ORANGE COUNTY IN BANKRUPTCY : Filing of Pool Bankruptcy Challenged : Courts: Judge is asked to dismiss petition on grounds that investment fund is not a separate entity from O.C.

An obscure agency that handles insurance matters for cities in Orange County has asked U.S. Bankruptcy Judge John E. Ryan to toss out the bankruptcy petition that Orange County filed on behalf of its troubled investment pool.

The Sacramento-based Special District Risk Management Authority, which has $1.1 million invested in the troubled pool, also complained that the county has failed to give investors timely information about the bankruptcy.

It was uncertain on Monday afternoon when Ryan would rule on the motion or what impact a successful challenge would have on the complex bankruptcy proceeding. But some attorneys who are familiar with the county’s Dec. 6 decision to file two bankruptcy petitions--one for itself and one for the ill-fated investment pool--said that the authority is a key legal question: Was the pool operated independently of the county or was it simply a department with no special rights?

The authority that serves dozens of small government agencies in California argues that the failed investment pool run by former Treasurer-Tax Collector Robert L. Citron had no legal right to make a separate bankruptcy filing Dec. 6. The authority’s filing describes the county’s claim that the pool exists as a separate entity as “a fictional character worthy of a place in Disneyland.”

“What we’re saying is that the pool entity doesn’t exist” independently, said Tom Mouzes, an attorney representing the authority. “We’re saying it’s a legal fiction of mammoth proportions that never should have been filed in the first place.”

County bankruptcy attorneys on Monday defended the county’s double filing. “We cannot imagine that a court would dismiss it,” said county bankruptcy attorney Lee Bogdanoff.

Other attorneys described the dismissal request as legitimate.

“Our clients have from the inception questioned the propriety of the pool filing,” said Ron Rus, a bankruptcy attorney who represents three water districts that invested about $9 million in the troubled pool.

“The pool filing is like someone filing bankruptcy for himself and his checkbook,” said another attorney who had considered filing a similar motion. “You’ve got to ask how that can be.”

Bennett Murphy, an attorney representing Orange County bondholders, said that “many key players (in the bankruptcy) have wanted to keep the (pool rejection) option open” until they have a better grasp of how the bankruptcy proceedings will evolve.

Similarly, Patrick Murphy, an attorney who represents the county’s official creditors’ committee, noted that the authority’s filing might be premature because Ryan recently extended the deadline for filing challenges until mid-March.

“We weren’t interested in sideshows,” Murphy said. “We thought there were more efficient uses of our time. . . . First we have to understand where we stand and what our options are.”

One attorney, who asked not to be identified, said that a ruling against the county could make it more difficult for the county to spread the pool loss among investors. The attorney suggested that the county had hoped to reach a settlement in the pool case that would limit the county’s overall liability. But if the two cases are merged, the attorney said, “it could make things much more difficult for the county.”

Bogdanoff rejected the authority’s claim that the county failed to negotiate with creditors before filing for Chapter 9 protection, as well as the claim that the county isn’t working fast enough to develop a plan to settle claims.

Bogdanoff said the county did not have time to negotiate with creditors because it had to act quickly to protect its assets once it became clear that bankruptcy was the only option. The county, Bogdanoff said, is moving as fast as it can toward settling a highly complex case. “It is hard to argue we have unreasonably delayed anyone,” he said.