Judge Rejects Challenge to Bankruptcy Bailout

NORWALK — A Los Angeles County judge Thursday tossed out a lawsuit challenging the constitutionality of Orange County’s bankruptcy bailout, easing the fears of the Wall Street investment community that nearly $900 million in county recovery bonds might not be repaid.

Superior Court Judge Daniel Solis Pratt rejected the claims of an Orange County watchdog group that had argued the annual diversion of $50 million in county revenues to repay the bonds violated a reform written into the California Constitution in 1878 after a series of fiscal calamities in the state.

Pratt’s ruling was the polar opposite of a decision late last year by a fellow Los Angeles County judge, who held that a nearly identical diversion of $50 million in transportation funds to bail out that county’s teetering public hospitals was unconstitutional.

“We’re pleased with the decision and it is, of course, very important to Orange County’s recovery, and ought to be influential in improving the county’s credit and bond ratings,” said Bruce Bennett, the county’s lead bankruptcy attorney who argued the case before Pratt.

“He basically adopted the county’s position on every issue,” Bennett added.

Richard I. Fine, the Century City attorney who filed the lawsuit on behalf of the Committees of Correspondence, an Orange County activist group, said he would immediately appeal Pratt’s ruling.

“When you get into these political situations, sometimes the judicial system fails, and it did here,” said Fine.

“We have a judge who was unwilling to follow the clear dictates of the law and who obviously feels the case is too hot to handle,” Fine added. “Now he’s kicking it up to the Court of Appeals where, in the end, we’ll prevail.”

Wall Street analysts, who said the case was being closely followed because it could unravel the bankruptcy recovery plan, found comfort in the ruling, saying it would provide a stout boost to the financial recovery of a county still struggling to improve a bankruptcy-battered investment rating that prevents it from borrowing money at reasonable interest rates.

A higher investment rating would also allow Orange County to issue debt without having to buy costly insurance guaranteeing repayment.

“This lawsuit was the biggest cloud looming ominously over the county,” said David Brodsly, vice president of Moody Investment Service. “It was certainly an issue we were concerned about. I think it bodes well for the county’s future.”

County Chief Executive Officer Jan Mittermeier said the decision is “going to help get us where we want to go, which is a investment-grade rating.”

Fine said he found it highly curious that the judge ignored his own tentative ruling on Aug. 8, when Pratt indicated he was inclined to allow the case to go to trial.

Fine also claimed that the judge exceeded his legal authority in dismissing the complaint before a trial.

“Under the law, when you are looking at a complaint, every consideration is given to the truth of that complaint,” Fine said. “Here, from the judge’s opinion, it is quite clear that he did not do that.”

“It shows this to be a political decision, since there is no way any objective judge could make such a ruling before a trial. He is bound by the law.”

Fine was also the attorney who successfully challenged on identical legal grounds the transfer of $50 million in Metropolitan Transit Authority funds to Los Angeles County’s health care system.

In that case, brought by Raymond Veltman, a retired Brentwood trucking company owner, Superior Court Judge Richard C. Hubbell ruled that special-purpose legislation to transfer the MTA money was unconstitutional because it was “a special statute for the benefit only of Los Angeles County.” The constitutional amendment adopted after the 1878 financial scandals says broadly that special-purpose legislation may not be enacted to achieve ends obtainable under general law.

Los Angeles County’s appeal of Hubbell’s decision is pending.

To emerge from the largest municipal bankruptcy in history, Orange County fought for the passage of a series of special-purpose bills permitting the transfer of $38 million a year for 15 years of transportation funds and another $12 million a year for 20 years of money previously earmarked for redevelopment, flood control and recreational uses.

That $50-million annual diversion was set aside to repay $880 million in county borrowings.

As he did in the Veltman case, Fine noted in his lawsuit that such diversions have been illegal in California since the state Constitution was amended more than a century ago in the wake of a severe economic recession that led to widespread private and public failures.

“Banks collapsed, the securities markets declined, municipalities defaulted on their bonds, businesses closed and trade stagnated,” the California Supreme Court later wrote of that reform.

Passing special-purpose laws to help municipalities weather financial crises, the court also noted, “was considered to be a major cause of the inordinate mass of debt with which many communities were burdened.”

In his six-page ruling, Pratt wrote that the watchdog group had failed to demonstrate “that a general statute can be made ‘fully applicable and complete on the subject’ of the recovery legislation to address the historic fiscal crisis of Orange County.”

William G. Steiner, chairman of the Orange County Board of Supervisors, said the decision “was very important for the county, because it means our credit-worthiness is no longer in jeopardy.” He said that during recent visits to investment firms in New York, Chicago and Boston, “this case was on everyone’s minds.”

Supervisor Jim Silva said he hoped the decision would end any uncertainty about the county’s bankruptcy recovery plan.

“I think this shows that the county is on the right course,” Silva said. “I think the majority of the residents are pleased with the plan because we are out of bankruptcy without a tax increase.”

Bill Ward, a member of the Committees of Correspondence, said the group has no intention of abandoning its challenge.

“We are not going to back down. We are going to fight,” said Ward. “I still believe this recovery plan is against the law.”

Even if the case is appealed, Bennett said he expected the bankruptcy recovery plan to be upheld.

“We do not believe that any appellate court will view this case differently,” Bennett said.