Settlement With Creditors Up for OK

After months of courtroom maneuvering and back-room wrangling, a bankruptcy judge could clear the way today for more than 200 cities, school districts and other public agencies to recoup money held hostage in Orange County’s investment imbroglio.

Judge John E. Ryan is expected to review a complex repayment plan that’s being described as one of the largest bankruptcy settlement agreements ever sought. The agreement would return $5.7 billion left in the county’s shattered securities portfolio, which plummeted in value by $1.7 billion late last year before being plunged into bankruptcy.

The plan has drawn grudging support from an overwhelming majority of county creditors and pool investors.

“There’s clearly no choice but to get it approved,” said G. Larry Engel, a lawyer who represents a handful of cities outside Orange County whose funds are tied up in the bankrupt bond pool. “The system doesn’t allow folks timely access to their funds and people are now desperate. They need the cash. They basically have no choice.”

The plan would ease an impending cash crunch that, during coming weeks, threatens to push dozens of schools, cities and special districts toward massive cutbacks or insolvency. But while there’s relatively little opposition to the plan, there’s clearly something in the document for everyone to dislike.

* Holders of existing Orange County bonds fret that the plan will let cash-strapped Orange County start its financial restructuring by saddling itself with an additional $1 billion in debt.

* County employees are wondering if the plan might limit their ability to sue Merrill Lynch & Co. and other firms that advised the ill-fated bond fund.

* Buena Park and Yorba Linda question why they should be forced to pay for future legal and accounting bills as the bankruptcy case continues.

* Municipalities from outside of Orange County with funds tied up in the bond pool complain that the county hopes to extract a “ransom” in exchange for letting cash-strapped investors access their remaining funds.

Although 21 objections to the plan were on file at U.S. Bankruptcy Court in Santa Ana on Monday, Orange County officials “were pleasantly surprised that the motion drew so little opposition,” said Lee Bogdanoff, one of the county’s bankruptcy attorneys.

Ryan has freed up the entire day for the hearing that could draw an overflow crowd of lawyers to his sixth-floor courtroom. During one previous hearing, late-arriving attorneys were escorted to an adjacent courtroom where they followed the proceedings over a public address system.

During today’s hearing, Ryan “is going to have to struggle with some really tough issues,” said Patrick C. Shea, a lawyer representing cities, schools, water districts and other government agencies with funds in the bankrupt pool. “But my sense is that this thing is going to fly.”

But even if Orange County immediately started to cut checks and disburse funds, some of the hardest-pressed school districts still would face possible insolvency.

“This is the first step in long process,” said John Dean, superintendent of the Orange County Department of Education. “It shows real promise. But the schools certainly can’t quit worrying.”

That’s because the agreement only guarantees immediate payment of 77 cents in cash for every dollar held in the ill-fated pool. Schools also would receive 13 cents in recovery notes and a county-issued IOU for the remainder.

School districts are counting on the county’s promise that the recovery notes will be convertible into cash by June 5, so the recovery plan must move like clockwork for districts that are basing their upcoming school-year budgets on a 90% pay-back.

“Those recovery notes are the difference between bankruptcy and some semblance of solvency,” Dean said. “Yes, 77 cents is a first major step. The next step is equally important.”

Some school districts already have begun planning in the event that the notes can’t immediately be converted into cash.

The Newport-Mesa school board, for example, will hire outside financial consultants and bond counsel to examine possible contingency plans. In Irvine, city, school and water district officials are discussing a possible joint powers authority to help the cash-strapped school system avoid insolvency.

In filings made during the past month, pool investors, creditors and others with an interest in the document hammered out with assistance from the Orange County Business Council have made it clear that the document is a child of compromise.

Creditors characterized the plan as “an admirable solution to some very thorny trust and bankruptcy law questions.” But they also argued that the plan “is not without its costs to existing creditors.”

Holders of Orange County bonds are worried because the county will soon issue $1 billion in new debt--including $240 million which will enjoy “superpriority status” over the county’s existing debt.

Some note holders are seeking to strengthen their claims in return for supporting the bankruptcy settlement plan. But Shea characterized their objections as “not sufficient to hold up the settlement agreement.”

Buena Park and Yorba Linda officials have “begrudgingly” accepted the plan. But they’ve asked Ryan to eliminate the plan’s demand that the two cities make a $100,000 contribution to a “professional fee reserve” that would pay legal and accounting bills as the complex case works its way through bankruptcy and civil courts.

Buena Park and Yorba Linda officials described the proposed contribution as “illogical and perhaps legally improper.”

Some of the harshest language against the settlement plan comes from a handful of cities outside of Orange County, including Mountain View, Montebello and Santa Barbara, that have money trapped in the pool.

“The fact that (investors) are willing to settle is not an indication of the lack of merit in their claims (of county malfeasance),” according to the April 21 filing. “It is merely an indication of (their) desperation.

“The (investors), or many of them, cannot afford to wait any longer for complete access to their remaining funds in the pools,” according to the filing. “It does little good to be right, if one does not survive until victory.”

County attorneys on Monday downplayed the objections.

“We don’t believe any (objections) raise issues which stand in the way of court approval,” Bogdanoff said. “This may be the largest bankruptcy compromise ever . . . (and) given the magnitude . . . the importance and the notoriety, it’s astonishing that there were so little meaningful objections.”

Several lawyers noted that investors have little choice but to accept the plan.

“If this settlement doesn’t occur, then we’re all back to square zero in Bankruptcy Court,” the attorney said. “There would be no resolution of the pool case. It would basically be a free-for-all once again.”