$64-Million Claim Against O.C. Is Put Off

A federal bankruptcy judge has ruled that Orange County doesn’t have to immediately repay $64 million that was part of a deal struck with broker Merrill Lynch and Co. before the 1994 bankruptcy.

The county is suing Merrill Lynch for $2 billion, claiming that the brokerage misled government officials about risky investments. The note, the largest contested bankruptcy claim remaining against the county, was part of a $600-million issue that Merrill Lynch sold the local government in 1994.

Appaloosa Investment Ltd. bought the $64-million note from Merrill Lynch in November 1995, after the county publicly vowed not to pay Merrill.

U.S. Bankruptcy Judge John E. Ryan rejected a plea for prompt payment to Appaloosa, leaving the claim in limbo. He signed the order Dec. 31.

Appaloosa paid $48 million, a 25% discount, according to court records. Merrill also agreed to pay interest on the note and most of Appaloosa’s court costs for collecting the note.

Appaloosa is “in the shoes of Merrill Lynch,” county attorney Bruce Bennett said this week after the ruling. “What Ryan has effectively ruled is that Merrill failed in its strategy to insulate the claim.”

Although the county paid every other noteholder in June 1996, attorneys argue that the $64-million note was invalid because it breached the state debt limit. They also assert that the claim should be subtracted from the billions that Merrill allegedly owes.

Ryan let those arguments stand, pending a trial. But he threw out a third argument, that the county shouldn’t have to pay Appaloosa because of bad acts by Merrill.

Merrill Lynch spokesman Bill Halldin said the brokerage was “pleased that the court rejected the county’s claim that our conduct was an issue in this case.”

Orange County declared bankruptcy in December 1994 after losing about $1.64 billion in securities deals. Two top treasury officials were convicted of improper fund diversions to hide risky investments.