United States: Recent Court Decisions Clarify Rights And Status Of Education Management Organizations Operating Charter Schools

Court cases involving charter schools and education management organizations ("EMO") have been rare in North Carolina. Two decisions issued this spring thus provide important insight into how courts will interpret management agreements and the role of management companies when dealing with claims against schools.

Charter Management Agreement Enforceable, Even if Not Approved By State Board

In Banyan GW, LLC, v. Wayne Preparatory Academy, the North Carolina Court of Appeals upheld summary judgment for a management company, concluding that a charter school still owed fees required by the parties' management agreement, even though it was never approved by the State Board of Education.

In 2013, after its first charter school application was denied, the charter school, Wayne Preparatory Academy submitted a second application. WPA had not sought approval from the State Board to use Banyan as a management company and did not disclose Banyan's involvement with the charter school application. However, the application was prepared by Banyan, which had promised WPA's board that Banyan would "provide turn-key job preparing the application, finding funding ... and management of the operational aspects of the school." After the charter school application was filed, but before it was approved, WPA and Banyan entered a five-year "Support Services Agreement," that required WPA to pay Banyan an annual fee of $285,000 plus $295 per each student enrolled in excess of seven hundred students.

In 2014, the Office of Charter Schools sent WPA a letter demanding that WPA either seek approval to use Banyan as a management company or terminate the contract. WPA's board chose to terminate the contract with Banyan, and Banyan sued for breach of contract, seeking, among other things, to enforce a $500,000 liquidated damages clause.

The trial court granted summary judgment for Banyan, concluding that WPA must pay Banyan liquidated damages for terminating the contract early. In affirming the judgment, the Court of Appeals rejected WPA's argument that its failure to obtain approval of the Banyan contract by the State Board of Education rendered it void. The Court also held that the parties had not conditioned Banyan's right to fees upon approval by the State Board, such that Banyan was entitled to fees whether or not the State Board approved it to serve as the education management company for WPA.

The Court's decision highlights the need to carefully draft management contracts with charter schools to protect the interests of both sides. Management companies should be certain that each charter school board with which it is associated seeks and obtains all required approvals from the State Board of Education and/or Charter School Advisory Board before performance is required under the management agreement. The parties should further specify their relative rights if the charter application, or their management agreement, is not approved, or if state regulators impose conditions upon the management agreement beyond the scope of what the parties anticipated.

EMOs Held Not "State Actors"

In March, U.S. District Court Judge Malcom Howard issued a widely-publicized decision in Peltier, et al. v. Charter Day School, Inc., et al., holding that the school's dress code, which required girls to wear skirts or "skorts," violated students' constitutional right to equal protection.

A significant issue in the case was whether the charter school and its non-profit board members, as well as its educational management company (EMO), were "state actors" and thus subject to claims under the constitution. Although the court recognized that charter schools are operated by private, non-profit corporations, it ultimately held that charter schools are state actors for the purposes of providing free public education to students and making discipline decisions.

However, the court dismissed the students' claims against the charter school education management company, concluding that the EMO served only as a contractor, and therefore was not a state actor. The Court's decision thus provides critical protection for education management companies facing constitutional claims by individual students.

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