Not a smooth operator: What the Ohio Supreme Court’s recent White Hat ruling means

guest column by John Hickey

On September 15, the Ohio Supreme Court released Hope Academy Broadway Campus, et al. v. White Hat Management, LLC, et al., holding—with a possibly major asterisk—that evil will always triumph over good, because good is dumb.

No, really. Hope Academy, a (public) charter school, signed a management contract that it really shouldn’t have because that contract was ridiculously one-sided in favor of White Hat, a private firm that manages charter schools, and the court ultimately held (in a very divided opinion—more on that in a moment) that the contract was binding even though White Hat was doing a lousy job of managing the charter schools it was contracted to manage.

Picture a contract for a personal shopper (not that you’ve really ever thought about hiring one) in which the personal shopper gets to keep everything they’ve bought—using your own money—if you fire them. That’s not far from what Hope Academy signed. The Hope Academy schools, which are public, signed contracts with White Hat, a private operator, under which White Hat would manage the individual schools for 95-96 percent of the per-pupil funding that the schools received from the Ohio Department of Education. In addition, the contracts provided that on termination, White Hat got to keep all the personal property White Hat purchased in its own name to operate those schools—furniture, computers, software, etc.—unless the individual schools (which, remember, had only been keeping 4-5 percent of the revenue) paid White Hat the remaining “cost basis” of all that property.

The Ohio Supreme Court held 5-2 that the term was enforceable, even if it was possibly mindbogglingly stupid for the schools themselves to sign such a deal. Of the two dissenters, Justice O’Neill argued that the contract should never have been legal in the first place; he “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.” Justice Pfeifer dissented for two reasons: first, he argued that the rest of the court was misreading the contract and that it could be read to require White Hat to make Hope Academy the owner of the purchased property, and second, that if it really did allow White Hat to keep both the money and the property purchased with it, then the contract was “unconscionable,” meaning so unfair that it the court should refuse to enforce it. (Legally, O’Neill saying the term is “against public policy” and Pfeifer saying the contract is “unconscionable” are not quite the same thing, but they’re close enough for anyone who isn’t a lawyer—both holdings would void the contract.)

The more interesting part of the decision is the majority opinion, which could have implications far beyond the fate of a bunch of used furniture, computers, software and other school materials. The court held that “a management company that undertakes the daily operation of a community [charter] school has a fiduciary relationship with the community school that it operates” (emphasis added) and that “the fiduciary relationship between an operator and its community school is implicated when the company uses public funds to purchase personal property for use in the school that it operates.” Fiduciary duties are, to use the nontechnical term, a big effing deal. More technically, a fiduciary duty generally means “a duty of the utmost good faith, trust, confidence, and candor owed by a fiduciary to the beneficiary; a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person.” Fiduciary duties override general capitalist assumptions about looking out for your own best interests; fiduciaries are obligated to look out for their beneficiaries’ best interests.

There wasn’t enough evidence on the record for the court to rule one way or another whether that duty had been breached, but even holding that it existed is a major development. The Ohio appeals court that considered the case before it reached the Supreme Court held that there were no such duties. Two Ohio Supreme Court justices, Kennedy and French, agreed, but the other five—including the two who dissented on the contract issue—all agreed that fiduciary duties arose in this context. Therefore, White Hat won what may, down the road, prove to be a Pyrrhic victory at the Supreme Court, while it had won a total victory in the lower appeals court. In future litigation between charter schools and their operators, expect to see schools arguing that, regardless of specific contracts involved, operators like White Hat were absolutely not acting “with the highest degree of honesty and loyalty” and in the “best interests” of the schools.

***CORRECTION: In the print edition of this guest column, we incorrectly listed Susan Covey as the author of this fine breakdown about the Ohio Supreme Court’s recent ruling that allows White Hat Management to sell, for its own purposes, equipment purchased with public funding. The columnist here is the one and only John Hickey, to whom I am gravely sorry. – Chris ***