Challenge to Bankruptcy Bailout Survives

A lawsuit challenging the constitutionality of Orange County’s $800-million bankruptcy bailout survived county efforts to have it thrown out Friday when a judge signaled that he was inclined to allow the suit to proceed.

The Committees of Correspondence, an activist group of consistent critics of elected officials who failed to prevent the bankruptcy, sued the county last December, asserting that the special-purpose statute passed by the Legislature to get the county out of bankruptcy violated a 116-year-old section of the California Constitution.

The county’s diversion of $50 million a year--originally earmarked for transportation, flood control, redevelopment and parks--to repay $880 million in bonds was precisely the kind of special legislation that California outlawed forever in the 1870s, the group alleges.

“Having our taxes diverted to bail out the county’s fiscal buffoonery really grates,” said Steve White, a leader of the Committees of Correspondence. “Particularly when it was done instead of downsizing and restructuring county government as we asked for all along.”

As it has since the case was filed, the county sought a quick dismissal, but Judge Daniel Solis Pratt, a Los Angeles Superior Court judge sitting in Norwalk, issued a “tentative order” indicating he believed the lawsuit should continue.

It was the second time the lawsuit has survived county attempts to have it squelched. Earlier this year, the county tried unsuccessfully to have U.S. Bankruptcy Judge John E. Ryan, who presided over the bankruptcy, take it away from state court.

The case was later transferred to Los Angeles when Orange County’s entire judiciary disqualified itself because of an apparent conflict of interest.

After listening to arguments by Bruce Bennett, the county’s bankruptcy attorney, Pratt said he would consider the issues before mailing a final order next week.

Richard I. Fine, the Century City attorney who filed the case, called Pratt’s tentative ruling “significant, because the county’s purpose was to knock the case out and this now puts the entire bankruptcy recovery plan in jeopardy.”

“The county has $275 million a year in free, discretionary funds that [county officials] could have used to pay for the recovery, and they didn’t have to take this money,” Fine added.

After the hearing, Bennett said the county was simply pursuing “the cheapest and most efficient way to dispose of this lawsuit.”

The challenge to the bankruptcy bailout was prompted by another case brought by Fine last year in Los Angeles involving virtually identical legislation.

In that case, Los Angeles Superior Court Judge Richard C. Hubbell ruled unconstitutional a special-purpose law that transferred $50 million in transportation money to prop up the teetering health care system in Los Angeles County.

Fine’s victory in that case, now on appeal, prompted the Legislature to recently pass a law that would transfer other money in the event the appellate court doesn’t overturn Hubbell’s ruling.

The legal underpinning for the challenge to the Orange County bankruptcy bailout is a reform written into the California Constitution in 1878 after a string of financial calamities caused several municipalities that had benefited from special-purpose legislation to go broke.

“Banks collapsed, securities markets declined, municipalities defaulted on their bonds, businesses closed and trade stagnated,” the California Supreme Court wrote of that reform in a 1970 decision.

The court continued, “Popular dissatisfaction had begun to focus on the special legislation authorizing local indebtedness, since it was felt that this gave undue influence to narrow interest groups seeking public financing of projects from which they could reap disproportionate benefits.”

As a result, the Constitution was amended to specify that “a local or special statute is invalid in any case if a general statute can be made applicable.”

No matter how urgent the fiscal crisis that prompted the Orange County legislation, Fine said, “not one case since has allowed such special legislation” to stand.