Sudden Rift Threatens Deal on Debt Extension : Bankruptcy: Attorneys square off after pool participants object to proposal that would avoid default on nearly $1 billion in bonds and notes.

Attorneys for the two largest constituencies in Orange County’s massive bankruptcy case squared off Tuesday, making the prospects of a one-year extension on the county’s short-term debt even dimmer and opening a nasty rift among parties that had previously cooperated.

The eruption came when the committee of participants in the county’s failed investment pool joined half a dozen others in objecting to a proposal by the county and its creditors to avoid default on nearly $1 billion in bonds and notes due this summer by extending their maturities until next June.

Patrick C. Shea, the attorney for the pool committee, echoed objections filed Monday by groups of bondholders and other pool investors, saying that the proposed rollover is actually a bankruptcy plan of adjustment in disguise and unfairly outlines which county debts will be repaid when.

“It goes way too far,” Shea said of the 40-page agreement. “We do not oppose the ultimate resolution as much as we vigorously oppose the vehicle they are using to get there. This is really a fight over strategy, not over substance.”

Robert J. Moore, the attorney for the creditors’ committee that negotiated the rollover deal, said Shea’s objection amounted to back-stabbing. He noted that his committee did not object to the county’s comprehensive settlement agreement with pool participants approved by U.S. Bankruptcy Court Judge John E. Ryan last month, and accused Shea of going back on his promise to support the rollover plan.

“We have worked throughout the six-month course of this case in a spirit of cooperation with the pool committee to reach a global solution,” Moore said. “We’ve acted in a constructive fashion. We want fair treatment, we want equal treatment. We believed we had agreement from the pool committee. We believe the pleading filed by the pool committee is a renege.

“We’re angry about the action taken, and we intend to fight it in court,” Moore added. “This is a lesson we have learned that we will not forget in terms of cooperation and relying on their commitment.”

Shea said he had agreed to support the debt extension only in concept--and continues to do so. He also argued that Moore supported the pool committee’s settlement with the county only because it freed money to help pay bondholders that Moore represents.

“They didn’t do us any favors,” Shea said. “This is not a case about people doing each other favors.”

The dispute, along with the other six objections, will be heard by Ryan at a June 23 hearing on the fate of the debt-extension proposal. According to the proposal, bondholders would receive about 75% of their current interest rate monthly for the next year, then get the balance of the interest--plus 95 cents for every dollar invested--next June. In exchange, the county waives most of its rights to repudiate the debt.

Individual note holders have until July 7 to vote on the deal. If those holding more than 90% of the debt agree, it affects everyone; if more than 50% agree, it affects only those voting “yes.”

In his objection, Shea expresses concern that the debt-extension deal unfairly discriminates against his clients by subordinating pool participants’ claims to those of vendors, employees and bondholders.

“While the committee wishes to be as constructive as possible, it cannot address these issues in a vacuum and cannot afford to stick its head in the sand with respect to the relief apparently being sought in the motion,” the filing states. The “committee would breach its fiduciary duty if it did not consider every step legally possible to make sure that limited funds were distributed first to its constituents.”

The two sides, along with county negotiators, plan to meet before the court hearing in hopes of avoiding a large-scale battle in front of Ryan.

“I would like to find a way to resolve the differences between the pool committee and the county committee short of a contested hearing on the rollover arrangements,” county bankruptcy attorney Bruce Bennett said.