3 Drop Suit Against San Juan City Officials : Courts: Countersuit, in return, is dropped. A trial date, however, has been set in dispute pitting the remaining plaintiff against the six officials.

SANTA ANA —  Three residents who alleged in a lawsuit that San Juan Capistrano City Manager Stephen B. Julian and council members misused public funds dropped their suit on Monday, and in return the city officials dropped their countersuit.

Both sides agreed not to renew the legal actions in a settlement approved by Superior Court Judge David C. Velasquez.

However, a trial date was set for July 27 in the year-old legal dispute that pits attorney Carlos F. Negrete, the only remaining plaintiff, against Julian and past and present council members Gary L. Hausdorfer, Kenneth E. Friess, Lawrence F. Buchheim, Anthony L. Bland and Phillip R. Schwartze.

Negrete’s lawsuit was filed in March, 1991, after a series of articles published by The Times detailed financial transactions between the city and Julian. The articles reported that Julian incurred a debt of $398,235 from five loans with the city.

Attorneys for the city and Julian have maintained that the transactions are legal and aboveboard.

Julian’s attorney, Henry David, said Monday that the settlement was reached after advising the plaintiffs that if they lost they would be held personally liable for costs associated with the year-old legal battle.

“We . . . said that if they wanted to stay in the lawsuit knowing it is frivolous at this point, that we would seek our attorney fees from them personally,” David said. Julian’s attorney fees so far have amounted to about $120,000, he said.

“We’re out of it because we don’t have any insurance against suits and we can’t afford to run the risk,” said Julian Keithahn, who appeared in Orange County Superior Court with his wife, plaintiff Adele Keithahn.

Another plaintiff, Timothy Byers, an appliance salesman, said he agreed to dismiss his portion of the lawsuit so he “would not be hit with a countersuit.”

Byers said he had “pretty much” achieved his intention, which was to force public disclosure of Julian’s financial arrangements. Byers said he also had set out to determine if the debts violated any laws.

“I really don’t know if there is a violation,” Byers said. “You can disclose a transaction, but was it legal? I don’t know. It would take a CPA or an attorney to decide that, and I’m neither.”

Negrete’s lawsuit seeks a court order to prevent further municipal loans to city employees. It also requests that Julian be required to “disgorge” any “profits” he may have realized from his loan-related transactions with the city.

As a result of the newspaper articles, Julian sued The Times for libel. He dropped the lawsuit after The Times printed a four-paragraph statement last month that noted that the news articles and separate expressions of opinion to which Julian objected did not state that he was “corrupt” or that his actions were “illegal.”

Carol Stogsdill, editor of The Times Orange County Edition, said that the statement was not a withdrawal of any of the newspaper’s coverage.

“Our coverage has been balanced and fair and has served to inform readers of loans, repayment terms and other compensation arrangements that were otherwise unknown to the public at large,” Stogsdill said. “Ultimately, of course, it’s up to members of the community to decide if their government is performing to their satisfaction.”

Julian, who had sought $3.2 million in damages, was paid nothing. He also dropped his demand that the newspaper pay his legal costs, which he claimed came to $50,000. Julian was represented by his son, Kenneth, who is an attorney with the firm of Graham & James.