HOPE ACADEMY BROADWAY CAMPUS ET AL., APPELLANTS, v. WHITE HAT MANAGEMENT, L.L.C., ET AL., APPELLEES.
No. 2013-2050
Supreme Court of Ohio
Submitted September 23, 2014—Decided September 15, 2015.
145 Ohio St.3d 29, 2015-Ohio-3716
{¶ 119} For these same reasons, I also strenuously dissent from the majority‘s determination that the warrant was not executed in good faith. The affidavit in support of the warrant stated that a 24-year-old man had sent several text messages admitting his involvement in the egging of vehicles belonging to David Maistros and that during a conversation with a confidential informant he had stated that he had found Maistros‘s address online. A reasonable officer would have no reason to question the validity of the search warrant.
{¶ 120} I respectfully dissent.
O‘CONNOR, C.J., and FRENCH, J., concur in the foregoing opinion.
Sherri Bevan Walsh, Summit County Prosecuting Attorney, and Heaven DiMartino, Assistant Prosecuting Attorney, for appellee.
Russell S. Bensing, for appellant.
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 (collectively, “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
{¶ 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
{¶ 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
{¶ 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 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 a 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
{¶ 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 allegedly 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.
{¶ 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
{¶ 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, 4 N.E.3d 1087, ¶ 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.
{¶ 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-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
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
{¶ 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
Sponsors
{¶ 17} The community school operates under a contract with a “sponsor” that monitors the school‘s performance according to state laws and regulations.
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.
Operators
{¶ 19} A community school may contract “for any services necessary for the operation of the school.”
{¶ 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.
{¶ 21} But although the statutes define what an operator is,
{¶ 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 remained 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.
{¶ 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:
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
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.
(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
{¶ 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 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.
{¶ 32} Community schools are public schools.
{¶ 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 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 exclusively 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
{¶ 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 that 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 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 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
{¶ 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 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.
{¶ 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
{¶ 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 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
{¶ 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
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
{¶ 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, J., 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
{¶ 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 lead 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 lead opinion 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 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
{¶ 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
{¶ 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 lead opinion 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.” Opinion, ¶ 21. 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.
{¶ 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
{¶ 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 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. 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 lead opinion 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 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
{¶ 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
{¶ 63} The lead opinion 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.” Opinion at ¶ 34. 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 of “agent” for the 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 lead opinion‘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 lead opinion concludes, the contract is enforceable.
Proposition of Law II
{¶ 65} The lead opinion 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.
{¶ 67} I begin with longstanding tenets of principal-agency law. First, a principal-agency relationship is created by agreement:
(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 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.
{¶ 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 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 lead opinion‘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.
{¶ 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 agreement that a fiduciary relationship was established either in the written contract or by mutual understanding, and neither does the lead opinion.
{¶ 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 lead opinion‘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 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 lead opinion only to the extent that it affirms the judgment of the court of appeals.
FRENCH, J., concurs in the foregoing opinion.
{¶ 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 public policy nor contract law can ever be stretched far enough to reach that preordained result.
{¶ 82} As the lead 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
{¶ 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 lead 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.” Lead 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 the public funds that they received from the state to White Hat. It is to be 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 its 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
{¶ 86} The lead opinion is absolutely correct. This contract does indeed permit an operator who is providing a substandard education to squander public money
{¶ 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 or representative of a public office.
{¶ 88} In all the pages of the record in this case, it remains unclear how much of the public property of the failed schools 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 children and our tax dollars.7 For that choice, the state has already paid dearly
{¶ 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.
at http://www.ohio.com/news/local/charter-schools-misspend-millions-of-ohio-tax-dollars-as-efforts-to-police-them-are-privatized-1.596318.
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 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 lead 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.”
{¶ 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 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 lead 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 lead 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.
Jones Day, Chad A. Readler, and Kenneth M. Grose, urging affirmance for amicus curiae Ohio Coalition for Quality Education.