Medina County Courthouse

Wednesday, January 05, 2011

Court Rules Officers of Community Schools Are 'Public Officials,' Can be Personally Liable for Lost Public Funds

Not Sheltered by Corporation Laws from Personal Liability

Cordray v. Internatl. Preparatory School, Slip Opinion No. 2010-Ohio-6136.
Cuyahoga App. No. 91912, 2009-Ohio-2364. Judgment of the court of appeals affirmed, and cause remanded to the trial court.
Pfeifer, Acting C.J., and Lundberg Stratton, O'Connor, O'Donnell, Lanzinger, and Cupp, JJ., concur.
Brown, C.J., not participating.

View oral argument video of this case.

(Dec. 20, 2010) In a 6-0 decision announced today, the Supreme Court of Ohio held that an officer, employee or duly authorized agent of a community school that receives public funds under R.C. Chapter 3314 falls within the statutory definition of a “public official,” and therefore such persons may be personally liable to the state for lost or misspent public funds.

Applying that holding to a civil lawsuit in which the state is attempting to recover funds from the treasurer of a now-defunct community school in Cleveland, the Court remanded the case to the Cuyahoga County Court of Common Pleas for further proceedings.

The International Preparatory School (TIPS), a nonprofit corporation, operated as a community or “charter” school located in Cleveland. Hasina Shabazz and her now-deceased husband, Da’ud Abdul Malik Shabazz, were members of the board of TIPS. As a community school, TIPS received state funding based largely upon the number of students enrolled at the school as reported by the school to the Ohio Department of Education. On Oct. 18, 2005, TIPS ceased operating as a community school. On Oct. 20, 2005, the state petitioned the Cuyahoga County Court of Common Pleas for, among other relief, a temporary restraining order and the appointment of a receiver to secure TIPS’s assets. The trial court issued a temporary restraining order that same day, and appointed a receiver in January 2006.

In January 2007, the state auditor issued a report of an audit of TIPS for the period of July 1, 2004, through Oct. 18, 2005. The auditor determined that TIPS had sought and received overpayments totaling $1,407,983 from the Department of Education by submitting inflated enrollment figures for the 2004-2005 and 2005-2006 school years. The auditor issued a finding in favor of the Department of Education against TIPS as an entity and jointly and severally against Hasina Shabazz and the estate of her husband for the amount of the overpayments.

Pursuant to state law, the state filed a complaint in common pleas court initiating a civil lawsuit to convert the auditor’s finding to a court judgment awarding the state joint and several recovery from TIPS and Shabazz for $1,407,983. In her answer to the complaint, Shabazz asserted that she was not the treasurer of the school, but treasurer only of the board of directors of the non-profit corporation that operated the school. Shabazz and the state filed cross-motions for summary judgment. Shabazz argued that two statutes shielded her from liability: R.C. 1702.55, under which “members, the directors, and the officers of a corporation shall not be personally liable for any obligation of the corporation,” and R.C. 3314.071, which states that “[n]o officer, director, or member of the governing authority of a community school incurs any personal liability by virtue of entering into any contract on behalf of the school.” The trial court found Shabazz’s reliance on the statutes misplaced, found her personally liable for the public funds at issue, and granted the state’s motion for summary judgment against her.

Shabazz appealed to the Eighth District Court of Appeals. The appellate court reversed the trial court’s summary judgment. The court held that Shabazz was not a “public official” under the ordinary meaning of that term, and therefore could not be held personally, strictly liable for the overpayments to TIPS. The 8th District also held that, because the school was organized as a nonprofit corporation, Shabazz as a corporate officer could be held personally liable only if the state could prove that she had breached her fiduciary duty as a director of a publicly funded corporation, or that she had committed personal wrongdoing sufficient to strip her of the protection of the state’s corporation laws. Based on those holdings, the court of appeals vacated the trial court’s summary judgment in favor of the state and remanded the case to the trial court for further proceedings.

The state sought and was granted review of the 8th District’s decision by the Supreme Court.

In today’s unanimous opinion, authored by Justice Paul E. Pfeifer, the Court agreed that the case should be remanded to the trial court for further proceedings. In doing so, however, the Justices rejected the court of appeals’ holdings regarding Shabazz’s personal liability for the overpayments to TIPS, and held instead that 1) an officer of a community school is a “public official” as that term is defined in state law; and 2) the laws protecting corporate members and directors from personal liability for a corporation’s financial obligations do not protect a public official from strict liability for a loss of public funds.

Justice Pfeifer noted that R.C. 9.39 imposes the strict requirement that “(a)ll public officials are liable for all public money received or collected by them or their subordinates under color of office.” He then cited R.C. 117.01(E), which defines a “public official” as “any officer, employee, or duly authorized representative or agent of a public office.” Therefore, Justice Pfeifer wrote, “(A)n officer, employee, or duly authorized representative of a charter school is a public official only if a community school is a ‘public office.’”

“R.C. 117.01(D) defines ‘public office’ (as) ‘any state agency, public institution, political subdivision, other organized body, office, agency, institution, or entity established by the laws of this state for the exercise of any function of government.’ Community schools fall within the definition of public office because they are entities ‘established by the laws of this state for the exercise of [a] function of government.’”

“ ... (A)s entities ‘established by the laws of this state for the exercise of any function of government,’ community schools are public offices pursuant to R.C. 117.01(D). In turn, an officer, employee, or duly authorized representative of a community school is a public official pursuant to R.C. 117.01(E). Under R.C. 117.01, public money received pursuant to the community school funding scheme set forth in R.C. 3314.08 would meet the R.C. 9.39 element of ‘public money received or collected ... under color of office.’ Those payments were made by the state to TIPS due to the requirements of Ohio’s community-school funding laws.”

“A factual question remains, however. In order for the state to establish Shabazz’s liability, it must show that she or her subordinates received or collected public money under color of office. Shabazz disputes that she was the treasurer of TIPS; she claims that she was the treasurer of the board of directors of TIPS. ... The label ‘treasurer’ is less important than the character of the position she held. We remand the matter to the trial court for a determination of whether Shabazz’s responsibilities at TIPS included the receipt or collection of public money, or whether she supervised employees who received or collected public money under color of office.”

“Finally, we hold that R.C. 1702.55 offers no protection for public officials. Public officials are personally liable for public funds. Thus, R.C. 1702.55, which protects members, directors and officers of corporations from the debts of the corporation, does not protect public officials from liability for lost public funds. Liability attaches to a public official by virtue of the public office he or she holds. It is his or her own obligation to ‘account for and disburse according to law moneys that have come into his hands by virtue of his being such public officer’ ... Any liability that arises therefrom is not a corporate debt — it is the official’s own debt.”

“Accordingly, we affirm the judgment of the court of appeals that summary judgment was inappropriate, although for different reasons, and we remand the cause to the trial court.”

Justice Pfeifer’s opinion was joined by Justices Evelyn Lundberg Stratton, Maureen O’Connor, Terrence O’Donnell, Judith Ann Lanzinger and Robert R. Cupp. Chief Justice Eric Brown did not participate in the Court’s deliberations or decision in the case.

Benjamin C. Mizer, 614.466.8980, for Ohio Attorney General Richard Cordray and the Ohio Dept. of Education.

Brett E. Horton, 216.589.9610, for Hasina Shabazz.

No comments: