The Ohio Supreme Court issued a long-awaited decision yesterday in a case that reached the high court from initial litigation between a group of charter schools in Cleveland and their operator, White Hat Management. In the court ruling, which was a split ruling between the justices, the court held that a management company that undertakes the daily operation of a charter school has a fiduciary relationship with the charter school that it operates. This reversed the finding of the Tenth District Court of Appeals' ruling that the management company had no fiduciary relationship with the schools.
The Ohio Supreme Court also ruled that a for-profit management company, and not the charter schools it contracted with, has the right to retain property purchased with public funds when their operating contract with the schools ended.
In November 2005, the governing board of 10 community schools - seven Hope Academies and three Life Skills Centers in Cleveland and Akron - signed a contract with White Hat Management to operate and manage the schools. White Hat received 95 percent of each school's state funding for operational expenses, including staff salaries, rental fees and property such as computers, furniture and desks. White Hat titled the property in its own name. When the governing board terminated its contract with White Hat, it also filed a lawsuit against the management company after the schools were told they must buy back any property they wanted to keep that was titled in White Hat's name.
Ruling and Opinion
- In the Supreme Court ruling, the justices wrote that the ten charter schools that filed the case agreed to the terms of the contract and must abide by them. The majority opinion, written by Justice Judith Ann Lanzinger regarding contract terms, noted: "the notion that the schools would knowingly transfer their funds to White Hat for White Hat to purchase the property for itself does not seem supportable but was an agreed-upon term."
- The court's majority opinion also said the case "invites further exploration" and observed that current law does not spell out the duties of charter school operators and does not restrict contract provisions.
- The court ordered the case returned to a trial court to inventory the equipment named in the case and dispose of it under the terms of the White Hat contract.
- Justice Lanzinger also refuted in the ruling White Hat's claim that it had no duties as a fiduciary to the schools because the contracts defined its role as an independent contractor. The court 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 daily operations, a fiduciary relationship was created. Justice Lanzinger wrote: "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. These are hallmarks of a fiduciary relationship."
OAPCS Member attorneys had varying opinions regarding the most significant aspects of the case. Most agreed that the fractured opinion, with two dissenting justices, indicated there was not broad agreement within the court about different aspects of the ruling.
They noted that the court's finding that there is a fiduciary relationship between a management company and its schools, which is the highest duty in the law, is a major aspect of the case that will in the future hold management companies accountable to make financial decisions in the best interests of schools. The validity of contracts between management companies and boards noted in the ruling, however, also underscores the importance of initial terms when contracts are drafted, the attorneys observed. Board training is more imperative now than ever, as contractual documents overseen by board members are determining factors in litigation, they noted.
As always, we welcome the questions and concerns of our members in this or any other matters. Further insight into this case and other legal issues related to charter schools will be featured during the OAPCS Charter School Law Summit September 25, 2015 at OCLC in Dublin, Ohio. Discount registration rates are available to members through tomorrow.
Click here for more details.
Please contact me if you have any questions or concerns.
Director of Government Affairs
Ohio Alliance for Public Charter Schools
33 N. Third Street, Suite 600
Columbus, OH 43215