Lawyer Bonus Is Shot Down in Bankruptcy

A federal judge Wednesday rejected a $48-million bonus sought by the law firm that represented Orange County in its bankruptcy litigation, freeing officials to pay out the hefty settlements from the Wall Street firms they accused of causing the financial crisis.

The $865 million will be divided among 200 government agencies and school districts that lost nearly $1.7 billion in the ill-fated investment pool administered by former treasurer Robert L. Citron.

“Now we can get on with life and start distributing the money for the folks who have been waiting,” county Supervisor Tom Wilson said.

The payments have been held up since September by a last-minute demand from Hennigan, Mercer & Bennett for $48 million in legal fees on top of the $26 million the firm has been paid.

The firm had argued that its contract entitled it to an “adjustment” to the hourly fees it already received while litigating the cases against Merrill Lynch & Co. and other companies.

U.S. District Judge Gary Taylor agreed the firm was entitled to an adjustment under its contract. But he called the firm’s own calculations a “huge-magnitude leap” from a fair hourly rate. He ruled the firm was entitled to $3 million in additional compensation but did not specify how he arrived at that amount.

“A high degree of skill was expected from the Hennigan firm, and its hourly rates [as much as $445 for the senior partners] reflected that expectation,” he wrote.

J. Michael Hennigan, a founding partner at the firm, said he accepts the ruling and will not appeal.

“We are well-satisfied with the results for our firm and proud of the results we obtained for the people of Orange County,” he said. “We are done with this.”

County supervisors and community activists, who have fought any additional payments to the attorneys, said they are glad to move forward but remain critical of the lawyers.

“The taxpayers got sucker-punched 3 million times over today,” county Supervisor Todd Spitzer said. “Shame on the lawyers.”

Nonetheless, Spitzer and other officials said it is unlikely the county and the other agencies will appeal the ruling.

“I think the county needs to move on,” Supervisor Jim Silva said. “We need to get the money to the agencies that need it.”

It will probably take a few more months before the litigation proceeds are distributed.

Former state Treasurer Thomas W. Hayes, the court-appointed representative who is managing all litigation efforts, must now file his final report to the bankruptcy court, which is then expected to approve disbursements.

The payments will mean near total financial recovery for many of the agencies that placed money in the investment pool.

Schools--the top priority in the county’s bankruptcy recovery plan--will have recovered 97% of their investments once they receive their share of proceeds from the lawsuit settlements. Cities and public agencies will recover 93%. But the county’s own funds will get back just 35 cents on the dollar.

In the wake of the financial collapse, the county laid off hundreds of workers, slashed budgets for social services and tried to increase revenues by importing trash to local landfills. But in recent years, the county has made a series of significant strides.

In September, Moody’s Investor Service boosted Orange County’s once-dismal credit rating to its highest level since the bankruptcy. The county now enjoys the second-highest rating of any county in the state, trailing only Contra Costa County.

Officials from local cities and school districts expressed general support for the fees resolution.

“It has been a very long journey, and I’m glad to see it so close to the end,” said Irvine Councilman Dave Christensen, adding that the city hasn’t decided how it will use the money.

School districts have already recovered most of their bankruptcy losses. Many of them plan to use litigation proceeds to repair leaking roofs and crumbling playground blacktops.

“The schools have been waiting expectantly for this money because for every district involved, we can use any dime we can get,” said John F. Dean, county superintendent of schools.

“It is great that we are finally going to get the money,” added Stan Oftelie, former CEO of the Orange County Transportation Authority, who helped write the county’s recovery plan. “But it is a sad ending to an otherwise distinguished performance by Hennigan & Mercer.”

But others said they are just happy to have the battle over legal fees behind them.

“Three million is a small price to pay to get this unfortunate chapter behind us,” said Reed Royalty, president of the Orange County Taxpayers Assn.

With the fee issue settled, only one bankruptcy-related lawsuit remains.

Fourteen other agencies that opted to sue on their own are still seeking $80 million from Merrill Lynch.

The agencies, known as the “Killer Bs,” are the cities of Buena Park, Yorba Linda, Atascadero, Milpitas, Claremont, Montebello, Mountain View and Santa Barbara; the Santiago and Yorba Linda water districts; and the redevelopment agencies in Buena Park, Yorba Linda, Santa Barbara and Montebello. Their case is still pending.

Times staff writer E. Scott Reckard contributed to this story.