ORANGE COUNTY IN BANKRUPTCY : Investors Jockey for Winning Edge in a Game With Few Rules

What has become crystal clear in the nation’s largest municipal bankruptcy is that many investors in Orange County’s ill-fated investment portfolio are going to lose money, lots of it. What is unclear is whose ox is going to be gored.

Will the billions of dollars lost by departed Treasurer-Tax Collector Robert L. Citron be divided evenly among those with money in the fund, or will some end up far down in a pecking order, shouldering more of the financial loss than others?

In an ordinary business bankruptcy, there is a firm division between secured creditors, those who extended credit against a guarantee or collateral, and unsecured creditors, generally suppliers of goods and services. Secured creditors are the ones most likely to get their money.

But in the case of Orange County’s investment pool, municipal bankruptcy law sets no priority between the competing claims of the Newport-Mesa Unified School District, with almost $80 million in the fund, Judge Margaret R. Anderson’s retirement nest egg and the special $8-million fund that had been set aside to replace the county Fire Department’s aging fleet of trucks.

Nor does it distinguish between the managers of the $1.3-million fund to protect gnatcatcher habitat, Operation Santa Claus, which has $10,000 in the pool, and the Orange County Transportation Authority, with $1 billion on the line.

All must fend for themselves with few hard and fast rules in an emerging battle over the $5.4 billion that remains in the pool.

Already, scores of investors are exploring legal arguments in an attempt to show they deserve to recover more than others who placed money with the county treasurer.

“There are lots of competing parties with competing demands. Unwieldy is perhaps too mild a term to describe what’s happening,” said professor Dan Schechter, a bankruptcy expert at Loyola Law School in Los Angeles. “There is a strong argument that there will be a hierarchy of creditors. But this is an area of new law. There is no set priority on anything. I mean, the county could end up giving everyone a 27% haircut.”

There are 187 governmental entities that have funds in the investment portfolio that Citron managed as well as thousands of individuals who invested retirement funds and court settlements.

Who eventually recovers money and in what amount will be determined largely by the U.S. Bankruptcy Court and the county creditors committee, which was picked Wednesday by bankruptcy Trustee Marcy J.K. Tiffany.

The panel is made up of representatives from the fund’s major institutional investors, including the Orange County Department of Education, the County Transportation Authority, the County Sanitation Districts, the Transportation Corridor Agencies, the city of Irvine representing all county cities, and the city of Mountain View, representing municipalities outside the county.

The creditors committee is responsible for developing a disbursement and recovery plan that is acceptable to the competing interests that sit on the committee, as well as a host of subcommittees.

In addition, investors and creditors can ask the Bankruptcy Court to order the county to release funds or grant them priority for recovering their original investments.

Bankruptcy lawyers anticipate that many of those involved will make their pitch to the creditors committee or the Bankruptcy Court. Complex negotiations to work out compromises will also occur, they say.

“Circling the wagons is part of the game,” said Richard Levin, who for 16 years was a bankruptcy attorney with Stutman, Treister & Glatt, the Los Angeles law firm now representing Orange County. “You have a lot of people who have lost money or stand to lose lots of money. Of course, they are going to fight.” Under Chapter 9 of the bankruptcy statutes, all parties involved are supposed to be treated equitably, bankruptcy lawyers say. No one can be granted priority for removing funds or being paid unless the creditors committee or a bankruptcy judge agrees to it.

“Bankruptcy does not look at deservedness or whether you invested voluntarily or involuntarily,” Levin said. “The fundamental principal of distribution is equality. If you have no collateral, you are part of the great unwashed.”

The lawyers also say it could very well turn out that the losses are shared pro rata--that is, everyone will lose a percentage equal to what they had in the fund.