IN THE COURT OF COMMON PLEAS OF FRANKLIN COUNTY, OHIO CIVIL DIVISION GOVERNING BOARD OF THE EDUCATIONAL SERVICE CENTER OF LAKE ERIE WEST, Plaintiff, vs. ELECTRONIC CLASSROOM OF TOMORROW, Defendant.
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Case No. 18CV-000324 Judge Holbrook
THE OHIO ATTORNEY GENERAL’S RESPONSE TO THE ELECTRONIC CLASSROOM OF TOMORROW’S JUNE 27, 2018, MEMORANDUM REGARDING ASSIGNMENT OF CLAIMS The Ohio Attorney General (“the State”) submits this memorandum in response to the June 27, 2018, Supplemental Memorandum filed by the Electronic Classroom Of Tomorrow (“ECOT”) regarding the Interim Special Master’s June 1, 2018, motion to assign claims. The State submits that the Interim Special Master’s motion should be granted without the limitations ECOT suggests because those limitations would unduly limit the ability to recover improperly transferred public funds. A. Background. ECOT is a community school. It is therefore a public school; it operated on public money, and its assets are public property. Cordray v. Internatl. Preparatory School, 128 Ohio St.3d 50, 2010-Ohio-6136, ¶¶ 21-24, 27. ECOT is deeply in debt to the State and other entities; its most recent audit reports that its liabilities far exceed its assets. Electronic Classroom of
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Tomorrow, Single Audit For The Year Ended June 20, 2017, p. 56, Statement of Net Position.1 Those debts include substantial debts to State entities: $1,586,277.29 owed to the Ohio Department of Jobs and Family Services, $1,481.96 owed to Owens State Community College, and $61,996,427.39 owed to the Ohio Department of Education (“ODE”). Given the size of the State’s claims, and given ECOT’s insolvency, the State has investigated whether ECOT has claims against third parties that could provide funds to pay the State and other creditors. As discussed more fully below, that investigation indicates that ECOT has substantial claims against third parties. The State therefore offered to prosecute all claims ECOT might have against third parties, for its own benefit, the benefit of other creditors, and for the benefit of school districts across Ohio.2 The Interim Special Master was open to that because it could substantially benefit creditors without substantial cost to them. He filed his June 1, 2018, motion to authorize the assignment of all ECOT’s claims to the State except several specifically defined categories of claims.
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Available at: https://ohioauditor.gov/auditsearch/Reports/2018/Electronic_Classroom_of_Tomorrow_17Franklin_Disclaimer.pdf Last visited July 2, 2018. The page cite in the text is based on the pagination of the PDF version posted on the Auditor of State’s website, rather than the internal pagination of that document. 2
That is true in two respects. First, as discussed below, the claims are large enough that, if recovered, they would exceed the amounts owed ECOT’s creditors. R.C. 3314.074(A) would route any funds remaining after creditors are paid to the school districts where ECOT’s students resided during its last year of operation. Second, even if there are insufficient funds to generate a surplus over creditors’ claims, the portion of any recovery paid on ODE’s claims would also be distributed to school districts where ECOT’s students resided. 2
ECOT originally responded on June 15, 2018, stating that it did not object to the assignment, so long as any funds collected are distributed pursuant to the Court’s supervision. The Interim Special Master responded by proposing an order that provided for the Court distributing any proceeds. See Exhibit 1 hereto. ECOT now has rejected that approach. It instead seeks—for the first time, and after the deadline for responding to the motion to assign has expired—to impose additional restrictions on the assignment. Those restrictions include limiting the type of claims assigned and delaying any action on assigned claims until the Supreme Court rules on the case considering ECOT’s dispute with ODE. See Exhibit A to ECOT’s Supplemental Memorandum. B. The assignment should be approved without the restrictions ECOT proposes. The State agrees that the proceeds of assigned claims should be distributed pursuant to Court supervision, but it cannot agree with the restrictions ECOT belatedly proposes. There are two reasons for the State’s position. First, limiting the types of claims assigned as ECOT suggests would insulate improper transfers involving millions of public dollars. ECOT’s tax filings report that it has transferred at least $199,268,313.18 to two companies controlled by ECOT’s founder, William Lager. Those companies are Altair Learning Management I, Inc. (“Altair”) and IQ Innovations, LLC Learning Management I, Inc. (“IQ”). All the funds transferred were public money. All or portions of that public money can be recovered in at least three ways: -
By claims for breach of fiduciary duty against Lager. Lager was a fiduciary of ECOT as its promoter, its agent, and as a public official. He therefore had a fiduciary duty of loyalty to ECOT. He violated that duty by doing business with ECOT through two companies he had substantial interests in: Altair and IQ. That entitles ECOT to recover all profits Lager realized through those companies’ dealings with ECOT.
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By civil claims under R.C. 2921.42 to recover funds paid to Altair and IQ. R.C. 2921.42(A)(4) prohibits a public official from having an interest in public contracts and R.C. 2921.42(H) voids any contracts infected with such interests. Lager’s status as ECOT’s agent made him a public official of ECOT within the meaning of R.C. 2921.01(A), ECOT’s contracts with Altair and ECOT were public contracts, and Lager had interests in those contracts by virtue of his interests in Altair and IQ. Those contracts were therefore void, entitling ECOT to recover the funds paid pursuant to them.
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By civil claims against Lager under R.C. 2923.34, part of Ohio’s Corrupt Practices Act. ECOT’s contracts with Altair and IQ constituted corrupt activity because they violated R.C. 2921.42, there was a pattern of that activity because there were multiple contracts, Lager participated in that pattern, and ECOT was injured by paying funds pursuant to contracts that were void as a matter of law. Lager is therefore liable for that injury, subject to potential trebling under R.C. 2923.34(E).
ECOT’s creditors—and the public that provided the funds at issue—have an exceedingly strong interest in pursuing those claims. ECOT has offered no reason why those claims should be forfeited. Second, there is no reason to wait for the Supreme Court’s decision. Substantively, the claims just discussed are conceptually distinct from the matters before the Supreme Court, so that Court’s decision will have no bearing on them. The claims just discussed are based on conflicts of interest among adults, while the Supreme Court is considering whether students must actually participate in instruction as a condition for State funding. There is no overlap between those questions. Procedurally, although other claims are more directly related to the question before the Supreme Court, that Court already has rejected ECOT’s plea to delay collection of claims directly related to the question before it. State ex rel. Electronic Classroom Of Ohio v. The Ohio State Board of Education, 2017-Ohio-5799 (July 12, 2017).
Practically, any
suggestion that ECOT will reopen if it wins in the Supreme Court is a pipe dream. Its students have moved on, its hard assets have been sold, and it would still be approximately be 4
$169,331,086.61 in debt even if it prevailed against ODE.3
There is no reason to delay
prosecuting those claims. Conclusion The State therefore submits that the Court should reject ECOT’s tardily proffered restrictions and enter the order proposed by the Interim Special Master, attached as Exhibit 1 hereto. If the Court enters that order, the State intends to immediately file suit on the assigned claims to recover monies for the benefit of State entities, other creditors, and Ohio school districts. Respectfully submitted, MICHAEL DEWINE (0009181) Ohio Attorney General /s/ Todd R. Marti TODD R. MARTI (0019280) REID T. CARYER (0079825) Assistant Attorneys General Office of the Ohio Attorney General Education Section 30 E. Broad Street, 16th Floor Columbus, OH 43215 Phone: (614) 644-7250 Fax: (614) 644-7634 Email: todd.marti@ohioattorneygeneral.gov reid.caryer@ohioattorneygeneral.gov Counsel for the Ohio Attorney General
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That figure is calculated by subtracting the amount of ODE’s claims from ECOT’s total liabilities, as reported in its most recent audit. Electronic Classroom of Tomorrow, Single Audit For The Year Ended June 20, 2017, p. 56, Statement of Net Position. 5
Certificate of Service The undersigned hereby certifies that copies of this filing will be served on all counsel of record via the Courts ECF system this 3d day of July, 2018. A copy was also emailed to Douglas Cole, Counsel for the Ohio Department of Education at DRCole@organcole.com. /s/ Todd R. Marti TODD R. MARTI (0019280)
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IN THE COURT OF COMMON PLEAS OF FRANKLIN COUNTY, OHIO CIVIL DIVISION GOVERNING BOARD OF THE EDUCATIONAL SERVICE CENTER OF LAKE ERIE WEST, Plaintiff, vs. ELECTRONIC CLASSROOM OF TOMORROW, Defendant.
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Case No. 18CV-000324 Judge Holbrook
ORDER GRANTING THE JUNE 1, 2018, MOTION OF INTERIM MASTER FOR AN ORDER ASSIGNING TO THE STATE OF OHIO CERTAIN CLAIMS AND CAUSES OF ACTION OF THE ELECTRONIC CLASSROOM OF TOMORROW The matter before the Court is the Interim Special Master’s June 1, 2018, motion for an order assigning to the State of Ohio certain claims and causes of action of the Electronic Classroom of Tomorrow (“the Motion”). No party or party in interest has opposed that motion and the Court concludes after its independent review that the Motion is well taken. The Court therefore ORDERS that: 1. The Interim Special Master is authorized to make, and this order hereby effectuates, an assignment to the State of Ohio of any and all claims the Electronic Classroom Of Tomorrow (“ECOT”) and/or the Interim Master has against Altair Leaning Management I, Inc., IQ Innovations Inc., The Educational Service Center of Lake Erie West, and any other vendors, persons, or entities, including but not limited to claims described in the motion as well as any and all other claims that may be recoverable, except:
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Ex. 1, p. 1
A. Any e-rate claim to recover funds from third-party purchases made by ECOT; B. Any refund of funds expended by ECOT subsequent to the entry of the Agreed Interim Order Approving Interim Master for the Electronic Classroom of Tomorrow was entered by this Court on January 24, 2018 (the “Agreed Order�); C. Any claims arising out of the sale of the real and personal property being sold pursuant to an Order of this Court; D. Any funds due ECOT for any overpayment to any public retirement system; and, E. Any funds due ECOT from the Ohio Department of Education, including but not limited to, federal funds for services provided to students. 2. The State of Ohio, through the Ohio Attorney General, has full authority and discretion to commence proceedings in any court or other forum on, prosecute, settle, compromise, and/or take any other actions he deems appropriate regarding the claims assigned in paragraph 1 above. 3. Nothing in the Agreed Order prevents the State of Ohio from taking any action authorized by paragraph 2 above. 4. The State shall turn over all proceeds of the claims assigned in paragraph 1, less costs of collection, to the Interim Special Master or his successor for distribution as ordered by the Court pursuant to applicable law. Such proceeds shall be turned over within 30 days of their receipt by the State. IT IS SO ORDERED
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_____________________________ Judge Holbrook
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Ex. 1, p. 2