CHICAGO -- A lawsuit filed by a Michigan school district against its bond counsel for a 1991 deal charges the law firm with three counts of malpractice, including a conflict of interest charge for representing both the district and the issue's underwriter.
If the Pontiac School District prevails in its charge against Miller, Canfield, Paddock and Stone, bond attorneys in the state said a precedent could be set for guiding the conduct of law firms in bond deals.
The suit, which is pending in Oakland County Circuit Court, was filed by the district in July against Miller Canfield, a Michigan-based law firm.
In addition to the conflict of interest charge, the district also has charged the law firm with malpractice in structuring the $54.6 million unlimited tax general obligation bond issue and drafting the ballot proposition.
Dennis Pollard, the school district's attorney, said the district is seeking damages of "substantially more than $10 million" from Miller Canfield.
In its answer in July to the school district's complaint, Miller Canfield denied the charges, saying any damages the district incurred resulted from its own negligence.
Pollard characterized the suit as "unusual" because of the conflict of interest charge against the district's former bond counsel.
The lawsuit claims that while Miller Canfield served as the district's bond counsel on the deal, the law firm was representing Kemper Securities Group Inc., senior manager on the deal, "without securing the consent of [the district] after consultation.
The suit cites a rule under the Michigan Rules of Professional Conduct, which govern the conduct of lawyers in the state. The suit says that rule made it Miller Canfield's duty "not to represent another client in that transaction whose interests were directly adverse to [the district's], absent the [district's] consent after consultation."
The suit says the interests of the district and Kemper were "directly adverse" because Kemper was trying to maximize its revenues by participating in the bond issue, while the district was aiming to minimize the bonds' selling and interest rate costs.
In its answer to the complaint, Miller Canfield said it did "some preliminary underwriter counsel work in connection with the 1991 bond issue without securing the consent of [the district] after consultation." But the law firm claimed it did not act as underwriter counsel, nor was it paid as underwriter counsel for the issue.
The official statement for the issue lists Dykema Gossett, another Michigan-based law firm, as underwriter counsel.
Miller Canfield also disagreed with the district's interpretation of the state's professional conduct rule, claiming it did not pertain to the situation involving the bond issue. George Stevenson, the Miller Canfield attorney who served as the district's bond counsel, declined to comment on the suit.
Charles Polzin, an attorney at Hill Lewis, who is representing Miller Canfield, said he believed his client participated only in the initial drafting of an official statement for the issue and was not involved "in those areas where the school district and the underwriter have diverse interests," such as negotiating fees.
Joel Piell, a senior partner and chair of Miller Canfield's public law department, said the deal did not proceed to the point "where it was appropriate to have a conflict letter done."
Pollard likened Miller Canfield's position to being "a little bit pregnant."
"We maintain that [Miller Canfield] should never have represented [Kemper] at the time the deal was being structured," he said. adding that "the interests of Kemper prevailed over the interests of Pontiac schools."
The lawsuit says the district paid Miller Canfield $80,000 for its work on the issue.
Richard Allen, a managing director in Kemper's Lansing. Mich., office, confirmed that Miller Canfield had worked with Kemper for "a couple of weeks" following voter approval of the bond issue in February 1991. He said the work consisted of preparing some documents for the deal's official statement.
However, Allen pointed out that once the decision was made a month or two later to sell the issue through the Michigan Municipal Bond Authority, Dykema Gossett was selected as underwriter counsel by Kemper in accordance with general state practices not to use one law firm in a dual role on a bond deal.
Allen said he did not know whether Miller Canfield obtained consent from the Pontiac School District for the firm's "short-lived relationship" with Kemper. He added that Kemper never paid Miller Canfield for the work it did because the law firm ultimately was not underwriter counsel when the deal was realized.
Originally, the district was planning to issue the bonds. But for credit enhancement reasons, the issue, which contained new, refunded, and deficit funding bonds, was sold June 27, 1991, in an insured deal through the Michigan Municipal Bond Authority. Sarah Eubanks, the authority's executive director said the authority had no role in selecting bond or underwriter counsel for the deal.
Cynthia Weed, a Seattle-based attorney who chairs the National Association of Bond Lawyer's committee on professional responsibility, said the issue of dual representation in a bond deal is not "black-and-white." She said there "is a very strong division of opinion" among bond attorneys on whether they should act as both bond and underwriter counsel in a deal.
In most states, she said, the code of ethics of the state bar association governs acceptance practice. But in Michigan, state bar officials said they do not believe the question of dual representation in a bond issue has ever come up.
John Kamins, chairman of the bar's Public Corporation Law Section and a partner at Honigman Miller Schwartz and Cohn, said the practice happens "infrequently" on municipal bond issues in the state and that when it happens, the reason is usually to save on the cost of issuance.
He said that, in general terms, the state's code of ethics calls for a law firm to determine whether it can "ethically fulfill" its responsibility to both clients.
"Having one firm in a dual role requires full disclosure to both the municipality and the underwriter and their informed consent to the law firm being in the dual role," he added.
Kamins said the practice has not become an issue in Michigan for bond deals because "most law firms would not put themselves in a dual role." He added that a court ruling in favor of the Pontiac School District on the conflict of interest charge "would be a precedent that everyone in bond law may be interested in and may take some guidance from."
Other public finance officials said dual representation happens a lot on bond deals in the state. In fact, Allen said it is Kemper's policy in Michigan to use different attorneys at one law firm to fill the role of bond counsel and underwriter counsel, as long as the issuer consents to the arrangement.
"We find it to be a matter of economics," he explained. "It lowers the cost passed on to the issuer."
As for Miller Canfield, Piell said the firm has "in the past and expects to in the future represent both the underwriter and issuer."
"We don't believe it's normally an adverse relationship," he explained. "We don't participate in the negotiation of business terms."
In its lawsuit, the district also charges that Miller Canfield omitted language in the ballot proposition for the unlimited tax general obligation bonds that would have authorized the district to acquire land for the relocation of some facilities. While voters approved the bond proposal on Feb. 5, 1991, the lack of notice for land acquisition prohibits the district from using any of the bond proceeds to buy the land for a bus service and storage facilities site, Pollard said.
On the other count in the lawsuit, which deals with the structuring of the $54.6 million GO bond issue, the district alleges that Miller Canfield misinterpreted the Michigan State School Aid Act of 1979 to the detriment of the school district, according to Pollard.
He said Miller Canfield's alleged misinterpretation had to do with $9.2 million of the bonds that were sold to fund the district's deficit. Miller Canfield led the district to believe it could receive $2.5 million to $3 million more in state aid revenues over the life of the bonds by shortening their maturity to three years from the statutorily allowed 10 years, he added. This would increase the millage rate over the life of the bonds, he explained.
The higher millage rate did not result in increased state aid for the district as Miller Canfield said it would, Pollard said. But the higher millage rate needed to pay off the deficit bonds forced the district as part of the 1991 issue to refund $18 million of noncallable debt it had sold in 1985, he said. The refunding was needed to keep the district's promise to voters that it would not exceed 2.8 mills to pay off all of its new and outstanding debt, he added.
The debt was refunded as capital appreciation bonds to push debt service payments out into future years and not violate the promised 2.8 mill cap. Pollard explained. He said the district has calculated that the use of capital appreciation bonds will result in $27 million in additional interest costs to the district.