Investment Pools’ Bankruptcy Filing Dismissed

A federal judge has dismissed the bankruptcy filing of the Orange County Investment Pools, ruling that the portfolio run by former Treasurer-Tax Collector Robert L. Citron for some 200 local government agencies does not qualify as a municipality under the bankruptcy code.

The ruling by U.S. Bankruptcy Judge John E. Ryan will probably have no practical impact on the ongoing financial fiasco because it comes days after the pool’s remaining assets were disbursed through a court-approved settlement agreement. The county itself had filed a separate bankruptcy petition that remains intact.

“I don’t think it matters to me anymore,” said Patrick C. Shea, the attorney representing the committee of participants in the failed investment pool. “The only concern that we had with the motion to dismiss was that it would interrupt the settlement process. We accomplished what we wanted to accomplished.”

County bankruptcy counsel Bruce Bennett echoed Shea’s reaction.

“My goal is to solve problems,” he said. “The problem [of the pool] is solved, so I can’t be tremendously concerned about the finding that . . . the pool case is ineligible. I don’t think it will have a functional impact on many people involved in the case.”

But attorneys who pushed for the pool case dismissal welcomed the ruling as a moral victory because the county’s contention that the pool was a separate entity filing for bankruptcy was rejected by the judge.

“Our position all along has been that the county has not been exactly candid with its disclosure of what’s really going on,” said Ronald Rus, who represents the Yorba Linda Water District, which challenged the investment pool filing along with the investment bank Merrill Lynch & Co., the city of Huntington Beach and the Special District Risk Management Authority.

“Hopefully, it will make the people that are participating in the county and the representatives in various municipalities understand that just because the county says something is so, it may or may not be that way,” Rus added. “The county has been spinning its own story of how things work, and you can’t just concede to it because the powers that be say it’s so.”

Added Merrill Lynch spokesman Timothy Gilles: “Today’s decision is another blow to the county’s credibility.”

Huntington Beach officials also claimed credit for pressuring the county to settle by filing the motion to dismiss. Ryan held a hearing March 31 and indicated then that he would like to dissolve the pool bankruptcy, but gave the two sides time to agree on a settlement before he issued his ruling.

“That was the hammer over the head of Bruce Bennett: He knew he didn’t have a case,” Huntington Beach City Atty. Gail C. Hutton said Wednesday.

“We said, ‘The emperor has no clothes,’ and what this ruling does is, it debunks the theory that Bruce Bennett is infallible,” added Deputy City Atty. Arthur de la Loza. “We’ve been fighting that office since day one and this is a clear legal victory on a very important point.”

In the 31-page decision, Ryan said that the $7.6-billion portfolio Citron managed was “an instrumentality of the county” but not a municipality eligible for Chapter 9 bankruptcy protection, because it is the creation of the county and lacks sovereign power.

However, Ryan rejected arguments by Merrill Lynch that the county had filed a separate bankruptcy petition for the pool in bad faith. He also tossed aside contentions that the pool remained solvent after suffering nearly $1.7 billion in investment losses when Citron’s bet on falling interest rates went bust.

“The OCIP filed to protect its assets and allow it the opportunity to work out an adjustment of its debts in a orderly way,” Ryan wrote. “Nothing in the record indicates that the OCIP has attempted to unreasonably deter and harass its creditors. Rather, from the beginning, the OCIP has moved quickly toward resolving its problems.”

Bankruptcy experts said the ruling was not a surprise--many have suggested since days after the initial filing that the pool case would be tossed out of court because it is not a municipality as defined by Chapter 9.

“The problem with the pool bankruptcy is that it raises the question, ‘Can you take your bank account and, since it’s overdrawn, put it into bankruptcy?’ Despite the desire of most persons to do that, you can’t,” said Chicago attorney James Spiotto. “The practical reality is that if you could bankrupt your checking account separate from yourself, people would have done it a long time ago.”

Since the OCIP filing was the first of its kind, Ryan’s ruling sets a precedent, but there may never be another case on which to test it.

“Fortunately, they already have an agreement to which everybody has signed on, so the very real problem of how do you handle this case has been solved,” said UCLA law professor Daniel Bussell. “I don’t know that there’s really a broad impact, but it’s an interesting intellectual exercise.”

Times staff writer Michael G. Wagner contributed to this report.