O.C.--AFTER THE BANKRUPTCY : Attorneys Turn Their Attention to Post-Bankruptcy Legal Battles

J. Michael Hennigan, the professorial Los Angeles lawyer who heads Orange County’s litigation campaign against Wall Street firms it blames for the bankruptcy, believes it’s only a matter of time before the county recovers some or all of the $1.64 billion it lost.

“It’s not a question of if [we’re going to recover], but when,” Hennigan said confidently.

Ronald L. Olson, another Los Angeles lawyer who represents brokerage firm Merrill Lynch & Co. against the county’s $2-billion lawsuit, says the county shouldn’t count on it.

“People who are looking to Merrill Lynch and other Wall Street firms for the pot of gold to make everything right in Orange County are looking in the wrong place,” Olson said. “There’s no pot of gold on Wall Street.”

As the county prepares to emerge from bankruptcy this week, its small battalion of lawyers is focusing attention--and a $50-million war chest--on Merrill Lynch, the world’s largest brokerage and the deepest pocket in the ongoing litigation, and other targets.

Those include former outside auditor KPMG Peat Marwick, which is being sued for $3 billion, and about 20 financial, accounting and law firms the county will identify in lawsuits this week.

Nearly 200 cities, school districts and other agencies are banking on the success of these lawsuits to recover the staggering losses suffered in the investment pool once managed by former county Treasurer-Tax Collector Robert L. Citron. The county needs to recover at least $1.1 billion from litigation to repay everyone, one top official said last week.

J. Kenneth Jones, superintendent of the Fullerton Joint Union High School District, said school officials believe “the county will not have emerged from bankruptcy until all of us are paid in full.”

Jones chairs a committee of about 31 school districts that are still owed $110 million.

Under the county’s recovery plan, the school districts will share the first $55 million of litigation proceeds. Cities and special districts would be next in line for proceeds of the lawsuits, followed by the county. After they are paid, everyone will share in any remaining money that can be obtained.

Until this week, the county’s main focus in the litigation campaign has been Merrill Lynch. The county contends the brokerage’s “aggressive” sales staff sold Citron most of the risky securities that caused the county’s financial downfall. Hennigan and his partners are pursuing a unique approach in that lawsuit: They claim the county had not budgeted money to purchase the securities Merrill Lynch sold to Citron, and therefore the sales are ultra vires, or void.

The county will likely make similar claims against other brokerages, which are expected to adopt Merrill Lynch’s defense that Citron and county officials made their own investment decisions and are now trying to shift the blame for their mismanagement.

The county asked U.S. Bankruptcy Court Judge John E. Ryan to rule on the ultra vires question before deciding other aspects of the case. But Ryan declined.

Olson, Merrill Lynch’s lawyer, said the county’s early strategy “to isolate the ultra vires issue, win an early determination and leverage it against [other firms] appears to have failed.

“Now they are broadening the net and reaching out for additional scapegoats,” he added.

Hennigan said the county is still confident that a court would declare the transactions void.

If the Merrill Lynch case is any sign, the county and investors in its pool should not count on banking any money from litigation soon.

Attorneys are engaged in discovery, the pretrial process that calls for the exchange of documents. At the current rate, discovery will last through the end of 1997, meaning that a trial--if there is one--would be held in 1998 at the earliest.

James W. Mercer Jr., Hennigan’s partner, said he has been encouraged by the documents that have been turned over by Merrill Lynch.

“The county’s case is even more compelling,” Mercer said. “We believe the prospects of recovery are high.”

Mercer’s optimism is supported by an analysis by Calvert D. Crary, a New York attorney who tracks major cases across the country, particularly those involving public companies.

Crary predicts that Merrill Lynch will be held “responsible to some extent” for the county’s losses and will probably pay a settlement of $500 million to $1 billion. Even that, he said, could be done without serious disruption of Merrill Lynch’s business.

Nearly “all cases are settled eventually,” Crary said. “The question is how much needs to happen before a case a settled.”

Hennigan says he also believes that all the cases will be settled eventually.

“There’s too much at stake for them to take these cases to trial,” he said.

But Olson, Merrill Lynch’s attorney, said that “we have no settlement talks in motion and we don’t anticipate any such talks any time soon.”

Legal experts say the pace of the Merrill Lynch case will be slowed this week after the new lawsuits are filed. Ryan is expected to consolidate discovery in all the cases to avoid multiple exchanges of documents and repeatedly taking depositions from the same witnesses.

If a defendant offers to settle, the Board of Supervisors won’t decide whether to accept or reject the offer. Under the county’s bankruptcy recovery plan, that will be up to Thomas W. Hayes, the county’s litigation czar, who is in charge of the $50 million.

Peer Swan, a director of the Irvine Ranch Water District, which is still owed $60 million, said pool participants insisted on a single person being in charge because they wanted him “to balance the process, take firm decisions, and say when enough is enough.”

If recent experience is any indication, the case against auditors Peat Marwick and a separate one against bond counsel LeBoeuf, Lamb, Greene & MacRae that is scheduled to be filed this week stand the best chance of an early settlement, according to Stephen Gillers, a New York University law professor. Officials at Peat Marwick and LeBoeuf have denied any wrongdoing.

Gillers noted that law firms in the recent savings and loans failure decided to settle rather than fight in court.

“When these massive failures happen, like an Orange County bankruptcy, the firms want to avoid what could be a very public fight, because information comes out that they would prefer to keep secret,” Gillers said.

But suing a firm such as LeBoeuf is not going to solve Orange County’s problems.

The firm has an insurance policy with a maximum payout of $50 million, which means that Orange County must rely on winning against the companies with deeper pockets, such as Merrill Lynch.