When school management companies fail: Righting educational wrongs

Journal of Law and Education, Jul 2002 by Conn, Kathleen

If school management directors breach their fiduciary duties to students who are shareholders, and students successfully sue in either a derivative, direct or class action suit, rescissory damages may be the most suitable form of damage remedy. An equitable remedy, rescissory damages are most appropriate when fiduciaries unjustly enrich themselves by exercising their authority deliberately to extract personal financial gain at the expense of those who depend on them."' In the complicated scheme of mergers and other corporate exchanges, rescissory damages must be claimed in a timely fashion or forfeit."' However, in the public school environment, proceedings move more slowly than in the fast-paced corporate world. Nevertheless, recission itself would be an impossible remedy because deprivation of educational opportunity is irreversible, but rescissory damages could pay for compensatory education or tutoring.

basic educational supplies, this could constitute a breach of the duty of loyalty. Similarly, if directors seek to entrench themselves in control, for whatever personal reasons, this is a breach of the duty of loyalty. Care may also be involved in the breach, but the requisite showing of a breach of loyalty is satisfied.

A classic decision in which the Delaware Court of Chancery considered plaintiff's request for a monetary award based upon the theory of rescissory damages was Weinberger v. UOP.' The Delaware Supreme Court remanded Weinberger to Chancery so the court could enlarge the class of minority shareholders the plaintiff represented and consider all relevant factors of valuation. Chancellor Brown ultimately declined to award rescissory damages to shareholders allegedly disadvantaged by a merger that had occurred years ago, awarding $1 per share nominal damages instead. The Chancellor explained his understanding of rescissory damages as designed to reward the shareholder with the highest valuation the stocks had attained between the time of the wrongdoing and the time of the lawsuit, minus the price they had already received at sale. In effect, rescissory damages would have allowed the shareholders "to be made nearly as whole as possible."'58 Although Chancellor Brown did not deem such damages appropriate in Weinberger because of the speculative nature of the damage amounts claimed, the goal of making educationally deprived students "nearly as whole as possible" seems appropriate. Damages could be calculated based on the costs of compensatory education or of tutoring to reach competency in areas in which students tested as deficient.

the educational context as well. If award of rescissory damages for one student or group of students puts a corporation-managed school out of business, all students enrolled in the school thereby suffer disruption of their educational process. Similarly, the negative ripples will extend to the public schools that must accommodate the displaced students. Safeguards would have to be put in place.

In another well-known Delaware decision concerning rescissory damages, Cinerama v. Technicolor, Inc.,'63 Chancellor Allen identified yet another rationale that makes rescissory damages especially appropriate in the student context: principles of restitution. This is the same rationale identified in Lynch v. Vickers Energy Corp." The need for restitution is an important assignment of blame that society should hear when directors of for-profit school management corporations betray the public trust.