Magistrate orders HAEDC to return property, money to City of Hillsboro

Magistrate Thomas W. Scholl this month ruled in favor of Highland County Prosecutor Anneka Collins and the City of Hillsboro in a quo warranto case involving the Hillsboro Area Economic Development Corporation, a community improvement corporation founded in 2015 under the tenure of former Hillsboro Mayor Drew Hastings. 

A quo warranto is “a challenge to a person’s authority to hold a public office,” according to Court News Ohio’s legal glossary. Collins told The Highland County Press that these actions can only be filed by the Attorney General’s Office or the prosecutor, and the city approached her with the request to file. The Court of Appeals has jurisdiction in these proceedings.

In his decision, Magistrate Scholl agreed that the City of Hillsboro is “entitled to the return of the monies and property it transferred to and is currently being held by HAEDC related to economic development activities on behalf of the city.

“The magistrate has found that HAEDC misused its franchise by operating as if it were an agent for the city under R.C. 1724.10, when it actually was not, and holding onto monies and property transferred to it from the city under the appearance of such agency,” Scholl wrote. “Therefore, HAEDC has violated R.C. 2733.02(D), which provides that a quo warranto action may be brought against a corporation when it has misused a franchise, privilege or right conferred upon it by law. 

“The magistrate concludes that HAEDC’s misuse of its franchise is an offense that, in an action in quo warranto, can be remedied by ousting it from the continuance of such activities.” 

Scholl ruled that the HAEDC “must be ousted from the continued use and possession of the property and funds in its custody related to the economic development activities it engaged in on behalf of the city, and it must be compelled to return such property and money to the city.” 

As previously reported, the Hillsboro Area Economic Development Corporation, a community improvement corporation (CIC), was established via council resolution in May 2015 “for the purpose of advancing, encouraging and promoting the industrial, economic, commercial and civic development of the city of Hillsboro.”

In January 2021 — one year into current mayor Justin Harsha’s tenure — Hillsboro city council voted to “withdraw from involvement” in the previous Hillsboro Area Economic Development Corporation and to establish a new CIC, the City of Hillsboro Community Improvement Corporation.

According to that ordinance, when the articles of incorporation for the new CIC were filed and the “establishment of the City of Hillsboro Community Improvement Corporation pursuant to the terms of this ordinance” was finalized, “the City of Hillsboro [would] withdraw from involvement in the Hillsboro Area Economic Development Corporation (HAEDC), and the matters previously entrusted to HAEDC shall hereafter be entrusted to the City of Hillsboro Community Improvement Corporation.” 

Collins filed the original complaint April 13, 2022 in the Fourth District Court of Appeals, “seeking a writ of quo warranto ordering the immediate removal of [the HAEDC] as the economic development agent for the City of Hillsboro and the dissolution of the Hillsboro Area Economic Development Corporation.”

The complaint asked for the writ to order the HAEDC “to immediately return to the City of Hillsboro all money and property in its possession related to economic development activities on behalf of the City of Hillsboro and appoint a trustee to oversee this process,” as well as to “remove [the HAEDC’s] corporation status.”

According to exhibits and information in the complaint, after council’s vote in January 2021 “to terminate its relationship to” the HAEDC, Harsha — at that point still a member of the HAEDC board — moved at a Feb. 3, 2021 HAEDC meeting to transfer “any property given to the HAEDC by the City of Hillsboro” back to the city. The motion failed, with only Harsha voting in favor.

During that same meeting, according to its minutes, Harsha “explained that two-fifths of the board must consist of city officials or elected officials” (Harsha was the only city representative on the six-member board) and that legal counsel advised the city “there could not be two boards.” The HAEDC board said that they had also received a legal opinion that “subsequent CIC would be ineffective,” and that “the HAEDC would be effective and the [new Hillsboro] CIC would not.” 

The next day, Hillsboro safety and service director Brianne Abbott sent a letter to the HAEDC “hereby demanding that the HAEDC cease and desist from any activity pertaining to real estate, monies or assets formerly entrusted by the City of Hillsboro.” 

Two weeks later, on Feb. 18, 2021, the HAEDC met and voted 4-0 to “remove Mayor Harsha from the board” due to the “discussion at the Feb. 3, 2021 meeting.” They also added a new clerk at that meeting, as the previous clerk was an employee of the city.

As of that meeting, according to its minutes, the HAEDC had “approximately $93,000 in [its] account,” with its properties including the former Gross Feibel building.

“The [HAEDC] has and is acting without adequate City of Hillsboro represented as required by Ohio Revised Code Section 1724.10(B)(1) and is acting without a designation by the City of Hillsboro pursuant to Ohio Revised Code 1724.10(A) as the agency of the City of Hillsboro for the industrial, commercial, distribution and research development in the City of Hillsboro, and the Hillsboro Economic Development Corporation is not otherwise properly organized as a community improvement corporation,” Collins wrote in the April 2022 complaint. 

“The City of Hillsboro cannot exercise its economic development activity … without access to the property and funds held by the [HAEDC], and the City of Hillsboro is entitled to return of the said property and proceeds,” Collins continued. “All property and proceeds received by the [HAEDC] from the City of Hillsboro were given in trust for the sole purpose of economic development in the City of Hillsboro and authority granted to [the HAEDC] by the City of Hillsboro is now withdrawn and vacated, and the trust terminated.” 

Collins alleged that the HAEDC was “deceptively and otherwise improperly possessing and dealing with public funds and property to the injury of the City of Hillsboro and [its] citizens.” She alleged that the HAEDC “has offended against a law providing for its creation or renewal, or any amendment thereof;” “has committed or committed an act which amounts to a surrender of its corporate rights, privileges and franchise;” and “has misused a franchise, privileges or right conferred upon it by law.” 

The HAEDC, represented by Thompson Hine LLP, filed a motion to dismiss the complaint May 16, 2022, according to court records. They argued that the “City did not designate HAEDC as its agency for development under Section 1724.10 of the Revised Code, and its continued operation, with or without the City’s representation and designation, violates no Ohio law governing nonprofit corporations.” 

“[The city] therefore has no statutory basis to request the relief sought, and the Complaint fails as a matter of law,” the HAEDC motion said.

In the motion to dismiss, the HAEDC argued that the city ordinance “does not specifically designate HAEDC as the City’s Section 1724.10 Community Improvement Corporation” and that its articles of incorporation were “not signed on behalf of the City and do not include any ‘provision to the effect that the corporation shall be subordinate to and subject to the authority of the city of Hillsboro.’

“The articles of incorporation also do not contain any language stating that HAEDC was created pursuant to the ordinance or otherwise an agent of a municipality,” the motion to dismiss continued. “[Collins] fails to attach a single agreement under which HAEDC would establish a plan for the industrial, commercial, distribution and research development of the City and act as an agent of the City in implementing that plan.” 

In an answer filed May 19, 2022, Collins responded that “the intent is unambiguous that the HAEDC be an agent of the City of Hillsboro.

“The agreements … clearly indicate that the purpose of the establishment of the HAEDC was for the benefit of City of Hillsboro and its economic development,” Collins wrote. “If Mr. Hastings signed said ordinances and agreements as the Mayor of the City of Hillsboro and a member of the Board of Directors of the HAEDC knowingly acting against the City of … Hillsboro, that would be an action in fraud to the city.” 

Collins added that “there is no question that the intent of the City of Hillsboro was for the creation of a corporation to be the statutory agent of the City of Hillsboro. 

“Had this not been the intent, the City of Hillsboro, with Drew Hastings acting as mayor, would not have transferred property to the HAEDC,” Collins wrote. “Additionally, if the articles of incorporation, which were not written by an agent of the City of Hillsboro, failed to include the language necessary to show the HAEDC was an agent of the City of Hillsboro, that is a fraud on the City of Hillsboro as the 2015 resolution makes it clear that was the intention of the city.”  

Oral arguments were held Aug. 10, 2022, and the motion to dismiss was denied in October 2022, according to court records.

Later in October, the HAEDC filed a motion for leave to sell certain real property because the HAEDC “spent all of its funds defending [this] complaint, to date, and, therefore, seeks the Court’s permission to sell several parcels of real property (HAEDC’s only remaining assets) to continue to fund its defense of this case,” they wrote. 

Collins responded that “inability to pay is not a reason to stay filing deadlines” and that the property the HAEDC wanted to sell “is actually property that was transferred to the HAEDC by the City of Hillsboro to be used for the benefit of the city.

“Allowing this property to be sold in order to benefit the HAEDC is exactly why the HAEDC should not be in existence,” Collins wrote. “This action by the HAEDC flies in the face of common sense and reason.

“There were considerable proceeds in the HAEDC fund initially, most of which was money to be used for the benefit of the City of Hillsboro. The fact that HAEDC has exhausted their funds … is further proof that the HAEDC should be abolished.”

In December 2022, the magistrate denied HAEDC’s motion for leave, after which the HAEDC filed their response to Collins’ initial complaint. In March 2023, Collins filed a reply, and in July 2023, the matter was to be submitted to the magistrate.

The Highland County Clerk of Courts received the magistrate’s decision Feb. 5, according to court records.

In the decision dated Feb. 1, 2024, Magistrate Scholl wrote that the way the HAEDC “might have operated to misuse its corporate franchise in contravention of R.C. 2733.02(D) … is the crux of the matter here.”

According to Scholl, quo warrant relief could be granted “if the factual circumstances and evidence show that HAEDC was operating as if it were a designated municipal agent for the city, despite the lack of formalities required under R.C. 1724.10 … thereby misusing the franchise that it has.

“In this respect, [Collins] argues Hastings began transferring property and money from the city to HAEDC; HAEDC held itself out to the community as an agent working for the betterment of the city; and HAEDC has not acted for the betterment of the city,” Scholl wrote. “[Collins] asserts that it is apparent that HAEDC was operating as of it were a community improvement corporation pursuant to R.C. 1724.10, and the city’s transferring money and property to HAEDC, which would be a violation of both the Ohio Constitution and R.C. 721 if HAEDC was not operating as an agent under R.C. 1724.10.”

Scholl wrote that he “agrees with” Collins’ “[contention] that the city is entitled to the return of the money and property it transferred to and is currently being held by HAEDC related to economic development activities on behalf of the city.

“The arguments [Collins] has developed do demonstrate that HAEDC was operating as if it were a designated municipal agent for the city … thereby misusing the franchise that it has in order to gain funds and property from the city,” the magistrate wrote. “A review of the records and exhibits submitted show that the city transferred property and money to HAEDC, which would only be permissible had HAEDC been the city’s agent. 

“HAEDC did nothing to inform the city that it was not acting as the city’s agent, or dispel the city’s belief of the same, and, in fact, sequentially maintained the city’s mayors on its governing board, which would have been permissible only if HAEDC had been the city’s agent under R.C. 1724.10. Despite its lack of agency, HAEDC continued to accept transfers of property and money from the city. 

“The record supports that HAEDC held itself out the city as its agent under R.C. 1724.10, despite being the drafter of articles of incorporation that lacked the requisite language to form an agency,” Scholl continued. “Thus, the record makes clear that HAEDC was engaging in activities that it could only have the authority to engage in had it been the city’s agent.” 

Scholl concluded that “the HAEDC misused its franchise by operating as if it were an agent for the city under R.C. 1724.10 when it actually was not.” 

Scholl did find that HAEDC “neither offended against R.C. 1724.10 nor committed or omitted an act that amounts to a surrender of its corporate rights, privileges and franchises,” as alleged by Collins.

Magistrate Scholl wrote that “there is nothing in R.C. that requires every community improvement corporation to operate as agency of a political subdivision” and that the “HAEDC was not specifically created as the city’s agent,” based on their articles of incorporation and no evidence of “any contracts indicating” such an agreement.

“Given these determinations, [Collins’] arguments protesting that HAEDC did not meet the requirements for agency ... are irrelevant, as HAEDC was not required by R.C. 1724 or any contracts or documents to meet the requirements,” Scholl wrote. “HAEDC was not required to meet the requirement … that it be designated as the agency of one or more political subdivisions or that two-fifths of its board” be City of Hillsboro representatives. 

According to the court filing, “a party may file written objections to the magistrate’s decision within 14 days of the filing of the decision.”