ORANGE COUNTY IN BANKRUPTCY : Business Leaders Urge Water Districts to Drop Lawsuit : Courts: They say settlement would serve public better than costly legal fight over $9.3 million in county fund. But districts defend action, say other investors might sue too.

Orange County business leaders on Wednesday urged three water districts with $9.3 million tied up in the county’s failed investment fund to drop a potentially divisive and expensive legal challenge and instead work toward a negotiated settlement with the county.

“This (legal challenge) is not in the best interest of Orange County citizens,” said Todd Nicholson, president of the Orange County Business Council. “Litigation is not the thing to do at this point. It’s going to be enormously expensive to taxpayers.”

Nicholson said local business executives are trying to devise a way to resolve the differences short of a lawsuit and “all the costs and heartaches that go with it.”

But water district executives defended their decision to seek a court hearing on the status of their money and suggested that other disgruntled investors might follow suit.

“We’ve had some spiritual support from some of our sister cities and agencies who agree with our direction,” said Bill Robertson, general manager of the Yorba Linda Water District, which serves 62,000 people and has $2.6 million invested in the fund.

The Yorba Linda Water District, the Municipal Water District of Orange County and Santiago County Water Districts on Tuesday asked U.S. Bankruptcy Judge John E. Ryan to let a state court judge determine the status of their combined, $9.3-million investment in the now-failed pool.

The districts were the first of 186 cities, school districts and other public agencies that invested in the collapsed pool to break ranks and seek a court order seeking their money back. “I don’t think it’s a terribly productive step in the case,” said Bruce Bennett, the county’s bankruptcy attorney. “And I think the vast majority of pool participants would agree with me.”

On Wednesday, business leaders personally lobbied water district officials to withdraw the motion, but the districts showed no interest in backing down.

“We would be pleased to withdraw the motion if business leaders who’ve stepped forward can counter the county’s intransigence and come up with an acceptable plan,” said Keith Coolidge, spokesman for the Municipal Water District of Orange County, which serves 1.7 million Orange County residents and invested $4.6 million in the pool.

But Coolidge said that the county isn’t making necessary information about the bankruptcy plan available to investors. “Our real intent (with the motion) is to try and force some of the negotiations out into the open,” he said.

The water districts maintain that their investments are not a county asset and that state law, not federal bankruptcy codes, should prevail. Ryan has not yet set a hearing on the matter.

The motion underscores the vital issue of who--the county or fund investors--should absorb the $1.7 billion lost last year when tumbling interest rates drove down the value of the county-run investment pool.

Attorneys for the water districts also have questioned whether the county had a legal right to file two bankruptcy petitions--one for the ill-fated fund, the other for the county government. The motion filed by attorney Ron Rus contends that the pool itself isn’t a valid candidate to file for bankruptcy and should have been--but never was--registered with the California secretary of state.

Rus suggested that the validity of the pool filing “will be challenged at some time in the future.”

“What’s a fact now, though, is that the districts’ funds are not a county asset and that the county has no right to withhold them,” he said.