O.C.’s Delayed-Payment Plan Attacked in Court

Orange County’s plan to postpone repayment of nearly $1 billion in short-term debt came under a broad legal attack Monday, raising the specter of the deal collapsing and the county defaulting on notes coming due this summer.

At least four separate groups representing bondholders and participants in the county’s failed investment pool filed legal objections, claiming the proposed debt rollover is essentially unfair and goes too far in doling out rights to various creditors.

“It’s discriminatory and it’s unfair and it’s undemocratic. It’s an attempt by the county to coerce us,” said Robert Darby, an attorney protesting the rollover on behalf of four firms that own $75 million worth of county tax and revenue anticipation notes originally due next month but being extended until June 30 of next year.

“These are the sorts of issues that are meant to be dealt with in the context of the confirmation process of a plan,” Darby said. “The county is trying to short-circuit and distort that process, and that’s inappropriate.”

The legal filings threaten to undercut one leg of the bankrupt county’s recovery plan. They usher in a new era in the bankruptcy case--with creditors bickering among themselves for position in the long line of creditors, rather than joining forces to fight the county.

“The objections certainly demonstrate that there are major fissures among the creditors in the case,” county bankruptcy attorney Bruce Bennett said. “For better or for worse, it’s going to be incumbent upon the county to resolve them, either through negotiations, which we prefer, or in court.”

In addition to Darby’s group of Alliance Capital, Putnam Investment Management, the Benham Group and the Northern Trust Co., the other parties filing objections Monday included:

* Boston Safe Deposit & Trust Co., Charles Schwab Corp., Lehman Bros. and Wells Fargo, which together own about $170 million worth of a controversial $600-million issue of taxable notes that the county sold last summer to pump up its faltering investment pool.

* A committee representing dozens of schools and community college districts.

* An obscure, Sacramento-based agency that had just $1 million in the county pool when it went belly up.

A fifth objection is expected to be filed today by the largest group in the bankruptcy case, the committee representing 200 schools, cities and other agencies that had money in the county-run pool when sour investments sent it to Bankruptcy Court on Dec. 6.

Patrick C. Shea, the committee’s attorney, said the debt-extension proposal “has been very carefully wordsmithed” and contains too many “traps” that could trip up his clients later on as the case moves forward in the courts.

“The whole thing seems to be really inappropriate. It goes way too far,” Shea said of the rollover agreement. “It is a fight that does not need to be fought now. It is a fight that will probably lead to more confusion. It’s going to generate far more heat than light. It does not advance the case.”

Two groups of cities were also expected to file objections.

Attorneys for the creditors committee, which authored the proposal, said that they were not surprised by the objections and that they still expect the rollover to win approval of the note holders.

“There are common interests and there are divergent interests. Through most of the case, the common interests seem to have dominated the bondholders’ point of view, and I think that will remain the case,” said Bennett Murphy, who represents the bondholders’ subcommittee. “I do think there are some possible ways to work out people’s problems, and there’s time available to make that happen.”

The proposed extension, approved earlier this month by negotiators for the county and its creditors, would enable the county to avoid defaulting on $975 million in notes and bonds coming due this summer by extending their maturities until June, 1996.

Investors would receive just under 75% of their original interest rate monthly over the coming year, then get the balance of the interest--plus an extra 95 cents for every $100 invested--next June. In exchange, the county relinquishes most of its rights to challenge the legality of the debt in court, though it retains the option of repudiating a controversial, $600-million taxable note deal that was underwritten by Merrill Lynch & Co.

U.S. Bankruptcy Judge John E. Ryan will consider the proposal and the objections at a hearing June 23.

Individual note holders have until July 7 to vote on the plan. If those holding 50% of the debt give the deal the nod, it goes into effect just for those who vote yes; if those holding more than 90% approve the extension, it impacts everyone.

“We just want equal treatment here. With this rollover plan, we are being asked to give up things that none of the other creditors are,” said John Cain, a spokesman for New York-based Lehman Bros. “We are going to appeal to the judge’s sense of fair play.”

In their filing, Cain’s group argues that the extension violates the equal protection clause of the 14th Amendment of the U.S. Constitution.

“While the county’s ultimate goal of staving off a default on its bonds and notes may be laudable, the means by which it is doing so is to treat holders of county debt in impermissible, substantially different ways,” the filing states.

Both note holders’ objections focus largely on the process for voting on the proposed rollover. They argue that holders of $175 million in Teeter notes should not be included in the debt extension because the county is undertaking simultaneous action to retire those notes in June.

“The county and the committee have attempted to rig the election so they can later claim a majority of note holders have elected to extend their debt, and have thus absolved the county from default,” Darby’s filing states. “The county has effectively bought the votes of the Teeter note holders [$175 million of the $975 million] by promising to satisfy their debt.”

Darby also complains that “the proposed treatment” of note holders who reject the rollover is “both punitive and discriminatory.”

Still, several of the note holders who filed objections said that if Ryan modifies the agreement, they may vote for it.

“At the end of the day, they’re going to have a business decision to make on whether or not to roll,” noted Robert J. Moore, attorney for the creditors committee. “They will make that business decision in their self-interest. We hope that means the rollover will be successful.”

But the pool participants, who are not parties to the agreement, raised perhaps the broadest objections. Attorneys for the schools subcommittee argued that the proposal is “unfair, unreasonable and inequitable.”

“The stipulation’s provisions are often confusing and convoluted, containing inaccuracies which will most assuredly result in extensive challenge and litigation by various parties,” the filing states. “The Stipulation and the Note Extension Agreement grossly overreach.”

The simplest, and thinnest, objection came from the Special District Risk Management Authority, an obscure agency that has taken an active role in many aspects of the wide-ranging bankruptcy case. In its three-page filing, lawyers for the authority complain that they had too little time to review the proposed debt extension, and that it could impact their claim even though they are not a party to the agreement.

“Buried in the stipulation . . . is a provision that the order of this Court be forever binding and conclusive upon all parties in interest in the Chapter 9 case,” the pleading states. “Such a provision cannot be imposed on a non-consenting third party. . . . The motion is misleading and fails to describe in full . . . the overall effect on the pool participants.”

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