Donncha, jkohlbach is exactly right. I was getting the same initial error when attempting to edit an exiting post (in a regular user's blog) authored by the admin--and by the way, I can't seem to get the revised mu.php file to fix the problem either.
After reading jkohlbach's last post, I attempted to reproduce the scenario he suggests above since we, too, have many blogs that are shared by multiple users.
I went into one such blog as the admin, removed a certain user, logged in as another regular user to attempt to edit a post authored by the removed user, and got the "You cannot make this user the post author" error.
If I were smart enough to fix the problem myself, I wouldn't be complaining on the forums :) --just thought you'd like to know. And thanks for keeping MU rolling along, Donncha!