Prosecutors Suffer Setback in O.C. Bankruptcy Case

The charges against two supervisors accused of misconduct for their roles in Orange County’s bankruptcy should be dismissed unless the judge in their cases can find compelling reasons to proceed with a trial, an appeals court said Tuesday.

The ruling by the 4th District Court of Appeal was a major setback to Orange County Dist. Atty. Michael R. Capizzi’s campaign to prosecute Supervisors William G. Steiner and Roger R. Stanton--the only two supervisors still in office who were at the helm when the county declared bankruptcy.

“Obviously, this is not the result that we would have wanted,” said Wallace J. Wade, one of Capizzi’s top assistants. “But this is not the final word.”

The court’s ruling was additional good news for the beleaguered supervisors, whose spirits have been buoyed in recent weeks by the likelihood that the county will emerge from bankruptcy by June 12.

“Things are looking up,” said Steiner, who flies to New York today with other county officials to sell nearly $900 million in bonds to pay county creditors who have gone unpaid since the county declared bankruptcy Dec. 6, 1994.

Under the appellate court’s ruling, Superior Court Judge John W. Ouderkirk of Los Angeles has been ordered to dismiss the charges by June 11, or be prepared to defend his ruling before the appeals court Aug. 27.

The appeals court action does not apply to Auditor-Controller Steve E. Lewis, who also was accused by the county grand jury of misconduct.

All three county officials, who face removal from office if the “willful misconduct” charges are found to be true, have denied any wrongdoing. Since being charged in December, they have filed a series of legal motions seeking to undermine the district attorney’s case. Most have been denied.

But in March, Ouderkirk granted one defense motion. He sided with defense attorneys who argued that the supervisors enjoyed “legislative immunity” and could not be prosecuted for their alleged failure to adequately investigate proposed county borrowings before voting on bond issues.

The borrowed money was used to make risky investments that caused the nation’s largest municipal bankruptcy.

Ouderkirk said the supervisors’ votes on those borrowings are shielded from review by long-standing legal doctrines separating branches of government and granting lawmakers protection for their votes.

Ouderkirk said the U.S. Constitution protects lawmakers from prosecution for their votes, as long as corruption is not involved. There were no allegations of corruption in the Orange County case.

But Ouderkirk let stand three misconduct allegations that Stanton and Steiner failed to oversee management of the county’s ill-fated investment pool, saying those were executive functions and were not covered by legislative immunity.

After Ouderkirk’s decision, both sides complained to the appeals court. The district attorney wanted the charge reinstated, while defense attorneys wanted the remaining charges dismissed.

On Tuesday, the appeals court denied the district attorney’s appeal and granted the defense’s request to throw out the cases, unless more compelling arguments are made to support Ouderkirk’s decision.

Attorneys for the supervisors praised the appeals court ruling.

Wylie Aitken, who represents Stanton, said the ruling was a “significant victory for the taxpayers, since we are now hopeful that further taxpayer money will not be wasted on either side of a proceeding that never should have been brought forward in the first place.”

Another attorney said it was a “stunning” ruling.

“In layman’s terms, the court of appeals is giving an indication that it is going to set aside the entire accusations,” said the attorney, who requested anonymity.

Times staff writer Michael G. Wagner contributed to this story.