O.C. College District Settles Bankruptcy Suit

Clearing the way for the first major settlement in Orange County’s campaign to recover its bankruptcy losses, a local college district has settled a separate damage suit that had blocked a $45-million payment to the county and local schools.

Under the terms of the settlement announced Monday, the North Orange County Community College District will receive $10.2 million from LeBoeuf, Lamb, Greene & MacRae, the New York law firm that served as “bond counsel” on more than $1 billion in borrowings used by former Treasurer Robert L. Citron to gamble on some of Wall Street’s riskiest securities.

Local school officials who will receive some of the $24 million destined for the schools were exultant upon hearing of the settlement.

Several school leaders said they will likely use the money to repair roofs, buy more computers and textbooks, and perhaps improve campus medical services.

“This is definitely a step forward in our recovery from bankruptcy,” said Margie Wakeham, a trustee with the Irvine Unified School District, which will recover about $2.2 million from the settlement. “What this money does is give us some flexibility to do some things that we haven’t been able to do in several years.”

The county’s attorneys thought they had a deal with LeBoeuf in December that would give local schools $24 million, and divide another $21 million among the other agencies that collectively lost $1.64 billion in the 1994 collapse of the county-run investment pool.

But one condition of that December deal was that the North County college district drop its separate suit against LeBoeuf, and content itself with the roughly $2 million it would get under the settlement negotiated by the county’s attorneys.

Despite relentless pressure from both county officials and state legislators, the district refused to buckle, and continued preparing for a trial that was to get underway in San Diego this week.

After the college district announced the settlement of its suit Monday, LeBoeuf issued a statement saying that it also has a settlement agreement with Orange County, “which it expects will be signed in the next few days.”

The biggest winner in the latest deal was the North Orange County Community College District, which will become the first agency--of the nearly 200 in the county’s ill-fated investment pool--to recover all of its losses--and then some.

The college district, which operates Fullerton and Cypress colleges, filed suit against LeBoeuf last year, seeking $11 million in damages. It alleged that the firm had failed to alert school administrators to Citron’s high-flying investment strategies, even though LeBoeuf’s partners had intimate knowledge of the treasurer’s activities.

The district was also a party to the $500-million damage suit the county had filed against LeBoeuf on behalf of all the agencies that lost money in the bankruptcy.

In negotiations between LeBoeuf and the county’s attorneys last fall, the law firm’s malpractice insurance company agreed to pay out the maximum $50-million face value of the policy. But LeBoeuf insisted that its attorneys be paid almost $5 million in legal fees from the insurance money.

Convinced that they stood to gain far more than the $2 million they would get under the county’s settlement with LeBoeuf, district officials continued to press their own $11-million damage suit.

Their rejection of the county’s deal brought a barrage of pressure from local and state officials. At one point, the county studied whether it could freeze more than $250,000 in job-training funds it gives the district.

A state lawmaker even introduced a measure seeking to withhold state funding equal to whatever the district received from its own lawsuit against LeBoeuf.

But the college district refused to budge, contending that LeBoeuf should be made to dip into its own profits and to pay more, instead of relying solely on its insurance coverage.

The $10.2 million the college district is getting under the newly announced settlement is in addition to the $2.5 million it has already received as its share of the $30 million that Merrill Lynch paid to Dist. Atty. Mike Capizzi last year to scuttle his investigation of possible criminal wrongdoing by Merrill executives.

Edmond M. Connor, an attorney for the college district, said school officials “accomplished what they set out to do, which is recover all of the taxpayer funds lost in the bankruptcy.”

College administrators “are to be commended for not surrendering their claims against the LeBoeuf firm in the face of unprecedented political pressure to do so,” said Connor, whose Irvine law firm will receive $1 million from the deal.

“By fighting for what they felt was right, they were able to make their district whole again--and that’s all they ever set out to do.”

Leonard L. Lahtinen, a trustee with the college district, was ecstatic.

“My statement is ‘Hallelujah’,” he said. “We resisted a lot of pressure directed at us in this case. Our patience will pay off for the students in our district. We desperately need this money to make improvements.”

Although LeBoeuf’s total payout will be greater under the new settlement, it could recover some money under one of the deal’s terms. LeBoeuf will receive the college district’s rights to the $6.2 million it would have received if the county is successful in other suits against Merrill Lynch and other brokerages to recover bankruptcy related losses.

The district’s deal with LeBoeuf means that college administrators will have all their money in hand by March 23 and, unlike the other pool investors, do not have to pin their hopes on the county winning its suits against other litigation targets.

Gary M. Cohen, a San Francisco attorney for LeBoeuf, said the law firm’s partners were glad to get “the whole matter resolved.”

“They want to return to the practice of law and provide legal services,” Cohen said. “The firm is obviously not acknowledging fault or responsibility and believes that it acted properly, but prefers to settle rather than continue with this litigation.”

Thomas Hayes, the former state treasurer who is overseeing the county’s bankruptcy litigation efforts, could announce as early as today that the county now has a firm deal with LeBoeuf. Hayes didn’t return a call seeking comment.

Bruce Bennett, the county’s bankruptcy attorney, said Hayes doesn’t expect to accept a deal “any different from the ($45-million agreement) negotiated at the end of last year.”

Supervisor William G. Steiner expressed relief that a settlement was finally at hand.

“I hope this puts a stop to the erosion of money [that has been] going to attorneys in this legal dispute,” Steiner said. “I’d rather put this money in the pockets of the schools than in the pocket of the lawyers.”

John Nelson, assistant superintendent for the Orange County Department of Education, said: “It was important to get this behind us so the whole case could proceed.” The college district’s lawsuit was “holding back a lot of people from getting their money. This should make it possible for us to finalize the deal . . . so that the cities, schools and other pool investors get paid.”

The $60 million is the largest-ever professional liability payout by a law firm. It tops the $51 million in 1993 that Jones, Day, Reavis & Pogue made to the Resolution Trust Corp. to settle malpractice claims involving legal work done for Charles H. Keating Jr.’s Lincoln Savings and Loan Assn. of Irvine.

Davan Maharaj and Shelby Grad can be reached by calling (714) 966-7700 or be e-mailing davan.maharaj@latimes.com or shelby.grad@latimes.com. Times librarian Sheila A. Kern provided research for this article.