Judge Says O.C. Must Set Aside Funds for Debt

SANTA ANA — In perhaps the biggest legal setback so far, a U.S. District Court judge Thursday ruled that bankrupt Orange County must craft a plan guaranteeing it can repay up to $169 million in debt to creditors.

Judge Gary L. Taylor reversed the earlier decision of a bankruptcy judge who had agreed with the county that the bankruptcy voided its obligation to set aside funds to pay off its debts.

Taylor’s ruling comes as a blow to county officials who say there’s not enough money in the budget to maintain county services and put funds in reserve for creditors.

“It has the potential of being a very serious setback,” said County Chief Executive Officer William J. Popejoy. “The set-asides are already spent.”

The county immediately appealed Taylor’s decision in the 9th Circuit Court of Appeals, a move that will put off the creditors for at least several more months, according to county bankruptcy attorney Bruce Bennett.

“There will be no immediate impact on the county’s finances or operations,” Bennett said. “Obviously, though, we would have hoped that the ruling had gone the other way.”

Taylor’s action sends the case back to U.S. Bankruptcy Court Judge John E. Ryan. If the county loses its appeal, Ryan is directed to guide the county in coming up with a plan to ensure that creditors are repaid.

That plan could include a range of options, including requiring the county to set aside funds for repayment. The county had started placing money in reserve to satisfy creditors, but stopped when the money was shifted to providing county services.

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The ruling Thursday was hailed by attorneys representing such major creditors as Alliance Capital Management L.P., the Benham Group and Putnam Investment Management that hold $60 million worth of the notes involved in the case.

The three noteholders had appealed the case to Taylor after Ryan made his ruling favoring the county in February.

Attorneys for the three said the ruling could restore some confidence to the municipal finance market that had been shaken by the county’s refusal to put aside money to pay off the debts.

“It will be a stabilizing factor,” said Robert Darby, an attorney for Alliance, Benham, Putnam and two other county creditors. “It ought to provide a little bit of comfort to those who might want to continue to loan money to municipalities.”

The major creditors hold county tax and revenue anticipation notes, known as TRANs, which most local governments sell to generate money to ride them over until property tax revenue flows in.

Darby said Taylor’s ruling gives the TRANs holders the status of secured creditors, which puts them ahead of hundreds of unsecured creditors who must get in line for payment by the county when the bankruptcy is finally settled under a plan of adjustment.

Although the notes were originally coming due next Wednesday, Darby said most of the TRANs holders agreed to the county’s plan allowing it to put off paying about $1 billion in debts until June 30, 1996.

Taylor instructed bankruptcy judge Ryan to guide the county in fashioning a plan to ensure that the debt will be paid.

Alliance attorney Clarisse Young said Ryan has several options that also include ordering the county to offer creditors more collateral on the debts.

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“We are obviously thrilled by this decision,” Young said. “We believe that we will be upheld at the 9th Circuit.”

In February, the county successfully argued before Ryan that the unprecedented Dec. 6 bankruptcy nullified any obligation to make set-aside payments on the debt.

Although the county had put aside more than $30 million before the bankruptcy, it stopped making about $139 million worth of payments between December and July.

Ryan agreed with the county that its obligation to make the set-aside payments did not survive the bankruptcy.

But Taylor held that a state law governing short-term borrowing by municipalities creates an obligation or a lien that exists despite a municipality’s bankruptcy.

County officials have steadfastly maintained there is not enough money in the county’s coffers to operate various departments and keep aside a fund for creditors.

Under the latest plan for the 1995-96 budget, the general fund will drop to $275 million, down $187.5 million from last year.