O.C.’s Last Chapter: Judge Closes Bankruptcy Case

As applause thundered from a cherry-paneled courtroom in Santa Ana, a federal judge Wednesday officially closed the book on Orange County’s financial collapse, the largest municipal bankruptcy in U.S. history.

“Speak now or forever be foreclosed,” Judge John E. Ryan said moments before ending the hearing, which took place five years and two months after the county filed for bankruptcy. But none of the more than a dozen attorneys raised any objections, and most shared Ryan’s wide grin.

The hearing was called to finalize distribution of $816 million in litigation proceeds to the more than 200 government agencies that lost money. But for the attorneys and government officials who worked through the crisis, it was an opportunity to commemorate the milestone.

“It’s over!” exclaimed Assistant County Counsel Thomas C. Agin, whose office has been consumed with the bankruptcy for most of the last five years. “There were tons of lessons to be learned, and I hope we clearly learned them, and we don’t make the same mistakes again.”

Thomas Hayes, the former state treasurer who helped oversee the county’s bankruptcy recovery, was deluged with handshakes and congratulations. He graciously accepted the compliments but said the saga had taken its toll.

“I didn’t have gray hair when this started,” he said wearily. “I’m very happy about the results. . . . We were as successful as we could have been.”

The $816 million will be divided among cities, school districts and other agencies that lost about $1.6 billion in the ill-fated investment pool administered by former Treasurer Robert L. Citron.

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

Schools--the top priority in the county’s bankruptcy recovery plan--have recouped on average 97.7% of their investments. Cities and public agencies have recovered 94.4%. The county got back 87 cents on the dollar.

Schools have been expecting the money for months and plan to use it for a variety of projects, from buying computers for classrooms to repairing cracked blacktops and leaky roofs.

The money comes from settlements the county reached with Merrill Lynch & Co. and other Wall Street firms that officials hold responsible for the bankruptcy. The total settlements reached $871 million. Part of the money will go to Hayes’ compensation of $9.8 million.

The litigation proceeds were supposed to be distributed last year. But they were held up while a federal judge considered a request by the county’s outside attorneys for a hefty bonus. The firm of Hennigan, Mercer & Bennett sought an additional $48 million; the judge eventually granted them $3 million.

On Wednesday, the conflict was largely forgotten as the top attorneys addressed the court for the last time. Ryan, who has settled myriad legal battles between the attorneys over the years, set the tone.

“I see a lot of familiar faces today, a little grayer,” the judge said from the bench. “I know this is a happy day. I see a lot of happy faces.”

J. Michael Hennigan, a key attorney in the county’s recovery effort, agreed. “It is a historical day. . . . We are proud of it.”

At the Hall of Administration, county managers celebrated but also sounded a cautionary note.

“We can’t ever forget what has happened,” said the county’s chief executive officer, Jan Mittermeier. “We have to remain vigilant so that no one individual can control the financial future of the county.”

The county borrowed $1 billion to pay its creditors and emerge from bankruptcy. It is scheduled to receive the largest portion of the settlement proceeds, $304 million. Mittermeier said the money will go to relieve part of that debt.

The county’s financial collapse on Dec. 6, 1994, stunned Wall Street as well as local residents.

Betting on declining interest rates, Citron had made risky investments that fell apart when the Federal Reserve began raising interest rates in the early 1990s.

Citron pleaded guilty to six felony counts of fraud and misappropriation of funds. There was no evidence that he personally profited from the investments.

Despite the milestone, some county officials said the financial collapse still looms large.

Board of Supervisors Chairman Charles V. Smith pointed out that the county is still faced with a debt of three-quarters of a billion dollars. “Until that has been taken care of, the bankruptcy is not over,” he said.

Former Supervisor William G. Steiner agreed.

“It was an all-consuming process that had very negative impacts. . . . The poor took the brunt of the cuts,” Steiner said from Scottsdale, Ariz., where he now lives. “If there is any silver lining, it is that there were a lot of lessons from the debacle.”

* SURPLUS SPLIT OK’D

Judge backs plan for splitting $17 million mixed up in the financial collapse. A13