Bankruptcy Judge Denies County Bid to Drop Dissidents’ Suit

The insurrection by 14 cities and agencies in the massive Orange County bankruptcy case was kept alive Friday when Judge John E. Ryan denied the county’s motion to dismiss the case.

The group, dubbed the Killer Bs when they chose Option B of the county’s settlement plan, sued the county in Bankruptcy Court in October claiming the county knowingly defrauded investors in the county’s pool.

The vast majority of pool participants chose settlement Option A and received 77% of their investments and a series of IOUs for the balance, but surrendered the rights to sue the county or financial and legal firms for the role in the county’s financial debacle.

Those who chose Option B got only the 77% but retained the right to sue, as the Bs did in October when they filed their own lawsuit against Merrill Lynch & Co., the Wall Street brokerage that county officials contend sold them inappropriately risky securities.

On Friday, Ryan told the Bs they must wait until bankruptcy claims against the county are formally settled in the case before they move forward with their adversary proceeding. In addition to the lawsuit, the group has filed claims with the bankruptcy court seeking $83 million.

The county recently made public a portion of its bankruptcy settlement plan, in which about $44 million is estimated to pay the remaining claims of the Option B group.

“A contest is not triggered until there is an objection to those claims by the county,” Ryan said, adding that at that point the court will take another look at how best to resolve the dispute and might allow the adversary proceeding to go forward.

But Ryan preserved the group’s right to assert a claim for their share of any money recovered by the county in its lawsuits against Merrill Lynch, KPMG Peat Marwick, the county’s outside auditor and others.

“It’s the right decision,” said attorney G. Larry Engel, who represents the Bs, after the hearing.

“We’re not bomb-throwers disrupting the county’s reorganization,” Engel told the court. But, he added, “We have a right as governments not to make gifts of our property to Orange County.”

Mountain View City Atty. Michael Martello said after the hearing, “I’m happy with the decision. Hopefully, now we’ll all sit down soon and work this out so we can stop paying lawyers’ fees.”

The Option B agencies are: the cities of Buena Park, Yorba Linda, Atascadero, Mountain View, Santa Barbara, Montebello, Milpitas and Claremont; the Buena Park Redevelopment Agency; the Yorba Linda Redevelopment Agency; the Yorba Linda Water District; the Santa Barbara Redevelopment Agency; the Montebello Redevelopment Agency and the Santiago Water District.