equal to the ‘remaining cost’ basis of the personal property on the date of termination."

{¶ 8} After the action was filed, the parties executed a series of interim or "standstill" management agreements, which permitted them to continue operations as if the contracts were still in effect. On February 21, 2012, the schools filed a motion for partial summary judgment, asking the court to declare the property rights of the parties under the terms of their contracts and applicable laws.

{¶ 9} On May 11, 2012, the trial court granted the motion in part and denied it in part. The court upheld the contract term that required the schools to pay White Hat an amount equal to the "remaining cost basis" before obtaining the personal property titled in White Hat's name. It also upheld the schools' right to assume existing leases or to enter into new leases of facilities owned by White Hat at fair market value.³ The trial court granted the schools' motion for a Civ.R. 54(B) certification and found that there was no just reason for delay.

{¶ 10} The schools appealed. The Tenth District Court of Appeals affirmed the trial court's judgment and held that the continuing fee paid to White Hat lost its nature as "public funds" once the funds came into White Hat's possession and control. Hope Academy Broadway Campus v. White Hat Mgt., L.L.C., 10th Dist., 2013-Ohio-5036, 4 N.E.3d 1087, ¶ 24. The appellate court held that the contract was unambiguous and that it conferred on White Hat the authority to require the schools to buy back any personal property purchased by White Hat using the continuing fee. The court also stated that there was "no formal general fiduciary duty created by the agreements that required White Hat to purchase and hold property for the schools' benefit." Id. at ¶ 39.

III. Issues Before This Court

{¶ 11} We accepted the schools' appeal on three propositions of law, summarized as follows: (1) Public funds paid to a private entity exercising a governmental 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; (2) When a private entity operating a community school 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 for the school, the private entity is acting as a purchasing agent and the property must be titled in the name of the community school; (3) A private entity that agrees to operate all functions of a community school has a fiduciary relationship with the community school. 138 Ohio St.3d 1448, 2014-Ohio-1182, 5 N.E.3d 666.

{¶ 12} While we affirm that portion of the judgment of the court of appeals that upheld the buy-back provision as enforceable against the schools, we reverse the judgment of the court of appeals on the issue of the existence of a fiduciary relationship between the parties. We hold that an entity that manages the daily operations of a community school pursuant to a contract with the school's governing authority is an "operator" within the meaning of R.C. 3314.02(A)(8)(a). We also hold that a management company that undertakes daily operation of a community school has a fiduciary relationship with the community school it operates. Because the management company of a community school is performing a traditional government function, that fiduciary relationship between the company and its community school is implicated when the company spends public funds to purchase personal property for use in the school it operates. We therefore affirm in part and reverse in part the judgment of the Tenth District Court of Appeals and remand this case to the trial court for further proceedings.

IV. Legal Analysis

{¶ 13} A brief overview of relevant legislation is needed to place this dispute in context.

Community–School Legislation: R.C. Chapter 3314

{¶ 14} Community-school legislation became effective in 1997 when the General Assembly enacted R.C. Chapter 3314, titled the Community Schools Act. Am.Sub.H.B. No. 215, 147 Ohio Laws, Part I, 909, 1187. The General Assembly declared that its purposes in enacting this chapter included "providing parents a choice of academic environments for their children and providing the education community with the opportunity to establish limited experimental educational programs in a deregulated setting." Id., Section 50.52, Subsection 2(B), 147 Ohio Laws, Part I, 2043.

{¶ 15} We upheld the statutes as constitutional and held that community schools are part of Ohio's public school system. State ex rel. Ohio Congress of Parents & Teachers v. State Bd. of Edn., 111 Ohio St.3d 568, 2006-Ohio-5512, 857 N.E.2d 1148, syllabus, and ¶ 32. See also R.C. 3314.01(B) ( "A community school created under this chapter is a public school * * * "). We also recognized that educational policy decisions are within the purview of the General Assembly. Id. at ¶ 73. Since its enactment, R.C. Chapter 3314 has been amended repeatedly. Yet, as this case shows, many aspects remain unchanged.

{¶ 16} The legislation establishing community schools distinguishes among three types of entities: sponsors, governing authorities, and operators. These terms should be closely examined to more fully understand R.C. Chapter 3314.

Sponsors

{¶ 17} The community school operates under a contract with a "sponsor" that monitors the school's...