February 21, 2017
Mark Noss email
Subject: Letter from counsel
Mark Noss is threatening to sue the Grand Traverse Academy (GTA) for millions if the board of directors at the Traverse City, Michigan, charter school replaces his company, Full Spectrum Management, LLC (FSM), as its educational services provider.
Noss, a former GTA board president whose FSM assumed control of the charter school on March 19, 2014 after its board cut ties with former manager Steven J. Ingersoll, has hired Grand Rapids-based attorney Jon Bylsma of Varnum LLP to represent him in the looming legal battle arising from the GTA board’s decision to entertain bids for a new management company. In addition, Noss is seeking reimbursement for his expenses related to the now-scuttled GTA expansion.
In a January 5, 2017 letter to the GTA board, Bylsma demanded payment for his client, including all expenses “incurred by Dr. Noss or his entities in reliance on the Academy's assurances, understandings, and written Lease Agreement”.
Bylsma, referencing the lease for the GTA math and science center expansion (originally set to be constructed by MDN Development, LLC, a private, for-profit entity controlled by Noss), asserted that “Dr. Noss, through his entity, MDN, has incurred several hundred thousand dollars of expenses in connection with the Math and Science Center. This has been done at the request of the Board, and pursuant to the authorized and executed Lease Agreement.”
In addition, if he is ultimately cut loose by the GTA, Noss brusquely stated in a February 21, 2017 email to the GTA board that he would seek a buyout of his current management contract, which is not scheduled to expire until June 30, 2021. Based on his contractually obligated fee, annually ranging from $650,000 to $2,000,000, the management fee buyout alone could net Noss between $2,600,000 to $8,000,000 if he is successful.
And, most shockingly, Noss is demanding that the GTA assume repayment responsibility for a $1,000,000 Traverse City State Bank line of credit he took over in 2014 from convicted felon Steven J. Ingersoll.
It’s getting ugly, and could get even uglier.
THE ROAD TO HELL IS PAVED WITH GOOD INTENTIONS
Noss' grip on the management of the GTA began to loosen in late 2016, when it was determined the Academy did not have the legal authority to enter into the proposed MDN proposal, which included a ground lease and a lease agreement.
Although the original agreements were signed on June 26, 2015, documents related to the construction process released to me by Lake Superior State University after a Freedom of Interest Act request in December 2016 revealed the long-delayed legal review process only began in late August 2016.
The GTA board sought alternative financing in the form of a short-term municipal bond through New York City-based Tortoise Investment Strategies, signing a non-binding letter of intent on November 18, 2016. The agreement was terminated by the board on March 10, 2017.
In addition, another sticking point appears to be the GTA board's recent decision to shift compensation responsibility of some key employees from the school to Noss and his Full Spectrum Management.
RISK, REWARD...AND ROI
In his January 5, 2017 letter to GTA board attorney, Kerry Morgan, Jon Bylsma threw down the gauntlet:
I am writing to address, before it is too late, what is apparently a severe misunderstanding between Dr. Noss, Full Spectrum Management, LLC ("FSM"), and MDN Development, LLC ("MDN"), on the one hand, and Grand Traverse Academy (the "Academy") and its Board, on the other. Over the last several weeks, Grand Traverse Academy has: (1) attempted to shift reimbursable expenses pursuant to the Educational Provider Agreement between the Academy and FSM to be non-reimbursable expenses of FSM directly, contrary to the terms and conditions of the agreement between the parties; (2) suggested that it intends to terminate the Educational Provider Agreement; and (3) signed a Letter of Intent in direct contradiction to its obligations pursuant to a Lease Agreement authorized by the Academy Board entered into on February 2016.
Dr. Noss is unsure of the motivation or rationale behind recent actions and requests a meeting to discuss the current status of those issues. Time is of the essence. We are aware that the Academy's Letter of Intent with Tortoise Credit Strategies, LLC ("Tortoise") specifically requires a breach of the terms and conditions of the Educational Provider Agreement where it calls for "any individual or entities performing services for the Academy that are required to be performed by the ESP under the ESP Agreement will be employed or contracted by the ESP and not the obligor. In addition, the costs for these employees or contractors will be covered under the ESP fee and will not be passed through the obligor." There is no room for that condition to be met without a breach of the existing agreement.
Regarding the Lease, Dr. Noss, through his entity, MDN, has incurred several hundred thousand dollars of expenses in connection with the Math and Science Center. This has been done at the request of the Board, and pursuant to the authorized and executed Lease Agreement. This letter is not intended to threaten legal action or take any other position other than that Dr. Noss would like the opportunity, as a long-time Board member and someone who cares deeply about the Academy, to discuss those issues. We cannot imagine a scenario under which the terms and conditions pursuant to the Tortoise Letter of Intent would be more beneficial, financially or otherwise, for the Academy than the existing agreements with Dr. Noss.
Specifically, Dr. Noss, through MDN, undertook the financing and construction of the Math and Science Center at significant individual risk, including the risk of any cost overruns, at a ROI well below any market return that would be required by an arms-length third party. If it is true that the Academy can find other financing, that would be wonderful. All costs, however, incurred by Dr. Noss or his entities in reliance on the Academy's assurances, understandings, and written Lease Agreement must be paid. Again, it is difficult to imagine that reimbursing Dr. Noss for these expenses and entered into a market rate third-party transaction will somehow be better.
I would like to respond briefly, so that we are operating from a common understanding, to some of the recent correspondence. Specifically, your recent correspondence with Dr. Noss regarding the compensation for the Superintendent, HR/accounts payable position, and the IT director. Your e-mail, which states that these items fall under FSM management fee rather than as a reimbursable expense, specifically states that these responsibilities are those set forth in Article III of the Agreement.
Article 5.03, however, specifically identifies goods and services provided pursuant to Article III as those being reimbursable expenses for which the Academy shall reimburse to FSM. Indeed, there is no conceivable reading of the existing Agreement under which the positions referenced above would be a non-reimbursable expense to be incurred by FSM and paid out of its management fee. Similarly, there is clearly some misunderstanding with regard to the extent and purpose of the FSM management fee. The FSM management fee covers employees that work at FSM (as opposed to be working at the Academy), who essentially perform administrative functions with regard to those employed at the Academy.
It also covers risk. FSM is a signor on the Academy's line of credit that had a balance of $925,000 out of a total $1,000,000 line when FSM took over management of the Academy in March of 2014.
Interest on that line is being paid out of the FSM management fee today and currently has about $800,000 left. This money is used for cash flow purposes and has kept the Academy out of a cash flow deficit situation for many years.
Notably, FSM reduced its management fee by $211,000 in fiscal year 2015-2016 to keep the Academy out of a deficit situation. This was done not out of any legal or other obligation, but purely to help the Academy at the expense of FSM and Dr. Noss.
So that I am clear, we are hopeful to clear the air with regard to both the Educational Provider Agreement and the financing and construction of the Math and Science Building.
If using a third-party financier from New York to do the financing and dictate who the service provider will be for the Academy is in the best interests of the Academy, FSM and Dr. Noss will be happy to allow that to happen. Towards that end, Dr. Noss would like to understand better the terms and conditions under which Tortoise intends to conduct the financing and what building the Academy intends to build pursuant to that financing.
Moreover, Dr. Noss would like to understand how it is that the Academy intends to honor its obligations pursuant to the existing Agreement and enter into an agreement with Tortoise consistent with the Letter of Intent. This would have to include, of course, paying the reliance damages in connection with the Lease and the building of the Math and Science Center, paying off the Line of Credit and other obligations that FSM has been carrying on behalf of the Academy, and buying out the Educational Provider Agreement.
I, and Dr. Noss, will make ourselves available as soon as possible to have such discussion as we realize that time is of the essence. We appreciate your consideration of these matters. Thank you for your consideration.
Two days later, on January 7, 2017, GTA board attorney Kerry Morgan responded to Bylsma:
Thank you for your correspondence dated January 5, 2017, expressing the concerns of your client. We are pleased to see that Dr. Noss recognizes the importance of putting the Academy, its teachers, parents and students first in our ongoing discussions.
By way of background, the Grand Traverse Academy (the "Academy") is a Michigan public school academy operating as a Michigan non-profit corporation and governmental agency of the State of Michigan, organized pursuant to Part 6A of Chapter 380 of the Revised School Code, Act No. 451, Public Acts of Michigan. 1976. as amended, Michigan Compiled Laws ("MeL") Section 380.501, et. seq. (the "School Code") and the Michigan Nonprofit Corporation Act, Act No. 162, Public Acts of Michigan 1982. as amended, MCl Section 450.2101. et .. seq. (the "Non-Profit Act").
As such, the Academy possesses only those powers enumerated under the Nonprofit Act and the School Code. The School Code specifically sets forth the Academy's power to acquire and dispose of its property and to finance the purchase of such property only for educational purposes.
The Lease Agreement between the Academy and MDN Development, LLC ("MDN") is part of a development proposal under which MDN would lease from the Academy a portion or the Academy's real property, finance and construct a Math and Science Center addition to the Academy's current facility and then lease the addition to the Academy.
The Academy's approval for the Lease Agreement contained in the Board Resolution dated February 2, 2016, was "subject to final legal/accounting review." Unfortunately, this legal review was only conducted in the Fall of 2016 after it was requested by the Traverse City State Bank as a condition of the granting of a loan to MDN to be used to finance the building addition. At this time, the Academy hired the law firm of Miller, Canfield, Paddock and Stone, PLC ("Miller Canfield") to conduct a review of the proposed MDN proposal and to render an opinion as to whether the Academy had the legal authority to enter into the proposed MDN proposal which included a Ground Lease and the Lease Agreement.
After its review, Miller Canfield was unable to render an unqualified legal opinion that the Academy had the legal authority under the School Code to lease a portion of its real property to a private entity and then lease the privately built addition. Further, Miller Canfield was also concerned that the private use of the Academy's property could adversely affect the tax-exempt status of the Academy's outstanding 2007 Bonds which were issued to acquire, construct and remodel the Academy's school facility.
Under federal tax law, property acquired with the proceeds of tax-exempt bonds is generally prohibited from being used for private purposes. The February 2, 2016, Board Resolution therefor failed legal sufficiency and is void ab initio. Your client is placed on notice of same by this correspondence.
Moreover, a resolution dated June 26, 2015, authorizing issuance of security which by its terms is contingent upon the validity of the February 2, 2016 resolution, likewise fails legal sufficiency and is void ab initio. The same holds true for an exclusive easement agreement entered into on June 26, 2015, by and between Grand Traverse Academy and MDN. The easement itself is contingent upon the validity of the original resolution which itself was subject to legal review and which legal review subsequently identified its legal insufficiency thereby rendering it void ab initio. Your client is placed on notice of each of the foregoing by this correspondence.
It should also be noted that the Academy's Charter Contract requires that any facility addition or expansion, whether purchased or leased, is subject to the approval of the Academy's Authorizing Body, the Lake Superior State University ("LSSU"). This approval from LSSU has not been obtained.
It is the Academy's position that FSM, as the Academy's full-service management company, was responsible for obtaining the required legal review of the MDN proposal and the required approval from LSSU.
MDN and FSM are both entities controlled by Dr. Noss. FSM and Dr. Noss should have been well aware of the requirement for a legal review of the MDN proposal and the necessary approval from LSSU. Thus, any expenses incurred by MDN before these approvals were obtained were made at MDN's peril.
We trust this amply and sufficiently responds to and rebuts your concern that the letter of intent conflicts with the lease agreement authorized by the Academy.
We have, in the past, requested that Dr. Noss provide a documented list of those fees MDN has incurred so that we may evaluate whether or not they fall within the authority of a public school to purchase in its own right. The only documents we have received is a legal bill for $30,000, an invoice for appraisal services in the amount of $9,500, and all invoice from Inland Seas Engineering for $605. These documents were attached to a summary sheet seeking $40,105. We have received no documentation evidencing if anything has been actually paid. Nor have we received any of the underlying agreements or contracts. The few documents, therefore, as submitted are inadequate to determine if they reflect services which the Academy may lawfully purchase.
If you provide documented details of what services have actually been performed, evidence of their underlying contractual obligation as well as evidence of payment by MDN, we will be happy to review this request further.
We also wish to address the matter of reimbursable expenses under the educational provider agreement between the Academy and FSM. The Academy approached your client requesting adjustments in connection with certain employees which would shift the obligation for their compensation to FSM. FSM rejected that proposal. That is where the matter now stands.
However, we would be remiss to point out that the March 19, 2014, agreement authorizes the Academy to "terminate this agreement on July I, 2016 or any date thereafter for any reason whatsoever and without cause or penalty upon 30 days written notice to FSM." Article 8.01(b).
In addition, the agreement states that the compensation paid FSM "For services hereunder from all services shall be at least $650,000 for any fiscal year." Article 5.O1(c).
This is the contractual floor. We are advised the Academy currently pays more than this amount, though the contract only requires it to pay $650,000 for FSM services under Article 5, in addition to payment of costs under Article 5.03.
The discussion regarding this matter was characterized early on as shifting of payment for services of certain employees but that focus misses the forest for the trees. The central thrust of the Academy's interest is to reduce its expenses, not so much how they are characterized as fees versus reimbursements or otherwise. Thus, without regard to the characterization of those payments as a fee for services under Article 5.01, or costs under Article 5.03, the bottom line is that the fee itself may be reduced by the Academy consistent with the contract to $650,000.
Thus, the Academy again requests that the parties sit down and discuss the viability of any reduction of the fee paid to FSM based on the contractual options which the parties wrote into their own prior and unambiguous agreement.
Indeed, you raise a related concern about whether or not the Academy intends to terminate the educational provider agreement with FSM. Permit us to address that subject.
As stated above, the Academy is a charter school operating under the laws of the State of Michigan. As such, its Board must be constantly vigilant in connection with the expenditure of public funds. Part of this due diligence is to review expenses of the Academy, including services provided by your client. In connection with this obligation, it is a well-recognized best practice to solicit bids for educational provider services. Your client understands this from his days on the Board as its President. Yet, the Academy Board has not met to discuss this matter and has not made any decision about seeking bids. Frankly, the Board has been attending to other matters of priority. My prior communication on this subject should not be misunderstood or construed to suggest otherwise. Any continued suggestion to the contrary is unfounded and unwarranted.
If the Board elects to bid educational services, that decision will be made in an open meeting. Such a process would be open to all eligible providers and we would expect and anticipate FSM to bid on an equal basis with all others who may have an interest.
A review of the history of the Academy indicates that its past practice of not bidding out such an important service should come to an end.
We believe your client, with his background as former President of the Academy Board itself, readily agrees with the wisdom of this approach and is not constrained in his current position from recognizing the Board's obligation. We have no reason to doubt that he will voice support for the Board's exercise of its fiduciary obligation concerning provider services. This support includes setting aside any of FSM's potential self-interest as the only possible provider of education services for the sake and benefit of the Academy, its teachers, parents and students.
If we are mistaken in any way concerning this support, please advise.
Finally, we are advised that your client has requested the Academy to assume responsibility or liability in connection with a loan to full Spectrum Management, LLC from Traverse City State Bank. We are advised that Dr. Noss and FSM assumed all obligations, legal or otherwise, in connection with a line of credit later converted to a loan, initially obtained by Smart Schools Management and Dr. Steven Ingersoll. The Academy was not involved in this matter and was not aware of it as far as we can tell.
Dr. Noss has produced no documentation to the contrary. The Academy, therefore, has neither responsibility nor liability in connection with any TSB loan which Dr. Noss or FSM assumed or agreed to assume from Smart Schools Management or Dr. Steven Ingersoll.
Nor does it have any knowledge of the use of these funds or their transfer to whom or from whom by FSM. Of course, we would be happy to review any documentation to the contrary, but we do not believe any exists regarding the instant commercial installment loan number 176555, at issue here. Should you have any questions, please feel free to contact the undersigned.
On February 21, 2017, Byslma responded, doubling down on Noss's demand that the GTA take on the remaining $800,000 Traverse City State Bank line of credit debt as its own:
Thank you for your letter of February 7, 2017. I am hopeful that we can continue to move forward constructively to resolve the issues between our clients.
1. THE LEASE. With regard to the Lease Agreement, the Lease Agreement has been signed on behalf of the Board without conditions. Nonetheless, it is our intention to either proceed with the construction and Lease, as I understand the legal issues have been dealt with, or to make sure that MDN Development, LLC (“MDN”) is reimbursed for expenses it incurred in good faith based on the representations, Board approval, and unconditional execution of the Lease Agreement. A listing of those expenses entitled "GTA Expansion Cost To-Date" is attached to this letter.
MDN does not seek any lost profits or opportunity costs, only to cover its costs and liabilities. Your position that it was Full Spectrum Management, LLC's ("FSM") obligation to obtain the required legal review is a position that will only lead to litigation. First of all, if the required legal review is the responsibility of FSM, then we would be happy to provide that legal review and move forward with the lease.
The same is true for approval from Lake Superior State University ("LSSU"). Specifically. LSSU has been kept in the loop and we do not believe that it would be difficult to obtain approval for this arrangement.
In no circumstance, however, were expenses incurred toward this signed lease at FSM's or MDN's risk.
2. THE FSM MANAGEMENT AGREEMENT. As to the underlying contract between Grand Traverse Academy ("Academy") and FSM, FSM is happy to discuss restructuring the contract in an advantageous way to the Academy.
Your review of the historical context, however, misses the point. FSM bailed the Academy out when it was in trouble to the Academy's benefit, not FSM's. Dr. Noss, through his entity FSM, look over a difficult situation when the prior service provider failed. We are open to discussing the viability of any reduction of the fee paid to FSM based on the contractual options.
FSM is not happy, on the other hand, to discuss rebidding its management agreement. FSM sought and obtained an extension of the agreement until 2021. This was done to represent to Traverse City State Bank ("TCSB ") the stream of payments that acted as security on the TCSB LOC and the MDN construction loan. The failure to change the date from 2016 to 2021 in Paragraph 8.01(b) was an oversight. We dispute the Academy's right to terminate without an uncured breach.
Regarding the TCSB LOC, FSM is not asking the Academy to assume responsibility or liability in connection with that loan. The Academy is already responsible for that LOC. Specifically, these are funds that were provided by TCSB directly to the Academy.
Because the Academy did not have the credit or ability to sign for that loan, FSM's predecessor did so, followed by FSM. In fact, at the same time, the Academy represented to TCSB that FSM's contract was good through 2021. There can be no question that those funds went to the Academy, and therefore under a theory of unjust enrichment, there can be no dispute, legally or morally, of who is responsible for that loan.
Importantly, FSM has never drawn on that line of credit and, instead has only paid down on behalf of the Academy. Refusing to acknowledge this responsibility will only result in a legal dispute which will further take away from funds budgeted for the education of students of the Academy.
Please advise on how you would like to proceed. I understand that there is a Board meeting to discuss the possibility of putting the management contract up for bid; we are happy to come to that meeting or otherwise discuss restructuring our existing agreement. I look forward to hearing from you soon.
That February 21, 2017 letter is sent via email by Mark Noss to members of the GTA board of directors and the school's superintendent, Susan Dameron:
I wanted to make sure you received the attached letter from my legal representative before tomorrow night’s Board meeting. It is unfortunate that matters have gotten to this point but I am optimistic that FSM and the Board can work cooperatively for the benefit of GTA. I would ask for the opportunity to discuss these issues and come to some compromise prior to any board decision. I am standing firm with all points brought forth by my counsel regarding FSM’s contract, TCSB Line of Credit, the signed lease, and all incurred building project expenses.
Clearly, I will protect my contract by taking legal action should you proceed with an RFP. If that is your course, in order to protect GTA, I only ask that you do it in closed session, which at this time would be in the best interest of GTA. Such a decision will create a feeling of uncertainty amongst staff affecting morale and potentially revisiting union talks. Most importantly, enrollment will be severely impacted and the future of the GTA following the media coverage. All at a critical time when we are considering expansion. Also know that Traverse City State Bank, a local community bank, has been a loyal partner since the Academy’s inception since 2000, even in the worst of times. The bank also needs to be protected which is why I took the LOC on behalf of GTA in the first place.
I am confident that through open communication these issues can be resolved to everyone’s satisfaction. I look forward to the opportunity.
Grand Traverse Academy board of directors uploaded a formal request for proposal on its site April 11, 2017, and set April 21, 2017 as the submission deadline.
Tomorrow, I will have a complete analysis of the issues raised on both sides of this boiling legal controversy.
UPDATE: April 28 @ 8:00am
During last night's meeting, the Grand Traverse Academy board of directors rejected Noss' demand that the charter school assume responsibility for repayment of a $1,000,000 Traverse City State Bank line of credit Noss took over from its originator, former manager Steven J. Ingersoll. The board issued a statement indicating the debt will remain with Noss. Noss has been making interest payments on the outstanding debt, which stands at roughly $800,000.