ORANGE COUNTY IN BANKRUPTCY : O.C. to Budget $2 Million for Creditors’ Legal Fees : Courts: Agreement ends long feud, but some attorneys in case predict that county will have to set aside more before June 30.

Orange County agreed Wednesday to set aside $2 million for legal bills and professional fees being incurred by the county’s creditors--effectively increasing the county’s seven-month budget for lawyers, accountants and bankruptcy case advisers to $14 million.

The agreement, approved by U. S. Bankruptcy Judge John E. Ryan during a terse 2 1/2-hour meeting in Santa Ana, ended a long-simmering feud between the county and the official creditors’ committee over who should pay the dozens of lawyers and other professionals now working on the complex case.

But some of the attorneys involved predicted that $2 million won’t be enough, and that the Board of Supervisors will be forced to set aside even more money before the fiscal year ends June 30.

“There are more straws in the soda,” said creditors committee attorney Patrick A. Murphy, who had requested that the county set aside $3.6 million. “I don’t think the money is sufficient.”

The dispute over attorney fees began in December, shortly after U. S. Trustee Marcy J.K. Tiffany arranged for the formation of a creditor committee representing vendors, bondholders, employees and other groups with special interests. Tiffany also took the unusual step of creating subcommittees to give county employees, holders of county bonds and vendors better representation.

On Wednesday, Ryan wrestled with the tough question of who should pay for the small army of professionals engaged by the committee and subcommittees. In a typical business bankruptcy, creditors and the debtor absorb those expenses.

But in Orange County’s unprecedented filing, massive legal fees will come from “the pockets of the citizenry, the taxpayers,” Tiffany said in court documents. “(It) is . . . incumbent upon the parties . . . to protect the public interest by being even more diligent about restraining costs.”

County bankruptcy attorney Bruce Bennett acknowledged that the payment plan wouldn’t satisfy many of the high-powered and high-priced attorneys on the case.

“This is not personal,” Bennett said. “This is a matter of how much money the county . . . doesn’t have. In this case, it’s tax dollars . . . for a county in a huge deficit position.”

The complex plan approved by Ryan requires the county to reimburse professionals hired by the official committee for “reasonable” expenses on a regular basis as the bankruptcy case moves toward a solution. But Ryan refused to order the county to reimburse individual creditors on the committee who opt to use their own attorneys, unless the work is authorized by the full committee.

And attorneys, accountants and other professionals working for the vendor subcommittee will be reimbursed on a regular basis for only 50% of their “reasonable” expenses. The other half will be subjected to a stiffer test.

That same test will be used to determine if the county must pay professionals hired by the bondholder and employee subcommittees. Ryan said that professional fees will be paid if the two subcommittees can prove that professionals’ work has made a “substantial contribution” to settling the bankruptcy case.

Ryan agreed to let the employee and bondholder subcommittees submit requests for payment during the bankruptcy. But Ryan said that bankruptcy law made no provision for interim payments, as requested by the employees subcommittee.

During Wednesday’s hearing, Bennett repeatedly noted that the cash-strapped county would be hard-pressed to pay the bills of the growing army of attorneys and accountants now involved in the complex case. The $2 million--an average of $307,000 per month--is conditioned, Bennett said in court papers, “upon the county having adequate cash available to make the payments.”

The $2 million that the county must now budget to cover the creditors’ legal bills is in addition to $12 million previously set aside to cover the county’s legal and accountancy bills in the county bankruptcy filing.

The county and investors in Orange County’s ill-fated investment pool bankruptcy case are negotiating an agreement on fees in that case. It is expected that the county will absorb its own fees in that case, while investors will assume responsibility for their fees.