Cordray v. International Preparatory School , 128 Ohio St. 3d 50 ( 2010 )

[Cite as Cordray v. Internatl. Preparatory School, 128 Ohio St.3d 50, 2010-Ohio-6136.]
CORDRAY, ATTY. GEN., ET AL., APPELLANTS, v. INTERNATIONAL
PREPARATORY SCHOOL ET AL.; SHABAZZ, APPELLEE.
[Cite as Cordray v. Internatl. Preparatory School,
128 Ohio St.3d 50, 2010-Ohio-6136.]
The treasurer of a community school is a public official and may be strictly liable
to the state for the loss of public funds.
(No. 2009-1418 — Submitted April 21, 2010 — Decided December 20, 2010.)
APPEAL from the Court of Appeals for Cuyahoga County, No. 91912,
2009-Ohio-2364.
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PFEIFER, Acting C.J.
{¶ 1} This case stems from the demise of a community school formed
pursuant to R.C. Chapter 3314. We address the issue of whether a treasurer of a
community school is a public official who may be strictly liable to the state for
public funds lost when the school accepted public funds that it was not entitled to
receive. We hold that 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.
Factual and Procedural Background
{¶ 2} The International Preparatory School (“TIPS”), a nonprofit
corporation organized under R.C. Chapter 1702, operated as a community school
pursuant to R.C. Chapter 3314. Defendant-appellee Hasina Shabazz and her now-
deceased husband, Da’ud Abdul Malik Shabazz, were members of the board of
TIPS. Pursuant to R.C. Chapter 3314, a community school is operated by a
governing authority, pursuant to a contract with a state-approved sponsor. TIPS
was sponsored by the Lucas County Educational Service Center (“LCESC”). As
a community school, TIPS received state funding based largely upon the number
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of students enrolled at the school as reported to the Ohio Department of
Education. R.C. 3314.08.
{¶ 3} On October 18, 2005, TIPS ceased operating as a community
school. On October 20, 2005, the state petitioned the trial court for, among other
relief, a temporary restraining order and the appointment of a receiver to secure
TIPS’s assets. The trial court issued a temporary restraining order that same day
and appointed a receiver in January 2006.
{¶ 4} On January 30, 2007, the state auditor issued a report of an audit of
TIPS for July 1, 2004, through October 18, 2005. The auditor determined that
TIPS had improperly sought and received $1,407,983 from the Department of
Education by submitting inflated enrollment figures. The auditor issued a finding
in favor of the Department of Education against TIPS as an entity and against
Shabazz and her husband individually. In her finding for recovery, the auditor
stated:
{¶ 5} “[TIPS] permanently closed and ceased its operation as a
community school in October 2005. Between July 1, 2004 and October 18, 2005,
[TIPS] was over funded by the Ohio Department of Education in the amount of
$1,407,983, which was deposited into [TIPS’s] account. The Ohio Department of
Education calculated the amount overpaid for the year ended June 30, 2005 was
$361,446 and for the year ended June 30, 2006 was $1,046,537. Since [TIPS]
was not eligible for these funds, the funds were due the Ohio Department of
Education and should have been returned.
{¶ 6} “In accordance with the foregoing facts, and pursuant to Ohio Rev.
Code Section 117.28, a Finding for Recovery for public funds due the State that
has not been remitted is hereby issued against [TIPS], Hasina Shabazz, Treasurer
and the estate of Da’ud Abdul Malik [sic], Chairman of the Board of Trustees,
jointly and severally, and in favor of the Ohio Department of Education in the
amount of $1,407,983.”
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{¶ 7} R.C. 117.28 and 117.36 authorize the state to institute a civil action
to reduce to judgment any audit findings that show the misuse of public funds.
On August 3, 2007, the state filed an amended complaint against Shabazz and her
husband’s estate. In her answer to the complaint, Shabazz claimed to have been
“treasurer of the International Preparatory School Corporate Board,” and she
continues to argue before this court that she was not the treasurer of the school,
but treasurer only of the board of directors of TIPS.
{¶ 8} Shabazz and the state filed cross-motions for summary judgment.
Shabazz argued that two statutes shield her from liability: R.C. 1702.55, under
which “members, the directors, and the officers of a corporation shall not be
personally liable for any obligation of the corporation,” and R.C. 3314.071, which
states that “[n]o officer, director, or member of the governing authority of a
community school incurs any personal liability by virtue of entering into any
contract on behalf of the school.” The trial court found Shabazz’s reliance on the
statutes misplaced, found her personally liable for the public funds at issue, and
granted the state’s motion for summary judgment against her.
{¶ 9} Shabazz appealed to the Eighth District Court of Appeals. On May
21, 2009, the appellate court reversed the trial court’s summary judgment. The
court held that Shabazz was not a “public official” under the ordinary meaning of
that term, and therefore could not be held personally, strictly liable for the
overpayments to TIPS. Cordray v. Internatl. Preparatory School, Cuyahoga App.
No. 91912, 2009-Ohio-2364, ¶ 31-35.
{¶ 10} Further, the court held that since R.C. 3314.03(A)(1) mandated
that community schools be established as nonprofit corporations under R.C.
Chapter 1702, the officers and directors of community schools are protected by
R.C. 1702.55. Id. ¶ 36. However, the court held that Shabazz could be liable if
the state could prove that she had breached her fiduciary duty as a director of a
publicly funded corporation or if the state could prove personal wrongdoing
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sufficient to pierce the corporate veil. Id. at ¶ 41. The court thus held that there
were genuine issues of material fact regarding whether Shabazz caused the
improper payment of public money to TIPS, and it remanded the matter to the
trial court.
{¶ 11} The cause is before this court upon the acceptance of a
discretionary appeal. Cordray v. Internatl. Preparatory School, 123 Ohio St.3d
1470, 2009-Ohio-5704, 915 N.E.2d 1253.
Law and Analysis
{¶ 12} That public officials are liable for the public funds they control is
firmly entrenched in Ohio law. In Crane Twp. ex rel. Stalter v. Secoy (1921), 103
Ohio St. 258, 259-260, 132 N.E. 851, this court stated that it is “pretty well settled
under the American system of government that a public office is a public trust,
and that public property and public money in the hands of or under the control of
such officer or officers constitute a trust fund, for which the official as trustee
should be held responsible to the same degree as the trustee of a private trust
fund.”
{¶ 13} In Seward v. Natl. Surety Co. (1929), 120 Ohio St. 47, 49, 165
N.E. 537, this court stated, “It has been the general policy, not only with
government employees and appointees, but with state officers, county officers,
township officers, and all other public officials, to hold the public official
accountable for the moneys that come into his hands * * *.”
{¶ 14} The liability for public officials is strict: “Over the years, this court
has held public officials liable for the loss of public funds, even though illegal or
otherwise blameworthy acts on their part were not the proximate cause of the loss
of public funds.” State v. Herbert (1976), 49 Ohio St.2d 88, 96, 3 O.O.3d 51, 358
N.E.2d 1090.
{¶ 15} Although, as this court stated in Herbert, applying strict liability
seems harsh, id., it is necessary from a public-policy standpoint:
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{¶ 16} “ ‘[I]t would be distinctly against public policy not to require a
public officer to account for and disburse according to law moneys that have
come into his hands by virtue of his being such public officer; that it would open
the door very wide for the accomplishment of the grossest frauds if public
officials were permitted to present as the defense, when called on to disburse the
money according to law, that it had been (performed) or destroyed by some
deputy, or other subordinate, connected with the public office.’ ” Id. at 96-97,
quoting Seward, 120 Ohio St. at 50, 165 N.E. 537.
{¶ 17} The state asserts that Shabazz, as treasurer of a community school,
is a public official who should be liable for funds illegally collected by TIPS. In
determining whether a community-school treasurer is a public official, we look to
the Revised Code for guidance. R.C. 9.39 represents a codification of Ohio
common law imposing strict liability on public officials for the loss of public
funds with which they have been entrusted. The statute reads:
{¶ 18} “All public officials are liable for all public money received or
collected by them or their subordinates under color of office.”
{¶ 19} R.C. 9.38(1) provides that for the purposes of R.C. 9.39, the
definitions of “public official,” “public office,” and “color of office” are the same
as those contained in R.C. 117.01. R.C. 117.01(E) states, “ ‘Public official’
means any officer, employee, or duly authorized representative or agent of a
public office.”
{¶ 20} Thus, an officer, employee, or duly authorized representative of a
charter school is a public official only if a community school is a “public office.”
R.C. 117.01(D) defines “public office”:
{¶ 21} “ ‘Public office’ means any state agency, public institution,
political subdivision, other organized body, office, agency, institution, or entity
established by the laws of this state for the exercise of any function of
government.”
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{¶ 22} Community schools fall within the definition of public office
because they are entities “established by the laws of this state for the exercise of
[a] function of government.” As this court held in 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, ¶ 32, community schools are legislatively created as a part of
Ohio’s constitutionally required system of common schools:
{¶ 23} “The Ohio Constitution requires establishment of a system of
common schools. This requirement is grounded in the state’s interest in ensuring
that all children receive an adequate education that complies with the Thorough
and Efficient Clause. To achieve the goal of improving and customizing public
education programs, the General Assembly has augmented the state’s public
school system with public community schools. The expressed legislative intent is
to provide a chance of educational success for students who may be better served
in their educational needs in alternative settings.”
{¶ 24} The General Assembly made clear in R.C. 3314.01(B) that
community schools are public schools: “A community school created under this
chapter is a public school, independent of any school district, and is part of the
state’s program of education.” Thus, as entities “established by the laws of this
state for the exercise of any function of government,” community schools are
public offices pursuant to R.C. 117.01(D). In turn, an officer, employee, or duly
authorized representative of a community school is a public official pursuant to
R.C. 117.01(E).
{¶ 25} Returning to R.C. 9.39, that statute provides that “public officials
are liable for all public money received or collected by them or by their
subordinates under color of office.” We have already determined that an officer,
employee, or duly authorized representative of a community school is a public
official. R.C. 117.01(A) defines “color of office”:
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{¶ 26} “ ‘Color of office’ means actually, purportedly, or allegedly done
under any law, ordinance, resolution, order, or other pretension to official right,
power, or authority.”
{¶ 27} Under R.C. 117.01, public money received pursuant to the
community-school-funding scheme set forth in R.C. 3314.08 would meet the R.C.
9.39 element of “public money received or collected * * * under color of office.”
Those payments were made by the state to TIPS due to the requirements of Ohio’s
community-school-funding laws.
{¶ 28} A factual question remains, however. In order for the state to
establish Shabazz’s liability, it must show that she or her subordinates received or
collected public money under color of office. Shabazz disputes that she was the
treasurer of TIPS; she claims that she was the treasurer of the board of directors of
TIPS. She claims that other people were hired as treasurer for the school, but also
admits that she occasionally filled in as interim treasurer when the school lacked a
treasurer.
{¶ 29} The label “treasurer” is less important than the character of the
position she held. We remand the matter to the trial court for a determination of
whether Shabazz’s responsibilities at TIPS included the receipt or collection of
public money, or whether she supervised employees who received or collected
public money under color of office. We note that R.C. 3314.011 requires every
community school to have a “designated fiscal officer,” whom the state auditor
may require to be bonded.
{¶ 30} Finally, we hold that R.C. 1702.55 offers no protection for public
officials. Public officials are personally liable for public funds. Thus, R.C.
1702.55, which protects members, directors, and officers of corporations from the
debts of the corporation, does not protect public officials from liability for lost
public funds. Liability attaches to a public official by virtue of the public office
he or she holds. It is his or her own obligation to “account for and disburse
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according to law moneys that have come into his hands by virtue of his being
such public officer.” Seward, 120 Ohio St. 47, 50, 165 N.E. 537. Any liability that
arises therefrom is not a corporate debt—it is the official’s own debt.
Conclusion
{¶ 31} Accordingly, we affirm the judgment of the court of appeals that
summary judgment was inappropriate, although for different reasons, and we
remand the cause to the trial court.
Judgment affirmed
and cause remanded.
LUNDBERG STRATTON, O’CONNOR, O’DONNELL, LANZINGER, and CUPP,
JJ., concur.
BROWN, C.J., not participating.
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Richard Cordray, Attorney General, Benjamin C. Mizer, Solicitor General,
Brandon J. Lester, Deputy Solicitor, and Todd R. Marti, Assistant Solicitor, for
appellants.
Brett E. Horton and Earle C. Horton, for appellee.
Cloppert, Latanick, Sauter & Washburn and Sue A. Salamido, urging
reversal for amicus curiae Ohio Education Association.
Ulmer & Berne, L.L.P., and Donald J. Mooney Jr., urging reversal for
amici curiae Ohio Federation of Teachers, Ohio School Boards Association, Ohio
Association of School Business Officials, Buckeye Association of School
Administrators, and Ohio Association of Public School Employees.
Eastman & Smith, Ltd., Albin Bauer II, and Amy J. Borman, urging
affirmance for amici curiae Imagine Charter Schools, Center for Education
Reform, and Atlantic Legal Foundation.
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