Charter Schools Can Be Sued for False Claims About Enrollment, Programs

The North Carolina Supreme Court recently clarified that charter schools can be sued for violations of the N.C. False Claims Act (NCFCA) just like any other entity that defrauds the State. Kinston Charter Academy had argued that it is shielded from lawsuits for damages, like a state agency, because it is statutorily authorized, fulfills a public purpose, and receives state education funds.

North Carolina allocates money to a charter school on a per-pupil basis in line with its per-pupil allocation to the public school district where it is located. The state allocated $6,265 per pupil at charter schools and other public schools in the 2019‒20 fiscal and school year, with a total of $734.7 million going to charter schools for their 117,264 students. When a charter school obtains a portion of these funds based on misrepresentations about its programs, attendance numbers, and other aspects of their operations, the State or a whistleblower suing on its behalf can sue to recoup the funds, plus fines.

False claims act lawsuit followed state audit of Kinston Charter Academy

Attorney General Josh Stein sued Kinston Charter in 2016 in Wake County Superior Court, alleging that it grossly inflated its expected enrollment for the 2013‒14 school year in order to get an additional $344,000 in state funds to start the year.

A 2015 report by the state Auditor found that Kinston Charter’s attendance and finances had been eroding for five years and that the K-8 school had been using increasingly expensive short-term loans to bridge the gaps. Stein alleged that the school and its directors knew the school would be obligated – but unable – to repay the state money when the attendance fell short. In the 2012‒13 school year, the school had forecasted enrollment of 372 but ended up enrolling only 300 and finished the year with just 274. Deep staff cuts followed.

The preliminary 2013‒14 budget that the school submitted to the State Board of Education (“SBOE”) in early 2013 was based on its forecast that 310 students would attend, roughly the same number that began the 2012‒13 year. Later in the spring, the school increased its estimate to 366, the largest legally allowable increase that would not require specific approval by the SBOE. But only 189 began the year; the $344,000 overpayment reflects the shortfall of 177 students.

It’s important to note that all of this information comes most directly from the state Auditor’s report and the allegations in the State’s complaint. It is not clear that any sworn testimony or other discovery has been taken in the lawsuit, because the school asked Wake County Superior Court to dismiss the case, soon after it was filed, on the basis of sovereign immunity, which protects a defendant both from liability and, in some instances, from discovery. The Superior Court denied that request, but the school appealed that ruling, and it was overturned in 2019. Still, the Supreme Court had the final word on December 17, 2021.

Court rejects sovereign immunity for charter schools

Throughout, the school argued that it was effectively a state agency because of its state funding, its public function, and its regulation by the SBOE, thus entitling it to sovereign immunity. It similarly argued that the NCFCA did not specify which “persons” could be sued under the NCFCA and that its purported governmental character kept it from being such a “person”. But the Supreme Court rejected those arguments, holding that, at most, charter schools operate like local government agencies, that the state law allowing charter schools explicitly requires them to be run by independent non-profit corporations, that state regulation does not negate that independence, and that a separate statute defines non-profit corporations as “persons” throughout state law unless specified otherwise.

In other words, five years and eight months after the lawsuit was filed against the school, the Supreme Court ruled that it can legally be sued.

Bad Faith estimates allow for a “false claim”

The Supreme Court also rejected the school’s argument that its forecasts of student enrollment cannot qualify as “false claims” that would subject it to liability under the NCFCA. Where an entity receives state money based on forecasts or estimates that it made recklessly and in bad faith, as was alleged by the Attorney General in this case, there is a “false claim.”

What’s next for Kinston Charter?

The Supreme Court’s ruling does not mean that Kinston Charter Academy loses the case and is liable, only that the Attorney General’s allegations are sufficient to take the case into discovery – and potentially to trial. The ultimate result will depend on the trial judge’s or jury’s determination of whether and how reckless and unreasonable the school was in forecasting the student population for its 2013‒14 school year. The defendants will be on the hook, if at all, for the portion of the 177-student overestimate that is deemed to have been reckless – and the portion of the $344,000 overpayment that is deemed to have been unreasonable – plus fines.

Does it matter? For Kinston Charter, probably not; the school closed just a few weeks into the 2013‒14 school year. But the Supreme Court’s ruling also upheld the claims against several of the school’s officers.

Financial rewards for charter school whistleblowers

More importantly, any future NCFCA lawsuit against a charter school would not get iced for nearly five years on arguments that it is a not a “person” or that it enjoys sovereign immunity. It is now clear that charter schools can be sued by the North Carolina Attorney General, and probably by a whistleblower with inside knowledge about fraud and other false claims that caused the state to lose money.

Such a whistleblower plaintiff, known a “relator”, can recoup 15% to 30% of the recovery in a successful lawsuit, depending on a range of factors. In the case of Kinston Charter, where much of the information came from a report by a state agency, a relator would have stood to receive a much smaller amount, up to 10% at the absolute maximum. For this reason, an employee or insider who suspects that a charter school or government contractor is overcharging the government should consult an experienced whistleblower attorney immediately to discuss options, without waiting for publication of a report by a government agency such as the Office of the State Auditor.