Creditors, O.C. Haggle Over Interest

Despite a 2-month-old agreement requiring “timely” payment, Orange County has failed to hand over millions owed local schools, cities and other government agencies that had money in its collapsed investment pool.

Accountants for the county and the investors have been haggling for months over the correct amounts due from the interest earned by the investment pool from the day the county declared bankruptcy until May 19, when the county disbursed most of what remained in the pool.

“They are holding the money hostage,” said Patrick C. Shea, the lead attorney for the pool investors who characterized the delayed payment as a default and is threatening to go to court to get his clients’ money.

“The period of understanding and flexibility has expired, and we need to get some movement on this,” Shea said. “This isn’t World War III. We may be coming on to World War III later, but this is just a problem that needs to be resolved.”

The dispute concerns $75 million to $100 million--a small sum compared to the $4 billion that was distributed to pool investors May 19 under a court-approved settlement, but a significant amount both for the bankrupt county and the local governments now facing a potential loss of at least 10% of the money they’d invested in the pool.

Arthur Andersen & Co., the county’s number cruncher, says the interest due is $76 million, because that is what remained in the pool after the pool investors’ principal was paid out. Price Waterhouse, the accounting firm working for the pool participants, used a more direct approach of analyzing each transaction in the pool and estimates the interest owed as $91 million.

“We did the approach of looking at what’s left, because cash is cash, and you can only pay out what you have left,” said Paul Sachs, leader of the Arthur Andersen team. “If you only have $76 million, that’s all you can pay.”

County officials say they are willing to release the $76 million if the pool participants drop the issue, but the investors want to get the $76 million out now, and possibly collect more once both sides agree on a final number.

“We can’t in good conscience just take the lower number and potentially leave $15 million as a windfall for the county,” said Price Waterhouse’s Bernie Burke. “I’m the first to say the lower amount might be the correct amount, but I’m not going to consent to a lower amount just for expediency.

“The numbers are supposed to come out the same, and they don’t. Until they do, you can’t be sure you’ve got the right answer,” Burke added. “It’s a real conundrum.”

Sachs said a complete review of the pool’s activity since the bankruptcy filing--including a six-week liquidation of the complex, highly leveraged securities blamed for its downfall--would be too lengthy and costly to make it worthwhile.

County officials also prefer to wait until the dispute is settled so they only have to deal with the expense and hassle of cutting checks to each of the investors once.

“If you and I both agree that you owe me some money, and I say you owe me $100 and you say it’s $80, at the minimum, you owe me $80,” Shea said. “The issue is whether you hold the $80 hostage. As far as I’m concerned, you’re in default on the $80.”

Investors in the failed pool received about 77% of their Dec. 6 balances back in cash on May 19. Since then, schools have received another 13%, and cities and other agencies 3%, from the proceeds from so-called recovery bonds the county floated last month.

The interest earned on the pool since Dec. 6 was supposed to be distributed along with the cash payout May 19, but both sides agreed to wait when the numbers didn’t match.

The two accounting teams, however, have yet to reach common ground.

Sachs said he pointed out several potential errors in Burke’s arithmetic last week and is waiting to hear back. Burke, for his part, said his calculations are on hold while he awaits information from Salomon Bros., the county’s financial adviser.

Sachs also suggested that some of the missing $15 million might have accidentally been distributed to pool participants May 19 along with their principal.

Meanwhile, pool participants have yet to see a penny in interest. In addition to the interest, the county still owes schools 10% and other agencies 20% of their Dec. 6 investment pool balances--a total of about $850 million.

When a proposed sales tax increase was rejected by voters last week, county officials said the remaining debts to pool investors would likely never be repaid, ratcheting up the contentiousness in the unprecedented bankruptcy case.

Shea said he would file legal papers demanding unpaid interest money in Bankruptcy Court next week.

Bruce Bennett, the county’s chief bankruptcy attorney, called Shea’s threat of a court battle “needless and wasteful.”

“This is the type of thing that should be handled by the accountants. This is an issue that does not belong in court,” Bennett said. “To me, it seems like a waste of court time and a waste of lawyer time and a waste of client money.”

Shea insisted that he will stop fighting as soon as his clients get paid.

“We’ve been doing this for five weeks now and we’ve gone nowhere. We need to get the interest out,” he said. “We would take any amount that the county felt comfortable in giving us and reserving the rest of the issues for another time.”