Alternatives Unlimited-Special, Inc. v. Ohio Dept. of Edn.

[Cite as Alternatives Unlimited-Special, Inc. v. Ohio Dept. of Edn., 2012-Ohio-6310.]
Court of Claims of Ohio
The Ohio Judicial Center
65 South Front Street, Third Floor
Columbus, OH 43215
614.387.9800 or 1.800.824.8263
www.cco.state.oh.us
ALTERNATIVES UNLIMITED-SPECIAL, INC., et al.
Plaintiffs
v.
OHIO DEPARTMENT OF EDUCATION
Defendant
Case No. 2009-03410
Judge Joseph T. Clark
DECISION
{¶ 1} On February 7, 2011, the court rendered judgment in favor of plaintiffs,
Alternatives Unlimited-Special, Inc. (individually AU-Special), and Alternatives
Unlimited, Inc. (individually AU, Inc.) (collectively referred to as plaintiffs), on their
breach of contract claim.1 The case proceeded to trial on the issue of damages.2
{¶ 2} Plaintiffs’ claims arise from a contract that was executed by the parties in
1999. In this case, plaintiffs have re-filed claims that were originally filed in Case No.
2002-04682. On December 9, 2008, the Tenth District Court of Appeals issued a
decision in Case No. 2002-04682 affirming the May 2, 2008 judgment of this court
which granted partial summary judgment to defendant-appellee, Ohio Department of
Education (ODE). In its decision, the court of appeals summarized the procedural
history of the case as follows:
1
Judgment was granted in favor of defendant on plaintiffs’ claims for unjust enrichment and
promissory estoppel.
2
Plaintiffs’ April 26, 2012 motion to file a long brief is GRANTED. Defendant’s May 4, 2012
motion to strike portions of plaintiffs’ post-trial brief is DENIED.
{¶ 3} “On May 7, 2002, appellants filed suit against ODE in the Court of Claims,
asserting two causes of action for breach of contract, which included claims for
promissory estoppel and unjust enrichment. Appellants generally sought declaratory
judgment and monetary damages for ODE’s failure to pay for all of the students actually
enrolled and taught at [the Cleveland Alternatives Learning Academy] CALA, as well as
the alleged invalid, unilateral rescission of the contract. ODE countered that it owed no
obligation to provide funding for students improperly enrolled in grades two, seven, and
eight, and that certain individuals associated with appellants were entitled to rescind the
contract as the governing authority. ODE also asserted that appellants lacked standing
to bring suit on the contract.
{¶ 4} “The issues of liability and damages were bifurcated, and the case
eventually proceeded to trial regarding liability only on July 12, 2004. On September
15, 2005, the trial court issued its judgment in favor of ODE, concluding that neither AU-
Special nor AU, Inc. was a party to the contract as the governing authority for CALA,
and, thus, they lacked standing to pursue their claims for breach of contract. Appellants
appealed, and in Alternatives Unlimited-Special, Inc. v. Ohio Dep’t of Educ., 168 Ohio
App. 3d 592, 2006 Ohio 4779, 861 N.E.2d 163 (‘Alternatives I’), this court reversed the
judgment of the trial court, finding ODE was estopped from denying appellants’ standing
based upon an unrelated case in another appellate jurisdiction, in which the state and
appellants agreed that appellants were the ‘governing authority’ for CALA, and, thus,
were the proper party in the present case. This court remanded the matter to the Court
of Claims.
{¶ 5} “Upon remand, prior to trial, ODE moved for partial summary judgment,
arguing that the contract between the parties was never modified to include funding for
grades two, seven, and eight. After an oral hearing on ODE’s motion for partial
summary judgment, at which appellants did not appear, the trial court granted ODE’s
motion. On April 23, 2008, appellants moved to amend their complaint to dismiss
without prejudice all remaining claims not related to the funding for grades two, seven,
and eight. On May 2, 2008, the trial court entered judgment for ODE.” Alternatives
Unlimited-Special, Inc. v. Ohio Dep’t of Educ., 10th Dist. No. 08AP-396, 2008-Ohio-
6427 (Alternatives II), ¶ 4-6.
{¶ 6} In this case, plaintiffs are asserting the same claims regarding grades three
through six that were asserted in Case No. 2002-04682, but were later dismissed with
the filing of an amended complaint pursuant to Civ.R. 15(A). Counts 1 through 3 of the
complaint in this case are identical to the first three counts in the complaint filed in Case
No. 2002-04682.3
{¶ 7} The parties executed a five-year contract for the term September 1, 1999 to
June 30, 2004, which authorized plaintiffs to operate the school for students in grades
three through six. Pursuant to the contract, plaintiffs received funding for the 1999-2000
and 2000-2001 school years. However, on August 24, 2001, before CALA was
reopened for its third year of operation, defendant sent a letter stating, “[p]lease be
advised the community school known as the Cleveland Alternatives Learning Academy
no longer has the authority to operate as a community school pursuant to Chapter 3314
of the Ohio Revised Code. The governing authority members of the school, Elijah Scott
and David Smith, rescinded the contract with the Sponsor, State Board of Education,
effective August 1, 2001.”4 (Plaintiffs’ Exhibit 2.)
{¶ 8} In the liability decision, the court determined that “[d]efendant had the
authority to terminate the contract with plaintiffs prior to its expiration for any of the
reasons listed in R.C. 3314.07(B)(1). However, defendant was required to notify CALA
of the proposed termination in writing at least 90 days prior thereto. As stated above,
defendant failed to provide any written notice of termination prior to the August 24, 2001
letter which purported to rescind the contract. Thus, defendant committed a breach of
the contract by failing to provide plaintiffs with either the required statutory or contractual
notice of termination.” (Liability decision, page 8.)
{¶ 9} “[I]n an action for breach of contract, the plaintiff has the burden of proving
four elements: (1) the existence of a contract; (2) performance by the plaintiff; (3)
3
On March 5, 2010, the Tenth District Court of Appeals issued a decision finding that plaintiffs’
claims regarding grades three through six were timely filed pursuant to the savings statute, R.C.
2305.19(A).
4
Plaintiffs contended that the purported recision was invalid inasmuch as Scott and Smith were
not the governing authority of CALA. The Tenth District Court of Appeals subsequently determined that
defendant was collaterally estopped from denying that AU was the governing authority of CALA inasmuch
as the state had previously taken that position during litigation in a court of competent jurisdiction.
Alternatives I, at ¶ 51.
breach by the defendant; and (4) damage or loss to the plaintiff.” Alternatives II, at ¶ 12,
citing Jarupan v. Hanna, 173 Ohio App.3d 284, 2007-Ohio-5081.
{¶ 10} With regard to performance, there is no dispute that plaintiffs operated
CALA for the first two academic years of the five-year contract period, 1999-2000 and
2000-2001, and that plaintiffs presented evidence that CALA opened in the fall of 2001.
However, the parties disagree as to what compensation is owed to plaintiffs for
operating CALA during the period of time that CALA was in operation under the
contract.
CONTRACT PERIOD
{¶ 11} R.C. 3314.07 provides limitations regarding the expiration, termination, or
nonrenewal of a contract establishing a community school as follows:
{¶ 12} “(A) The expiration of the contract for a community school between a
sponsor and a school shall be the date provided in the contract. A successor contract
may be entered into pursuant to division (E) of section 3314.03 of the Revised Code
unless the contract is terminated or not renewed * * *.
{¶ 13} “(B)(1) A sponsor may choose not to renew a contract at its expiration or
may choose to terminate a contract prior to its expiration for any of the following
reasons:
{¶ 14} “(a) Failure to meet student performance requirements stated in the
contract;
{¶ 15} “(b) Failure to meet generally accepted standards of fiscal management;
{¶ 16} “(c) Violation of any provision of the contract or applicable state or federal
law;
{¶ 17} “(d) Other good cause.
{¶ 18} “(2) A sponsor may choose to terminate a contract prior to its expiration if
the sponsor has suspended the operation of the contract under section 3314.072
[3314.07.2] of the Revised Code.
{¶ 19} “(3) At least ninety days prior to the termination or nonrenewal of a
contract, the sponsor shall notify the school of the proposed action in writing. The
notice shall include the reasons for the proposed action in detail, the effective date of
the termination or nonrenewal, and a statement that the school may, within fourteen
days of receiving the notice, request an informal hearing before the sponsor. Such
request must be in writing. The informal hearing shall be held within seventy days of the
receipt of a request for the hearing. Promptly following the informal hearing, the sponsor
shall issue a written decision either affirming or rescinding the decision to terminate or
not renew the contract.
{¶ 20} “(4) A decision by the sponsor to terminate a contract may be appealed to
the state board of education. The decision by the state board pertaining to an appeal
under this division is final. If the sponsor is the state board, its decision to terminate a
contract under division (B)(3) of this section shall be final.
{¶ 21} “(5) The termination of a contract under this section shall be effective upon
the occurrence of the later of the following events:
{¶ 22} “(a) Ninety days following the date the sponsor notifies the school of its
decision to terminate the contract as prescribed in division (B)(3) of this section;
{¶ 23} “(b) If an informal hearing is requested under division (B)(3) of this section
and as a result of that hearing the sponsor affirms its decision to terminate the contract,
the effective date of the termination specified in the notice issued under division (B)(3)
of this section, or if that decision is appealed to the state board under division (B)(4) of
this section and the state board affirms that decision, the date established in the
resolution of the state board affirming the sponsor’s decision.” (Emphasis added.)
{¶ 24} The evidence shows that, by August 2001, defendant had obtained
sufficient evidence to support its decision to terminate the contract. The most
convincing evidence of CALA’s operational problems was the testimony of David
Varda, defendant’s Associate Superintendent for Finance and Accountability, who
learned that CALA’s financial records were “unauditable.” Varda testified that he was
involved with the audits that were performed to determine FTE enrollment at CALA.
Daniel Schultz, Chief Deputy Auditor for the State of Ohio, stated in his November 11,
2001 report to Varda that for “more than a year” he attempted to obtain financial records
from CALA, including the use of subpoenas, but its management was uncooperative.
(Defendant’s Exhibit B.) According to Schultz, the records from AU-Special show that
the resources of CALA and another charter school in Baltimore, Maryland “were
commingled and it is highly possible that the funds which should have been spent on
[CALA] were expended on other projects outside of the State of Ohio.” Id.{¶ 25} As stated above, plaintiffs were notified that defendant intended to
terminate the contract on August 24, 2001. (Plaintiffs’ Exhibit 23.) Although defendant
failed to give plaintiffs proper written notice pursuant to R.C. 3314.07, the evidence
established that plaintiffs were aware of both the August 24, 2001 letter and defendant’s
intention to terminate the contract. Indeed Stuart Berger, a founder of both AU, Inc. and
AU-Special, testified that he understood that defendant did not intend to fund CALA for
the 2001-2002 academic year. Defendant’s Chief Legal Counsel informed Berger that
the school was not authorized to operate without a contract and that the school would
not receive funding. There is no evidence to show that plaintiffs requested a hearing
pursuant to R.C. 3314.07 to contest the attempted termination.
{¶ 26} Nevertheless, even if plaintiffs had requested a hearing and appealed the
decision pursuant to R.C. 3314.07(B)(5)(b), the termination of the contract would have
been effective upon the date on which the state board affirmed defendant’s decision.
Inasmuch as the decision of the state board of education is final pursuant to R.C.
3314.07(B)(5)(b), the evidence showed that the decision to terminate the contract would
have been upheld had plaintiffs appealed the decision. In addition to defendant’s many
concerns regarding CALA’s failure to document learning opportunities and FTE
enrollment, there is no doubt that CALA’s failure to maintain auditable financial records
was a sufficient ground to terminate the contract pursuant to R.C. 3314.07(B)(1)(b);
“Failure to meet generally accepted standards of fiscal management.” Consequently,
defendant’s obligation to fund CALA ended during the fall 2001 term and plaintiffs are
entitled to only those damages that were contemplated under the contract for the fall
2001 enrollment period.
{¶ 27} There is no dispute that payments to plaintiffs were based upon full-time
equivalent (FTE) enrollment for students in grades three through six. Funding for
community schools involves a complex formula as set forth in former R.C. 3314.08.
The Tenth District Court of Appeals has noted that soon after CALA opened, the parties
“were quickly at odds over funding for CALA. Initial funding for community schools is
based on the school’s pre-opening enrollment estimates. CALA had a predicted
enrollment of 200 students. However, the actual enrollment at CALA fell well below the
estimated figure, resulting in overpayment of funds. Consequently, ODE established a
repayment schedule and began to recoup those funds from the monthly allocation of
payments from the state throughout the 2000-2001 school year.” Alternatives I, at 598-
599.
{¶ 28} Joni Hoffman (formerly Joni Cunningham), who in 2001 was the assistant
director of defendant’s Office of School Options, testified that CALA was in “repayment”
status during much of 2001. According to Hoffman, in addition to “student based”
payments CALA also received state and federal grant funds that were paid through
defendant. Hoffman testified that CALA recevied grant funds in 2001 and that her office
attempted to assist CALA when she became aware that the school was having financial
difficulty. In a letter dated May 10, 2001, Hoffman explained that the combined state
and federal grant funds available to community schools totaled “no more than $150,000
over three years.” (Plaintiffs’ Exhibit 19.) According to Hoffman, CALA received
$50,000 in 2001 for the “first phase” of grant funding, which represented the total
amount received from state grant funds. Hoffman stated that payment of both state and
federal grant funds by defendant was discretionary and that in 2001 she became aware
of problems with CALA’s enrollment and financial records which she believed affected
the quality of education that the school provided.
{¶ 29} Barbara Garey, who was the financial officer in defendant’s department of
school finance, testified that she prepared calculations for 2001, including certain
calculations for grades 2, 7, and 8, which were not approved grades. Garey explained
that initial payments to community schools were based upon FTE estimates and that
subsequent payments were “almost always” adjusted when actual FTE enrollment
records were received. Garey testified that the records obtained from CALA for
approved grades, three through six, supported an FTE calculation for June 2001 and
defendant subsequently issued a final check in the amount of $2,241.81, which included
deductions for previous overpayments.
{¶ 30} Although Berger acknowledged that the contract provided for payments
based upon FTE enrollment, he conceded on cross-examination that CALA could not
produce such records. Berger stated that plaintiffs did not have any records
documenting FTE enrollment after June 2001 and that it would be “impossible” to
determine FTE enrollment for fall 2001. Accordingly, plaintiffs have failed to prove that
they are entitled to damages based upon FTE enrollment. Furthermore, the evidence
shows that plaintiffs received the initial phase of state and federal grant funds in 2001
and plaintiffs failed to prove that they were entitled to additional grant funds for the fall
2001 enrollment period.
{¶ 31} In contrast to the evidence presented by defendant regarding payments
based upon FTE enrollment, plaintiffs presented documents which purport to show lost
profits based upon operating expenses and revenue estimates. “Lost profits may be
recovered by the plaintiff in a breach of contract action if: (1) profits were within the
contemplation of the parties at the time the contract was made, (2) the loss of profits is
the probable result of the breach of contract, and (3) the profits are not remote and
speculative and may be shown with reasonable certainty.” Charles R. Combs
Trucking, Inc. v. Internatl. Harvester Co., 12 Ohio St. 3d 241 (1984), at paragraph two of
the syllabus.
{¶ 32} The evidence established that CALA failed to produce adequate records
for either student enrollment or finances. Inasmuch as the contract provided that
payments to plaintiffs were based upon FTE enrollment, the court finds that any lost
profits during the fall 2001 term were the direct result of CALA’s failure to maintain
accurate enrollment and financial records. Even if the court determined that the loss of
profits was the probable result of the breach of contract, plaintiffs were required to
demonstrate both the existence and the amount of lost profits with “reasonable
certainty.” AGF, Inc. v. Great Lakes Heat Treating Co., 51 Ohio St. 3d 177, 183 (1990).
Varda’s testimony that CALA’s financial records were incomplete and unauditable was
particularly persuasive. The court concludes that plaintiffs have failed to demonstrate
either the existence or amount of lost profits with reasonable certainty.
{¶ 33} Plaintiffs also contend that defendant “improperly forced” them to
reimburse the state for payments made into Ohio’s State Teachers Retirement System
(STRS) and the School Employees Retirement System (SERS). However, the Tenth
District Court of Appeals has held that this matter has already been the subject of
litigation in a court of competent jurisdiction and that there was mutuality of the parties
such that the doctrine of res judicata would apply in this case. Alternatives I, at 606. In
that case, a settlement agreement was reached among the parties as to which
employer entity was responsible for paying into STRS and SERS. Id.; Birinyi v. School
Employees Retirement System, Cuyahoga C.P.C. No. 448544 (Oct. 25, 2002).
Therefore, res judicata bars plaintiffs from relitigating the same issue in this case.
{¶ 34} Finally, plaintiffs maintain that pursuant to R.C. 3314.18, defendant failed
to reimburse CALA for school lunches that were provided to enrolled students.
Although R.C. 3314.18 pertains to participation in federal school food programs, the
statute became effective June 30, 2006, almost five years after the contract period.
Moreover, plaintiffs admit that the contract did not address school lunches.
{¶ 35} For the foregoing reasons, the court finds that plaintiffs have failed to
prove that they are entitled to damages as a result of defendant’s breach of the
contract. Judgment shall be rendered in favor of plaintiffs in the amount of $25,
representing plaintiffs’ filing fee.
Court of Claims of Ohio
The Ohio Judicial Center
65 South Front Street, Third Floor
Columbus, OH 43215
614.387.9800 or 1.800.824.8263
www.cco.state.oh.us
ALTERNATIVES UNLIMITED-SPECIAL, INC., et al.
Plaintiffs
v.
OHIO DEPARTMENT OF EDUCATION
Defendant
Case No. 2009-03410
Judge Joseph T. Clark
JUDGMENT ENTRY
{¶ 36} This case was tried to the court on the issue of plaintiffs’ damages. The
court has considered the evidence and, for the reasons set forth in the decision filed
concurrently herewith, judgment is rendered in favor of plaintiffs in the amount of $25
which represents the filing fee paid by plaintiffs. Court costs are assessed against
defendant. The clerk shall serve upon all parties notice of this judgment and its date of
entry upon the journal.
_____________________________________
JOSEPH T. CLARK
Judge
cc:
Christopher P. Conomy Edward D. Hayman
Assistant Attorney General 28499 Orange Meadow Lane
150 East Gay Street, 18th Floor Orange Village, Ohio 44022
Columbus, Ohio 43215-3130
Jared S. Livingston
Michael Sanchez
1406 California Street
Houston, Texas 77006
004
Filed July 2, 2012
To S.C. Reporter January 16, 2013