Sun Bldg. Ltd. P'ship v. Value Learning & Teaching Acad., Inc.

• Decision Date: 16 June 2021
• Docket Number: NO. C-180244,C-180244
• Parties: SUN BUILDING LIMITED PARTNERSHIP, et al., Plaintiffs, and Ohio Attorney General, and Ohio Department of Education, Intervenors-Plaintiffs-Appellees, v. VALUE LEARNING & TEACHING ACADEMY, INC., d.b.a. VLT Academy, et al., Defendants, and Valerie Lee, Clyde Lee, and Echole Harris, Defendants-Appellants.
• Court: Ohio Court of Appeals

175 N.E.3d 10

SUN BUILDING LIMITED PARTNERSHIP, et al., Plaintiffs,

and

Ohio Attorney General, and Ohio Department of Education, Intervenors-Plaintiffs-Appellees,

v.VALUE LEARNING & TEACHING ACADEMY, INC., d.b.a. VLT Academy, et al., Defendants,andValerie Lee, Clyde Lee, and Echole Harris, Defendants-Appellants.

NO. C-180244

Court of Appeals of Ohio, First District, Hamilton County.

Date of Judgment Entry on Appeal: June 16, 2021

Dave Yost, Ohio Attorney General, and Todd R. Marti, Assistant Attorney General, for Intervenors-Plaintiffs-Appellees.

Bruns, Connell, Vollmar & Armstrong, LLC, Thomas B. Bruns and Lucinda C. Shirooni, for Defendants-Appellants.

OPINION.

Bergeron, Judge.

{¶1} In this debacle concerning the collapse of a community school (also known as a charter school), the superintendent ran the school into the ground, but managed to enrich herself and her family along the way. Not only were public funds squandered in this fiasco, but the scandal detrimentally impacted the lives of countless children, often from disadvantaged backgrounds. Ohio law imposes stiff penalties on its public officials for having a personal financial interest in the transactions of their public offices, and in the wake of the school's insolvency, this action involves the Ohio attorney general's efforts to hold the superintendent and her family accountable.

{¶2} After a trial on a stipulated record, the trial court found the superintendent strictly liable for the amounts of the conflicted transactions, and also determined that all the family members should relinquish their wages. Relatedly, the court held that the contracts between the school and the superintendent's husband's company constituted a pattern of corrupt activity, imposing treble damages. Ultimately, we affirm the strict liability claim against the superintendent and the reclamation of the family's wages. However, we disagree with the trial court's holding that the contracts with the husband's company constituted a pattern of corrupt activity, and we reverse the liability determination and damages under Ohio's racketeering statute.

I.

{¶3} In 2005, defendant-appellant Valerie Lee launched a community school (a publicly funded charter school) in the Cincinnati area—Value Learning & Teaching Academy (VLT). Located in the Over the Rhine neighborhood in the urban core of Cincinnati, VLT aimed to provide underprivileged children with a premier education. The public funding of the school also brought oversight by the Ohio Department of Education and the state auditor.

VLT ultimately failed to live up to its lofty aspirations, plunging headlong into difficulty, both educationally and financially. During its relatively short existence, VLT witnessed its students decline in their testing scores, emblematic of a crisis in its academic efforts. Nor did VLT fare any better financially. Although it passed its financial reviews with the state auditor, it began incurring multimillion dollar operating losses that would prove the death knell for the school's existence.

{¶4} VLT eventually sputtered into insolvency, closing its doors in 2014, which prompted its landlords to sue for unpaid rent. As part of that suit, the landlords brought claims against VLT, its sponsor, and various school personnel in their personal capacities. The landlords alleged, among other things, that these individuals bore personal liability for VLT's obligations because they participated in conflicted transactions, in derogation of public finance laws.

{¶5} This suit soon attracted the state's attention, as the Ohio Department of Education and the attorney general intervened on VLT's behalf, arguing that the state's involvement was necessary to protect the public's interest in recovering public assets. The state also took the position that VLT personnel were immune (as public officials) from the landlords’ suit and that VLT's assets (as a publicly-funded school) should be distributed according to relevant statutes instead of divvied up by the landlords. Ultimately, the trial court agreed, holding that the landlords lacked standing to recover public funds for their private use or to bring claims against VLT staff. As a result, despite affirming VLT's obligations to its landlords, the court allocated asset distribution preference to former teachers and administrators for unpaid wages and retirement contributions. The landlords appealed that judgment, and we affirmed. See Sun Bldg. Ltd. Partnership v. Value Learning & Teaching Academy, Inc. , 1st Dist. Hamilton Nos. C-160789 and C-160793, 2017-Ohio-8727, 2017 WL 5903365.

{¶6} Following our decision, the attorney general pursued many of the claims against VLT personnel. As relevant for this appeal, the attorney general specifically sought to recover from Ms. Lee and her husband and daughter (the "Lees"), because of their involvement with VLT. As already noted, Ms. Lee served as the superintendent. However, her husband, Clyde Lee, also worked for VLT as its project manager—a position he held from 2008 until 2014, when it closed. And Ms. Lee's daughter, Echole Harris, worked for VLT in various capacities from 2006 until its closure. As employees of a publicly funded institution, the Lees constituted public officials under the relevant statutes, and the attorney general alleged that they violated Ohio law by possessing a personal interest in two sets of VLT's transactions.

{¶7} The first set of transactions involved multiple contracts between VLT and an entity called CEED, Inc., for janitorial and maintenance services. These arrangements attracted scrutiny because Mr. Lee was the sole owner of CEED. As a result of owning CEED, the attorney general alleged that his interest in those contracts violated Ohio law based on his status as an employee of VLT. Further, the attorney general highlighted Ms. Lee's personal interest in the CEED contracts because she was an authorized user on its bank account. She transferred funds from CEED's account into her personal account and sometimes routed CEED payments straight to herself. Having determined that this scenario created a conflict of interest with respect to the CEED contracts, the trial court imposed two types of civil penalties against Mr. and Ms. Lee.

The court first determined that they should forfeit all employment wages they received during the relevant time periods, under the faithless servant doctrine. The court also held both of them liable under the Ohio Corrupt Practice Act (OCPA) for treble damages.

{¶8} As to the second set of transactions, the attorney general characterized the daughter's employment contracts as illegal. Here, though, only Ms. Lee possessed the potentially illegal interest because she co-owned the bank account where VLT deposited her daughter's wages. The trial court therefore held that Ms. Lee's illegal interest rendered the daughter's contracts void and unenforceable, and as a result, concluded that Ms. Harris should forfeit those wages.

{¶9} Finally, pertaining to both sets of transactions, the trial court held Ms. Lee strictly liable by virtue of her position as superintendent. Ms. Lee's name appeared on VLT's bank account that received public funds, and she also shared responsibility for managing those funds. Thus, the court concluded that Ms. Lee assumed responsibility for the entire amounts of VLT's contracts with CEED and her daughter.

{¶10} In sum, the trial court determined that Ms. Lee's liability amounted to $6,132,071.24¹ : $887,441.46 for her forfeited wages (faithless servant doctrine); $328,188.38 for her daughter's wages (strict liability); and $5,096,441.40 for the CEED contracts ($1,694,973.84 under strict liability, overlapping with treble damages under the OCPA). The court held Mr. Lee liable for $5,448,520.23: $352,078.83 for his forfeited wages (faithless servant doctrine); and $5,096,441.40, jointly and severally with Ms. Lee for triple the CEED contracts under the OCPA. Finally, the court held Ms. Harris liable for $328,188.38, jointly and severally with Ms. Lee, for the value of her employment contracts that the court deemed void and unenforceable.

{¶11} The Lees now appeal, presenting seven assignment of error, challenging the judgments against them and the attorney general's authority to sue in the first place. We note, however, that the trial court's factual determinations are not at issue because the parties presented joint stipulations instead of convening an in-person trial. Therefore, we review the trial court's conclusions de novo. See Brown v. Gallagher , 2013-Ohio-2323, 993 N.E.2d 415, ¶ 7 (4th Dist.) ("Review of a trial court's application of the law to stipulated facts is de novo.").

II.

{¶12} The Lees first challenge the case against them—in its entirety—by maintaining that the attorney general lacked the authority to prosecute these claims in the first place. In their first two assignments of error, the Lees posit that the attorney general had neither statutory standing nor common law standing because the state auditor failed to issue a "finding for recovery." Ultimately, we conclude that the attorney general enjoys statutory standing, rendering it unnecessary to address the parameters of his common law authority.

{¶13} To fully understand the Lees’ challenge to the attorney general's authority, we provide a little background on community schools. In 1997, the General Assembly passed charter-school legislation, known as the Community Schools Act and codified under R.C. Chapter 3314. See State ex rel. Rogers v. New Choices Community School , 2d Dist. Montgomery No. 23031, 2009-Ohio-4608, 2009 WL 2857360, ¶ 32 ; R.C. 3314.01. The act was designed to " ‘provid[e] parents a choice of academic environments for their children and provid[e] the education community with the opportunity to establish limited experimental educational programs in a deregulated setting.’ " State ex rel. Ohio Congress of Parents & Teachers v. State Bd. of Edn. , 111 Ohio St.3d 568, 2006-Ohio-...