Trustees Are Urged to OK Bankruptcy Settlement

Officials from across the county intensified pressure on a community college district Thursday to accept the first civil settlement stemming from Orange County’s 1994 bankruptcy, threatening to take action if a standoff doesn’t end soon.

The proposed $50-million settlement with bond counsel LeBoeuf, Lamb, Greene & MacRae would allow cities, schools and special districts to recover a portion of the hundreds of millions of dollars they lost when a county-run investment pool collapsed, causing the financial crisis.

But the settlement, officials said, is being held up by the North Orange County Community College District, which is a party to the county’s lawsuit and has a separate legal dispute with the law firm. County officials have been lobbying the district for weeks to drop its suit, which the LeBoeuf firm is demanding before it approves the deal.

Some frustrated officials said Thursday that they might ask the state to freeze some funding to the district if trustees don’t soften their stand.

“The state could withhold money, allocations or payments to them,” said Irvine City Manager Paul Brady. “But we are not asking for that now. We hope we can negotiate this through before any other steps are necessary.”

Edmond M. Connor, an attorney representing the college district, said the trustees’ position has not changed despite the mounting pressure.

“I have not heard of these threats, but I will hope that no one will pursue such a course of action because it appears to be grossly illegal,” Connor said. “But this would be typical of the kind of heavy-handed tactics that are being employed to force the district to submit to the county’s will.”

Connor criticized the proposed settlement, describing it as a “sweetheart deal” that would not require the law firm’s partners to make any financial restitution.

“Instead of leaning on the district to give up its efforts to recover all taxpayers’ dollars, why doesn’t the county ask the LeBoeuf firm to dip into its $67 million in profits in 1996 and make up the difference between what the county wants and what the district needs?” he said.

The county alleged in its lawsuit that the firm failed to alert county leaders to the highflying investment strategies of former Treasurer-Tax Collector Robert L. Citron, even though LeBoeuf’s partners had intimate knowledge of his activities.

The community college district filed a separate $11-million lawsuit against LeBoeuf last year, also accusing the firm of not warning college administrators about Citron’s risky investments when the law firm helped the district borrow $72 million to pour into the investment pool in 1994.

The proposed settlement would amount to one of the largest ever by a law firm. Sources said the firm’s malpractice insurance would cover any payment up to $50 million.

Board of Supervisors Chairman William G. Steiner, who has tried for more than a month to broker a deal, said the settlement could be jeopardized by further delays.

“It would be a travesty if this $50-million settlement evaporated because of continued litigation,” Steiner said. “The insurance policy is like a melting ice cube. It will diminish in size as long as we don’t settle this.”

Steiner described the settlement as a “milestone” and the “first acknowledgment of culpability” by one of the more than 20 legal and financial firms being sued by the county.

“I’ve written letters and had meetings, but in essence, I got nowhere,” Steiner said. “I couldn’t persuade the [college] district to consider the broader interest of all pool investors rather than their own narrower self-interest.”

Supporters of the settlement say it represents a major step in repaying agencies that lost money in the bankruptcy. They also criticize the college district for seeking more money than all the other investors.

“What they’re doing is irresponsible,” said Patrick Shea, attorney for the agencies that invested in the county investment pool. “Not only does this position harm the schools, but it harms everyone--police, fire, public transportation. . . . It’s incomprehensible.”

Shea pointed out that the district was one of several school systems that borrowed additional money to place in the county investment pool hoping to take advantage of the high yields.

After the bankruptcy, some officials demanded that the districts that borrowed money to invest shouldn’t receive the same treatment as other investors. But the final bankruptcy recovery plan called for all of the districts’ debts to be paid.

“Their claims are basically gambling debts,” Shea said. “The rest of the communities carried these players on their backs until now.”

But Connor said the borrowing is irrelevant and that the district is only exercising rights allowed under the bankruptcy recovery plan.

“We’re doing nothing more than abiding by the agreement allowing us to file a separate suit against the LeBoeuf firm just as other investors are filing separate suits,” he said. “What they’re offering would not cover [the district’s] lost principal, and we’ve got one shot at recovering all our money.”

Most of the district’s trustees could not be reached for comment Thursday. Trustee Leonard L. Lahtinen said he continues to stand by the board’s position but referred calls to Connor.

Chancellor Tom K. Harris Jr. said he doubted the state would ever interfere with the district’s funding because of its stance on the settlement. “I can’t believe that would happen,” he said. “I don’t think that would be appropriate.”

School districts would appear to be the biggest winners from any LeBoeuf settlement. Under the recovery plan, schools would receive the first $55 million of any civil settlements. After that, other investors, including cities, the county and special districts, such as the Orange County Transportation Authority and Sanitation Districts of Orange County, would get a share.

Earlier this year, local schools received about $27 million of the $30 million Merrill Lynch & Co. paid to avoid criminal charges related to the bankruptcy. But the districts are still due about $80 million--with individual school systems still out from several hundred thousand to several million dollars.