Judge Orders Full Disclosure to O.C. Vendors

U.S. Bankruptcy Judge John E. Ryan on Thursday ordered debt acquisition firms that have purchased vendors’ claims against bankrupt Orange County for as little as 30 cents on the dollar to disclose that the county is offering to pay those bills in full.

Firms such as San Diego-based Debt Acquisition Co. of America have solicited vendors with offers to purchase their claims for 30% to 70% of their worth. Ryan said some firms used misleading tactics to frighten vendors into believing that the county will never make good on the claims.

In fact, the county has filed a “plan of adjustment” with the Bankruptcy Court that promises to pay vendors 100 cents on the dollar, possibly by this summer.

“The issue here is one of disclosure,” Ryan said, noting that some of the solicitations failed to reveal that point. “It seems to me [that Debt Acquisition Co. of America] and others doing business in the area have the obligation to disclose the information in this area regarding the county’s intended distribution.”

More than 140 claims, worth about $1 million, have been sold for 30% to 70% of their face value to debt acquisition firms in recent months, said attorney Richard A. Marshack. He represents the more than 700 vendors who are owed nearly $60 million because the county declared bankruptcy Dec. 6, 1994, after suffering a $1.64-billion investment loss.

Ryan’s ruling will force debt acquisition firms to individually notify vendors and allow them to reverse their decisions. In the future, claim holders must also be notified of the county’s adjustment plan, according to the ruling.

Ryan said he was taking steps to protect unsophisticated business owners, comparing the situation to insider trading, where a party with access to privileged information can parlay it into a profit.

“We are absolutely pleased. We view this as a victory for the vendors,” Marshack said outside court.

Nathan Jones, attorney for Debt Acquisition Co. of America, said that the firm would abide by Ryan’s ruling but took offense at the judge’s comparison to insider trading. Jones also said he believes it would be misleading to tell vendors that the bankrupt county is prepared to pay 100 cents on the dollar.

“There’s many a slip between the cup and lip,” said Jones, adding that the county’s plan contains at least nine pages outlining potential problems that could hinder a total payback. “You look at their plan, and there are pages and pages about risks.”

But Ray Serafin, a general manager of Lake Arrowhead Resort, which provided goods to the county and sold its $6,000 claim to Debt Acquisition Co. of America for $2,000, said that he believes he was misled.

“I feel as though the resort and myself have been deceived by Debt Acquisition regarding the true possibility of payment,” Serafin said in court records.

Attorneys on both sides admit that they are not even sure exactly how many such vendors exist. As a result, the responsibility for staying aware of developments in the county’s complex bankruptcy case falls on the vendors. The county has not been obligated to notify vendors of its plan of adjustment.

“So the problem is that you have people who may be out of the county, who can’t or don’t read the local papers, who are perhaps unsophisticated and don’t realize this is a 100% case,” said Mary Ann Schulte, who chairs a group representing vendors. Many of the vendors who sold their claims are from outside the state and had little access to information about the bankruptcy.

Schulte’s group voluntarily advises vendors who have sought assistance, but there are others who are unaware of the panel.

Jones was the only attorney to represent debt acquisition firms at Thursday’s hearing, where he argued against Ryan’s guidelines for solicitations. Officials with other firms that have purchased county claims, such as Newstart Factors Inc. of New York, declined to comment when contacted.

Ryan said that the firm Jones represented is “very reputable” but voiced concerns about its solicitation letter, which raised questions about whether the county would pay vendors. When the letter went out, in late November, Debt Acquisition Co. of America should have known that the county intended to pay in full because that information was public, Ryan said.

The hearing at one point raised questions about the morality of debt acquisition, a multimillion-dollar business that thrives in bankruptcy situations. Defenders of the practice say such firms keep businesses afloat by providing cash upfront and assuming unwanted risk.

“There’s nothing wrong with it,” Jones said.