Ohio Supreme Court Hears Oral Arguments Today in Case Involving White Hat Management

Today, September 23, 2014, the Ohio Supreme Court will hear oral arguments in a long running case that has pitted Ohio’s notorious White Hat Management Company, which manages charter schools for-profit, against ten of its schools whose boards set out to dissolve ties to the management company and bring in a new manager.  White Hat at first refused to disclose to its schools how it had spent the 96 percent of taxpayer funding for the schools that went directly to the management company without the charter boards’ oversight.  The schools had to go to court to force White Hat to disclose this information to the schools it managed.  Now the question is: Who owns the school buildings, furniture, and all equipment?

The case involves basic and important questions: whether charter school boards are in charge and can cleanly terminate contracts with poorly performing management companies they have hired to run the schools, whether management companies can create subsidiaries with taxpayer funds to amass real estate empires and then rent buildings back to the management companies with whom they are affiliated at rents well over market rates, whether buildings and other assets purchased by the management companies with tax dollars are owned by the charter school boards or the private management companies, and finally whether charter schools themselves—that draw funding from Ohio’s state education fund and the state’s over 600 public school districts—are public or private entities.

Doug Livingston, an Akron Beacon Journal reporter and Ohio’s top education writer, explains the case succinctly: “The case involves Akron-based White Hat Management and 10 charter schools.  The schools’ boards, after paying White Hat millions to run what turned out to be poorly performing schools, fired the company when they were unable to obtain answers as to how the money was spent.  But after the firing, White Hat argued that it owned most of the assets and it would be the boards that would have to move and start up new schools from scratch.  Meanwhile, the buildings that were vacated often became the home for new charter schools run by the for-profit White Hat… The case illustrates a larger issue: Ohio charter schools were created more than 15 years ago as independent public agencies.  But as so many for-profit companies now own the real estate, furniture and computers, the questions are raised: Are charter schools still public?  Are they independent? Or are they now privately run, for-proft businesses?”

Livingston points out that a recent investigation by the Beacon Journal and the News Outlet at Youngstown State University uncovered a number of instances when members of charter boards explained that they had been recruited by management companies to serve on the charter boards that later hired the management companies.  White Hat Management was reported by charter board members to have been one of the management companies that recruited them to serve on a board that was, supposedly, responsible for hiring a management company—despite that federal law requires that not-for-profit boards be independent of any contractors or managers they hire.

Purchase and rental of school buildings is a significant part of this case.  Livingston reports that the “Beacon Journal-News Outlet review of hundreds of property records and business filings across Ohio found multiple connections between management companies and property owners.  The investigation found that 40 percent of Ohio public charter schools pay rent to for-profit or out-of-state landlords.  At least six companies have leased property to charter schools that also hired them to run the schools.  One real estate company charges a rental rate that equals nearly half the property’s market value…. The most active companies are Summit Academy, which owns half its school properties, and White Hat, which has created out-of-state real estate companies to acquire at least 11 of its 29 brick-and-mortar charter schools in Ohio… White Hat and others have related companies that manage real estate portfolios, and while the schools in those portfolios may change names, the education management company doesn’t.”

According to Livingston, “The Ohio Department of Education keeps no records on the private management companies hired by public charter schools… And because the state asks little, determining ownership of assets is complex.”

White Hat claims it owns all the buildings, furniture and equipment as an independent contractor.  According to M. Bettman writing for Legally Speaking Ohio, “White Hat argues that the charter schools are ultimately governed by their individual school boards—no management company takes that role.  Charter schools are allowed to contract with management companies like White Hat to administer the daily functions of the school.  As was perfectly permissible, the management agreements shifted all financial risk from the Schools to White Hat.”

Bettman also presents the schools’ argument, “The Schools argue that public funds do not lose their public function just because a private entity has received them… White Hat did not provide a discrete or remote service, but was entrusted with carrying out a government function on a daily basis, and received public funds for doing this… White Hat acted as a purchasing agent for them in the acquisition of furniture, computers, and other personal property… White Hat became an agent for the Schools, therefore establishing a fiduciary duty for White Hat to act primarily for the benefit of the Schools.”

The Court of Appeals, according to Bettman, found for White Hat: “that the Schools owned only the property that had to be titled in their own names due to the nature of the funding source, and that is the only situation in which White Hat operates as the purchasing agent for the Schools.  Otherwise, the funds received by White Hat… became its private funds, and property it bought with those funds belongs to it.”

The case is complicated by the political power of David Brennan, owner of White Hat Management, former member of  Ohio’s higher education board of regents, long time advocate for Ohio’s school voucher program, proponent of legislation to promote the unregulated growth of charter schools, and campaign-donor extraordinaire to members of the Ohio General Assembly.