Pontiac School Dist. v. Miller, Canfield, Paddock & Stone

• Decision Date: 21 February 1997
• Docket Number: Docket No. 180757
• Citation: 221 Mich.App. 602,563 N.W.2d 693
• Parties: PONTIAC SCHOOL DISTRICT, Plaintiff-Appellee/Cross-Appellant, v. MILLER, CANFIELD, PADDOCK & STONE, Defendant-Appellant/Cross-Appellee.
• Court: Court of Appeal of Michigan — District of US

Page 693

563 N.W.2d 693

221 Mich.App. 602

PONTIAC SCHOOL DISTRICT, Plaintiff-Appellee/Cross-Appellant, v. MILLER, CANFIELD, PADDOCK & STONE, Defendant-Appellant/Cross-Appellee.

Docket No. 180757.

Court of Appeals of Michigan.

Submitted Nov. 20, 1996, at Detroit.

Decided Feb. 21, 1997, at 9:00 a.m.

Released for Publication April 29, 1997.

Pollard & Albertson, P.C. by Dennis R. Pollard and Neil H. Goodman, Bloomfield Hills, for Plaintiff-Appellee/Cross-Appellant.

Barris, Sott, Denn & Driker, P.L.L.C. by Eugene Driker and Morley Witus, Detroit, and Hill Lewis by Robert B. Webster, Charles H. Polzin, and Kevin H. Breck, Birmingham, for Defendant-Appellant/Cross-Appellee.

Before TAYLOR, P.J., and HOOD and P.J. CLULO ^*, JJ.

TAYLOR, Presiding Judge.

Following a jury trial, defendant appeals as of right, and plaintiff cross appeals, the judgment awarding plaintiff $3,933,249.40 in present damages and $21,138,438 in future damages. We reverse and remand for a new trial.

I

This legal malpractice action arose in connection with a $54,665,074 bond issue. The bond issue was necessary to address plaintiff's accumulated deficit, its deteriorating physical facilities, inadequate supply of textbooks and equipment, and other assorted needs. In 1989 and 1990, plaintiff's then superintendent, Dr. LaBarbara Gragg, and her administrative staff, principally Paul Rothrock, then an assistant superintendent and plaintiff's chief financial officer and its "point person" on the bond issue until January 1991, raised the possibility of a substantial bond issue with plaintiff's financial advisor, Ronald G. Erickson, and plaintiff's bond counsel, George Stevenson, of the firm Miller, Canfield, Paddock & Stone (Miller Canfield). Dr. Gragg and Rothrock sought to determine plaintiff's borrowing potential without causing the taxpayers to pay more than 2.8 mills in taxes. At a meeting in September 1990, plaintiff's administrators estimated plaintiff's needs to be in the range of $80 million. Yet, on the basis of the 2.8 mill figure, Dr. Gragg and Rothrock estimated that plaintiff could only borrow between $53 and $55 million. Thereafter, as a result of discussions with Rothrock, Erickson set forth a proposal for a bond issue that estimated plaintiff's bonding capacity as $53.21 million without exceeding the 2.8-mill limitation. ¹ Dr. Gragg, acting on Rothrock's recommendation, proposed that plaintiff's board of education seek voter approval of two ballot proposals requesting approximately $53 million.

Thereafter, at a meeting on December 10, 1990, plaintiff's board of education approved a resolution prepared by Stevenson seeking voter approval of two ballot proposals for $9.2 million in deficit reduction bonds to eliminate plaintiff's accumulated deficit and up to $48.45 million in bonds to fund various projects, such as remodeling buildings, replacing the bus depot, buying school buses and textbooks, improving athletic facilities and playgrounds, and refunding the 1985 bonds for asbestos removal. On February 5, 1991, the voters approved the two ballot proposals by a two-to-one margin. The following day, Dr. Gragg, without consulting Stevenson, designated Kemper Capital Markets Securities as the lead underwriter. Shortly thereafter, the board of education adopted a resolution designating Kemper as the lead underwriter for the bond issue. Upon its selection, Kemper's representative, Richard Allen, contacted another Miller Canfield attorney who agreed to represent Kemper in the bond issue. While attorney Stevenson was aware of the conflict of interest, he neither advised plaintiff that defendant also represented Kemper in this transaction nor sought plaintiff's consent to allow the dual representation.

The planning team for the bond issue consisted of Allen and Brian Leflar from Kemper, Stevenson, Erickson, and Ronald Franey, who had replaced Rothrock as plaintiff's chief financial officer on January 1, 1991. While Kemper was to prepare the bond structure, Stevenson's role was to advise about the legal aspects of the bond issue. Although plaintiff originally intended to issue approximately $6.5 million in deficit reduction bonds over a ten-year period, Franey and Erickson testified that they decided to compress the repayment period of the deficit reduction bonds to three years and increase the amount from $6.5 to $9.2 million on the basis of Stevenson's advice that plaintiff would receive $1.2 million in additional state aid for every mill that was levied to pay for the deficit reduction pursuant to § 21 of the State School Aid Act, M.C.L. § 388.1621; M.S.A. § 15.1919(921). ² According to Franey and Erickson, the decision to repay the $9.2 million in deficit reduction bonds over a three-year period on the basis of the expectation of additional state aid led also to the decision to refund the 1985 school building and site bonds.

The proposed bond structure was presented at the board meeting on February 21, 1991. Before the public meeting, the board held a one-hour study session about the structure of the bond proposal and a closed session to discuss teacher contract negotiations. At the study session, the superintendent and each board member received an informational packet showing that Kemper proposed borrowing a total principal of $58.5 million, predominantly in CABs, which incurred $107 million in interest and $167 million for debt service over the twenty-five-year life of the bonds. Allen discussed the use of CABs with the board, pointing out that CABs were similar to Series E savings bonds issued by the federal government in that interest was deferred until the future and that they cost more than CIBs. At the closed session, Franey informed the board that if plaintiff refunded its 1985 bond issue, it would receive additional state aid of approximately $2.6 million in the first year, and about $7 million to $8 million over a three-year period. There was no discussion about the additional state aid at the public meeting that followed because it was decided that bringing up the additional money "wouldn't serve the best interests of the School District for the future." Stevenson remained silent throughout Franey's presentation. At the public meeting, Allen led the discussion presenting the proposed bond structure to the board, while Stevenson spoke briefly about the legal aspects of the bond issue, fielding several questions from the audience. No alternative bond structures were discussed. According to Allen, only one proposal was made to the board because "that was the only way to go" based on the premise that plaintiff "wanted to get as much done as possible" without exceeding the 2.8-mill limitation. Erickson also acknowledged that the bond structure was presented as the "optimum package" to the board because "[w]e didn't have too many options. The option was not to do it."

Subsequently, at a meeting on March 21, 1991, the board adopted three resolutions authorizing a bond issue not to exceed approximately $54.4 million, which was structured as follows: $9.2 million for deficit reduction; $15.8 million for refunding the 1985 school building and site bond issue; $4.6 million for refunding the 1985 asbestos removal bonds; $5 million for textbooks; and $19.8 million for building construction.

Because of plaintiff's low credit rating, the bond insurance company that ultimately insured the bond issue required plaintiff to sell its bonds to the Michigan Municipal Bond Authority (MMBA), which, in turn, issued its own bonds. After submitting an application to the Michigan Department of Treasury with information concerning the bond structure, the MMBA agreed to participate in the sale of plaintiff's bonds.

In early May 1991, plaintiff was informed by an official of the Michigan Department of Education that because there was no site-acquisition language on the February ballot proposal, plaintiff could not use the bond proceeds to buy land for a new bus depot. Although Dr. Gragg's staff recommended that plaintiff ask the voters to approve a ballot proposal at the school board election in June 1991 allowing the previously approved bond proceeds to be used for the acquisition of land for a new bus depot, Dr. Gragg decided not to do so. The board of education concurred in her decision. As a result, plaintiff contracted with a private bus company to supply transportation services, eventually using the bond proceeds intended for the new bus depot for other purposes.

On June 27, 1991, the bond closing occurred. The final bond structure consisted of the following: $9.2 million in deficit reduction bonds with a debt service of $10.402 million; $5 million for textbooks bonds with a debt service of $6.201 million; $4.6 million for refunding asbestos bonds with a debt service of $5.964 million; $19.78 million in CABs for new construction with a debt service of $58.655 million; $15.8 million in CABs for refunding the 1985 school building and site bonds with a debt service of $45.725 million. The total debt service on the approximately $55 million bond issue was $126.947 million.

Subsequently, in February 1992, plaintiff was informed by the Michigan Department of Education that its calculation of additional state aid was incorrect. In the spring of 1992, Dr. Gragg informed the board that plaintiff would not receive $2.6 million in additional state aid as expected and that, as a result, it would finish the 1991-92 school year with a $2 million deficit because it was too late in the fiscal year to make the necessary adjustments.

Plaintiff initiated this legal malpractice action on July 7, 1992. The amended complaint had three counts. In the first count, plaintiff alleged that Stevenson negligently drafted the language of the February ballot proposal by failing to state that plaintiff intended to use bond proceeds to purchase land for a new bus garage. Because the use of the bond proceeds to buy the land required voter approval, plaintiff...