CHICAGO - A jury in Pontiac, Mich., late Tuesday found a Detroit law firm guilty of conflict of interest and two other legal malpractice charges for its work on a 1991 Pontiac school district bond issue.

While the jury awarded the school district damages of $22 million to $28 million, the judge in the case will later determine the exact amount.

The case, which bond attorneys have said could set a precedent for bond counsel conduct in Michigan, was filed by the school district in 1992 against the law firm of Miller, Canfield, Paddock and Stone.

The Pontiac school district charged the law firm with malpractice related to its work on a $54.6 million unlimited tax general obligation bond issue the district sold in 1991. The key issue in the case was a conflict of interest charge by the district, which claimed that Miller Canfield served as bond counsel on the offering while also representing Kemper Securities Inc., the senior manager of the deal, without the district's consent.

Dennis Pollard, the school district's attorney, said his client won because of the "overwhelming evidence" of Miller Canfield's negligence and malpractice.

"The school district feels very much vindicated," Pollad said. "They felt that in retrospect, they were taken advantage of by a law firm that didn't protect their interests."

William Danhof, a partner at Miller Canfield, said the firm will appeal the verdict after a final order in the case is entered in Oakland County Circuit Court. The appeals process to the Michigan Court of Appeals could take two to three years, he said.

"There are several appealable errors in the case, and we and our lawyers are sorting through them now," said Stratton Brown, a partner at Miller Canfield.

Danhof said the jury's verdict does not mean the law firm is going out of business.

"Our insurer will cover almost every dime of this. We're not quitting," he said. The lawsuit did not challenge the validity or legality of the bond issue, Danhof said.

The school district had asked for damages of $22.7 million on the conflict of interest charge and a total of $21.6 million on two other legal malpractice charges involving the bond issue.

The district also requested $1.4 million in damages for Miller Canfield's alleged failure to draft correct ballot language for the bond issue and $20.2 million for the firm's allegedly incorrect interpretation of a Michigan statute regarding state aid for paying off deficit funding bonds. Pollard said the smaller award for damages was due in part to the jury's finding of 20% negligence on the part of the district on one of the counts and in part to some overlapping in the damages requested.

Earlier this year, the school district rejected a mediator's award of $2.5 million and the case proceeded to trial.

The seven-week trial featured testimony from about 30 witnesses who were involved in the transaction or are considered experts in public finance or law.

In his closing arguments last Thursday, Pollard said "no one at the school district had any idea that Miller Canfield was representing the underwriter in this transaction, so it's about divided loyalty - a very, very important part of the attorney's responsibility to a client."

Pollard took issue with the defense's assertion that Miller Canfield's work with Kemper was "conditional."

"It's preposterous to suggest that you could go on and in this case represent Kemper and dedicate as much as 86 hours over two and a half months and then say it was all conditional," Pollard said. "There is no such thing."

Robert Webster, an attorney representing Miller Canfield, called the conflict of interest charge " a red herring in this case."

There was no conflict of interest that caused George Stevenson, the Miller Canfield attorney who worked on the district's bond issue, not to advise alternatives to the bond issue plan promoted by Kemper, Webster said, "Literally there were no alternatives to advise," he said.

"George Stevenson was not put there throwing away this bond issue," Webster said.

Miller Canfield's Brown said yesterday that the law firm represented both the district and Kemper but intended to get the district's consent to the arrangement. However, by the time the issue went to market, the consent was no longer needed because another firm was acting as Kemper's underwriter counsel, the said.

The official statement for the bond issue lists Dykema Gossett, another Michigan-based law firm, as underwriter counsel for the deal, which was ultimately sold through the Michigan Municipal Bond Authority.

Brown said the other charges brought by the school district were the result of misunderstanding or omissions on the part of the school district. The district charged that Miller Canfield omitted language in the ballot proposal for the bond issue that would have allowed the district to use bond proceeds to purchase land for a bus service and storage facility as the district had intended. In addition, the district claimed the law firm misinterpreted to the detriment of the district the Michigan State School Act of 1979 when it helped structure the bond issue.

Miller Canfield was paid $80,000 by the district for its work as bond counsel, according to the suit.

Public finance executives and bond lawyers in the state expressed shock at the verdict.

"It's not good news certainly," said Charles Moon, a partner a Dickinson, Wright, Moon, Van Dusen & Freeman in Detroit. "I think it's one of those situations where perhaps there was some lack of attention and there might have been bad judgment, but I don't believe there was $28 million of damages."

Attorneys outside of Michigan were also surprised by the verdict.

"I think any verdict of $28 million under any circumstances is a staggering amount of money," said M. Jane Dickey, a bond attorney at the Rose Law Firm in Little Rock, Ark, and past president of the National Association of Bond Lawyers. "It may inspire some attorneys to give up bond counsel work to take up bungee jumping."

The case is the first in Michigan dealing with a conflict of interest question over the activities of lawyers working on a bond issue.

Attorneys have said a decision by the lower court would be looked to as a guideline for bond lawyers. A decision by the appellate or states supreme court to uphold or reverse the lower court decision could be binding on attorney conduct, according to a Michigan-based bond attorney.

The verdict may also cast a pall over the widespread use of capital appreciation bonds by school districts in Michigan, Pollard said. Pontiac's bond issue contained about $35 million of the zero coupon bonds. He said the inclusion of the noncallable bonds will cost the district $104 million in debt service over 25 years. Pollard added that the school board looked to its experts like Miller Canfield, its bond counsel, to fully explain the implications of issuing that type of debt.

Pollard said most of the money awarded in damages would be applied to debt service on the bond issue. The amount of damages was the highest over awarded in Oakland County, he said.

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