Court charts new territory: Public funds received for a free public education retain their public character after transfer to private community school operator

On September 15, 2015, the Ohio Supreme Court issued a long-anticipated ruling in Hope Academy Broadway Campus v. White Hat Mgt. L.L.C., a case involving controversial contract provisions between 10 Cleveland-area community schools (commonly known as charter schools) and their management companies. Under the contracts, the schools paid 95% to 96% of the per-student public funds they received, as well as all grant money they received, to White Hat. In turn, White Hat used the funds to run the daily operations of each school, including providing facilities and purchasing all furniture and other equipment. The contracts permitted White Hat to hold title to all property purchased using the public funds and required the schools to pay "an amount equal to the 'remaining cost' basis of the personal property" if the schools wanted to obtain title to the personal property after their contracts with White Hat terminated.

The Court held that, because a free public education is historically an exclusive governmental function, public funds "received or collected" for that purpose retain their character as public funds even after being transferred directly to a private operator.

The Court also held that because White Hat was authorized to act as the "duly authorized representative" for the schools in a broad range of functions, a fiduciary relationship existed between White Hat and the charter schools it managed. The issue of whether White Hat breached its fiduciary duty was not before the Court. The issue of whether the contracts were unconscionable was also not before the Court.

The Court's ruling also illuminated the possible need for legislation prescribing the acceptable use of public funds by community school operators. The Court characterized the legislature's attitude toward operators of community schools as laissez-faire and concluded that it is the duty of the General Assembly, not the Court, to determine whether public policy requires regulation prescribing the acceptable use of public funds by community school operators.

The case is Hope Academy Broadway Campus v. White Hat Mgt, L.L.C. and the opinion can be found here: 2015-Ohio-3716.pdf