ORANGE COUNTY IN BANKRUPTCY : Haggling Continues as County, Investors Work on Settlement : Crisis: Monday is earliest time for an agreement, both sides say. New draft of plan offered Thursday by county.

Orange County officials and participants in the county’s collapsed investment pool said Thursday they are still haggling over a settlement but could have a final agreement in place by Monday, though some dissident investors are still raising major objections.

County bankruptcy attorney Bruce Bennett provided a new, confidential draft of the settlement plan Thursday to the committee that represents pool participants.

After reviewing it, officials said it would be almost impossible for pool participants to reach their self-imposed St. Patrick’s Day deadline for completing the deal.

Instead, the pool participants plan to hold a series of news conferences today to voice their views on the latest plan, and then muddle through the details of the document during the weekend.

“We will have statements as to where the committee stands,” said Irvine City Manager Paul O. Brady Jr., vice chairman of the seven-member committee of pool participants.

“We were hopeful that we would have the (county), the committee and the Business Council all together by St. Patrick’s Day,” Brady said. “We’re not there yet. The thing we won’t have in hand is a document signed and delivered. We’re almost there. I hope we get there.”

*

Bennett declined to disclose specifics of his proposed plan, and said it is tough to gauge the status of negotiations because the case is so huge.

“It’s very difficult to tell when the other side of the dialogue is 198 different entities. I wish I could be talking to them all at once. I can’t,” Bennett said. “I am hopeful they will have a positive announcement. I haven’t heard from them.”

One source close to the negotiations, who spoke on the condition of anonymity, decried the rush to sign and seal the deal.

“They’re racing forward to do a deal, even though they don’t have a deal,” he said. “Relative to a lot of expectations, we haven’t made much progress and now everybody is out of time. . . . The county has played well the hostage maneuver.”

Bernard Schneider, an attorney representing Anaheim, said the pending settlement agreement is “not that satisfactory.”

“I don’t think anything is going to be resolved,” he said.

Officials on both sides said the deal has not changed drastically from the original settlement plan brokered last month by the Orange County Business Council, a coalition of influential executives representing 2,100 local companies.

That plan called for every pool investor to get 77% of their investment back in cash immediately. On top of that, schools would get an additional 13%--while cities and special districts would get 3% more--in marketable “recovery notes,” which would be paid over an unspecified period of time.

The remainder of the investors’ deposits would be treated as “senior claims” payable from the expected proceeds of the county’s lawsuit against Merrill Lynch & Co., which sold the money-losing securities to the county treasurer, and “subordinated claims” in the county’s bankruptcy action.

During more than a month of nearly nonstop negotiations, pool participants have begged for increased security on the subordinated claims, while the county has searched for a method to turn the recovery notes into cash more quickly. Some investors have also raised concerns about a provision of the agreement that requires them to promise not to sue county officials.

Bennett’s new plan, sources said, rejiggers the breakdown of money to be paid back to investors based on what is recovered in litigation. The longer, more complete document also contains scores of complex formulas and definitions that make it more confusing.

One source called the document “horrible” and another said it is “incomprehensible.”

“The agreement to implement is much worse than the term sheet” laying out the concepts of the deal, said one person close to the negotiations. “It doesn’t make any sense.”

*

Cities and pool investors from outside Orange County are particularly incensed over a provision in the agreement that agencies must promise not to sue county officials before they can get any cash.

Pool participants feel some current and former county employees, and the Board of Supervisors “deserve to be sued,” one source said.

“We don’t even know what people we’re talking about,” the source said. “Even assuming they don’t have any assets, what you want is their cooperation, and you don’t get cooperation from somebody you’ve already released” from liability.

Bennett said the clause releasing county officials applies only to circumstances in which the county itself could be held liable for employees’ actions. Under state law, employees and elected officials are “indemnified,” or backed by the county, unless the matter in question is beyond the scope of the employees’ jobs or involve “actual fraud, corruption or actual malice.”

“We don’t want to have back-door liability,” Bennett explained. “If this (settlement) is going to make any sense at all, it’s got to be a full settlement as far as the county is concerned. The county is certainly seeking a full release of problems that would come in through the front door and problems that come in the back door.

“A judgment against a person who is indemnified by the county is exposure to the county and to its citizenry,” he added.

*

Rumors circulated among pool participants Thursday that the county had privately reached a settlement of its $2.4-billion lawsuit against Merrill Lynch in which the brokerage would refinance about $1.3 billion of the county’s debt in exchange for being released from all suits.

But Bennett and Jim Mercer, the attorney who represents the county in its litigation against Merrill, insisted that there are no such settlement talks underway.

In recent days, the pressure to reach a settlement with the pool participants has intensified because of looming deadlines.

Hearings on challenges to the pool’s bankruptcy filing are scheduled for month’s end, and several investors--particularly school districts--say they will go belly up in April unless they gain access to the money in the frozen pool.

The pool participants have asked U.S. Bankruptcy Court Judge John E. Ryan to extend the emergency disbursement process into April and increase the amount available for withdrawal to $1.25 billion. But the county’s other creditors, including bondholders, have balked at the idea, putting added pressure on cash-short investors to accept a settlement sooner.

“We’re uncomfortable with a creeping plan in which assets are doled out without set standards,” said Robert Jay Moore, an attorney for the county’s bankruptcy creditors committee. “The committee has a growing discomfort with doling out the cash without a consensual resolution of the issues.”

The dissipation of the “emergency funds” that pool investors were allowed to withdraw from the bankrupt pool--limited to 30% of their balances--is making some pool investors more willing to accept the proposed settlement.

“I don’t think anything is really changing--reality is just setting in,” said one source close to the pool committee. “People need cash. The county needs cash and we need cash. Right now the cash is tied up. You don’t want a meltdown. You don’t want other people going bankrupt.”

Paul S. Nussbaum, the Wells Fargo banker on loan to the county to serve as deputy chief executive, said the negotiations at this point amount to haggling over language.

“They wanted stronger assurances” about the eventual repayment of the subordinated and senior claims, Nussbaum said. “They want the strongest language possible that the county will make its best effort. This could take days of going back and forth on comfort level of language.”

Nussbaum said that, at the daily staff meeting Thursday morning, he was told the settlement is 90% complete.

“So I joked, ‘Is that the same 90% we were at yesterday? Is that the same 90% from the day before?’ ” Nussbaum quipped. “You don’t get many laughs. The lawyers don’t laugh.”

Times staff writers Greg Johnson and Debora Vrana contributed to this story.