Ohio Supreme Court Rules Private Charter School Management Firm Owns Public Assets

Yesterday Ohio’s elected, Republican-dominated supreme court ruled that a privately held, for-profit charter management company, White Hat Management, owns the equipment and assets of several White Hat Hope Academies and Life Skills Academies that had sought to sever ties with White Hat and hire a new management company to run the schools. White Hat is owned by Akron entrepreneur and Republican mega-donor David Brennan.  The boards of ten Hope and Life Skills Academies had filed a lawsuit to recover assets purchased with public dollars that White Hat said its contract awarded to the management company.

The Columbus Dispatch describes Justice Judith Ann Lanzinger’s decision for the majority: “that charter school operators perform a governmental function and establish a fiduciary relationship with the schools they manage in purchasing school equipment, contrary to the position taken by White Hat.”  The Dispatch continues: “Current law largely does not address the duties of school operators and does not restrict the provisions of contracts between operators and charter schools, Lanzinger wrote.”

Over ten years, the Dispatch reports, the state paid approximately $100 million to the ten schools in Cleveland and Akron.  All the schools contracted with White Hat in 2005, agreeing to turn over 95 percent of each school’s state funding to pay teacher salaries, building rentals, utilities, and other expenses, an agreement known as a “sweeps contract” in which the management company receives virtually all of the school’s revenue and handles all of its operations with little day-to-day oversight by the school’s board.  The Akron Beacon Journal explains: “The dispute arose when the school boards and White Hat parted ways.  The school boards wanted to change management companies, but White Hat said that by virtue of its contract, it owned the assets of the schools, and the boards would need to move to a new location and acquire their own equipment and supplies, or buy the assets of the schools from White Hat.  The schools argued that the assets, purchased with public money, did not belong to White Hat.”

It is not surprising that the boards of the schools failed to negotiate a careful, tough contract with the management company to protect the schools’ assets for the schools.  It has been known for years that White Hat played an active role in helping recruit members of the boards of its schools—board members whose job was supposedly to oversee the performance of the management company.  In March of 2014, Doug Livingston reported for the Akron Beacon Journal that several board members of White Hat schools admitted openly that they had been recruited by White Hat Management to sit on charter school boards, despite that the IRS expects “a bright line between the charter-school governing board and the management company hired to run the school.  The company should not create the board or recruit its members, and any evidence of boilerplate contracts from one school to the next suggests the company many be in control.”  One board member told the Beacon Journal that White Hat had asked her to serve on the boards of four of its schools.

Stephen Dyer of Innovation Ohio explains that Justice Lanzinger received a $5,000 campaign donation from David Brennan in 2004.  Chief Justice Maureen O’Connor received campaign donations from Brennan in 2002, 2008, and 2010, totaling $11,900.  Justice Judith French received a donation last year from Brennan of $7,200.  Dyer notes that Justice Terrence O’Donnell, who has received $15,000 from Brennan over the years, recused himself.  Justice Paul Pfeiffer has not accepted a campaign donation from Brennan since the early 1990s.

Pfeiffer was the lone Republican dissenter from yesterday’s majority opinion, and he made his independence explicit: “The contracts in this case are plainly and obviously unconscionable.  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 opinion would have us believe; it is extremely unfair, so unfair, in fact, as to be unconscionable.  The contract term is so one-sided that we should refuse to enforce it.”  Justice William O’Neill, the court’s only Democrat, calls White Hat’s contracts with its charter schools, “a fraudulent conversion of public funds into personal profit.”

Two weeks ago, Brent Larkin, the Plain Dealer‘s editorial director from 1991 until his retirement in 2009, commented on the pending decision of the state supreme court in the White Hat Case: “White Hat is owned by Akron’s David Brennan.  He and William Lager, owner of the Columbus-based Electronic Classroom of Tomorrow, who have made millions by taking our money and not educating kids, have funneled more than $6 million into Republican candidates and causes.” “Operators of Ohio’s growing number of lousy charter schools are one win away from hitting a trifecta.  They’ve got the legislature in their hip pocket and a governor who is an inexplicable and inexcusable no-show on the issue.  Two down, one to go: The payoff for controlling the judiciary won’t be millions.  It’ll be tens, maybe hundreds, of millions. And every single penny of it will come from your pocket.  Only in Ohio could charter school operators come this close to essentially having their way with all three branches of government.”

Yesterday the Ohio Supreme Court confirmed Larkin’s fears.