Opinion
10-P-2010
03-05-2012
SOUTHEASTERN REGIONAL VOCATIONAL TECHNICAL SCHOOL DISTRICT v. KPMG LLP & others.
NOTICE: Decisions issued by the Appeals Court pursuant to its rule 1:28 are primarily addressed to the parties and, therefore, may not fully address the facts of the case or the panel's decisional rationale. Moreover, rule 1:28 decisions are not circulated to the entire court and, therefore, represent only the views of the panel that decided the case. A summary decision pursuant to rule 1:28, issued after February 25, 2008, may be cited for its persuasive value but, because of the limitations noted above, not as binding precedent.
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
Southeastern Regional Vocational School District (the school district), appeals from a judgment on a jury verdict on its claim for negligence in connection with school audits performed by KPMG LLP, and two KPMG partners, Lawrence A. Compton and Nichlas Brock Romano (hereafter KPMG). The school district challenges the judge's instructions to the jury regarding the manner in which various statutes require a regional vocational school district to account for and utilize revenues received from its vocational training programs. We affirm.
Because we affirm, we do not address KPMG's cross appeal arguing that the school district's action is barred by the statute of limitations.
1. Background. In 1996, the school district contracted with KPMG to conduct audits of its financial statements for the fiscal years ending June 30, 1997, through June 30, 1999. During that period, James Hager, who became the school district's superintendent in 1998, began to have concerns about irregularities in the school district's petty cash and credit card accounts. After initially approaching KPMG, the school district instead hired Melanson Heath & Company (Melanson) to look into those accounts.
As a result of that investigation, Melanson recommended changes in the school district's accounting and use of certain special revenue funds from its vocational training programs. In significant departure from KPMG's previous advice, Melanson recommended that the school district transfer those funds, totaling approximately $3.7 million, to its general fund, and then apply those funds to reduce the financial contributions (referred to as assessments) of the school district's nine member communities in the following year.
The school district earned revenues from its culinary arts, auto body shop, and beauty salon programs, among others.
Based on that recommendation, the school district met with the Massachusetts Department of Education and Department of Revenue, and determined that it should repay $2.8 million of the $3.7 million to the member communities in the form of reduced assessments.
The amount to be repaid was reduced from $3.7 million to $2.8 million, in part, because the school district subtracted approximately $367,000, reflecting two penalties imposed by the Department of Education based on the school district's failure to meet its net school spending requirements for fiscal years 1999 and 2000. The penalties represented the reduction in State aid for those years. We discuss the 'net school spending' requirement imposed by statute in more detail, infra.
The school district then sued KPMG alleging that KPMG was negligent in its advice regarding the manner in which the school district was required to account for and utilize revenues received from its vocational training programs. The school district alleged as its losses the $2.8 million in funds returned to the nine member communities in the form of reduced assessments, and the $367,000 in penalties representing lost State aid. The case was tried to a jury over three weeks. In answering special questions, the jury found that KPMG was negligent, but that KPMG's negligence was not a substantial cause of damage to the school district.
A central issue at trial was KPMG's recommendation regarding the accounting treatment under the statutes governing public school spending for revenues earned by the school district's vocational training programs. As a general matter, G. L. c. 44, § 53, requires that all money received by a public school district, unless otherwise provided by statute, should be deposited in the school district's treasury and spent only by specific appropriation. One such exception, c. 74, § 14B, provides that revenues derived from a vocational school's training programs, up to $15,000 per year, should be deposited in a special fund, from which expenditures may be made for such program without further appropriation. The parties disagreed as to whether revenues in excess of the $15,000 limit (excess revenues), could be deposited in special revenue funds, or instead were to be deposited in the school district's general fund.
Chapter 74, § 14B, provides, in relevant part: '[A]ny income received in a fiscal year not exceeding, in the aggregate, fifteen thousand dollars derived from the purchase and sale of products produced in the culinary arts subject area of the home economics program, or any other vocational-technical program conducted in any public vocational-technical high school shall be deposited in a special fund by the school committee. . . . Expenditures may be made from said fund by the school committee for purposes needed . . . for such program area without further appropriation, notwithstanding the provisions of section fifty-three of chapter forty-four; provided, however, that said special funds shall not be used to pay the salary of any employee, and in any fiscal year no more than five thousand dollars from said funds shall be used in the purchase of equipment.'
At trial, it was the school district's position that the excess revenues must be deposited in the general fund, at which point they would be subject to a five percent limit on surplus funds that exceeded the school district's operating budget, a restriction imposed on regional school districts by c. 71, § 16B 1/2 . Under c. 71, § 16B 1/2 , any surplus over the five percent limit was to be returned to the member communities by reducing their assessments in the next year. If, on the other hand, excess revenues could be held in special revenue funds, as KPMG maintained, then the school district could retain the excess revenues for its own use. For this interpretation, KPMG relied on c. 70, § 2, which sets forth the method for determining a school's net school spending requirements, a calculation that determines the amount of State and local aid to which a school district is entitled.
Chapter 71, § 16B 1/2 , provides, in relevant part: 'If the unencumbered amount in the excess and deficiency fund, so called, of a regional school district at the end of a fiscal year exceeds five percent of its operating budget and its budgeted capital costs for the succeeding fiscal year, the amount in excess of the said five percent shall be applied by the regional school district committee to reduce the amount to be raised by assessment on the member cities and towns in accordance with the terms of the agreement for the apportionment of costs.'
See generally Hancock v. Commissioner of Educ., 443 Mass. 428, 432-438 (2005) (describing background and purpose of Education Reform Act of 1993 to establish a mandatory funding scheme for public schools derived from a combination of State and local funds, based on the number and needs of children residing in each district).
Under c. 70, § 2, revenues generated by the school are excepted from the net school spending requirement. KPMG relied, in particular, on language in c. 70, § 2, providing as follows:
'net school spending shall also not include tuition revenue or revenue from activity, admission, other charges or any other revenue attributable to public education. Such revenue will be made available to the school district which generated such revenue in addition to any financial resources made available by municipalities or state assistance.'
Chapter 70, § 2, defines net school spending, in relevant part, as: 'the total amount spent for the support of education, including teacher salary deferrals and tuition payments for children residing in the district who attend a school in another district or other approved facility, determined without regard to whether such amounts are regularly charged to school or non-school accounts by the municipality for accounting purposes; provided, however, that net school spending shall not include any spending for long term debt service, and shall not include spending for school lunches, or student transportation. Net school spending shall also not include tuition revenue or revenue from activity, admission, other charges or any other revenue attributable to public education. Such revenue will be made available to the school district which generated such revenue in addition to any financial resources made available by municipalities.'
According to KPMG, revenues from the school district's vocational training programs were not to be included in determining whether the school was holding surplus funds that exceeded five percent of its budget at year's end pursuant to c. 71, § 16B 1/2 , and thus did not have to be returned to the member communities.
Also germane to this appeal is c. 70, § 11, which provides that a school district that underspends its budget by more than five percent will lose a portion of its State funding in the following year. It was pursuant to c. 70, § 11, that the Department of Education imposed $367,000 in penalties for the school district's failure to comply with its net school spending requirements for fiscal years 1999 and 2000.
Chapter 70, § 11, provides, in relevant part: 'if a district . . . underspends its current year budget by more than five percent of the amount required to be appropriated for that year, state school aid in the following year shall be reduced by the entire difference between those amounts.'
2. Return of $2.8 million. In instructing the jury, the judge essentially adopted KPMG's interpretation of the statutory scheme outlined above to the effect that under the definition of 'net school spending' in c. 70, § 2, revenues from the school district's vocational training programs were not part of the school district's net school spending requirements, and 'should not be included in the calculation under the c. 71, § 16B 1/2 , determination of whether greater than five percent remains in the district's operating budget.' On appeal, the school district argues that the instructions amounted to a directed verdict for KPMG, telling the jury, in essence, that the school district was not required to return the $2.8 million in surplus funds to the member communities and that Melanson, and not KPMG, caused the loss. According to the school district, the error in the jury instructions requires a new trial. See, e.g., Clement v. Rev-Lyn Contr. Co., 40 Mass. App. Ct. 322, 324 (1996). We disagree.
'An error in jury instructions is not grounds for setting aside a verdict unless the error was prejudicial -- that is, unless the result might have differed absent the error.' Blackstone v. Cashman, 448 Mass. 255, 270 (2007). We discern no such error here because notwithstanding any claimed error in the instructions, the jury found KPMG negligent in its answer to a special question. The failure of the school district to obtain a verdict in its favor arose not from any erroneous interpretation of the statutory requirements for accounting for and utilizing vocational program revenues, but from its failure to persuade the jury that KPMG's negligence was a substantial contributing cause of any loss to the school district.
Because resolution of the parties' differing interpretations of the statutory requirements is unnecessary to determination of the appeal, we decline to do so.
The school district lodged no objection to the jury instructions on causation and damage. Indeed, the judge gave the instructions on causation and damage that were consistent with those proposed by the school district.
Even had the jury been instructed as requested by the school district in regard to statutory requirements, the determination that the school district was not harmed by KPMG's negligence would not have been different. The $2.8 million surplus that the school district returned to the member communities was not money belonging to the school district, but money required by statute to be returned to the member communities in the form of decreased assessments. Indeed, the school district does not contend otherwise. Even under the school district's interpretation of the governing statutes, it suffered no loss because of KPMG's failure to advise it that the money should be returned to the member communities because the school district could not lose money that it was never entitled to keep.
As noted previously, according to the school district, the judge should have instructed the jury that excess revenues from the vocational training programs could not be held in special revenue funds and should have been deposited in the general fund, where they would be applied to reduce the assessments on the member communities.
The school district argues, nevertheless, that it suffered the loss of $2.8 million because had KPMG properly advised that the money had to be returned to the member communities, the school district somehow would have spent it in a timely fashion. In support of this contention, the school district points to testimony of superintendent Hager and Kenneth Gartrell, the school district's expert witness. Both testified that the school district would have spent the excess revenues had it known the those funds would have to be returned to the member communities. Even viewed generously, such testimony was wholly speculative and amounts to nothing more than disagreement with the jury's determination to the contrary. See generally Squeri v. McCarrick, 32 Mass. App. Ct. 203, 209 (1992) (proof of damages must be based on more than mere speculation).
The auditors from Melanson testified that even had they discovered the excess revenues years earlier, their recommendation would have been the same -- return the amounts that exceeded five percent of the school district's budget to the member communities. Moreover, the evidence overwhelmingly demonstrated that the school district did not spend even its existing budget in fiscal years 1999 and 2000. To the contrary, the Melanson auditors noted that the school district scrambled to use up its budget at year's end, utilizing encumbrances, bogus purchase orders, and misclassified expenses to give the appearance that it had spent its budget. One Melanson auditor, Karen Roberts, described the school district as 'madly spending' at year's end, while another, John J. Sullivan, described the school district as 'frantically going out' to encumber and issue purchase orders with the intent to use up 'a very large amount of unspent appropriation' at the end of the year. In the same vein, the school district failed to establish a causal connection between three programs it eliminated, starting in 2000, and the return of the $2.8 million surplus to the member communities in 2002. Though Hager testified in general fashion that the programs were cut largely due to lack of funds, those cuts occurred in the same year in which the school district was frantically attempting to use up its unspent budget at year's end.
Significantly, Gartrell conceded on cross-examination that he did not know about the school district's history of underspending its budgeted funds, and its attempt to use up funds with encumbrances and bogus purchase orders, when he opined that the school district would have taken action to spend the excess revenues rather than return them had it been properly advised. Indeed, based on the record before us, the testimony of Hager and Gartrell that the school district would have spent the $2.8 million surplus but for KPMG's negligence falls far short of demonstrating that the school district was damaged and even farther from demonstrating that the school district was prejudiced by the claimed erroneous instruction.
3. Penalties. As discussed previously, because the school district failed to meet its net school spending requirements for fiscal years 1999 and 2000, the Department of Education imposed two penalties representing reduced State aid for those years. The school district maintained that it incurred these penalties as a result of KPMG's auditing failures that permitted surplus funds to accumulate improperly. Even were that so, the evidence again amply established that these penalties were not borne by the school district, but were deducted from amounts returned to the member communities in the form of reduced assessments.
The school district's attempt to piece together snippets of testimony to create the impression that the school district incurred the loss is not successful in overcoming the clear import of the documentary evidence and testimony showing that the penalties were passed on to the member communities. In sum, to the extent that the judge may have erred in instructing the jury on statutory requirements that bore on KPMG's negligence in advising as to the proper accounting treatment of the vocational program revenues, the school district has failed to persuade us that it was prejudiced by the claimed errors.
4. Copy of statute to the jury. On the second day of the jury deliberations, the jury requested a copy of c. 74, § 14B, c. 44, § 32, c. 71, § 16B 1/2 , c. 71, § 16B, and the Education Reform Act of 1993. Rather than provide the jury with the entire Education Reform Act of 1993, the judge gave them a copy of the definition of net school spending, from c. 70, § 2, one of the provisions he had referenced in his instructions. The school district complains that by providing only the net school spending definition, the judge permitted the jury to place undue emphasis on what the school district contends is a statutory provision of very limited purpose. We disagree. The judge's response to the question was well within the ambit of his discretion. See Beaupre v. Cliff Smith & Assocs., 50 Mass. App. Ct. 480, 493 n.21 (2000). Even were that not so, for the reasons previously discussed, the school district has not persuaded us that had the judge acted otherwise the result would have been different. See, e.g., S. Solomont & Sons Trust v. New England Theatres Operating Corp., 326 Mass. 99, 110 (1950) ('substantial rights of the plaintiff are not injuriously affected if the course taken reaches the inevitable result of the case').
Judgment affirmed.
By the Court (Grasso, Smith & Meade, JJ.),