ORANGE COUNTY IN BANKRUPTCY : Second Suit Challenges Pool Bankruptcy Filing

The Yorba Linda Water District on Monday moved to challenge the bankruptcy petition filed by Orange County on behalf of its troubled investment pool, the second such challenge filed by an investment pool participant against the county this month.

The water district, which had about $2.6 million invested in the county’s pool when the bankruptcy was declared, asked U.S. Bankruptcy Court Judge John E. Ryan to dismiss the pool’s bankruptcy filing on the grounds that the pool was not entitled to seek protection from its creditors under Chapter 9 of federal bankruptcy law.

The water district’s attorneys argue that filings under that chapter of the Bankruptcy Code are reserved exclusively for governmental bodies, such as cities, counties and special districts.

“What the county did is like filing bankruptcy for your checking account,” said Joel Miliband, an attorney for Yorba Linda district. “The pool has no revenue-raising ability, it has no taxing authority and no governmental board. It is not eligible.”

Less than a week after county officials disclosed that the $7-billion investment pool had suffered more than $1.5 billion in losses, Orange County filed two Chapter 9 municipal bankruptcy petitions--one for itself, and one for the investment pool.

While the county’s bankruptcy lawyers have defended the dual filings in the past, a county spokesman said no one at the county was available to comment Monday on this newest challenge.

Lawyers for the Yorba Linda district argue that the pool run by former Treasurer-Tax Collector Robert L. Citron could not file bankruptcy because it “is not a municipality and is not specifically authorized to be a debtor under Chapter 9.”

The first such challenge was filed Feb. 6 by the Sacramento-based Special District Risk Management Authority, which handles insurance matters for cities in Orange County, and had about $1.1 million invested in the pool. Arguments on that challenge will be heard by Judge Ryan on March 28 in Santa Ana.

It was unclear when the second challenge would go before the judge or what impact the two filings might have on the county’s bankruptcy proceedings, lawyers said.

Miliband speculated that if Yorba Linda’s petition is upheld by the judge, it would make it difficult for the county or business leaders to fashion a settlement plan that deals only with the pool investors and puts aside the claims of other creditors such as bondholders and vendors who have sold goods to the county on credit.

“Doing a separate (settlement) plan for the pool just wouldn’t work,” he said. “You’d have to develop a comprehensive plan for all the county’s problems.”

Other attorneys said more filings may be on the way.

“Frankly, I’m not surprised,” said Tom Mouzes, an attorney representing the risk management authority, when told of the second court action.

“The county’s bankruptcy filing for the pool was only an attempt to manipulate the Bankruptcy Code,” he said. “They are attempting to gain a protection here that they don’t really have.”