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Thursday, August 28, 2014

NEVER MIND THE MAN BEHIND THE CURTAIN! Piercing The Corporate Veil: Steven Ingersoll, Smart Schools Management and the Grand Traverse Academy Board of Directors

The Traverse City Record-Eagle recently reported on Steven Ingersoll’s six month trial extension request, news first revealed on this blog.

Quoted in the article was attorney Kerry Morgan, currently representing the Grand Traverse Academy Board in its quest to retrieve the $1.6 million dollars owed to the school by its former education management provider, Smart Schools Management, Inc.

Morgan stated that “he’s been looking into how and whether it’s even possible the school can retrieve the $1.6 million from Smart Schools.”  Morgan went on to ponder whether there’s a “legally enforceable obligation for that money to be paid.”

Like many of you, Miss Fortune was perplexed—although the Academy had parted ways with Ingersoll’s Smart Schools management entity in March, the school’s Board of Directors has yet to make an effort to recover the money from Ingersoll’s company. 


Seems like someone in State of Michigan's Department of Education would want to know why that's not being addressed.

Hmmm?


In addition, as of June 30, the Academy’s Board still classified the missing money as an “Asset” on its June balance sheet although it's clear that Smart Schools will never provide a benefit to be used in future periods.

So, has the Board gotten cold feet? What could be preventing any attempt to recover the taxpayer money that disappeared from the Grand Traverse Academy into Smart Schools Management’s bank accounts?

In an effort to determine the rationale for the “legally enforceable obligation” question, I went to the source—attorney Kerry Morgan.


In an email response to my inquiry, Morgan stated that the Academy’s “recovery if any must arise under the management contract.” Morgan explained that the Grand Traverse Academy “had a Management contract with SSM, not Ingersoll. SSM is a corporation, Ingersoll an individual.”

Morgan explained that the fact that Ingersoll “is the owner of SSM does not make him personally liable on a contract between SSM and GTA.” The nature of corporate liability means that “statements that ‘Ingersoll owes GTA x dollars’ are misleading. If Ingersoll personally owes GTA any money it must arise from some legal obligation. An oral promise without valid consideration is simply not an enforceable legal obligation.”

Morgan raises several important points, including the true nature of the repayment plan the Academy accepted from Smart Schools Management (relating to the $2,338,980 overpayment/advance revealed in the 2013 fiscal audit) and the Academy’s ability to compel a court to “pierce the corporate veil” of Smart Schools Management.


PIERCING THE CORPORATE VEIL

A key reason that business owners and managers choose to form a corporation or limited liability company (LLC) is so that they won't be held personally liable for debts should the business be unable to pay its creditors. But sometimes courts will hold an LLC or corporation's owners, members, and shareholders personally liable for business debts. When this happens it's called "piercing the corporate veil."

But first, let’s take a look back at how we arrived at this problem.

It might be an overstatement to say that some education management companies (like Smart Schools) use charter schools as their own personal piggy banks, but the scandal at the Grand Traverse Academy illustrates just how easy it is for taxpayer money to flow from charter schools to private companies…and to private individuals.

The Grand Traverse Academy’s 2013 audit revealed that Smart Schools Management Inc., an education management firm run by the school’s co-founder Steven Ingersoll, would draw down cash advances from the school every year, unauthorized by the board. The advances were based on budgeted amounts that “exceeded what the Academy could ultimately afford.”


The audit concluded, “Smart Schools Management, Inc.’s ability to prepay their fee and withhold payment of overpaid fees enables Smart Schools Management, Inc. to abuse their access to public funds.” Though these practices were apparently business as usual at the Academy, Board officials raised no alarm when these “prepaid expenses” jumped from $69,898 in 2012 to $2.3 million in 2013.

Rather than demanding Ingersoll’s company give back the $2.3 million, the Academy’s board agreed to a compensation plan that would reduce management fees for future services until 2016.

But less than a year later, an April 10, 2014 federal indictment charged Ingersoll with fraud. The indictment alleged that Ingersoll had tried to redirect about half of a $1.8 million Bay City Academy construction loan to a personal bank account controlled by Ingersoll and his wife in part to “reduce his indebtedness to the Grand Traverse Academy.”

As the Traverse City Record-Eagle has reported, because of this legal jeopardy, which includes additional counts of tax evasion, the $1.6 million Ingersoll owes to the charter school remains in limbo.

Corporate Liability for Business Debts

As Kerry Morgan explained in his email, corporations are legal entities, separate and distinct from the people who create and own them.

One of the principal advantages of forming a corporation or an LLC is that, because the corporation or LLC is considered a separate entity (unlike partnerships and sole proprietorships), the owners and managers have limited personal liability for the company's debts. This means that the people who own and run the corporation or LLC cannot usually be held personally responsible for the debts of the business.

But, in certain situations, courts can ignore the limited liability status of a corporation or LLC and hold its officers, directors, and shareholders or members personally liable for its debts. When this happens, it is called piercing the corporate veil. Closely held corporations and small LLCs are most likely to get their veils pierced (corporations that are owned by one or just a few people are called closely held corporations, or close corporations for short).

If a court pierces a company's corporate veil, the owners, shareholders, or members of a corporation or LLC can be held personally liable for corporate debts. This means creditors can go after the owners' home, bank account, investments, and other assets to satisfy the corporate debt. 


But courts will impose personal liability only on those individuals who are responsible for the corporation or LLC's wrongful or fraudulent actions; they won't hold innocent parties personally liable for company debts.

Factors Courts Consider in Piercing the Corporate Veil

The most common factors that courts consider in determining whether to pierce the corporate veil are:

•whether the corporation or LLC engaged in fraudulent behavior
•whether the corporation or LLC failed to follow corporate formalities
•whether the corporation or LLC was inadequately capitalized (if the corporation never had enough funds to operate, it was not really a separate entity that could stand on its own), and
•whether one person or a small group of closely related people were in complete control of the corporation or LLC.


I’m not attorney (and never played one on TV), but it looks to me like the Grand Traverse Academy may have a good chance at winning a case against Smart Schools Management.

So what could be preventing the Grand Traverse Academy Board from filing a civil action against Smart Schools Management to retrieve the money?

Could it be that, like Staten Island’s Fresh Kills landfill, the deeper you dig…the more it stinks?


THE REPAYMENT PLAN: THE TIES THAT BIND (AND GAG)

Despite a promise to clean the schoolhouse, things don’t appear to have changed much at Grand Traverse Academy. About one month before Steven Ingersoll’s impending indictment, Mark Noss, Ingersoll’s Ferris State classmate, twenty-year business associate and former board president, filed incorporation paperwork to form another education management firm, Full Spectrum Management, LLC.

The very same day, Grand Traverse Academy announced its switch to Noss’ company.

Even though Noss worked with Ingersoll for twenty years and headed the board that allowed Smart Schools Management to collect advanced payments year after year (and a multi-million dollar overpayment in 2013), he claimed he had no knowledge of Ingersoll’s alleged wrongdoing.


“Smart Schools Management took their management fee that was budgeted for that fiscal year,” Noss said. The fee was adjusted down at the end of the year, and the remaining amount was owed to the schools (emphasis added).

“There was never an advancement or more money provided to Smart Schools that they weren’t entitled to,” Noss said.

“With my deep understanding of GTA’s history and operations, and my thorough knowledge and alignment with the school’s model,” Noss explained in an April 28 email, “I am confident that Full Spectrum will be a great asset to Grand Traverse Academy.”

In a July 3 Record-Eagle article, Board President Brad Habermehl was quoted musing rhetorically about how the Academy could be "moving forward with a new team when we have all the same high management employees running the show with Mark."

Habermehl said he noticed after Ingersoll's indictment that correspondence about the school's finances came from Gretchen Ingersoll, Steven Ingersoll's daughter-in-law.

“After inquiring what the relationship was and what was going on, it came up she was still doing the books, and had been doing the books for Smart Schools,” said Habermehl, a Flint-based optometrist.

Habermehl said the GTA board hoped Gretchen Ingersoll would leave, as well as any other employees who "crossed over" from Smart Schools management.

And with another Smart Schools’ staffer, Margo Abbott, reportedly providing financial and school count support to both the Bay City Academy and the Grand Traverse Academy, it appears that the links continue.

In fact, Ingersoll’s son, Josh, recently registered Full Spectrum’s new domain name for Noss.

So what exactly did that “repayment plan” agreement state, anyway?

I don’t know, but it’s next on my FOIA request list.

1 comment:

  1. The primary purpose of incorporating a business is to protect the individuals from prosecution or liability. GTA can't go after Ingersoll for the money owed because their contract wasn't with Ingersoll. This is why he has a bazillion registered LLC's. They cover his ass in this situation.

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