ORANGE COUNTY IN BANKRUPTCY : Judge Refuses to Stall Plan to Pay O.C. Pool Investors

A federal judge Friday denied a request by three public agencies to delay adoption of a settlement plan for the $5.7 billion remaining in the county’s collapsed investment pool, clearing for now the last legal hurdle for final approval of the proposal.

“Nobody here is being bound to a certain treatment other than voluntarily,” said U.S. Bankruptcy Judge John E. Ryan during an emergency hearing. “Each has the right to accept or not accept this offer.”

The decision prevents what could have been a disastrous delay for many Orange County school districts and other pool investors, including the Orange County Transportation Authority, who must make debt payments of their own this summer. Several investors face possible bankruptcy or drastic cuts in services without further cash infusions from the investment pool, said Merrill R. Francis, an attorney for the county’s schools.

“Not only was (Ryan’s) decision legally correct, but it gives schools and other investors a chance to survive and will avoid economic catastrophe,” Francis said.

Attorneys for the Yorba Linda Water District, the Municipal Water District and the City of Huntington Beach made the last-ditch effort to delay approval of the settlement plan, arguing that they are being forced into making a decision about it without adequate information.

“There are gaping holes in what we know,” attorney Matthew Schier, representing Huntington Beach, told Ryan. “We don’t know what makes sense at this point.”

The city and the water districts had wanted the judge to order a delay while the county prepared a disclosure statement that would answer many of their questions, they said. The legal document would spell out in great detail each aspect of the county’s finances and the complex reimbursement plan.

The plan has received the endorsement of a majority of the pool’s nearly 200 investors. Most have selected Option A, which prevents them from suing the county but returns an average 77% of their investment in cash, with another portion in so-called recovery notes, which could be converted to cash by June 5. A variety of IOUs would make up the rest.

Fifteen agencies have chosen Option B, which pays them only the average of 77% in cash but preserves limited rights to sue the county for more.

The third option, selected by only three agencies so far, rejects the settlement altogether, but allows investors to retain all legal claims against the county.

Investors have until Tuesday to decide whether to accept the settlement and which option they prefer. Ryan is scheduled to make a final ruling on the plan at a May 2 hearing.

Attorney Chris Heffelfinger, who also represented Huntington Beach, told Ryan that the city and other investors have pressing questions about the plan. He said investors are especially eager to learn whether the county can find financial institutions that will be willing to back the county’s recovery notes and so allow them to be converted to cash in early June.

“What is the source for those funds?” Heffelfinger asked. “What is the fall-back position? . . . Many people feel they are being coerced into this plan.”

In court documents, attorneys for the city and the water districts argued that the settlement agreement is, in effect, a “de facto plan of adjustment” or an overall plan to settle the county’s bankruptcy. Under bankruptcy law, they argued, Ryan should require the county to produce the lengthy disclosure statement, which is regularly required in preparation for a plan to settle a bankruptcy.

But Ryan disagreed, saying that at most the settlement plan addresses only a part of the county’s bankruptcy and that objections to the plan can be aired at the May 2 hearing.

“This is not a question of the overall fairness of the settlement, but whether this is a de facto plan that resolves all rights, obligations of all parties to the overall problem that the county has,” Ryan said. “This is only a piece of the puzzle in terms of the eventual resolution.”

But in a nod to the investors’ concerns, Ryan asked county bankruptcy attorney Bruce Bennett about the status of the recovery notes--whether Bennett believes the county will be able to find financial institutions that will back the notes and how well negotiations with those institutions are moving along.

Bennett said the county has many options for being able to turn the notes into cash by June 5. They include obtaining bond insurance for the notes from a financial institution; backing the notes with a letter of credit; using a bank loan in lieu of the notes, and issuing high yield notes directly to pool investors that could be sold, in turn, through an investment house.

Bennett also said the county is in negotiations with several financial institutions, which he declined to identify. While the county has no commitment from any of them yet, he feels “very optimistic” that the county will get an agreement on time.

“Do you see anything today that would interfere with these options?” Ryan asked.

“No, I do not see anything that would block any of these options,” Bennett answered.