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Bankruptcy Judge Approves Complex O.C. Recovery Plan

Courts: The reorganization could put the county in the clear by the end of June. It calls for the sale of $920 million in bonds to repay note holders and other creditors.


SANTA ANA — Less than 18 months after Orange County filed the largest municipal bankruptcy in U.S. history, a judge on Wednesday approved its complex recovery plan to borrow nearly $1 billion from Wall Street to repay its debts.

The approval allows the county to emerge from bankruptcy--possibly by the end of June.

U.S. Bankruptcy Judge John E. Ryan described his final approval of the county's reorganization plan as "a very special day for the county of Orange, its inhabitants, its employees, leaders, businesses, schools, [special] districts and cities."

The county's decision to file bankruptcy on Dec. 6, 1994, was "a shocking day etched in the history of Orange County," Ryan said. "Few of us then would have said with any degree of certainty that the county would survive the bankruptcy crisis, let alone reach this confirmation day."

The plan's success--and ultimately, Orange County's recovery--now depends on whether Wall Street investors, still leery of the county's tainted financial reputation, will buy up to $920 million of county-issued bonds. Those bonds will be used to repay note holders, vendors and other creditors.

Bruce Bennett, the county's lead bankruptcy attorney and one of the recovery plan's two main architects, said he has no doubt that the county will sell the bonds by June. He said the judge's approval puts the financial crisis "behind Orange County once and for all."

But he was quick to add that the case will not be over until the county is successful in its litigation campaign against Merrill Lynch & Co. and other Wall Street firms the county blames for its financial crisis.

The most aggressive objections to the county's recovery plan were lodged Wednesday by Merrill Lynch's attorneys, who argued in court that Orange County did not have to declare bankruptcy to solve its financial problems.

Ronald Olson, a Los Angeles lawyer representing the brokerage giant, asked the judge not to make any finding that the county was "insolvent" when it declared bankruptcy, saying it would give county lawyers an unfair advantage in their lawsuit against Merrill Lynch seeking $2 billion.

Ryan denied the request, saying that prior to the bankruptcy filing "the county was not able to negotiate with its creditors because such negotiations were impracticable."

Olson said his client would consider appealing the judge's decision.

"The fight's not over," he said.


Wednesday's approval of the plan marked a banner day for county officials and residents, whose leaders left office or became targets of criminal and civil investigations after Orange County's investment pool lost $1.64 billion in late 1994.

The reorganization plan was the product of thousands of hours of work by the county's bankruptcy attorneys and financial advisors, who coaxed, bargained and even threatened creditors to get their support.

"We had to bully them to get them to do the right thing," said Christopher Varelas, the county's chief financial advisor and the other main author of the plan.

"It was like having to take a photograph of 1,000 people and needing them to stay still at the same time. Each day had a crisis. Each solution created more problems," said Varelas, a vice president with Salomon Bros., the county's financial advisor. "It is perhaps one of the most complex legal transaction that Wall Street has ever seen."

Putting together the plan so far has been costly. Attorneys, accountants, financial experts and other professionals have billed the county about $38 million so far.

The cornerstone of the county's recovery plan, which already has been approved by lawmakers in Sacramento, calls for a diversion of $50 million annually--for 20 years--to pay the county's debt. The money otherwise would have been used for mass transit, maintenance of county harbors and parks, and other public projects.

The plan calls for full repayment to companies that did work for the county and full reimbursement to county employees who are owed money.

A key component of the plan is the county's push to recover money from Merrill Lynch and the county's outside auditor, KPMG Peat Marwick, which it has sued for $3 billion.

The county also plans to set aside $50 million from the sale of bonds to pursue lawsuits against those firms and others it holds responsible for the collapse of its investment fund. The companies deny wrongdoing.

Under the plan, the county promises to distribute any money gained from the lawsuits among the public agencies that invested in the county's pool. To date, those agencies have been partially reimbursed for their losses. Some, including cities and many school districts, were forced to make deep spending cuts when their investment accounts plummeted in value.

Most cities have recovered 81% of their investments, while schools received about 90%.

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