Bankruptcy-Related Fees Still Mounting

SANTA ANA —  Orange County has paid out more than $42 million in fees alone for outside legal and financial advice related to its unprecedented bankruptcy, county officials said Tuesday.

Leading a long list of financial consultants, bond attorneys and other bankruptcy specialists that have submitted bills for their work is Hennigan, Mercer & Bennett, the county’s bankruptcy attorney.

On Friday, the U.S. Bankruptcy Court approved another round of payments for the firm, bringing its total compensation to about $13.5 million.

Attorneys for the firm are expected to remain busy for months as they handle depositions involving the county’s lawsuit against Merrill Lynch & Co. and other financial firms it holds responsible for causing the December 1994 bankruptcy.

The county has set aside an additional $50 million for the litigation and just recently modified one of many billing rules that had kept consultant costs down. Until now, the county covered only the fees of one attorney when groups of bankruptcy lawyers and paralegals met to discuss cases.

But in a compromise with lawyers unhappy about the rule, the county agreed to pay the fees of two or three “top attorneys” who attend the meetings at an hourly rate of $300 to $395.

The change is now being applied retroactively to all bills submitted since December 1995, meaning some bills that the county originally rejected will now be paid.

Dennis Bunker, the county’s risk management manager, said the increased payments “won’t be anything drastic” and will cover about 15 to 20 meetings that took place during the period. He could not cite a specific dollar amount for the increase.

Despite the mounting bills, County Chief Executive Officer Jan Mittermeier and her staff said they are working to reduce the county’s reliance on consultants.

Earlier this month, for example, Salomon Bros., which has been paid about $5 million thus far, has turned over control of the county’s investment pool to Treasurer-Tax Collector John M.W. Moorlach and his staff. The shift will save the county $1.3 million a year in consultant bills.

“That is a cost reduction that helps the taxpayers,” Moorlach said. “I’m really pleased to be at this point. We found our staff can be more competitive than outside consultants . . . and save the fees we would spend.”

The accounting firm of Arthur Andersen & Co. has all but phased out its auditing duties, which will now be handled by the new manager of internal audits and his staff at a reduced cost. The firm has been paid about $11 million so far.

“As we work through the various pieces of the recovery process, [the county] will see fewer consultant fees because their work will be complete,” said Mittermeier’s spokeswoman, Diane Thomas.

County Chief Financial Officer Gary Burton stressed that the county has tried to limit consultant costs wherever possible.

“We could not have gotten here without outside consultants and attorneys,” he said. “We put some really tough rules on them to keep the tabs down. I don’t know how much more efficient we could have been.”

Still, some supervisors expressed continued concern Tuesday over the costs.

“The spigot is open in the county and it has to be cut off,” Supervisor Jim Silva said. “I think we need to bring these jobs in-house when possible. Through Jan Mittermeier, we must make sure to monitor every item and not be afraid to ask questions.”

Silva, however, said the county should not cut corners in its case against Merrill Lynch and other bankruptcy defendants because of the windfall that could come with a favorable verdict or settlement.

“We need the best legal representation we can get because the other side isn’t going to be sparing any expense,” he said.

The county alleges that Merrill Lynch sold former Treasurer-Tax Collector Robert L. Citron exotic securities that contributed to the financial collapse. The county filed for bankruptcy after an investment pool Citron ran on behalf of the county and more than 200 cities and school districts lost $1.64 billion of its value.

The brokerage house and other firms named in other suits have denied any wrongdoing.

The $42 million in total consultant payments does not include millions of dollars in commissions earned by some financial firms early in the bankruptcy.

And it also does not include the $50 million the county has set aside strictly for litigation costs--a sum established in June as part of the county’s bankruptcy recovery plan. That fund is managed by Thomas W. Hayes, the former state treasurer.

County officials said they didn’t know how much of the litigation fund has already been spent or whether Hayes was using the same billing rules established by the county.

A successful lawsuit against Merrill Lynch and the others could reap the county billions of dollars, enough to pay off many of its debts, refund the money placed in the collapsed investment pool by cities and school districts and perhaps restore programs and services cut during the bankruptcy.

Under the terms of his contract with the county, Hayes would receive 1.5% of all litigation proceeds over $200 million. If the county recovers less than that amount, he would go largely uncompensated.

The consultant fees have been an emotional issue with some county activists, who complain about lawyers and others “getting rich” on the bankruptcy.

Bruce Whitaker, a member of the county’s Government Practices Oversight Committee, agreed.

“It’s been quite a feed bag for these consultants,” he said. “When you talk about $42 million, it’s a lot of money when you consider every dollar at the county counts. It’s excessive.”

Supervisor Todd Spitzer, a former prosecutor, said he understands the public’s frustration but believes the county needs the outside legal help.

“It’s absolutely devastating that we have to spend this money, but the county can’t afford not to have this expertise as we emerge from bankruptcy,” Spitzer said. “I want to make sure that we need the legal advice we are receiving.”

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Bankruptcy Bills

Orange County has been billed $53.6 million and paid more than $42 million in fees to more than a dozen financial consultants, bond attorneys and other bankruptcy specialists. The payout does not include commissions earned by some firms, which push the total well above $50 million. How much the four top firms have billed and been paid as of Tuesday:

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Billed Paid Arthur Andersen Financial consultant $17,611,000 $11,275,000 Hennigan, Mercer & Bennett Bankruptcy attorney $16,021,000 $13,565,000 Salomon Bros. Financial consultant $5,288,000 $5,084,000 Willkie, Farr & Gallagher Bond counsel $3,818,638 $2,667,626

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Source: Orange County Risk Management Department

Researched by SHELBY GRAD / Los Angeles Times