Hope Academy Broadway Campus v. White Hat Mgt., L.L.C. (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Hope Academy Broadway Campus v. White Hat Mgt., L.L.C., Slip Opinion No. 2015-Ohio-
3716.]
NOTICE
This slip opinion is subject to formal revision before it is published in
an advance sheet of the Ohio Official Reports. Readers are requested
to promptly notify the Reporter of Decisions, Supreme Court of Ohio,
65 South Front Street, Columbus, Ohio 43215, of any typographical or
other formal errors in the opinion, in order that corrections may be
made before the opinion is published.
SLIP OPINION NO. 2015-OHIO-3716
HOPE ACADEMY BROADWAY CAMPUS ET AL., APPELLANTS, v. WHITE HAT
MANAGEMENT, L.L.C., ET AL., APPELLEES.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Hope Academy Broadway Campus v. White Hat Mgt., L.L.C.,
Slip Opinion No. 2015-Ohio-3716.]
Community schools—R.C. Chapter 3314—“Operator, defined—Management
company that undertakes daily operation of community school has
fiduciary relationship with school—Contract clause requiring schools to
buy back equipment purchased by operator when purchase was made with
public money is enforceable.
(No. 2013-2050—Submitted September 23, 2014—Decided September 15, 2015.)
APPEAL from the Court of Appeals for Franklin County, No. 12-AP-496,
2013-Ohio-5036.
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SYLLABUS OF THE COURT
1. An entity that manages the daily operations of a community school pursuant to
contract with the school’s governing authority is an operator within the
meaning of R.C. 3314.02(A)(8)(a).
2. A management company that undertakes the daily operation of a community
school has a fiduciary relationship with the community school that it
operates.
3. The fiduciary relationship between an operator and its community school is
implicated when the company uses public funds to purchase personal
property for use in the school that it operates.
_________________
LANZINGER, J.
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 (“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
1
Appellants are the governing authorities of Hope Academy Broadway Campus, Hope Academy
Chapelside Campus, Hope Academy Lincoln Park Campus, Hope Academy Cathedral Campus,
Hope Academy University Campus, Hope Academy Broad Street Campus, Life Skills Center of
Cleveland, Life Skills Center of Akron, Hope Academy West Campus, and Life Skills Center
Lake Erie.
2
Appellees are White Hat Management, L.L.C.; WHLS of Ohio, L.L.C.; HA Broadway, L.L.C.;
HA Chapelside, L.L.C.; HA Lincoln Park, L.L.C.; HA University, L.L.C.; HA Cathedral, L.L.C.;
HA High Street, L.L.C.; HA Brown Street, L.L.C.; LS Cleveland, L.L.C.; LS Akron, L.L.C.; HA
West, L.L.C.; and LS Lake Erie, L.L.C.
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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 (“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
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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 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 alleged 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.
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{¶ 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. Franklin No. 12AP-496, 2013-Ohio-5036, ¶ 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-
3
White Hat also appealed several discovery rulings to the Tenth District Court of Appeals. See
Hope Academy Broadway Campus v. White Hat Mgt., L.L.C., 10th Dist. Franklin No. 12AP-116,
2013-Ohio-911. We declined to accept White Hat’s discretionary appeal from the Tenth District’s
decision. 136 Ohio St. 3d 1452, 2013-Ohio-3210, 991 N.E.2d 258.
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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
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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 performance according to state laws and regulations.
R.C. 3314.02(A)(1) and (C)(1); 3314.03(A)(4). A sponsor must first be approved
and then monitored on its performance by the Ohio Department of Education.
R.C. 3314.015(A)(2) and (3). It must enter into a detailed contract with the
governing authority of the school, the required terms of which are set by statute.
R.C. 3314.03(A)(1) through (26). The school must also submit to the sponsor a
comprehensive plan for the school, R.C. 3314.03(B), which must specify certain
details, such as internal financial controls and the process by which the governing
authority’s members will be selected in the future. R.C. 3314.03(B)(1) and (5).
The sponsor must monitor the governing authority’s compliance with its contract,
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evaluate the community school’s academic and fiscal performance, and take
action if the community school fails academically or financially. R.C.
3314.03(D)(1), (2), and (5). The sponsor may suspend the operation of a
community school that does not comply with its contract. R.C. 3314.07(B)(1)(c).
Sponsors may receive fees of up to 3 percent of total payments for operating
expenses that the school receives from the state. R.C. 3314.03(C).
Governing authorities
{¶ 18} A community school itself must be organized as either a “nonprofit
corporation” or a “public benefit corporation” depending on when it was
established. R.C. 3314.03(A)(1). Each community school must have a
“governing authority,” which shall consist of a board of no fewer than five
individuals. R.C. 3314.03(A)(14); 3314.02(E)(1). Even though community
schools are exempt from most of the state laws and regulations that apply to other
public schools, see R.C. 3314.04, they are not free from oversight. The
community school’s governing authority must account to its sponsor for the
school’s performance, and the sponsor is, in turn, accountable to the Ohio
Department of Education. 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, at ¶ 7.
R.C. 3314.04 exempts community schools from the rules governing boards of
education set forth in R.C. Chapter 3313, but R.C. Chapter 3314 imposes its own
duties and responsibilities on community schools.
Operators
{¶ 19} A community school may contract “for any services necessary for
the operation of the school.” R.C. 3314.01(B). The governing authority of a
community school has the option to hire an operator (usually a management
company) to manage the day-to-day workings of the schools. See R.C.
3314.02(A)(8)(a); 3314.026. An operator is an entity that is distinct from a
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sponsor. R.C. 3314.02(A)(1) (defining “sponsor”) and 3314.02(A)(8) (defining
“operator”).
{¶ 20} In this case, the schools contracted with White Hat for the daily
management and operation of their community schools. Yet it remains a fact that
operators, unlike sponsors and governing authorities remain largely unregulated.
R.C. 3314.02(A)(8) defines an “operator” as either (a) an individual or
organization that manages a community school’s daily operations pursuant to a
contract with the school’s governing authority or (b) a nonprofit organization that
provides “programmatic oversight and support” to a community school pursuant
to a contract with its governing authority. White Hat fits squarely within the first
definition.
{¶ 21} But although the statutes define who an operator is, R.C. Chapter
3314 is largely silent on an operator’s duties and its status vis-à-vis a community
school’s governing authority and its sponsor. Although legislation has been
introduced to further amend the Community Schools Act and to provide enhanced
oversight, there are currently no specific requirements for the content of the
contracts between the governing authority and an operator.4 Most of the existing
statutory references to an operator are nonsubstantive.5 While fees to sponsors
are capped, R.C. 3314.03(C), there is no ceiling on the amount of funding that can
be passed on to private operators such as White Hat. Indeed, the schools in this
case transferred to White Hat nearly all of the taxpayer dollars they otherwise
would have retained for the education of students.
4
2015 Sub.H.B. No. 2.
5
See, e.g., R.C. 3314.05(B)(2)(a) (referring to contracts between operators and governing
authorities); 3314.026 (outlining method for terminating operator contracts); and 3314.092 (setting
forth duty of operator to consult with school district regarding transportation before revising
school schedules).
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Position of the Parties
{¶ 22} Now that their contracts have terminated, the parties dispute
ownership of the personal property that was used in the schools’ daily operations
during the lives of the contracts.6 The schools argue that operating a community
school for public-school students is a governmental function and that White Hat
should be accountable for the public funds it received because these funds remain
public even after they were transferred to White Hat’s possession. The schools
also contend that funds designated for educating public-school students must be
used for the schools’ benefit and that a private entity operating a community
school has a fiduciary relationship with that school.
{¶ 23} White Hat responds that the General Assembly has already
provided for accountability by requiring White Hat to submit detailed financial
accounts for inclusion in the community school’s financial statements, which are
subject to audit. R.C. 3314.024. White Hat argues that funds do not retain their
public character after they have been received by the party being paid. White Hat
also emphasizes that community-school legislation expressly contemplates that
the parties will negotiate their respective duties and privileges in an enforceable
contract and that its contracts state that the operator is an independent contractor
rather than an agent or fiduciary.
{¶ 24} We now examine the contract terms that relate to this dispute over
personal property used in the schools.
The Contract Language
{¶ 25} Section 2 of the contract sets out the services that White Hat must
provide the schools. Subsection 2.b.i (subtitled “Equipment”) states:
6
“Personal property” is defined as “[a]ny movable or intangible thing that is subject to ownership
and not classified as real property.” Black’s Law Dictionary 1412 (10th Ed.2014).
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The Company [i.e., the relevant White Hat subsidiary-operator]
shall purchase or lease all furniture, computers, software,
equipment and other personal property necessary for the operation
of the School. Additionally, the Company shall purchase on
behalf of the School any furniture, computers, software, equipment,
and other personal property which, by the nature of the funding
source, must be titled in the School’s name.
(Emphasis added.)
{¶ 26} Section 8 provides for payment of fees and defines the “continuing
fee” as either 95 or 96 percent (depending on the school) “of the revenue per
student received by the School from the State of Ohio Department of Education”
and certain other payments paid to the school by government sources. Section
8.a.i then provides that all costs incurred in providing the White Hat educational
model shall be paid by White Hat, including the cost of purchasing books,
computers, equipment, and other property for use in the schools. The source of
funds for those purchases is, of course, the continuing fee, i.e., public money. In
the same subsection related to payment of costs, 8.i, the contract states:
It is understood that at the School’s election, upon termination of
this Agreement all personal property used in the operation of the
School and owned by the Company or one of its affiliates and used
in the operation of the School, other than proprietary materials
owned by the Company, may become the property of the School
free and clear of all liens or other encumbrances upon the School
paying to the Company an amount equal to the “remaining cost
basis” of the personal property on the date of termination.
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(Emphasis added.)
{¶ 27} Section 12.c of each contract again refers to the schools’ obligation
to pay before they may receive title to personal property used to operate the
schools:
Equipment and Personal Property. On or before the Termination
Date, and after the payment of the “remaining cost basis” to be
made by the School in accordance with Section 8(a), herein the
Company shall transfer title to the School, or assign to the School
the leases (to the extent such leases are assignable), for any and all
computers, software, office equipment, furniture and personal
property used to operate the School, other than the Company's
proprietary materials.
(Emphasis added.)
{¶ 28} The schools maintain that the contract cannot be interpreted to
require them, upon termination of the contract, to buy back the personal property
used in the schools’ operation. The schools point to the phrase from Section 2.b.i:
“the Company shall purchase on behalf of the School any * * * personal property
which, by the nature of the funding source, must be titled in the School’s name.”
When the nature of the funding source is public, title of the property must reside
in the schools.
{¶ 29} White Hat counters that this interpretation renders meaningless the
contractual requirement that White Hat purchase the personal property. It claims
that the funding source referred to was “usually a grant,” which requires the
property to be titled in the schools’ name.
{¶ 30} But nothing in the contract defines the “nature of the funding
source” or clarifies when the nature of the funding source requires that the schools
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have title to the purchased property. The provision creates a certain amount of
uncertainty on the issue of who owns the personal property used in the schools
after the contracts have terminated. Did the funds used to purchase the personal
property lose their public character once transferred to White Hat, a private
entity?
Public funds paid to private entities
{¶ 31} In its first proposition of law, the schools seek a broad statement
that public funds retain their character even after being paid to a private entity.
R.C. 117.01(C) states that “public money” means “any money received, collected
by, or due a public official under color of office, as well as any money collected
by any individual on behalf of a public office or as a purported representative or
agent of the public office.”
{¶ 32} Community schools are public schools. R.C. 3314.01(B); Cordray
v. Internatl. Preparatory School, 128 Ohio St. 3d 50, 2010-Ohio-6136, 941 N.E.2d
1170, ¶ 24. And as an entity established by the laws of this state for the exercise
of a function of government, namely education, a community school is a public
office. Id.; R.C. 117.01(D). We outlined the framework for determining “public
official” status in Cordray, in which we decided that the treasurer of a community
school was a public official obligated to account for and disburse public funds.
We explained that a “public official” is “ ‘any officer, employee, or duly
authorized representative or agent of a public office.’ ” Id. at ¶ 19, quoting R.C.
117.01(E). We then confirmed that any “duly authorized representative or agent”
of a community school, therefore, is a “public official.” Id. at ¶ 24.
{¶ 33} The public funds received by a community school from the
Department of Education are “received or collected” under color of office.
Cordray, ¶ 27. When those funds are transferred directly to an operator, they are
also public funds “received or collected” under color of office to the extent that
those funds are used to perform a governmental function. While we cannot
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broadly hold that public funds always retain their status as public funds, a private
entity such as White Hat engaged in the business of education is accountable for
the manner in which it uses public funds. Free public education, whether
provided by public or private actors, is historically an exclusive governmental
function.
{¶ 34} The contracts contemplate that funds designated by the Ohio
Department of Education for the education of public-school students will be used
for the benefit of public schools and not their private operators. The personal
property at issue in this case, which includes furniture, computers, software, and
other equipment, is essential for the schools to carry out the governmental
function of providing an education to Ohio’s children. The notion that the schools
would knowingly transfer their funds to White Hat for White Hat to purchase the
property for itself (and then later require the schools to buy the property back with
additional public funds) does not seem supportable but was an agreed-upon term.
{¶ 35} We interpret the contract between the schools and White Hat as we
interpret contracts between individuals, “ ‘with a view to ascertaining the
intention of the parties and to give it effect accordingly, if that can be done
consistently with the terms of the instrument.’ ” S&M Constructors, Inc. v.
Columbus, 70 Ohio St. 2d 69, 71, 434 N.E.2d 1349 (1982), quoting Hollerbach v.
United States, 233 U.S. 165, 171-172, 34 S. Ct. 553, 58 L. Ed. 898 (1914). We
have consistently explained that parties may contract for the terms they want, and
the “intent of the parties is presumed to reside in the language they chose to use in
their agreement.” Graham v. Drydock Coal Co., 76 Ohio St. 3d 311, 313, 667
N.E.2d 949 (1996).
{¶ 36} Common words in a contract are given their plain and ordinary
meaning, unless another meaning is clearly evident from the face or overall
content of the contract, or unless the result is manifestly absurd. Alexander v.
Buckeye Pipe Line Co., 53 Ohio St. 2d 241, 374 N.E.2d 146 (1978), paragraph two
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of the syllabus. Courts apply clear and unambiguous contract provisions without
regard to the relative advantages gained or hardships suffered by the parties.
Dugan & Meyers Constr. Co., Inc. v. Ohio Dept. of Adm. Servs., 113 Ohio St. 3d
226, 2007-Ohio-1687, 864 N.E.2d 68, ¶ 29, quoting Ohio Crane Co. v. Hicks, 110
Ohio St. 168, 172, 143 N.E. 388 (1924).
{¶ 37} “It is not the responsibility or function of this court to rewrite the
parties’ contract in order to provide for a more equitable result. A contract ‘does
not become ambiguous by reason of the fact that that in its operation it will work
a hardship upon one of the parties thereto.’ ” Foster Wheeler Enviresponse, Inc.,
v. Franklin Cty. Convention Facilities Auth., 78 Ohio St. 3d 353, 362, 678 N.E.2d
519 (1997), quoting Ohio Crane Co. at 172. Unless there is “ ‘fraud or other
unlawfulness involved, courts are powerless to save a competent person from the
effects of his own voluntary agreement.’ ” Dugan & Meyers at ¶ 29, quoting
Ullmann v. May, 147 Ohio St. 468, 476, 72 N.E.2d 63 (1947). The schools have
not argued that the contracts were unconscionable, and we will not address issues
not argued.
{¶ 38} The schools were represented by their own legal counsel, and they
agreed to the provisions in the contracts. They may not rewrite terms simply
because they now seem unfair. The contracts call for White Hat to title property
in the schools’ name in one situation: “the Company shall purchase on behalf of
the School any furniture, computers, software, equipment, and other personal
property which, by the nature of the funding source, must be titled in the School’s
name.” Section 2.b.1. At the same time, the “property purchased by the School
shall continue to be owned by the School.” Section 8.a.ii.
{¶ 39} So, if the nature of the funding source was such that White Hat was
required to purchase the personal property in the schools’ names, that property
belongs to the schools outright. But the contracts require additional payment
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from the schools if they wish to obtain the other personal property that White Hat
purchased.
White Hat as a Fiduciary
{¶ 40} The schools contend that they should not have to pay anything to
White Hat for the contested personal property, claiming that in agreeing to
undertake the operation of the schools, White Hat assumed a fiduciary
relationship to the schools. They urge that the broad authority conferred on White
Hat by the contracts to act in key matters on behalf of the schools and its control
of all functions of the schools’ day-to-day operations created a duty to act
primarily for the benefit of the schools. The complaint alleges that the operators
failed to account for the use of public funds. The complaint also alleges that
White Hat improperly used public funds for other than educational purposes in
violation of its fiduciary duty. White Hat, on the other hand, insists that the
operators do not owe fiduciary duties, because they are not public officials.
White Hat bases this argument on Section 14 of the contracts, which states that
“[t]he parties hereby acknowledge that their relationship is that of an independent
contractor.”
{¶ 41} We first note that the parties’ characterization of their relationship
in the contracts is not controlling. Restatement of Agency 3d, Section 1.02; see N
& G Constr., Inc. v. Lindley, 56 Ohio St. 2d 415, 417, 384 N.E.2d 704 (1978), fn.
1.
{¶ 42} The contract between the schools and White Hat makes the
operator the authorized representative of the community schools that it operates,
for purposes of hiring, training, supervising, and firing staff, selecting a
curriculum, purchasing equipment, maintaining academic standards, and
monitoring student performance, either under the direction of the schools or
subject to their approval. Clearly, pursuant to the contracts, White Hat is the
“duly authorized representative” for the schools in a broad range of functions.
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{¶ 43} We have defined the term “fiduciary relationship” as one “in which
special confidence and trust is reposed in the integrity and fidelity of another and
there is a resulting position of superiority or influence, acquired by virtue of this
special trust.” In re Termination of Emp. of Pratt, 40 Ohio St. 2d 107, 115, 321
N.E.2d 603 (1974). In determining whether a fiduciary relationship has been
created, the main question is whether a party agreed to act primarily for the
benefit of another in matters connected with its undertaking. Strock v. Pressnell,
38 Ohio St. 3d 207, 216, 527 N.E.2d 1235 (1988).
{¶ 44} In a recent and analogous case, a federal district court in Missouri
held that a fiduciary relationship existed between a charter school’s board and its
operator. Renaissance Academy for Math & Science of Missouri, Inc. v. Imagine
Schools, Inc., W.D.Mo. No. 4:13-CV-00645-NKL, 2014 WL 7267033 (Dec. 18,
2014). Applying that state’s test for determining the existence of a fiduciary duty,
the court concluded that a fiduciary relationship existed between the charter
school and its operator. The court so held because under the terms of the
operating agreement, the charter school’s board was required to give the operator
virtually all money and property that the board received from taxpayers. Id. at *3.
And without the board’s initial receipt of the money, the operator would not have
had access to those funds. Id. The court found that the board placed its trust and
confidence in its operator to create a successful learning environment and to
manage the school’s operations. In short, the operator took over the de facto
persona of the school’s governing authority. Id.
{¶ 45} Similarly, under Section 2 of the contracts, White Hat assumed
broad authority, contracting with the schools to perform “all functions relating to
the provision of the [relevant] Educational Model and the management and
operation of the School in accordance with the terms of the Contract,” except for
certain financial functions. Section 2.b.i. of the contracts makes the operators the
purchasing agent for the schools in certain situations, authorizing the operators to
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make purchases “on behalf of” the schools and to title property in the schools’
names. Certain crucial functions, such as staffing levels, recordkeeping, teacher
training, and hiring and firing teachers, are entrusted to White Hat. White Hat
agreed to act on behalf of the schools to help them carry out their purpose as
outlined in R.C. Chapter 3314. White Hat’s purpose, reflected in the contracts,
was to advance the schools’ interests. The schools contracted with White Hat to
operate “all functions” of their day-to-day operations. 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. See
Pratt at 115; Groob v. KeyBank, 108 Ohio St. 3d 248, 2006-Ohio-1189, 843
N.E.2d 1170, ¶ 16.
{¶ 46} While it appears that a fiduciary relationship was created by the
conduct of the parties, we cannot say whether a fiduciary duty was breached
based on the record before us. The issue of unconscionability also invites further
exploration in this case, but we may not consider issues not properly raised before
us. The legislature has enacted statutes that take a laissez-faire attitude toward
operators of community schools. We leave it to the General Assembly to
determine whether public policy requires stiffening of the regulatory scheme
governing these matters.
V. Conclusion
{¶ 47} 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 further hold that
a management company that undertakes the daily operation of a community
school has a fiduciary relationship with the community school that it operates.
That fiduciary relationship between an operator and its community school is
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implicated when the company uses public funds to purchase personal property for
use in the school that it operates.
{¶ 48} We therefore affirm the judgment of the Tenth District Court of
Appeals to the extent that it held that the buy-back provision of the contracts was
enforceable and that the schools are obliged under that provision to pay for the
personal property purchased by White Hat as described in the contract. We
reverse the portion of the judgment of the Tenth District Court of Appeals on the
issue of the existence of a fiduciary relationship between the parties. This case is
remanded to the trial court for an inventory of the property and its disposition
according to the contract terms.
Judgment affirmed in part
and reversed in part,
and cause remanded.
O’CONNOR, C.J., and WISE, J., concur in syllabus and judgment only.
KENNEDY and FRENCH, JJ., concur in judgment in part and dissent in part
and concur in paragraph one of the syllabus.
O’NEILL, J., concurs in the syllabus but dissents from the opinion and
judgment.
PFEIFER, J., dissents.
John W. Wise, of the Fifth Appellate District, sitting for O’DONNELL, J.
_________________
KENNEDY, J., concurring in judgment in part, concurring in
paragraph one of the syllabus, and dissenting in part.
{¶ 49} Respectfully, I concur in part and dissent in part. I agree with
paragraph one of the syllabus, which merely reiterates R.C. 3314.02(A)(8)(a)’s
definition of “operator” as an “organization * * * that manages the daily
operations of a community school pursuant to a contract between the operator and
the school’s governing authority.” I also concur in the judgment to the extent that
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it affirms the judgment of the court of appeals. I disagree with paragraphs two
and three of the syllabus and dissent from the part of the judgment reversing the
judgment of the court of appeals, although it is unclear what part of the judgment
it reverses.
{¶ 50} Also, because I believe that a discussion of agency is central to the
analysis, I would address the second proposition of law. Finally, I reject the dicta
of the opinion asserting that independent contractors can be fiduciaries without
any agreement to that effect. This dicta contradicts settled law and appears to be
without legal significance here. Also, as a factual matter, I do not believe that
ordering an inventory is required because under the contract, the parties titled the
personal property upon purchase, and there is no dispute about what is titled to
whom. I would affirm the judgment and adopt the reasoning of the court of
appeals in all respects.
Facts
{¶ 51} While I agree with the recitation of the facts in the majority opinion
as far as it goes, I note that the opinion pays scant attention to the sole focus of
this dispute, which is the comprehensive nature of the contract between the
parties. By ignoring the contract’s sweep, the majority conflates the roles of the
Hope Academy and Life Skills schools (collectively, “Hope Academy”), who are
the schools’ governing boards, and the White Hat Management companies, who,
by explicit agreement, operate as independent contractors.
{¶ 52} The terms of that agreement are not in dispute. The contracts state
that the Hope Academy governing boards are subcontracting all day-to-day
management of the schools to the White Hat companies, leaving the governing
boards no control over management. Section 14 of the agreement, identified as
“Relationship of the Parties,” states, “The parties hereto acknowledge that their
relationship is that of an independent contractor. No employee of either party
shall be deemed an employee of the other party. Nothing contained herein shall
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be construed to create a partnership or joint venture between the parties.” In
Section 2, the parties agree that Hope Academy will divest itself of control over
school management “to the extent permitted by law.” White Hat agrees to
provide “all functions relating to the provision of the HOPE Academy
Educational Model and the management and operation of the School * * * except
for the School accounting, financial reporting and audit functions which will be
performed by the designated fiscal officer hired by the Board.” This language, as
well as the rest of the contract, reveals that White Hat was granted full
responsibility to implement Hope Academy’s educational approach using White
Hat’s own expertise to educate students to the satisfaction of the governing board
and its sponsors. Hope Academy explicitly subcontracted all management
authority over the educational operations of its schools to White Hat, as allowed
by R.C. 3314.01(B), reserving no control. Only a fiscal officer, as required by
R.C. 3314.011, comes under Hope Academy’s direct authority.
{¶ 53} However, while Hope Academy subcontracted the school’s
management to White Hat, the Revised Code does not authorize contracting out
financial responsibility to the management company. The parties’ contract, as
well as R.C. 3314.011 and 3314.024, requires that financial oversight remains
with the sponsors or governing board. For example, management companies,
such as White Hat, providing services costing more than 20 percent of the
school’s gross annual revenues must “provide a detailed accounting including the
nature and costs of the services it provides to the community school.” R.C.
3314.024. And the school’s sponsor, not an independent contractor, must make
sure, through contracts executed with its governing board, that its schools comply
with a broad array of state education laws to ensure effectiveness, including
teacher licensing and academic and financial accountability. R.C.
3314.029(A)(1)(f), (g), (h), and (i) and 3314.03(A)(3), (4), (5), (8), (10), and (11).
The law requires transparency. Every contract between a sponsor and a
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governing board is filed with the state superintendent of public instruction and is
available to the public on the Department of Education’s website. R.C. 3314.03.
{¶ 54} The duties that White Hat undertook were comprehensive. The 16-
page contract delegates all the governing board’s day-to-day management duties
to White Hat, including acquiring buildings, technology, and insurance,
complying with all governmental requirements, and hiring and managing
personnel. White Hat, not the governing board, covers the entire payroll, and the
personnel are employees of White Hat. As with any other school, and as the
parties agreed, operating the school required almost the full amount of
government dollars allocated to the governing board.
{¶ 55} The majority suggests nefariousness when it asserts that the schools
“transferred to White Hat nearly all of the taxpayer dollars they otherwise would
have retained for the education of students.” In fact, the Revised Code places
limits only on the amount of money that sponsors may retain. “The total amount
of * * * payments [to the sponsor] for oversight and monitoring of the school
shall not exceed three percent” of revenues for operating expenses. R.C.
3314.03(C). In contrast, the Revised Code authorizes the schools to contract for
services in exchange for fees, R.C. 3314.01(B), but does not limit the amounts
that governing boards may pay to management companies. However, the
governing boards’ resources are limited by statute. R.C. 3314.08(C).
{¶ 56} To be completely accurate, the governing board transferred to
White Hat not only money but also responsibilities, expenses, and risk. The
parties did so specifically “to implement the HOPE Academy Educational
Model,” which Hope Academy apparently devised but did not have the expertise
or resources to implement. Contrary to the innuendo of the majority, the parties’
agreement did not diminish the amount of funds dedicated to “the education of
students” because Hope Academy did not retain any responsibility for educating
students.
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{¶ 57} The only issue now is whether that part of the contract between the
parties addressing ownership of property is void.
{¶ 58} A complete recitation of the propositions of law will bring these
matters into sharper focus.
Proposition of Law I
{¶ 59} Proposition of law I, which was not presented to the court of
appeals as an assignment of error, reads as follows:
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 obligation.
{¶ 60} As a preliminary matter, I do not take the second sentence of this or
the third proposition to suggest that our holding must apply uniquely to for-profit
entities. The majority should make clear that funds transferred pursuant to a valid
contract are earned according to the terms of that contract, regardless of whether
the contracting entities operate for profit.
{¶ 61} Otherwise, the proposition is easily rejected. State ex rel. Oriana
House, Inc. v. Montgomery, 108 Ohio St. 3d 419, 2006-Ohio-1325, 844 N.E.2d
323, cited by Hope Academy, does not support its position. That case merely
holds that the state auditor may audit private entities receiving public funds. Id. at
¶ 1, 27. It does not hold that a private company can never retain property titled in
its name when the property is purchased with public funds. Oriana House does
state that “[i]ndividuals or entities have a duty to account for their handling of
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those funds,” id. at ¶ 13, but accountability is not the issue here. At most, Oriana
House can be cited for the proposition that when a private entity receives public
funds to perform a government function, it is subject to audit by the state auditor.
Id. at ¶ 15. White Hat acknowledges that it is subject to audit under R.C.
3314.024 and that it has, in fact, been audited.
{¶ 62} In addition, Hope Academy cites no binding authority that actually
supports its statement that public funds do not automatically lose their public
character when they are transferred to a private entity. By contrast, White Hat
cites authority very much on point. In State ex rel. Yovich v. Cuyahoga Falls City
School Dist Bd. of Edn., 10th Dist. Franklin No. 91AP-1325, 1992 WL 142263,
*2 (June 23, 1992), the court held that public funds “lost their chief characteristic
of ‘public funds’ once the funds came into possession and control of * * * a
private entity.” The funds here, like those in Yovich, were initially public, but
were used by a public entity to pay a private entity for services rendered to a
school, and the private entity used those funds to pay the persons actually
rendering the service. And like the funds in Yovich, the funds in this case were
spent by a private corporation “whose funds were not controlled or held by” the
public entity. Id. The court in Yovich then “reject[ed] the contention that [the
provider of the service] was paid with public funds.” Id. Hope Academy offers
nothing persuasive in support of a different result.
{¶ 63} The majority invokes Cordray v. Internatl. Preparatory School,
128 Ohio St. 3d 50, 2010-Ohio-6136, 941 N.E.2d 1170, ¶ 25, to claim that White
Hat was receiving public funds from Hope Academy “under color of office.”
Therefore, according to the majority, the buy-back provision of the contract “does
not seem supportable,” although it was “an agreed-upon term.” However, as
recited above, Hope Academy has its own fiscal officers, and White Hat and
Hope Academy agreed that White Hat is an independent contractor. Nor, as I
discuss under the next proposition of law, does White Hat fit the legal definition
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January Term, 2015
of “agent” for such schools. Therefore, White Hat cannot be receiving public
funds “under color of office” in any way that would put the legitimacy of the
contract into question.
{¶ 64} Notwithstanding my concerns about the majority’s analysis of the
first proposition of law, I concur in its ultimate holding that the parties
legitimately agreed that White Hat would own all property that it purchased with
the money that Hope Academy provided as the continuing fee. As the majority
concludes, the contract is enforceable.
Proposition of Law II
{¶ 65} The majority does not address Hope Academy’s second proposition
of law, but it is central to a full analysis of whether Cordray is relevant.
Therefore, it should be addressed. Proposition of law II reads as follows:
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.
{¶ 66} I note first that this proposition applies only to property that White
Hat bought with the continuing fee. White Hat essentially concedes that it
operated as a purchasing agent when it used grant money to purchase property
that had to be titled in the schools’ name.
{¶ 67} I begin with long-standing tenets of principal-agency law. First, a
principal-agency relationship is created by agreement:
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(1) Agency is the fiduciary relation which results from the
manifestation of consent by one person to another that the other
shall act on his behalf and subject to his control, and consent by the
other so to act.
(2) The one for whom action is to be taken is the principal.
(3) The one who is to act is the agent.
Restatement of the Law 2d, Agency, Section 1 (1958). However, the parties
agreed in their contract that White Hat was an independent contractor. An
“independent contractor” is defined as follows:
An independent contractor is a person who contracts with
another to do something for him but who is not controlled by the
other nor subject to the other's right to control with respect to his
physical conduct in the performance of the undertaking. He may or
may not be an agent.
(Emphasis added.) Restatement of Agency, Section 2(3). See also Soberay
Mach. & Equip. Co. v. MRF Ltd., Inc., 181 F.3d 759, 767 (6th Cir.1999) (“[u]nder
the Restatement (Second) of Agency, which Ohio has adopted, an independent
contractor may also be an agent”).
{¶ 68} To determine whether White Hat, an independent contractor, is also
an agent, we must apply the test of Councell v. Douglas, 163 Ohio St. 292, 126
N.E.2d 597 (1955), paragraph one of the syllabus:
The relationship of principal and agent or master and
servant is distinguished from the relationship of employer and
independent contractor by the following test: Did the employer
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January Term, 2015
retain control of, or the right to control, the mode and manner of
doing the work contracted for? If he did, the relationship is that of
principal and agent or master and servant. If he did not but is
interested merely in the ultimate result to be accomplished, the
relationship is that of employer and independent contractor.
{¶ 69} Review of the contract clearly shows that the governing boards
conferred on the White Hat companies “all functions” relating to management of
the schools, leaving the governing boards no control over management. The
motive was to implement Hope Academy’s educational model. However, as
stated above, Hope Academy wanted no responsibility for or control over the
implementation. It contracted, “to the extent permitted by law, * * * all functions
relating to the provision of the HOPE Academy Educational Model and the
management and operation of the School” except for fiscal matters. This
language, as well as the rest of the contract, reveals that White Hat was retained to
implement Hope Academy’s educational approach as it saw fit. Hope Academy’s
interest was the “ultimate result to be accomplished,” i.e., properly educating
children, while subcontracting control to White Hat. Under Ohio law, then, White
Hat is an independent contractor and not an agent of the governing boards.
Proposition of Law III
{¶ 70} Proposition of law III reads as follows:
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.
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{¶ 71} All contracts contain an implied duty of good faith. Ed Schory &
Sons, Inc. v. Soc. Natl. Bank, 75 Ohio St. 3d 433, 443, 662 N.E.2d 1074 (1996).
However, “[a] ‘fiduciary relationship’ is one in which special confidence and trust
is reposed in the integrity and fidelity of another and there is a resulting position
of superiority or influence, acquired by virtue of this special trust.” In re
Termination of Emp. of Pratt, 40 Ohio St. 2d 107, 115, 321 N.E.2d 603 (1974).
{¶ 72} First, I emphatically disagree with the majority’s assertion that a
fiduciary duty exists between the parties here. Paragraphs two and three of the
syllabus are especially confusing because they are wholly dicta, with no identified
relevance to this case and therefore with uncertain application in the future. I
would note that the majority’s rationale actually suggests that it is Hope Academy
who violated its fiduciary duty to the citizens of Ohio by foolishly subcontracting
its educational duties to White Hat.
{¶ 73} The black-letter law on fiduciary relationships also contradicts the
third proposition of law. First, fiduciary relationships are established by
agreement. The agreement here identified White Hat as an independent
contractor. “Under Ohio law, there is generally no fiduciary relationship between
an independent contractor and his employer unless both parties understand that
the relationship is one of special trust and confidence.” Schulman v. Wolske &
Blue Co., L.P.A., 125 Ohio App. 3d 365, 372, 708 N.E.2d 753 (10th Dist.1998).
No evidence exists here that a special relationship was understood, and the
parties’ written agreement demonstrates otherwise.
{¶ 74} Furthermore, a fiduciary relationship cannot be created by the
principal alone. “A fiduciary relationship need not be created by contract; it may
arise out of an informal relationship where both parties understand that a special
trust or confidence has been reposed.” (Emphasis added.) Stone v. Davis, 66
Ohio St. 2d 74, 78, 419 N.E.2d 1094 (1981). Hope Academy does not identify any
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January Term, 2015
agreement that a fiduciary relationship was established either in the written
contract or by mutual understanding, and neither does the majority.
{¶ 75} Finally, Renaissance Academy for Math & Science of Missouri,
Inc. v. Imagine Schools, Inc., W.D.Mo. No. 4:13-CV-00645-NKL, 2014 WL
7267033 (Dec. 18, 2014), does not support the majority’s theory. In Renaissance,
a judge determined, after a week-long trial, that under the extremely unusual facts
of that case, the charter-school management company had had a fiduciary
relationship with the charter school. To reach this conclusion, the judge applied
the five-factor test under Missouri law for fiduciary relationships. The first factor
requires showing one dominant and one subservient mind “as a result of age, state
of health, illiteracy, mental disability, or ignorance.” Id. at *1.
{¶ 76} The evidence before the judge showed that the members of the
governing board were “not qualified to run a charter school,” that they were
“weak and confused,” and that in fact, the management company had recruited
those very board members because they were weak and pliable rather than
independent and dominant. Id. at *2. The management company obstructed the
board’s access to the information it needed, pressured and manipulated the board
members, and exerted such complete control over the board such that there was a
“surrender of independence” by the board. Id. at *3. The judgment was not
appealed. Renaissance does not stand for the assertion that operators are always
fiduciaries, and no one is claiming that Hope Academy is weak, incompetent, or
submissive to White Hat to the point of surrender.
{¶ 77} For the above reasons, I respectfully concur in the majority opinion
only to the extent that it affirms the judgment of the court of appeals.
FRENCH, J., concurs in the foregoing opinion.
_________________
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O’NEILL, J., concurring in syllabus and dissenting from opinion and
judgment.
{¶ 78} I concur that a management company has a fiduciary relationship
with a community school when it undertakes the daily operation of a community
school. However, I dissent from the decision to uphold the contract, as it violates
public policy and is unenforceable as a matter of law.
{¶ 79} Simply stated, defendant White Hat Management, L.L.C.,
voluntarily signed a contract that bound it as a fiduciary to two distinct entities:
the taxpayers of the state of Ohio and the parents of the children who attend the
community schools operated by White Hat. By contract, White Hat promised to
safeguard and effectively utilize $90 million of public funds that were specifically
set aside to educate the children of Ohio. And by contract, White Hat promised
the children of Hope Academy that it, White Hat, would fulfill its fiduciary duty
by providing a quality education for the sum of $90 million. The only part of that
contract that was fulfilled was that White Hat thoroughly and efficiently received
the $90 million. There has been no quality education, there has been no
safeguarding of public funds, and there most certainly has been no benefit to the
children.
{¶ 80} It is presumed that there are good community schools. These
White Hat schools are not in that category. The record is clear: White Hat
provides substandard service for outrageous fees in the name of profit. The
schools in this case received more than $90 million in public money from 2007 to
2010. And their performance level as attested to by the state was consistently
poor. Indeed, only two of the ten schools performed satisfactorily under state
standards during that time frame.
{¶ 81} Against this backdrop of failed promises and termination for failure
to deliver, a majority of this court intends to reward White Hat with the
termination bonus that White Hat arranged for itself in the contract. Neither
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January Term, 2015
public policy nor contract law can ever be stretched far enough to reach that
preordained result.
{¶ 82} As the opinion correctly concludes, the relationship between White
Hat and the schools has the legal hallmarks of a fiduciary relationship. “ ‘A
“fiduciary relationship” is one in which special confidence and trust is reposed in
the integrity and fidelity of another and there is a resulting position of superiority
or influence, acquired by virtue of this special trust.’ ” Stone v. Davis, 66 Ohio
St.2d 74, 79, 419 N.E.2d 1094 (1981), quoting In re Termination of Emp. of Pratt,
40 Ohio St. 2d 107, 115, 321 N.E.2d 603 (1974). As stated in the opinion, “White
Hat agreed to act on behalf of the schools to help them carry out their purpose as
outlined in R.C. Chapter 3314. White Hat’s purpose, reflected in the contracts,
was to advance the schools’ interests.” Opinion at ¶ 45. White Hat was
responsible for the day-to-day operation of the schools. Under the contract, White
Hat was responsible for providing the training and curriculum, hiring and firing
staff, purchasing the equipment, and maintaining academic standards.
{¶ 83} Under what circumstances would it be permissible for a fiduciary
to convert the assets of its principal to its own use? None. Under what
circumstances would it be permissible to allow a trustee to award the corpus of
the trust to itself? None. Yet the opinion concludes that “[w]hile it appears that a
fiduciary relationship was created by the conduct of the parties, we cannot say
whether a fiduciary duty was breached based on the record before us.” Opinion at
¶ 46. And then, feigning powerlessness, the opinion rewards White Hat with the
spoils not of its victory, but of its failure, all under the guise of contract law. This
is not an enforceable contract. It is a fraudulent conversion of public funds into
personal profit. That is not the relationship that was bargained for, and it is not
one that this court can magically create to protect the profits of White Hat.
{¶ 84} Under the contract, the schools were required to turn over nearly 96
percent of public funds they received from the state to White Hat. It is to be
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remembered that if that same amount of money had gone to a traditional public
school rather than a community school, it would be inconceivable to suggest that
anyone would be entitled to walk away with everything purchased using those
public funds. And let’s be clear here. If this contract did not exist, these public
funds would remain in the public-school system, which would have then been
required to have their performance monitored by the state and evaluated on an
annual basis.
{¶ 85} It is irrelevant how White Hat chooses to characterize the funds
received. The fact is that the money financing community schools—whether
general revenue funds or grant funds—qualifies as public money under the
definition in R.C. 117.01(C). This public money was used to purchase public
property to educate children. The public money used to purchase the school
equipment did not magically become private money simply because it was
disbursed by White Hat. Indeed because White Hat was a duly authorized
representative of the schools, it was acting as a public official. See Cordray v.
Internatl. Preparatory School, 128 Ohio St. 3d 50, 2010-Ohio-6136, 941 N.E.2d
1170, at ¶ 12, quoting Crane Twp. ex rel. Salter v. Secoy, 103 Ohio St. 258, 259-
260, 132 N.E. 851 (1921). Regardless of what the contract says, whether it is
ambiguous or foolishly entered into, the only way to interpret this contract to
permit White Hat to keep public-school property as its own is to essentially
disregard the law of Ohio.
{¶ 86} The opinion is absolutely correct. This contract does indeed permit
an operator who is providing a substandard education to squander public money
and then, upon termination for poor performance, reap a bonus, paid for by public
money. And that is why this contract is unenforceable as a matter of public policy
and contract law.
{¶ 87} The Ohio General Assembly has unequivocally stated that public
money means any money received or collected by or on behalf of a public office
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January Term, 2015
or representative of a public office. R.C. 117.01(C). The Ohio General Assembly
has also unequivocally stated that community schools are public schools. R.C.
3314.01(B). And this court has held that a duly authorized representative of a
community school is a public official and may be held strictly liable to the state
for the loss of public funds. Cordray at ¶ 1. And this court has held that public
property and public money in the hands of or under the control of public officials
constitute a trust fund, for which the official as a trustee should be held
responsible to the same degree as the trustee of a private trust. Crane Twp. at
259-260. It simply cannot be disputed that White Hat has voluntarily become a
public entity distributing public funds on behalf of the taxpayers of Ohio. It is
axiomatic that one who becomes a steward of public funds also becomes the
guardian of those same funds. Certainly the majority would not countenance the
prospect of $90 million being placed in front of a fan on the ledge of an open
window. While from an educational standpoint the result would be the same, the
waste of public funds in any instance cannot be woven into the fabric of Ohio
public policy. Finally, this court has held that contracts that bring about results
that the law seeks to prevent are unenforceable as being against public policy.
Cincinnati City School Dist. Bd. of Edn. v. Conners, 132 Ohio St. 3d 468, 2012-
Ohio-2247, 974 N.E.2d 78, ¶ 17. This has been the law of Ohio until today. Until
now, the public interest was not something that could be subverted or contracted
away. In refusing to apply the law in this case, the opinion invalidates an
extensive body of law designed to safeguard the public purse and the public
interest. The failure of White Hat to properly educate these children is an outrage.
Today’s opinion adds insult to that injury.
{¶ 88} In all the pages of the record in this case, it remains unclear how
much of the public property of the failed schools that White Hat believes it owns.
Under the law it owns none. It is unfortunate, in the truest sense of the word, that
these schools contracted with such a poor steward of our precious resources—our
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children and our tax dollars.7 For that choice, the state has already paid dearly
once. Refusing to uphold the buy-back provision of this contract is neither
judicial activism nor rewriting the parties’ contract in order to provide a more
equitable result. Rather, it is the application of existing statutes and Supreme
Court of Ohio case law to prevent theft of public property. While freedom to
contract is “as fundamental to our society as the right to write and speak without
restraint,” it is not unlimited. Nottingdale Homeowners’ Assn., Inc. v. Darby, 33
Ohio St. 3d 32, 36, 514 N.E.2d 702 (1987), citing Blount v. Smith, 12 Ohio St. 2d
41, 47, 231 N.E.2d 301 (1967). The state may interfere with this right, but only in
“exceptional cases where intrusion is absolutely necessary, such as promoting
illegal acts.” Id. I reject the opinion’s statement that the schools are seeking to
rewrite the terms of the contract simply because they now seem unfair. This
contract provision was illegal and unenforceable ab initio, and it is this court’s
constitutional obligation to put an end to this tragic legal fiction.
{¶ 89} I would hold that a contract that vests title to public property
purchased with public funds in a private entity violates public policy and is
unenforceable as a matter of law. To do anything else rewards failure and
encourages its repetition in the future in the name of profit. I dissent.
_________________
PFEIFER, J., dissenting.
{¶ 90} Charter schools are a noble idea. In theory, they rescue children
from broken urban school districts and educate them in smaller settings, similar to
7
The Akron Beacon Journal recently reported that since 2001, state auditors have uncovered $27.3
million in state tax dollars that have been improperly spent by charter schools, many run by for-
profit companies. And these same schools have produced academic results “that rival the worst in
the nation.” Livingston, Charter Schools Misspend Millions of Ohio Tax Dollars as Efforts to
Police Them are Privatized, Akron Beacon Journal (May 30, 2015, updated June 3, 2015),
available at http://www.ohio.com/news/local/charter-schools-misspend-millions-of-ohio-tax-
dollars-as-efforts-to-police-them-are-privatized-1.596318.
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January Term, 2015
private schools, where families can have direct ownership in their child's
education. Unfortunately, the consensus is that the theory has miserably failed to
meet the expectations, whether because of flawed legislation, ineffective
management, structural defects in the for-profit school model, unmotivated
students, or any number of other plausible reasons.
{¶ 91} This case could be little more than an academic exercise because
one can only assume that much of the furniture, computers, and other educational
and instructional materials at issue are now obsolete, untraceable, lost, or
converted to other uses. Even so, the opinion is wrong on the merits. The key
contract language is not nearly so dispositive as the opinion suggests. The
contract states, among other things, that “the Company shall purchase on behalf of
the School any furniture, computers, software, equipment, and other personal
property which, by the nature of the funding source, must be titled in the School’s
name.”
{¶ 92} The opinion has chosen to read this sentence in a way that supports
the position of the companies. But that reading is not required by the language.
The opinion reads the sentence such that the only items that must be titled in the
school’s name are those items that are required to be so titled by the funding
source. That reading of the sentence is overly restrictive, ignores the fact that the
companies had a fiduciary responsibility to the schools, and does not promote the
intention of the parties, or in any event, not the intention of the schools.
{¶ 93} A better reading of this key sentence subordinates the significance
of “by the nature of the funding source.” This is not a restrictive term; it is more
in the nature of an aside. With this understanding, the sentence essentially states
that assets purchased on behalf of the school must be titled in the school’s name
because of the nature of the funding source.
{¶ 94} Moreover, the contracts in this case are plainly and obviously
unconscionable. In effect, the contracts call for the public to give money to a
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SUPREME COURT OF OHIO
company to buy materials for the company to use on the public’s behalf to operate
a public school. The contracts require that after the public pays to buy those
materials for a public use, the public must then pay the companies if it wants to
retain ownership of the materials. This contract term is not merely unwise as the
opinion would have us believe; it is extremely unfair, so unfair, in fact, as to be
unconscionable. Black’s Law Dictionary 1757 (10th Ed.2014). The contract
term is so one-sided that we should refuse to enforce it.
{¶ 95} Methinks the opinion doth protest too much, going out of its way to
support the insupportable. To all but those of an unduly legalistic bent, the
conclusion reached by the opinion is antithetical to common sense.
_________________
Dinsmore & Shohl, L.L.P., Karen S. Hockstad, and Gregory P. Mathews;
and Shumaker, Loop & Kendrick, L.L.P., James D. Colner, and Adam M. Galat,
for appellants.
Barnes & Thornburg, L.L.P., C. David Paragas, Kevin R. McDermott, and
Amy Ruth Ita, for appellees.
Ulmer & Berne, L.L.P., and Donald J. Mooney Jr., urging reversal for
amicus curiae Ohio School Boards Association.
Benesch, Friedlander, Coplan & Aronoff, L.L.P., Martha J. Sweterlitsch,
and Katherine Frech, urging affirmance for amici curiae LeadingAge Ohio, Ohio
Association of Community Action Agencies, Ohio Association of Nonprofit
Organizations, and Ohio Community Corrections Association.
Day Ketterer Ltd., Robert J. McBride, Maria L. Markakis, and Kristen S.
Moore, urging affirmance for amicus curiae Summit Academy Management,
L.L.C.
Jones Day, Chad A. Readler, and Kenneth M. Grose, urging affirmance
for amicus curiae Ohio Coalition for Quality Education.
_________________
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