Hope Academy v. White Hat Mgt., L.L.C.Hope Academy v. White Hat Mgt., L.L.C.
On brief: Barnes & Thornburg, LLP, C. David Paragas, Jeanine Kerridge, William R. Martin, and Paul N. Garinger, for defendant-appellee White Hat Management, LLC. Argued: Jeanine Kerridge.
On brief: Dave Yost, Attorney General, and Todd R. Marti, for appellant. Argued: Todd R. Marti.
APPEAL from the Franklin County Court of Common Pleas
D E C I S I O N
BEATTY BLUNT, J.
{¶ 1} Defendant-appellant, the Ohio Department of Education (“ODE“), appeals from the March 19, 2020 decision of the Franklin County Court of Common Pleas granting the motion of plaintiffs-appellees Hope Academy Broadway Campus, et al. (collectively
I. Facts and Procedural History
{¶ 2} This dispute arises out of ongoing litigation initiated by the governing boards of ten Cleveland community schools (collectively, the “Schools“) in 2010. Defendants-appellees are private for-profit companies White Hat Management, LLC, and WHLS of Ohio, LLC along with ten subsidiary companies that operated and managed the Schools pursuant to contracts with each of the ten community schools. (See Hope Academy Broadway Campus v. White Hat Mgmt., LLC, 145 Ohio St.3d 29, 2015-Ohio-3716, ¶ 1) (Hope Academy). In Hope Academy, the Supreme Court of Ohio succinctly set forth the background of the litigation as follows:
As permitted by statute, see
R.C. 3314.03 , the governing authority of each school entered into an individual management agreement (collectively, “the contracts“) in November 2005 with one of the ten named education management organizations owned by White Hat. Each contract was substantially identical.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.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. 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 used part of the continuing fee to purchase personal property for use in the schools, it improperly titled that property in its own name.
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.
Hope Academy, 2015-Ohio-3716, at ¶ 3-7.
{¶ 3} The State Board of Education, i.e., ODE, was also named as a defendant in the original complaint. Hope Academy at ¶ 1. ODE asserted counterclaims against the Schools consisting of a claim for the return of federal grant funds disbursed in violation of grant terms (the “Grant Claim“), and a separate claim seeking return of both federal grant funds and state funds disbursed in violation of the Schools’ fiduciary duties (the “Trust Claim“). ODE also filed the same claims against White Hat via cross-claims. (See Jul. 6, 2010 Answer, Counter, & Cross-Cl.)
{¶ 5} Upon remand, the litigation continued. With leave of the trial court,1 ODE filed amended and supplemental cross and counterclaims wherein it reasserted its Grant and Trust claims. See Apr. 25, 2016 ODE‘s Am. & Supp. Cross & CounterCl. In their reply to the reasserted and supplemented counterclaims, the Schools asserted as one of its affirmative defenses that ODE lacked standing to bring the claims. (See May 3, 2016, Pls.’ Reply to Def. ODE‘s Am. & Supp. Cross & CounterCl. & Cross-Cl. against The White Hat Defs.) Discovery, including multiple depositions, continued for well over two more years.
{¶ 6} Eventually, the parties engaged in dispositive motion practice.2 Specifically, the Schools filed a motion for summary judgment on ODE‘s counterclaims on February 15, 2019; White Hat filed a motion for summary judgment on ODE‘s cross-claims on April 19, 20193; and ODE filed a motion for partial summary judgment on April 18, 2019.
{¶ 7} On March 19, 2020, the trial court issued several decisions providing rulings on the foregoing motions. The first of these was a combined decision and entry granting
The Court finds that the 2016 Amended and Supplemental Counterclaim is the operative pleading because it replaced the original Counterclaim filed in 2010. The parties agree that by the time ODE filed its Counterclaim in 2016, it no longer had the right to retain any recovered grant funds. Moreover, because Plaintiffs raised a standing defense in their Answer to the 2016 Amended and Supplemental Counterclaim, the Court finds that they did not waive the defense.
Upon review, the Court finds that DOE [sic] is no longer the real party in interest and lacks standing to assert the grant claims against Plaintiffs because it has [sic] no longer has the right to retain any recovered grant funds. Moreover, evidence in the record demonstrates that OSDOE has not sought the return of the grant funds even though the funds sought are from fiscal years 2006-2013. The Court further finds that none of the joinder exceptions in
Civ.R. 17(A) apply here.ODE had a reasonable opportunity to seek ratification, joinder, or substitution of USDOE following the filing of Plaintiffs’ Motion for Summary Judgment. However, ODE has failed to so join or substitute USDOE. Accordingly, the Court finds that Plaintiff‘s [sic] Motion for Summary Judgment is well-taken, and is hereby GRANTED.
Accordingly, as the Court finds that ODE lacks standing to proceed against Plaintiffs, the Court also finds that ODE‘s Motion for Partial Summary Judgment as to its Fifth Claim for Violation of Grant Conditions/Public Official Liability under
R.C. 9.39 is not well-taken, and is hereby DENIED.
(Emphasis in original.) (Mar. 19, 2020 Decision & Entry I at 5.)
{¶ 8} The second decision issued on March 19, 2020, was a combined decision and entry granting defendants’ motion to dismiss ODE‘s cross-claims, decision and entry
[f]or similar reasons, the Court finds that ODE is not the real party in interest and lacks standing to assert its Crossclaims against the White Hat Defendants. Accordingly, the White Hat Defendants’ Motion to Dismiss and Motion for Summary Judgment are GRANTED. ODE‘s Motion for Partial Summary Judgment is DENIED.
(Emphasis in original.) (Mar. 19, 2020 Decision & Entry II at 1-2.)
{¶ 9} Subsequently, at a status conference conducted by the trial court on April 1, 2020, the parties sought clarification of the March 19, 2020 decision and entry I because it did not appear to address ODE‘s Trust Claim as it pertained to the state funds. See June 30, 2020 Order. Thus, on June 30, 2020, the trial court issued a one-page order which found as follows:
[u]pon review, the Court finds that the parties did not assert that ODE lacks standing as to the claim for declaration of public trust over the state funds. Moreover, the Court finds that an issue of fact remains for trial as to whether ODE‘s claim is barred by the doctrine of ratification. As such, the grant of summary judgment against ODE applies only to the claim as it relates to federal grant funds.
(June 30, 2020 Order at 1.)
{¶ 10} Apparently, the Schools were not satisfied with this ruling, because they filed a motion for reconsideration. (See Jul. 10, 2020 Mot. for Recons.) On August 31, 2020, the trial court issued a one-page decision and entry granting plaintiffs’ motion for reconsideration of the trial court‘s June 30, 2020 order, which stated:
[u]pon careful review, the Court finds that Plaintiffs’ summary judgment motion addressed ODE‘s claim for Declaration and Enforcement of Public Trust as to both federal and state funds. In its memorandum in opposition, ODE either conceded that its trust claim only encompasses federal funds, or abandoned its trust claim as to state funds. Thus, the Court hereby
reconsiders its June 30, 2020 Order and finds that summary judgment against ODE applies to the trust claim in whole.
(Aug. 31, 2020 Decision & Entry at 1.)
{¶ 11} Subsequently, on September 18, 2020, the trial court issued an order providing for
{¶ 12} This timely appeal followed.
II. Assignments of Error
{¶ 13} ODE assigns three errors for our review:
- [I.] The Trial Court erred when it held that the Plaintiff Schools did not waive their real party in interest Defense.
- [II.] The Trial Court erred when it held that the Ohio Department of Education (“ODE“) was not the real party in interest to ODE‘s claims to recover federal grant funds.
- [III.] The Trial Court erred by holding that ODE abandoned the portion of its trust claim that was based on the Plaintiff Schools’ State funding.
III. Discussion and Legal Analysis
A. Standard of Review
{¶ 14} An appellate court reviews summary judgment under a de novo standard. You v. Northeast Ohio Med. Univ., 10th Dist. No. 17AP-426, 2018-Ohio-4838, ¶ 16, citing Brisco v. U.S. Restoration & Remodeling, Inc., 10th Dist. No. 14AP-533, 2015-Ohio-3567, ¶ 19, citing Coventry Twp. v. Ecker, 101 Ohio App.3d 38, 41 (9th Dist.1995). Summary judgment is proper only when the parties moving for summary judgment demonstrate (1) no genuine issue of material fact exists, (2) the moving parties are entitled to judgment as a matter of law, and (3) reasonable minds viewing the evidence most strongly in favor of the nonmoving party could reach but one conclusion, and that conclusion is adverse to the nonmoving party.
{¶ 15} The party moving for summary judgment bears the initial burden of informing the trial court of the basis for the motion and identifying those portions of the
{¶ 16} A fact is “material” if it “might affect the outcome of the suit under the applicable substantive law.” Mitchell v. Mid-Ohio Emergency Servs., L.L.C., 10th Dist. No. 03AP-981, 2004-Ohio-5264, ¶ 12. A “genuine” issue of material fact exists to prevent summary judgment only if “a reasonable jury could find that the evidence satisfies the evidentiary standards required at trial.” Myocare Nursing Home, Inc. v. Fifth Third Bank, 98 Ohio St.3d 545, 2003-Ohio-2287, ¶ 33.
{¶ 17} Finally, “[t]rial courts should award summary judgment with caution, being careful to resolve doubts and construe evidence in favor of the nonmoving party.” Welco Industries, Inc. v. Applied Cos., 67 Ohio St.3d 344, 346 (1993), citing Murphy v. Reynoldsburg, 65 Ohio St.3d 356 (1992). “Even the inferences to be drawn from the underlying facts contained in the evidentiary materials, such as affidavits and depositions, must be construed in a light most favorable to the party opposing the motion.” Hannah v. Dayton Power & Light Co., 82 Ohio St.3d 482, 485 (1998), citing Turner v. Turner, 67 Ohio St.3d 337, 341 (1993).
B. Appellant‘s First Assignment of Error
{¶ 18} In its first assignment of error, ODE asserts the trial court erred by finding the Schools did not waive their real party in interest defense. We do not agree.
{¶ 19} ODE‘s argument in support of its theory of waiver consists of two parts: first, the Schools waited until the case had been pending in the trial court for six years prior to asserting their affirmative defense of lack of standing4; and second, the Schools waited
{¶ 20} With regard to the first part of ODE‘s argument, “[i]t is well-settled that an amended pleading supersedes the original pleading.” Morris v. Morris, 10th Dist. No. 10AP-15, 2010-Ohio-4750, ¶ 32, citing Abram & Tracy, Inc. v. Smith, 88 Ohio App.3d 253, 263 (10th Dist.1993); Carlock v. Coleman, 7th Dist. No. 89 C.A. 121, 1990 Ohio App. LEXIS 3625 (Aug. 22, 1990), quoting 75 Ohio Jurisprudence 343, Pleading, Section 469 (” ‘it is hornbook law that an amended pleading supersedes the original, the latter being [treated] thereafter as nonexistent’ “). “Therefore, an amended pleading opens the door for defending parties to raise new affirmative defenses.” Id., citing Fitzpatrick v. Potter, S.D.Ohio No. 1:04-CV-369 (Oct. 14, 2005).
{¶ 21} In Morris, we determined that the trial court erred when it found the appellant had waived its arbitration defense by failing to assert it in response to the original pleading filed by appellees because appellees had later filed amended counterclaims and cross-claims, effectively abandoning their prior pleading. Here, as in Morris, when ODE filed its amended and supplemental cross and counterclaims on April 25, 2016, its amended cross-claims against the Schools took the place of its original cross-claims filed in 2010, thus opening the door for the Schools to assert their affirmative defense of lack of standing. In light of ODE‘s amended—and therefore superseding—pleading, there is no waiver of the standing defense merely because it was not asserted in response to ODE‘s original pleading.
{¶ 22} Likewise, with regard to the second part of ODE‘s argument, there is no waiver of the standing defense merely because the Schools chose not to file a dispositive motion on this issue until February 2019. ODE has cited no authority in support of its novel proposition that failing to file a dispositive motion on the issue of the standing defense earlier than the date required by the trial court‘s case management order results in waiver, nor was this court able to identify any such authority. Furthermore, as urged by the
{¶ 23} In short, ODE made a tactical decision to seek leave to amend its counterclaims against the Schools. Leave was granted in the form of an agreed order signed by the parties, including ODE. The amended counterclaims took the place of the original counterclaims, giving the Schools free rein to assert new defenses, including the defense of lack of standing. There simply is no waiver of this defense in this case.
{¶ 24} Accordingly, based on the foregoing discussion, we overrule ODE‘s first assignment of error.
C. Appellant‘s Second Assignment of Error
{¶ 25} In its second assignment of error, ODE asserts the trial erred when it held that ODE was not the real party in interest to ODE‘s claims to recover federal grant funds. We agree.
{¶ 26} As the Supreme Court has explained, “[a]t common law, all actions had to be brought in the name of the person holding legal title to the right asserted, and individuals possessing only equitable or beneficial interests could not sue in their own right.” Fed. Home Loan Mtge. Corp. v. Schwartzwald, 134 Ohio St.3d 13, 2012-Ohio-5017, ¶ 30, citing Clark & Hutchins, The Real Party in Interest, 34 Yale L.J. 259 (1925); 6A Wright, Miller & Kane, Federal Practice and Procedure, Section 1541 (2010). “However, the practice in equity relaxed this requirement, and states later abrogated the common-law rules and adopted ‘rules that permitted any “real party in interest” to bring suit.’ ” Schwartzwald, quoting Sprint Communications Co., L.P. v. APCC Servs., Inc., 554 U.S. 269, 279, (2008)5.
{¶ 27} The rule adopted in Ohio that permits any real party in interest to bring suit is
Every action shall be prosecuted in the name of the real party in interest. An executor, administrator, guardian, bailee, trustee of an express trust, a party with whom or in whose name a contract has been made for the benefit of another, or a party authorized by statute may sue in his name as such
representative without joining with him the party for whose benefit the action is brought. When a statute of this state so provides, an action for the use or benefit of another shall be brought in the name of this state. No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest. Such ratification, joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.
{¶ 28} The plain language of
{¶ 29} “Federal grants authorized by Congress create binding contracts.” United States v. Sumter Cty. School Dist., 232 F.Supp. 945, 950 (D.S.C.1964). In Sumter Cty. School Dist., the court determined that “[t]he applications for financial assistance by the School District and the approval of such applications, together with the commitment of Federal funds by the Commissioner, contain all the elements of a contract.” (Further citations omitted.) Id. The terms of the contract are set forth in the “assurances” given by the recipient of the grant. See id., fn. 2. Other courts have found such assurances given in exchange for federal grant funds are contractual in nature. See, e.g., United States v. Onslow Cty. Bd. of Edn., 728 F.2d 628, 633 (4th. Cir.1984); United States v. Marion Cty. School Dist., 625 F.2d 607, 609-10 (5th Cir.1980); United States by Clark v. Frazer, 297 F.Supp. 319, 322 (M.D. Ala.1968.) Thus, the Assurances given by the Schools in exchange for receiving federal grant funds most certainly constitute a contract.
{¶ 30} Furthermore, a review of the plain text of the Assurances shows that USDOE benefits from the Assurances. The introductory paragraph clearly identifies both the “Ohio Department of Education” and the “United States Department of Education” as “parties referred to in this document * * *.” Importantly, many of the obligations imposed by the Assurances inure to the benefit to USDOE, including requirements that the Schools comply with federal regulations concerning expenditure of the federal funds (Ex. 6, Assurances at
{¶ 31} Moreover, paragraph 31 of the Assurances specifically provides that the Schools (as Subgrantee) agree “that the [USDOE] or ODE have the authority to take administrative sanctions * * * as necessary to ensure compliance with applicable laws, regulations and assurances for any project” and that the Schools “acknowledge such authority under
{¶ 32} We reject the Schools’ contention that ODE cannot be a real party in interest because any federal grant funds that might be recovered must be returned to USDOE. Such a position entirely misses the point of the
{¶ 33} Finally, contrary to the protestations of the Schools, there is no threat of double liability to USDOE in this case. It is true that one of the purposes of the real party in interest rule is ” ’ “to assure [the defendant] finality of the judgment, and that he will be protected against another suit brought by the real party at interest on the same matter.” ’ ” Schwartzwald, 2012-Ohio-5017, at ¶ 32, quoting Shealy v. Campbell, 20 Ohio St.3d 23, 24-25 (1985), quoting Celanese Corp. of America, v. John Clark Industries, 214 F.2d, 551, 556 (5th Cir.1954). In this case, however, as urged by ODE, finality of the judgment will be assured for two reasons. One, because the USDOE is a successor in interest to any recovery of the federal grant funds, it will be bound by the judgment. See, e.g., Barker v. Jackson Natl. Life Ins. Co., 163 F.R.D. 364, 366 (N.D.Fla.1995) (“Even if not named, successors in interest are always bound by the judgment.“). Two, the USDOE would not be able to bring a future lawsuit in any event due to the expiration of the applicable statute of limitations as of June 30, 2013, when the last federal grant funds were spent by the Schools.
{¶ 34} Therefore, for the foregoing reasons, we find that ODE is the real party in interest of ODE‘s claims to recover federal grant funds. Accordingly, we sustain ODE‘s second assignment of error.
D. Appellant‘s Third Assignment of Error
{¶ 35} In its third assignment of error, ODE asserts the trial court erred by holding that ODE abandoned the portion of its Trust Claim that was based on the Schools’ state funding. We agree.
{¶ 36} Ohio jurisprudence provides little, if any, guidance on the issue of claim abandonment in the context of dispositive motion practice.7 Indeed, our research identified
This Court‘s jurisprudence on abandonment of claims is clear: a plaintiff is deemed to have abandoned a claim when a plaintiff fails to address it in response to a motion for summary judgment. See Hicks v. Concorde Career Coll., 449 F. App‘x 484, 487 (6th Cir.2011) (holding that a district court properly declines to consider the merits of a claim when a plaintiff fails to address it in a response to a motion for summary judgment); Clark v. City of Dublin, 178 F. App‘x 522, 524-25 (6th Cir.2006) (recognizing that the failure to respond properly to motion for summary judgment arguments constitutes abandonment of a claim); Conner v. Hardee‘s Food Sys., 65 F. App‘x 19, 24-25 (6th Cir.2003); see also Colston v. Cleveland Pub. Library, No. 1:12-CV-204, 2012 U.S. Dist. LEXIS 113527, 2012 WL 3309663, at *2 n. 2 (N.D. Ohio Aug. 13, 2013) (deeming a claim abandoned and granting summary judgment when a plaintiff “did not respond or even mention [the] claim in her opposition to Defendants’ motions for summary judgment“).
Brown v. VHS of Michigan, Inc., 545 Fed.Appx. 368 (6th Cir.2013). See also Abdulsalaam v. Franklin Cty. Bd. of Commrs, 637 F.Supp.2d 561, 578 (S.D.Ohio 2009) (“Plaintiffs do not clearly respond to that argument in their brief and that failure alone warrants summary judgment in Defendants favor on that issue“) citing Dage v. Time Warner Cable, 395 F.Supp.2d 668, 679 (S.D.Ohio 2005) (plaintiff abandoned claim by failing to address it in his responsive brief).
{¶ 37} With the foregoing guidance in mind, our task is to determine whether ODE failed to properly address and respond to the arguments of the Schools pertaining to the Trust Claim. As explained below, our review of the parties’ dispositive motion briefs filed in the trial court leads us to the conclusion that the memorandum in opposition filed by ODE in response to the Schools’ motion for summary judgment did not fail to properly address or respond to the arguments made by the Schools on this claim.
[t]he undisputed facts demonstrate that the funds at issue are federal funds that will not escheat to ODE of the State of Ohio, even if ODE proves that the Schools violated the grant conditions. Therefore, ODE is not a real party in interest and lacks standing to bring its claims for those funds.
(Emphasis added.) (Feb. 15, 2019 Pl.‘s/Countercl. Def.‘s Mot. for Summ. Jgmt. on the ODE‘s Countercls, at 1.) Within the body of the Schools’ motion under section III titled “Argument,” subsection A presents an argument that “ODE lacks standing to assert its claim for the federal grant funds because it no longer possesses an interest in those funds.” (Emphasis added.) Id. at 8. Nowhere in this subsection is there any mention of the state operating funds at issue in this case.
{¶ 39} Subsection C presents the Schools’ argument specifically pertaining to ODE‘s Trust Claim, asserting that “ODE‘s lacks [sic] standing to bring its claim for declaration and enforcement of public trust over all public funds and property and property purchased with public money, and ODE ratified the Schools’ conduct.” Id. at 11. Regarding the first part of this argument, the Schools assert that “ODE lacks standing to assert a claim for breach of trust because the trust property at issue is federal funds,” and “the grant funds at issue are federal funds issued by the federal government.” (Emphasis added.) Id. at 12. Again, the Schools’ standing/real party in interest argument pertains solely to the federal grant funds—not the state funds.
{¶ 40} Regarding the second part of the argument in subsection C, the Schools assert that even if ODE possessed standing to assert its Trust claim, the accrued actions of ODE over the years amounted to a ratification of the Schools’ conduct, thus barring its breach of Trust claim. Id. at 12. Other than one, singular reference to the state funds transferred to the Education Management Operators (“EMOs“), which is not expounded upon in any manner, the remainder of this argument—spanning almost two full pages—refers solely to the federal grant funds. Id. at 12-14. (“ODE held a meeting * * * to discuss how to account
{¶ 41} It defies simple logic to expect that ODE would proactively defend the state funds portion of the Trust Claim in the face of the foregoing arguments made by the Schools. Nor do the Schools cite to any authority that would support its proposition that ODE was required to affirmatively defend the state funds portion of the Trust Claim despite the fact that the Schools presented arguments pertaining only to the federal funds portion. Furthermore, we agree with ODE‘s contention that in any event, the substance of its response to the Schools’ ratification argument applied with equal force to both the state operating funds and the federal grant funds aspects of the Trust Claim.
{¶ 42} In short, when the Schools presented their arguments pertaining to the Trust Claim, they focused solely on the federal grant funds portion of the Trust Claim, and ODE properly addressed these arguments in its memorandum in opposition. The opening gambit was played by the Schools, and ODE responded in kind. Under the circumstances, particularly when viewed through a lens which requires the trial court to grant summary judgment with caution, giving the nonmoving party the benefit of the doubt, we find it was error on the part of the trial court to conclude that ODE abandoned that portion of its Trust Claim which was predicated on state operating funds.
{¶ 43} Accordingly, based on the foregoing discussion, we sustain ODE‘s third assignment of error.
IV. Disposition
{¶ 44} Having overruled appellant‘s first assignment of error and having sustained appellant‘s second and third assignments of error, we reverse the judgment of the Franklin County Court of Common Pleas and remand this matter for further proceedings consistent with this decision.
Judgment reversed; cause remanded.
SADLER and JAMISON, JJ., concur.