Legal fees hit eye-popping levels
More than $450,000 spent in two years on legal fights with contractors, citizens
Marshall Helmberger & Tom Klein
REGIONAL— The St. Louis County School District has paid the Knutson Flynn & Deans law firm more than $454,000 in fees over the past two years— vastly exceeding the spending of other area districts of similar size. And the figure does not include legal fees that the district was ordered to pay to plaintiffs in legal matters pursued by the district and its attorney Steve Knutson.
The bulk of the spending by the district was incurred primarily as a result of three legal matters handled by Knutson, all of which stemmed from the district’s 2009 bond measure and resulting school construction projects.
The largest of the three cases involved a dispute over final payments owed to a contractor, Duluth-based Jamar Construction, for installation of roofing materials at the district’s South Ridge School in southern St. Louis County.
Jamar made an initial payment demand of $183,000. During mediation, Jamar reduced that demand to $149,308, which was the amount initially claimed in the company’s arbitration filing. Prior to the arbitration hearing, Jamar further reduced that demand to $86,786 after a cost expert reviewed their expenditures in more detail. Meanwhile, Knutson filed a counter-claim for the district, alleging that Jamar owed the district $75,000.
The arbitrator ruled in favor of Jamar, awarding the company approximately $42,000, and rejecting the district’s counterclaim in its entirety. But in an unusual move, the arbitrator found that the school district was the prevailing party, which meant it should be awarded attorney’s fees (totaling $109,000 at that point) and expert witness fees, totaling $10,300, under its contract with Jamar.
Jamar appealed that decision and, last August, Sixth District Court Judge James Florey reversed the arbitrator on the question of attorney’s fees, and sent the matter back to the arbitrator to determine Jamar’s legal costs. In a second order, issued May 14, 2014, Florey confirmed the arbitrator’s determination of Jamar’s legal fees, and added additional legal costs that Jamar had occurred at the district court to the bill. The final tally was $163,000, which comes on top of the $42,000 in damages previously awarded to Jamar.
Further adding to the school district’s legal woes was Knutson’s own bill for handling the Jamar case— which is well in excess of $140,000 in just the past two years (older records were not immediately available from the district and so are not part of the total noted here).
And that figure could go much, much higher. Just last Friday, July 11, Knutson filed a notice of appeal to the Minnesota Court of Appeals. That action further ups the ante in the case, since should the appellate judges uphold the district court decision, the school district will likely be on the hook not only for Knutson’s legal bills, but also Jamar’s additional legal costs.
Depending on the outcome of the latest appeal, the district’s decision to defy Jamar’s original payment demand of $183,000, could well cost it over $400,000.
“That’s very problematic,” said Richard Painter, a corporate law professor at the University of Minnesota, in Minneapolis. Painter, a graduate of Harvard, who received his law degree from Yale, served two and a half years as associate counsel in the Bush White House among his many other positions. He is the author of a number of scholarly papers, as well as the 2009 book “Getting the Government America Deserves: How Ethics Reform Can Make a Difference.”
Painter, who has represented Fortune 500 companies in the past, said he’s never seen a construction contract case where a company incurred legal fees beyond the amount in dispute. “That’s absurd. Any attorney doing that in the private sector would have been fired,” he said.
But the Jamar case wasn’t the only problematic case pursued by the school district and Knutson. A similar dispute with International Falls-based Wagner Construction, racked up over $112,000 in legal bills, on top of the $103,000 net payment award granted to Wagner by an arbitrator.
The company had originally sought $367,000, most of it stemming from additional costs to the company due to errors by the school district’s project management. The district, rather than negotiate, again counter-claimed against the company, alleging that the district incurred additional costs to fix a failed foundation footing poured by Wagner.
The arbitrator in the case, however, found that Wagner was not at fault in the footing failure at the South Ridge School, because the worksite had been flooded after heavy rain in October, which weakened soils under the newly-poured footings. But, according to the arbitrator, the school district’s project team opted to proceed with the installation of pre-cast wall panels on the footings, despite knowing the soils were saturated. “The footings, not surprisingly, settled,” wrote the arbitrator in his decision.
The arbitrator awarded Wagner its estimated costs for repair of the footing, totaling $75,862. But the arbitrator found that Wagner had not adequately documented its largest claim, for $259,781, for extra gravel and other fill materials that it needed for grading work at South Ridge. Wagner alleged that their original bid was based on incorrect elevations provided in the bid documents by the district’s project team, and that the error forced Wagner to haul many thousands of extra yards of fill material to meet the terms of their contract.
Knutson, arguing for the school district, claimed Wagner had erred in calculating its bid, but the arbitrator disagreed, and said Wagner had made no mistake. Even so, the arbitrator said Wagner had not done an adequate job of precisely documenting original elevations, so he could not award the requested payment. It was a break for the district, since had the arbitrator granted the full payment request, it would have pushed the district’s total costs related to the case to almost half a million dollars, or well over the original payment request.
Campaign finance violation
Perhaps the most unusual case handled by the Knutson firm was the campaign finance disclosure complaint filed by Tower Mayor Steve Abrahamson and Tim Kotzian, as president of the Coalition for Community Schools. The case, filed in November 2010, charged that the school district had spent thousands of tax dollars on promotional and misleading brochures and newsletters that the district published to convince voters to support its controversial 2009 bond referendum.
An administrative law judge at the Office of Administrative Hearings initially threw out the complaint, in the belief that school districts were exempt from campaign finance rules. A three-judge panel of the Minnesota Court of Appeals promptly overturned that decision, finding that school districts are subject to campaign finance reporting if they spend money to promote a referendum. They also found that the school district’s newsletters and brochures were one-sided and promotional and misleading, and that the district’s campaign spending was “not authorized by law.”
Rather than submitting the required four or five-page report, and settling the case with complainants, the school district appealed to the Minnesota Supreme Court. In August 2013, the high court ruled largely in line with the Court of Appeals, except that the court majority agreed to dismiss a claim that the district had engaged in “false campaigning.” Nonetheless, the full court agreed that the district’s newsletters and brochures were “by their very nature promotional,” and agreed that the district was subject to campaign finance reporting for that spending if further proceedings demonstrated that the materials in question were, in fact, promotional.
District officials had the option of filing the required paperwork following that decision, but opted, instead, for more litigation, as the case then headed back to the OAH for an evidentiary proceeding.
During three full days of testimony, during which the school district was represented by Knutson and a second attorney from his firm, Michelle Kenney, the district offered testimony from former board members, the business manager, and former Superintendent Charles Rick, who testified that they thought the materials in question were “informational,” rather than promotional.
The three-judge panel that oversaw the hearing was unconvinced, however, and in a ruling issued May 30, 2014, the panel found that the district had promoted passage of the referendum by disseminating outdated, inaccurate, and exaggerated claims to voters, and they reprimanded the district for failing to file a required campaign finance report form. The OAH then ordered the district to submit the report by Aug. 30, 2014.
The price tag for the district’s fight to avoid financial disclosure? Over the past two years, Knutson has billed the district at least $144,500, and that doesn’t include attorney’s fees for earlier stages of the litigation, including hearings and briefs at the Court of Appeals and the Supreme Court.
Almost all of the $144,000 is attributable to the district’s decision to argue its case at the OAH, a decision that was purely voluntary on the district’s part.
An attorney’s obligation
While these three cases proved extraordinarily lucrative for the Knutson Flynn & Deans law firm, with total billings in excess of $395,000, they proved of questionable value for the school district. In total, between awards to contractors, attorney’s fees to Knutson, and attorney’s fees currently awarded to plaintiffs (which the district is appealing), the district has incurred total expenses and obligations of approximately $704,000 in just the past two years. The final tally is likely to be significantly higher.
Yet the school district’s total original financial liability in the three cases was no more than approximately $555,000, and that figure certainly could have been negotiated downwards significantly had the district and its attorney made the effort. Instead, the district, following Knutson’s advice, pursued a confrontational approach in every case, filing unsubstantiated counterclaims against contractors and openly ridiculing complainants in the campaign finance case. In no case, did the district or Knutson reach a settlement ahead of court action.
According to Professor Painter, such calculations are troubling, given the obligations of an attorney to his or her client. “The ethical obligation is to give the client sound legal advice, including advice about the risks of litigation. That doesn’t mean you never litigate, but it’s risky and expensive and an attorney must advise their client of those risks.”
According to Painter, attorneys typically offer such advice in writing, either in a letter or email. “There should be some disclosure of the expected costs and other risks of litigation,” he said. “At a minimum this advice needs to be given orally.”
“Hopefully those conversations occurred. If not, I would be very concerned,” said Painter.
Some school officials share that concern. Nancy Wall Glowaski, who represents the Orr area on the St. Louis County School Board, has objected to the recent decisions to pursue costly litigation given the risks involved.
“Why not settle out of court?” she asked. “Isn’t that what most folks do? It gets too expensive to fight everything in court and it’s better to just make a deal.”
Glowaski is particularly concerned that the district’s current arrangement with Knutson gives him the authority to pursue individual legal matters or lawsuits without board approval. “We’re giving the law firm an open ride,” she said, “and Knutson has just been milking the district.”
Glowaski also opposed the district’s decision not to file a campaign finance report following the Supreme Court’s ruling. Glowaski said the district could have saved tens of thousands of dollars in legal costs that resulted from the public hearing at the Office of Administrative Hearings if they had just filed the report.
“I don’t understand what the district expected to gain,” she said. “When the Supreme Court says to file a report, why not just do it? Better yet, don’t break the law in the first place.”
Newly-hired St. Louis County School Superintendent Steven Sallee said he is also concerned about the district’s extraordinary legal bills and plans to take action to bring them under control. He said an experienced superintendent should have the ability to address most issues facing the district without incurring significant legal bills, and he hopes to sharply reduce the use of attorneys, particularly the Knutson firm, as soon as is practical. He said he’d prefer to work with a local attorney, rather than a Twin Cities firm. “I think you’ll see that a year from now, these bills will be much smaller, assuming we don’t have something unforeseen,” said Sallee.
Glowaski agrees on the need to hire locally. She thinks the district would be better served if it relied more on attorney John Colosimo for its legal advice. When she shared some of her concerns about the district’s legal fights with Colosimo, she said he told her that the district “could have avoided a whole lot of trouble.” But, she added, “he said he can give the district advice, but they just don’t take it.”
The St. Louis County School District does use Colosimo for some legal matters. Over the past two years, his firm billed the district a total of $18,109.
Other districts spend far less
While the St. Louis County School District spent hundreds of thousands of dollars waging court battles, other neighboring districts generally avoid such costly endeavors.
During the past two years, for example, the Hibbing School District, which is slightly larger than the St. Louis County School District, spent a total of $41,645, most of that to its regular attorney, John Colosimo, of the Colosimo, Patchin, Kearney and Brunfelt Law Firm, of Virginia. Superintendent Bob Belluzo said that figure as actually “pretty high for us,” and most of it was incurred during the past school year, when legal fees topped $28,000 for the district.
Belluzo said he can’t remember the last time the district engaged in actual litigation over a contract or other matter. “Obviously we try to settle disputes short of that. Most times we’re pretty successful in doing so.”
The Virginia School District has a similar track record with its own legal expenses. According to business manager Spencer Aune, the Virginia schools spent a total of $24,591 in attorneys fees over the past two years. And Aune said that was higher than usual, because of legal costs this past school year related to the co-location proposal that was ultimately rejected by the school board. Like Hibbing, Virginia obtains its legal services primarily from the Colosimo firm.
Sallee, who previously served as superintendent in southern Minnesota school districts, said districts he worked for typically kept attorney’s fees to no more than a few thousand dollars a year.
The Timberjay also sought comment for this story from School Board Chair Bob Larson, but he did not respond to messages or emails. The Timberjay did provide attorney Knutson with an early draft of this story to obtain his response. Knutson replied in a four-page letter, which the Timberjay will post on its website at www.timberjay.com. In his letter, Knutson questions the newspaper’s motivations and said the story resorts to “fabricated facts and half-truths, and then compounds the problem by putting your spin on those fabricated facts and half-truths.”
At no point, did Knutson challenge the accuracy of this newspaper’s reporting of his actual billings to the school district.
Knutson challenges the size of the original demands from contractors that the Timberjay used in the initial draft, and those figures have been adjusted accordingly in this published version where the Timberjay found independent verification. In some instances, Knutson’s claimed amounts were not included in the story because they were inconsistent with documents obtained by the Timberjay. For example, Knutson claims that Wagner Construction originally demanded $401,760, plus interest, fees, and costs and states that the Timberjay’s lower figure, of $334,000, in its initial draft was evidence of the newspaper “trying to manufacture “facts” to support your not so hidden agenda.”
“Ultimately, Wagner was awarded a total of $103,694, which is only 26 percent of its demand,” noted Knutson. The arbitrator’s decision, obtained by the Timberjay, outlines the company’s demands as totaling $367,000, and that is the figure reported by this newspaper.
Knutson argues that the district came out ahead by challenging the contractor’s claims. “In both the Jamar and Wagner cases, the School District was exposed to more than $551,000 in total damages. The School District had no choice but to defend itself from such exorbitant claims. Settlement with the assistance of a mediator was attempted but ultimately unsuccessful not solely because of the School District’s position. In the end, the two contractors were awarded a total of approximately $146,000, which is only about 26 percent of what they were seeking. The amount of legal fees expended by the School District through the two arbitrations, while not insignificant, was considerably less than the approximately $405,000 that it saved in the process.”
Knutson, in his response, overlooks the more than $163,000 in legal fees incurred by Jamar Construction, which the district is currently ordered to pay. He also fails to acknowledge that Jamar Construction had significantly reduced its demand through the mediation process, from an original demand of $183,000 to $149,308, which was the amount initially sought in its arbitration filing. Yet prior to the arbitration hearing, held Nov. 28-30, 2012, Jamar further reduced its demand to $86,786, plus interest, fees, and costs, according to court records. Since then, the district has incurred more than $116,000 in additional attorneys fees and related costs from Knutson, and that tally will only increase with the district’s decision to appeal the award of attorneys fees to the Court of Appeals.
But Knutson challenges the suggestion that the district may have received less than adequate representation. “Your suggestion that the School District was not provided with appropriate legal advice relating to the three matters is nothing short of irresponsible… Moreover, your solicitation of attorneys and others on matters in which they do not have all of the facts to support further Monday-morning quarterbacking of the School Board’s decisions may sell papers but is far from reality.”