O.C. Investors Say It’s Time to Talk Pay-Back : Courts: Bankruptcy judge has kept fundamental legal issues on hold, but creditors will demand action next week.
Orange County has been in the equivalent of a financial intensive-care unit since filing its bankruptcy petition on Dec. 6.
But during a string of hearings scheduled to begin on Tuesday, a handful of investors in the county’s bankrupt bond pool will ask U.S. Bankruptcy Court Judge John E. Ryan to declare the patient healthy enough to move to the general ward.
It’s part of the behind-the-scenes battle that has seen high-priced lawyers methodically file more than 1,000 documents in the complex case since the county entered bankruptcy in December.
Ryan has kept the focus on the county’s financial problems and has directed attorneys to delay litigating fundamental legal issues until after the county has a better grasp on the extent of the crisis.
This weekend, county officials will continue to scramble for a negotiated settlement for the pool bankruptcy. But if that plan isn’t forthcoming, the lawyers will return to Ryan’s courtroom at 9:30 Tuesday morning to broach what they describe as key issues in the complex case--not the least of which is who lays legal claim to $5.6 billion in funds still trapped in the county’s ill-fated bond pool.
“Our attitude is that they’ve been holding our money hostage,” said Dennis Hauser, an attorney for the Sacramento-based Special District Risk Management Authority, a joint powers authority with $1.1 million tied up in the fund that has attacked the legitimacy of the pool bankruptcy filing. “We want to get as much of our money back, as soon as possible. It’s not fair.”
So far, the county has driven most of the action in Bankruptcy Court.
Its lawyers have used the shelter of Bankruptcy Court to set aside key parts of labor contracts, withhold property tax refunds from taxpayers and dip into bond debt reserves to pay more pressing bills.
Ryan, who in February described the unprecedented financial crisis as “acute and immediate,” has given the county considerable leeway to untangle its finances.
The judge has counseled nervous landlords to give the county time to determine which leases will be dropped. Plaintiffs with potentially expensive legal claims against the county and creditors who fear that bills won’t be paid have been advised to postpone legal action until the county’s financial health improves.
“The county has waged a very effective public relations campaign (designed to) convince elected leaders . . . that they’ve had their way in Bankruptcy Court,” said attorney Ron Rus, who represents several water districts with funds invested in the county’s ill-fated bond pool. “But the court has yet to rule on many things.”
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Some of those issues will surface during the coming week when attorneys converge upon Ryan’s sixth-floor courtroom in the downtown Santa Ana federal building.
Hauser’s risk management authority will question the legality of the county’s bankruptcy filings. Huntington Beach, the Yorba Linda Water District and the Municipal Water District of Orange County will seek permission to have a state court judge determine if a legal trust existed between the county and investors.
Holders of Orange County bonds will reiterate their opposition to the county’s practice of using bond reserve funds to pay daily operating expenses. And, cash-strapped investors will ask Ryan to pull some pool money out to replenish an emergency fund that’s rapidly running out of cash.
Orange County’s bankruptcy attorneys maintain that the urgency surrounding most of those issues will disappear if investors adopt the business-brokered plan that would return 77 cents in cash and a combination of notes for each dollar invested in the pool. County officials and investors reached a tentative agreement on the plan more than a week ago, but negotiations subsequently stalled.
“Not every issue in a (bankruptcy) reorganization case gets litigated,” said Lee Bogdanoff,one of the county’s bankruptcy attorneys. “In fact, the most significant issues are never litigated if they can be resolved.
“And we continue to believe that it’s critical for Orange County and all the municipalities, cities and districts to work together and come to a businesslike solution.”
Dissident investors argue that the legal challenges should move forward because they are part of the leverage being applied to force the county to seek a good-faith settlement.
“These are fundamental core issues, which is why we pursued them,” said Keith Coolidge, spokesman for the Municipal Water District of Orange County, which is seeking permission to transfer part of its legal battle out of Ryan’s courtroom and into the state court system.
“We want to make sure there’s pressure on both the committee that’s representing us in bankruptcy and the county to move forward,” said Coolidge, whose agency serves 1.7 million Orange County residents and has $4.6 million tied up in the pool. “That’s why we did what we did (with the legal challenges).”
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The issues are as complex as they are important.
The Special District Risk Management Authority, for example, is attacking the county’s legal strategy of filing two bankruptcy petitions--one for itself and one for the bankrupt pool.
Orange County bankruptcy attorneys maintain in court papers that the dual filing was legitimate, and that the strategy will help to facilitate “a rapid resolution of the disputed issues related to the rights of pool participants.”
The county argues that a settlement in the pool case might be reached “in a very short time,” and that dismissing the filing would create “delay and confusion” and delay distribution of pool funds to cash-strapped investors.
Hauser contends that the filing has complicated investors’ attempts at retrieving their funds, and that “the judge will be, for the first time, addressing what the pool is.”
The pool’s legal status, investors claim, has an important bearing on the county’s obligation to repay investors 100 cents on the dollar.
Water district officials maintain that the county acted as a trustee--not an investment adviser--for cities, schools and special districts with funds in the pool. That trust arrangement, investors argue, requires the county to pay back every dime invested in the pool.
“We feel that it’s our money, that we deposited it with the treasurer in trust,” said William Robertson, general manager of the Yorba Linda Water District. “Well, we think it’s a county problem if they can’t come up with (the money) and we feel it’s important to keep pushing the (trust) issue.”
In contrast, the county “has made every effort not to take a position on this ‘trust’ issue,” according to court papers. That’s because the county believes that the pool bankruptcy case can be settled without the time and expense of litigating the trust issue.
Huntington Beach officials, who will ask Ryan for permission to seek a state court judge’s opinion on the trust issue, also are adamant that the county pay back every dollar placed in the pool.
“It seems to us that the state law does everything possible to say that these monies are, indeed, those of the agencies and cities that put them (into the pool),” said Edward B. Rasch,an attorney representing the city of Huntington Beach.
“And if a judge finds that state law (doesn’t support a trust) then it seems that he’s saying the (investors who) put $5.5 billion into the pool have lost their claim to that money and should get in line with creditors.”
Creditors--including holders of county bonds--also have weighed in with an opinion on the existence of a trust. But creditors argue that the mere existence of a trust won’t necessarily help investors to recoup funds.
Creditors argue in filings that, if no trust existed, pool investors “are merely general unsecured creditors.” They also maintain that, even if a trust existed, investors would still be labeled “general unsecured creditors” because pool funds were commingled by county officials.
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The trust issue might surface again on Friday when Ryan is scheduled to deal with an emergency fund that has kept many cash-strapped cities, school systems and special districts afloat since funds were frozen in the bankrupt pool. County creditors are opposed to using additional pool money to replenish the emergency fund that is nearly tapped out.
Creditors’ opposition sparked an unusually terse filing by the official bankruptcy committee that represents pool investors. Unless agreement was reached on the emergency fund, investors said in court documents, they would, for the first time, ask Ryan to rule on the trust issue.
The county, which hopes to settle the pool bankruptcy without broaching the trust issue, quickly forged an agreement with the investors committee. Within days, attorneys for the investor committee made another filing that voided the trust issues raised in the earlier filing.
“I think that shows just how concerned the county is about the trust issue,” Rus said.
Creditors, meanwhile, are worried that their interests will be ignored if Ryan allows more money to flow out of the pool and into the emergency fund.
“We’re uncomfortable with a creeping plan in which assets are doled out without set standards, without full input from creditors,” said Robert Jay Moore, an attorney who represents county creditors.
Even if a pool bankruptcy settlement surfaces this weekend, Robertson, from the Yorba Linda Water District, maintains that the legal challenges scheduled for court hearings next week should not be dropped.
“I’m a water administrator, not a bankruptcy expert,” Robertson said. “But I do know that it’s important for us to get this definition of whether . . . a trust existed. We placed our money there knowing that we’d get it back. And if a plan doesn’t give us back 100%, then we still have to fight.”
