$1 Billion in Interim Withdrawals Approved : Court: Bankruptcy judge permits access of 30% of what an investor had in fund. It should be enough for cities and agencies to cover bills and payrolls through the end of January.
SANTA ANA — U.S. Bankruptcy Court Judge John E. Ryan approved an interim plan Thursday that will give Orange County and more than 180 cities and districts access to $1 billion from the county’s bankrupt investment pool to pay emergency bills and payrolls through Jan. 31.
The plan, which should help cities and other pool investors stave off potentially disastrous shortfalls, limits investors to 30% of their individual investments in the county fund. It also puts an overall cap of $1 billion on fund withdrawals.
Ryan called the plan fair: “It is not based on fears about what might happen. It’s based on hopes about trying to resolve this terrible situation.â€
Through its attorneys, the county promised that it would abide by the same rules governing other investors when it requests emergency funds over the next 30 days. Attorney Bruce Bennett said the county will probably ask for far less than the $300 million it would be entitled to demand under the newly approved plan.
It was unknown how much other cash-strapped municipalities and government agencies would demand.
Few of the more than 100 attorneys in court objected to the agreement, which also requires that emergency disbursement requests be reviewed by a creditors committee, a second committee representing pool investors, and the county.
Ryan said that municipalities could begin filling out the two-page emergency withdrawal request forms on Thursday afternoon, and that cash could begin flowing within days. He said he will be available next Thursday to rule on disputes.
But that quick pace is barely fast enough for some cash-strapped cities.
Montebello in Los Angeles County, for example, said it must withdraw $14 million, or all of its 30% allotment, to make a partial payment on a debt that’s due Dec. 30.
Absent the $14 million, Montebello’s creditors are unlikely to roll the debt over, and “if the city defaults (it) faces the same problem that (Orange County) faces now,†said Montebello’s attorney, John Lapinski.
But Lapinski said the new procedure at least gives the city a chance to make some payment.
“I’m cautiously optimistic that things will work out,†he said.
Bennett also made several important disclosures during the hearing for cities and districts that rely upon the county to collect and disburse their share of property taxes.
Some of the property tax payments that Orange County collected before the county declared bankruptcy Dec. 6 were pumped into the troubled investment fund, he said. Bennett didn’t give a dollar figure for the tax monies now entangled in the complicated bankruptcy proceeding.
But Bennett balanced that dose of bad news by saying that today the county will start disbursing to the cities property taxes that were collected after the bankruptcy filing. Bennett did not say whether the county’s fiscal woes would result in smaller checks being mailed.
Not all attorneys agreed with the plan Ryan approved.
In an apparent split that could grow between the county and other investors, several attorneys raised questions about who should be forced to bear the brunt of the $2-billion loss suffered by the county’s troubled bond fund. The arguments provided a glimpse into the complex legal question of what role the county played in the fund’s losses.
Attorneys for two community colleges and a city objected to the plan because it did not more strictly limit the county’s ability to make withdrawals.
Huntington Beach City Atty. Gail C. Hutton argued that the county should not be allowed to withdraw any funds until it guarantees that all other investors will be reimbursed 100%. Hutton said her “fiscally responsible†city should be given back its entire $43-million bond pool investment, because the county violated its role as a “trustee†by speculating with investors’ money. She said the county had no authority to impound the funds.
Hutton threatened to take the matter to Superior Court if the county will not agree to the city’s terms.
“The monies in the pool fund are sacrosanct,†Hutton told Ryan. “We are not unmindful of the county’s dire straits, but unless the county can guarantee it will protect our interests, the city cannot agree to the county’s invasion of the city’s money.â€
County bankruptcy attorney Bennett responded by arguing that under at least one scenario for resolving rival claims to the fund, the county could win the entire contents of the pool.
Bennett said it could be argued that the county merely placed funds for other investors and that “no valid or enforceable trust (agreement) existed or survived†between the county and other investors in the fund. That argument would lead to the conclusion that the county “is entitled to the entire (remaining) contents of the fund,†Bennett said.
Bennett also laid out several other possible scenarios. At the other extreme, he said, is Hutton’s argument that the county acted as trustee for the other agencies and that, as a “failed trustee,†the county’s claims should be relegated to the bottom of the pile.
A third possibility would be to pro-rate the loss equally between the county and the other agencies that invested in the pool, or according to a more complicated formula, he said.
Bennett stressed that the county has taken no stand on how the loss should be absorbed, and that other attorneys probably could come up with other possible outcomes for the tough legal question of how to apportion the $2-billion loss among the fund’s investors.
Bennett did suggest that pool participants attempt a negotiated solution. The other option: “Build a courtroom with roughly 200 attorneys’ tables and take no money out of the pool for several years.â€
But given the first possible scenario in which the county could win all of the funds, Bennett argued that the county is being generous in allowing other investors to take any money out of the pool.
Both the county and the Official Investment Pools Participants Committee, which represents investors, will meet over the next two weeks to come up with a proposal about how to handle the remaining funds in the pool, committee attorney Patrick Shea said.
Ryan said that it is essential for all parties to try to work together to resolve disputes short of litigation.
“We have an emergency and the question is how to deal with that emergency,†Ryan said. “If we do it with litigation . . . that reminds me of Nero with a fiddle.â€
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Targeted for Seizure
Here is what search warrants used by the Orange County district attorney’s office specified that investigators should look for in trying to determine whether any felonies have been committed in the county’s fiscal crisis:
* Documents offering or describing investment of any local agency in the Orange County investment pool from 1989 to the present, including prospectuses, newspapers, letters and other documents.
* Notes, contracts and other documents showing participation of any local agency in the pool.
* Letters and other memoranda describing the status of local agencies or individuals in the pool.
* Statements of accounts, transactions and balances.
* Checks and wire transfers of local agency funds to the pool.
* Letters and other correspondence notifying local agencies of any trouble or potential risk with the pool.
* Correspondence reassuring local agencies or any employees or officials of the safety of the investment.
* Correspondence describing how the county intends to extricate itself from problems.
* Documents showing any trades of the county in the name of investors.
* Lists of brokers and lenders used by the county from 1989 to the present.
* Calendars of former Treasurer-Tax Collector Robert L. Citron and former acting Treasurer Matthew Raabe.
* Documents offering or describing investment opportunities to Citron or anyone at the Orange County treasurer-tax collector’s office.
* Documents advising Citron of the need or demand for additional collateral under reverse repurchase agreements.
* Documents relating to reverse repurchase agreements or loans or all forms of credit used to facilitate any county investment.
* Letters and other memoranda describing the status of the county’s investment with broker-dealers or other lending institutions.
* Checks and wire transfers or other instruments used to transfer county funds to a broker-dealer or lending institution for purpose of investment.
* Hard or floppy computer storage disks describing the above items.
Source: Orange County district attorney’s office
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