Minors Could Lose Court Funds Invested in O.C. Pool : Bankruptcy: County’s advisers are urging judges not to spare children’s settlements from the losses. One official calls that plan unacceptable.

Children whose court settlements were placed in the Orange County investment pool could potentially lose millions of dollars in principal and interest, despite a vow by the county to protect them from its fiscal crisis, officials said Thursday.

James L. Smith, presiding judge of the Orange County Superior Court, said the county’s bankruptcy advisers are urging judges not to spare the estimated 420 minors who invested nearly $7 million in court settlements, mostly in personal injury cases, from their share of the pool’s $1.7-billion loss.

“We find that the court and the county have a divergence of opinion on how this should be handled,” Smith said. “But we’re interested in the moral aspects, not the legal aspects. We think these claims should be paid first, and the county should be trying to do that. I don’t see them trying to do that.”

Smith said the county’s bankruptcy advisers--he would not specify who--are urging judges to pay about 70 to 75 cents on the dollar to those minors trying to withdraw their money from the investment pool. That is less than the average 77% return that cities, schools and special districts will receive under a settlement agreement approved this week in U.S. Bankruptcy Court.

“It could go into the millions, certainly,” Smith said of the potential losses to minors.

Repeated calls to county bankruptcy attorneys were not returned Thursday.

Smith said court officials hope to work out a compromise soon so minors’ claims will be paid in full. Anything less would be unacceptable, he said.

The county has shown an interest in protecting children during the bankruptcy crisis--promising, for example, to do all it can to ensure that school districts are repaid 100% of the amounts they invested in the pool. Similarly, court officials have contended that minors should be repaid their investments, plus interest.

“I’m not saying that other creditors and investors don’t deserve theirs,” Smith said. “But I think (the minors) are in a special category and should be paid first. We have a higher obligation to do so.”

The status of the minors’ investments has been murky since the county sought bankruptcy protection Dec. 6. Shortly after a class-action lawsuit was filed to ensure that the minors would be paid in full, court officials said parents or guardians were free to withdraw the principal, with the promise of interest to come later.

One young investor who took advantage of that allowance was Laura Small, the Lake Forest girl who was awarded $1.6 million in 1993 after being mauled by a mountain lion in a county wilderness park. But attorney Darren Aitken, who represents Small, said the youngster, now 13, has yet to see an estimated $9,000 in interest earnings.

“We can’t seem to get a straight answer out of anyone on this, but we’re hearing that the county is not paying the interest,” Aitken said. “I hope that’s not true.”

Aitken filed a lawsuit against the county on behalf of Small in an attempt to get her investment back. The suit was placed on hold when the principal was released, but Aitken said he must consider going forward with it if the interest remains unpaid.

Minors cannot have access to their settlement funds until they turn 18. A state law sponsored by the Orange County Board of Supervisors and the Superior Court nearly two years ago allowed parents or guardians to place settlements in the county investment pool. Judges had routinely advised parents and guardians to invest in the pool to take advantage of what were then its high yields.

“We thought we’d do it because it’s a pretty strong thing, it’s a county deal,” said Mary Dunlap of San Clemente, whose daughter was awarded nearly $30,000 three years ago after a car accident. “Hopefully, we’ll get it all back. But what do we do? Just leave it there and pray?”

Irvine attorney Frank Nunes, who has filed a class-action lawsuit on behalf of the minors and others whose trust funds were invested in the pool, said he will press ahead with the lawsuit to ensure that the “innocents” caught up in the fiscal mess are paid in full.