O.C. Investors Clamor for Share of Pool Funds : Bankruptcy: If county fails to negotiate a settlement this weekend, lawyers will ask judge to allow legal challenges to move forward.

Orange County has been in the financial intensive care unit since filing its bankruptcy petition Dec. 6.

But during hearings scheduled to begin Tuesday, investors in the county’s loss-riddled bond pool will ask U.S. Bankruptcy Court Judge John E. Ryan to declare the patient healthy enough to leave ICU.

It’s part of a behind-the-scenes battle that has seen high-priced lawyers methodically file more than 1,000 documents in the complex case since the county tumbled into bankruptcy protection.

Ryan has kept the focus on the county’s financial problems, directing attorneys to delay litigating fundamental legal issues until after the county has a better grasp of the extent of the crisis.

This weekend, officials will continue to scramble for a negotiated settlement of the pool bankruptcy. But if no agreement is forthcoming, the lawyers will return to Ryan’s courtroom at 9:30 a.m. Tuesday to broach what they describe as key issues in the complex case--not the least of which is who may lay claim to the $5.6 billion that remains in the investment 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. “We want to get as much of our money back, as soon as possible. It’s not fair.”

So far, the county’s lawyers have used the shelter of bankruptcy 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 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 their 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 money invested in the county pool. “But the court has yet to rule on many things.”

Some of those unresolved issues will surface during the coming week, when attorneys converge upon Ryan’s courtroom.

Hauser’s agency will question the legality of the county’s bankruptcy filings. Huntington Beach and a handful of water districts 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 for daily operating expenses. And investors will ask Ryan to drain some pool money to replenish an emergency fund that is rapidly running out of cash.

Orange County’s bankruptcy attorneys maintain that the urgency surrounding most of those issues will disappear if investors adopt a business-brokered plan that would return 77 cents in cash and a combination of notes for each dollar that the pool’s roughly 200 governmental participants invested.

“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.”

Dissident investors argue that the legal challenges should move forward; in their view, these claims are their leverage for forcing 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.”

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 investment pool. Hauser contends that the dual 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 them 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.

In contrast, the county believes that the pool bankruptcy case can be settled without the time and expense of litigating the trust issue. Moreover, its attorneys maintain that the dual filing is helping to speed the pool case toward a settlement and that dismissing the filing would create “delay and confusion.”

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 100 cents for 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.

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.”