O.C. In Bankruptcy : Busy Days Are in Store for Lawyers : Litigation: It’s impossible to estimate how high the legal bill for O.C.’s bankruptcy may be, but it seems sure that many parties will file suits--including the county.
Finding the square root of pi might be easier than determining the legal price tag of Orange County’s financial catastrophe, but one thing seems clear: There will be lawsuits and it will cost money.
How many millions and how many lawyers were questions simply too abstract for even the nation’s leading bankruptcy lawyers to answer Thursday as the crisis over the country’s largest municipal Chapter 9 filing continued.
There are at least 185 investors in the county’s investment fund. Securities firms probably will sue, and the county will have to defend itself. Some of the municipalities, school districts and other governmental entities that invested billions in the county’s troubled investment fund may also be forced to file for bankruptcy protection.
In addition, county leaders announced Thursday that they would mount their own legal action against Wall Street firms unloading securities they were holding as collateral for loans to the county.
“It’s just impossible to guess on the numbers,” said James E. Spiotto, a Chicago attorney considered on of the top governmental bankruptcy experts in the country.
“The ripples here are not in one pond but many ponds, with all the parties having a right to be represented. The problem is trying to get the case consolidated and work it out quickly.
“But before that, if it gets big enough, where do you hold the court proceedings? The Rose Bowl? For the trials of these things do you rent a gymnasium? The practical restrictions will put some limitations on things, but the creditors have a right to raise issues.”
Just the delivery of court notices for hearings and the handling of communications with various attorneys, investors and the media will be a logistic nightmare, said lawyer Robert J. Moore, a Los Angeles lawyer considered an expert in bankruptcy.
“Bridgeport was negligible compared to this,” said Moore, referring to the Connecticut city that filed for Chapter 9 protection over $200 million in debt. Bridgeport’s was the largest Chapter 9 case filed before Orange County’s. Moore, who represents a party involved with the investment pool fund, added:
“There really is nothing like this case. . . . It’s extraordinary, and if a court finds that all these interests must be represented (by different law firms due to potential conflicts of interest), there would be a terrible problem, because there simply won’t be enough qualified bankruptcy practitioners to go around locally. I would expect to see a lot of firms from out of town coming in on this too.”
Many creditors, however, are expected to consolidate their legal efforts when possible, as several county school districts had on Thursday.
Chapter 9 of the federal Bankruptcy Code grants governmental agencies time to reorganize their finances and arrange with creditors payment of debts. It was developed during the Great Depression when many municipalities began losing their ability to raise taxes and had trouble paying their debts. Bankruptcy experts say it is rarely used. There have been fewer than 500 Chapter 9 filings since 1937 and only 117 since 1980.
In the wake of Orange County’s filing for legal protection from creditors, lawyers specializing in bankruptcy law--like so many other parties in the snowballing crisis--said the case is so unprecedented that they could only speculate on how the drama may play out in court.
“This is going to be a case that employs a lot of law firms and lawyers, and the people who will pay for that are probably the creditors and ultimately the taxpayer,” said Dean G. Rallis, who heads up the bankruptcy practice in the Los Angeles office of Baker & Hostetler, one of the nation’s larger law firms.
“The issue is complicated just by the fact that it’s a Chapter 9 filing by a huge municipality,” he said. “These other districts and municipalities will have more trouble going out and getting a loan . . . just by virtue of being in Orange County. . . . Chapter 9 is so infrequently used that most bankruptcy attorneys who’ve been practicing for years haven’t ever come across a Chapter 9 filing.
“But any idea of what this is going to mean legally, financially, just across the board,” he added, “is something nobody knows.”
The last thing the average person may be worried about at this point is whether lawyers will get paid. But in fact, lawyers in this case won’t automatically be paid by the debtor because there is no provision requiring it in Chapter 9, the lawyers said. So creditors will have to pay their own legal fees unless attorneys for the parties apply and are granted compensation by the court, or the parties agree otherwise.
“I was just thinking today that this is going to be a full-employment act for attorneys,” Orange County Superior Court Judge Michael Brenner said, laughing. “Is there any doubt in your mind (that investors) will all sue? Think of what this means for the local bar! Here we’ve been in a recession and times have been tough and the clouds are parting! That’s how lawyers think: ‘I gotta get in at the trough.’ ”
But Spiotto said that despite the inclination to josh or lawyer-bash on such issues as fees, now is not the time for such distractions if they slow down resolving the mess.
“Bankruptcy for a municipality is like open-heart surgery: If you stay in too long it makes no difference how skilled the doctor or team of surgeons is. You’ll lose the patient. So it’s in everyone’s interest to move quickly.”
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