Columbus Green Building Forum Vindicated by Ohio Court of Claims in Dispute with State of Ohio
Posted In: Litigation   | Posted by: Arenstein & Anderson Co., LPA
The Ohio Court of Claims recently granted summary judgment to Columbus Green Building Forum(“CGBF”), a Columbus, Ohio based, nonprofit organization dedicated to promoting energy-efficient and environment-friendly building practices in Central Ohio. The decision overturned a 2008 audit finding by the Ohio Department of Development (now the Ohio Development Services Agency) (“Development”) and awarded CGBF damages and interest against the State of Ohio totaling nearly $57,000. The State of Ohio opted not appeal the court’s decision. The full text of the final decision of the Ohio Court of Claims can be found by clicking on this link.
Arenstein & Andersen Co., LPA, a Dublin, Ohio law firm, and the Capital University Law School Small Business Clinic (“SBC”) represented CGBF in the lawsuit lead by attorneys Eric R. McLoughlin and Nicholas I. Andersen. When the Capital University Law School closed the SBC in June 2013, CGBF retained Arenstein & Andersen Co., LPA to continue representing it in the litigation.
The lawsuit related to CGBF’s administration of three grants it received from Development between 2007 and 2009. The grant funding originated from the United States Department of Energy, although Development did not disclose this fact to CGBF as it was legally required to do. The grants were intended to facilitate educational programs on various green building practices. Development awarded the grants to CGBF because Development did not have the internal capacity to conduct the programs itself and because CGBF was one of the few Central Ohio organizations with the necessary technical expertise.
For each grant, Development and CGBF executed a written grant agreement containing a description of the scope of work CGBF was to complete and a budget for the administration of the grant. CGBF’s grant budgets clearly spelled out who its Executive Director and Program Coordinator was and the amount of compensation CGBF would pay for her services. CGBF administered the grants and submitted requests for payment to Development for the costs of the grant programs, including the compensation it had provided to its Executive Director for coordinating the programs, as required. Development approved and paid all of CGBF’s requests through the end of 2008. Development did so with full knowledge that the requests included the compensation CGBF had provided to its Executive Director for coordinating the grant programs.
In November 2008, Development conducted a random audit of CGBF’s administration of the grants. Development’s auditors erroneously determined that CGBF had improperly charged the grants for its Executive Director’s compensation due solely on the fact that she was also a member of CGBF’s board of directors and was paid as an independent contractor for income tax purposes.
The auditors relied on a cost principle found in Office of Management and Budget Circular A-122- Cost Principles for Non-Profit Organizations (“OMB A-122”), related to costs for professional and consultant services, to disallow the compensation CGBF had paid to its Executive Director. The professional cost principle in OMB A-122 defines as allowable “[c]osts of professional and consultant services rendered by persons who are members of a particular profession or possess a special skill, and who are not officers or employees of the nonprofit.” Another cost principle in OMB A-122 provides, generally, that the costs of compensation for personal services a nonprofit pays to its employees are allowable provided that the amount of the compensation is reasonable. OMB-122 does not define the term “employee,” however, it does provide examples of what is meant by compensation for personal services, which “includes, but is not limited to, salaries, wages, [and] director’s and executive committee member’s fees.”
Development’s auditors found that the professional services cost principle, rather than the personal services cost principle, applied to the compensation CGBF paid to its Executive Director because CGBF classified her as in independent contractor, rather than a “W-2” employee, for income tax purposes. Thus, the auditors found that because the Executive Director was a member of CGBF’s board of directors, the compensation CGBF paid her was unallowable under the professional services cost principle. The auditors did not question the reasonableness of the compensation CGBF paid its Executive Director. Further, the auditors gave no weight to the fact that the written, approved grant agreements specifically provided for the Executive Director’s compensation.
When CGBF received Development’s audit report in January 2009, it immediately contested the audit finding. CGBF argued that: (1) the services its Executive Director performed to coordinate the grant programs were administrative personal services, not professional and consultant services, and, therefore, the costs were allowable notwithstanding the Executive Director’s position on the board; (2) the fact that Development approved and signed the written grant agreements that identified the Executive Director as a member of CGBF’s board and set forth the amount she would be compensated for the work constituted Development’s preapproval of the costs, thereby making the costs allowable; and (3) Development had failed to disclose the fact that the grant contained federal funds as it was required to do by the federal grant regulations.
CGBF soon learned that Development had no procedure for the appeal of its audit findings. Accordingly, CGBF attempted to reach an informal resolution of the matter with Development. During this informal resolution attempt, CGBF worked with Development’s Chief Legal Counsel Candace M. Jones regarding the audit findings. Upon reviewing the facts surrounding the audit and CGBF’s arguments, Chief Counsel Jones concluded that the Development’s disallowance of CGBF’s Executive Director’s compensation warranted reconsideration under the personal services cost principle.
Chief Counsel Jones even sought the approval of the United States Department of Energy in a letter wherein she stated in pertinent part that:
“Development believes that CGBF has performed the services required by the subgrant and supports CGBF’s use of grant funds to pay the costs of services provided by [its Executive Director]. * * * The amounts paid by CGBF compensated her for services specifically contemplated and allowed by the subgrant. The subgrant agreement identified [the Executive Director] as the individual who would perform the grant-related services, the compensation budgeted for the services was determined to be reasonable in light of the subgrant objectives, and the services were performed as described in the subgrant. * * * [Development] believe[s] the nature of services performed by [CGBF’s Executive Director] support reconsideration of amounts paid to her as compensation [for personal services rather than compensation for professional and consultant services]. To deny CGBF an allowance for the compensation elevates the form of [its Executive Director’s] working relationship with CGBF over the substance of the services she performed. Therefore, [Development] request[s] that [the United States Department of Energy] recognize the compensation paid by CGBF to [its Executive Director] as an allowable cost under the subgrant.”
The United States Department of Energy wrote back to Chief Counsel Jones to advise her that the decision whether or not to allow the costs was Development’s decision and that the federal government would not render an advisory opinion on what Development should do. Despite Chief Counsel Jones’ well-reasoned analysis that the costs should have been allowed, Development’s Audit Chief refused to reverse the audit finding. Development later offset payments due to CGBF under a third grant, funds that CGBF had already expended in reliance on the approved grant, against the amount it alleged CGBF owed on account of the audit.
CGBF’s board of directors determined that if it did not contest the erroneous audit result, it would most certainly be forced to close its doors and its mission to promote and encourage energy-efficient and environment-friendly building practices in Central Ohio would fail. As this result was unacceptable to CGBF’s board of directors availed itself to the then existing nonprofit business entity services provided by the SBC.
The SBC’s supervising attorney at the time, Eric R. McLoughlin, agreed to represent CGBF in a lawsuit against Development on a pro bono basis. Because of the complexity of the case, Attorney McLoughlin solicited the assistance of his colleague, Nicholas I. Andersen, Esq., a shareholder with Arenstein & Andersen Co., LPA, to serve as co-counsel. Attorney Andersen enthusiastically agreed to serve as co-counsel with the SBC on a pro bono basis.
When asked to recall his initial impressions on the case Attorney Andersen responded, “When I reviewed the facts surrounding the audit, the State’s ultimate determination, and the actions undertaken by the State afterwards, I was shocked at the injustice that had occurred. The State had approved the compensation CGBF paid its Executive Director on multiple occasions for each grant: initially, when it approved each grant proposal and entered into each grant agreement with CGBF, and subsequently, when it approved the requests for payment CGBF submitted under each grant. This was all done with full knowledge that the requests contained compensation CGBF had provided to it Executive Director for the work she did coordinating the grant programs. It was clear to me that CGBF had been treated unfairly. As such, I joined the team in hopes of leveling the playing field, as it seemed that the entire bureaucracy was against CGBF and its mission.”
CGBF commenced suit against Development in the Ohio Court of Claims in July 2011. CGBF asked the court to issue an order reversing the audit finding and awarding it approximately $51,000, plus interest, for the amounts Development had refused to pay from approved grants on account of the audit.
In January 2012, the court dismissed CGBF’s case after finding that it did not have subject matter jurisdiction over CGBF’s claims. Specifically, the court held that CGBF’s complaint only contained claims for declaratory and injunctive relief, rather than claims for monetary damages, and therefore the court determined it lacked jurisdiction. The court also found that even if it had jurisdiction over the case, CGBF’s claims were barred by the two-year statute of limitations that applies to claims against the State of Ohio.
CGBF appealed this dismissal to Ohio’s Tenth District Court of Appeals. The Court of Appeals reversed the dismissal and remanded the case for further proceedings. Specifically, the Court of Appeals determined that the grant agreements constituted legal contracts and that CGBF’s claim for Development’s breach of one of the grants by refusing to pay the amounts owed to CGBF under the grant was a claim for monetary damages within the jurisdiction of the Court of Claims. The Court of Appeals also held that CGBF’s claims did not accrue until Development withheld the payments due under the grant in December 2010 because that was the act that CGBF alleged was a breach of the contract and the act that caused it monetary harm. Accordingly, the Court of Appeals found that CGBF’s complaint was timely filed.
The Tenth District Court of Appeal’s decision is significant for a couple of reasons. First, it holds that government grant instruments are legal contracts that can give rise to breach of contract claims that the Court of Claims has jurisdiction over. Second, it provides a basis for challenging State actions in the Court of Claims when the State does not establish an administrative appeal procedure. The full Tenth District Court of Appeals’ decision is available on the Supreme Court of Ohio’s website. See the full decision by clicking on this link.
When the case returned to the Court of Claims, the State filed an answer denying all liability to CGBF. It also countersued CGBF alleging that CGBF owed the State in excess of $57,000 on account of the audit.
Following a lengthy discovery period, CGBF filed an extensive motion for summary judgment asking the Court of Claims to rule in its favor without a trial on all matters at issue in the lawsuit. In order to grant a motion for summary judgment, a court must find: (1) that there are no disputes of material fact; (2) that the moving party is entitled to judgment as a matter of law; and (3) that even when construing the evidence in favor of the nonmoving party, reasonable minds could come to but one conclusion. The Court of Claims held that CGBF met this heavy burden of proof and granted summary judgment in CGBF’s favor, awarding it judgment against the State of nearly $57,000.
In rendering judgment in CGBF’s favor, the Court of Claims determined that:
(1) Development’s auditors’ utilization of a person’s classification as an independent contractor for income tax purposes, without applying the common law agency test, as the only factor in determining “employee” versus “contractor” was erroneous. The court stressed that “[a]lthough the income tax treatment of the hired party is one factor to be considered in determining whether that person is an employee under the general common law of agency, it is not the only factor.”
(2) Based on the evidence presented by CGBF in the form of affidavits, admissions, and deposition testimony, the compensation CGBF paid to its Executive Director was allowable under the personal services costs principle.
(3) Development’s audit findings were erroneous and must be reversed.
(4) Development’s refusal to pay CGBF the amounts that were due under the last grant was based solely on the audit, and since it was erroneous and reversed, Development breached the grant by refusing to pay CGBF.
(5) The State of Ohio’s counterclaim against CGBF for amounts it alleged were due on account of the audit failed as a matter of law in light of the reversal of the erroneous audit result.
According to Attorney McLoughlin and CGBF’s board of directors, CGBF would never have succeeded in this case without the extensive pro bono legal services that were provided by the SBC. Attorney McLoughlin stated that at least, “nine law students worked on the CGBF case over the course of three years, collectively putting in more than 130 hours of free legal services.” Attorney McLoughlin himself said that he spent almost 250 pro bono hours working on the case with the students and teaching them the practical aspects of litigating complex cases.
Additionally, Attorney McLoughlin expressed disappointment that the Capital University Law School decided to close the SBC for budgetary reasons, stating that, “it is a shame that future students will not have an opportunity to gain hands-on experience practicing law while at the same time helping deserving clients like CGBF, who would find it difficult if not impossible to pay full market rates for the legal services they need.” According to Attorney McLoughlin, many of the students who participated in the SBC program feel similarly.
The Court of Claim’s ruling resolved a controversy between CGBF and Development that lasted over five years. In the end, the court determined that CGBF was right all along. Although it is unfortunate that CGBF was put through a half a decade of litigation due to Development’s erroneous audit finding, common sense and fairness finally prevailed. Additionally, CGBF’s board of directors recently confirmed that it would continue its mission of promoting energy-efficient and environment-friendly building practices in Central Ohio. Accordingly, the Court of Claim’s ruling was not only a win for CGBF, but also a win for the environment and the citizens of the State of Ohio as a whole.
About Arenstein & Andersen Co., LPA
Arenstein & Andersen Co., LPA is a full-service law firm based in Dublin, Ohio serving clients in Bexley, Columbus, Delaware, Dublin, Gahanna, Hilliard, Lewis Center, Marysville, Pickerington, Plain City, Powell, Springfield, Westerville, Worthington, and surrounding areas. Arenstein & Andersen Co., LPA’s legal services include: business, litigation, taxation, family law, estate planning, probate, and bankruptcy.