County Creditors Tie Recovery Plan to Merrill Suit : Bankruptcy: Pool participants are refusing to sign off without some encouraging signs on the legal front. Mittermeier says that they’re just hurting themselves.

Cities, schools and special districts that are owed money by bankrupt Orange County are refusing to sign off on a financial recovery plan because of the county’s problems in suing Merrill Lynch & Co. to recover its losses, officials said Friday.

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“We’re not going to take a deal to our clients unless we know there’s a viable suit against Merrill Lynch,” said Jon Schotz, financial adviser to the more than 200 schools, cities and other government entities that had money tied up in the county’s ill-fated investment pool. The pool ultimately lost $1.7 billion.

The county blames Merrill Lynch for encouraging it to buy the risky financial investments that helped plunge it into bankruptcy. As part of its financial recovery plan, the county has promised to use any proceeds from a successful suit against Merrill Lynch to repay its creditors. Merrill Lynch denies any wrongdoing.

But despite a fleet of attorneys, the county’s lawsuit against the Wall Street firm was dismissed Oct. 17 because it failed to meet a basic legal requirement that the county prove it was the proper party to bring the suit. Attorneys refiled the lawsuit against Merrill Lynch, but the firm is expected to try once again to have it dismissed. A hearing is likely in the next few weeks.

This latest hitch in the county’s efforts to deal with its financial disaster comes as it scrambles to meet a Jan. 1 deadline to present a recovery plan to the bankruptcy court judge overseeing the county’s finances. Gov. Pete Wilson has threatened to install a state trustee to oversee the county if it fails to pull itself out of bankruptcy by mid-1996.

County Chief Executive Officer Jan Mittermeier said Friday that participants who lost money in the county’s investment pool will only end up harming themselves if they refuse to sign off on the recovery plan.

“The county only has X amount of dollars,” Mittermeier said. “If the joint agreement is not signed, I can’t pay anyone back 100% on the dollar, and that means defaulting on bonds. I don’t think anyone wants to see that. I believe that ultimately, they will sign the agreement.”

The recovery plan centers on diverting more than $800 million in tax funds from the Orange County Transportation Authority and other county government agencies to help repay creditors.

Irvine City Manager Paul O. Brady Jr., who represents investment pool participants, said he is still optimistic that the county will meet its Jan. 1 deadline.

“We’re not trying to make life miserable for the county,” Brady said. “But we can’t go forward if they can’t go forward with their suit. Hopefully, this will all be worked out in the next few weeks.”

Compounding the latest problem is the fact that the county and the pool participants are still trying to iron out differences between the original bankruptcy recovery plan crafted by the pool participants and the final plan adopted by state legislators.

County bankruptcy attorney Bruce Bennett refused to discuss the issues in detail, citing ongoing negotiations. However, he said, “There are a few outstanding issues, but none are of any major financial consequence.”

Supervisor Marian Bergeson said the county and its creditors need to move forward. Creditors need to put a little more faith in the county, which is determined to seek legal action against Merrill Lynch, she said.

“I think this is all most unfortunate,” she said. “I think the important thing is to get out of bankruptcy. The sooner we all join hands and support a plan . . . we’re that much closer to eliminating the cloud of bankruptcy.”