HomeMy WebLinkAbout14 SETTLEMENT AG 05-01-95Rourke, Woodruff & Spradlin
ProfeSsional Corporation
NO. 14
5-1-95
MEMORANDUM
TO:
Honorable Mayor and Members of the City Council
City of Tustin
FROM: City Attorney
DATE:
RE:
April 25, 1995
Comprehensive Settlement Agreement Regarding
Orange County Investment Pools
Issue:
Should the City Council change from Option B to Option A under the
Comprehensive Settlement Agreement?
Recommendation:
Pleasure of the City Council.
Background:
Previously, the City Council considered a proposed Comprehensive Settlement
Agreement regarding the Orange County Investment Pools and chose Option B.
Under both Options A and B, the City will get a cash distribution of 75% to 76% of
the interest funds that had remained on deposit with the County Treasurer. This
distribution does not require the County to raise any additional funds. The County has
the cash from its sale of securities in the pool.
Under Option A, the County promises to use its best efforts to deliver recovery
notes that could be exchanged for cash on or before June 5, 1995. This may give
the City an additional 3 to 4 cents on the dollar. The County also promises to use its
best efforts to obtain a settlement from Merrill Lynch that would provide the City with
approximately 9 cents on the dollar. Finally, the County promises to back the
remaining 11 cents on the dollar with repayment claims. These claims would be
transferred to the Orange County bankruptcy case. Under Option A, the City would
assign all of its legal rights against third parties to the County. On the other hand,
under Option B, the City would be free to pursue recovery of its 24-25% loss, along
Honorable Mayor and Members of the City Council
City of Tustin
April 25, 1995
Page 2
with other Option B participants in the Orange County bankruptcy and through
separate lawsuits against the County or Merrill Lynch. The primary difference
between Option A and Option B is that the County makes certain promises to Option
A participants, while Option B participants are promised nothing.
The County's promises under Option A have been used by the County in
attempting to garner support for the sales tax. For example, the County Counsel's
proposed wording for Measure R, the sales tax measure that will go before the voters
on the June 27th ballot, states that the sales tax is:
"to raise revenue for general County purposes, including,
but not limited to, preservation-of the central County
services, and payment of County bankruptcy obligations to
schools, cities, and other creditors .... "
However, throughout the discussions on the Comprehensive Settlement Agreement,
sales tax revenues were not promised as a way to make good on the Option A
promises. For example, approximately 9 cents on the dollar that's been promised
under Option A, will come out of the settlement with Merrill Lynch. The 3 to 4 cents
that's to come out of the recovery notes must be secured by June 5, 1995, well in
advance of the June 27 vote on Measure R. Theoretically, it would be possible for
the County to use funds that it received from the sales tax to pay back the last 11
cents owing schools, cities and other creditors. However, there is absolutely no
County obligation to pay back that 11 cents; it's simply a claim in the County
bankruptcy, which may or may not be paid. The County itself is in severe financial
trouble and will assuredly use whatever available funds it has to meet its outstanding
debt obligations, as well as to fund essential County services. This includes using
sales tax revenues. Accordingly, it is unlikely that any funds raised from the sales tax
would ever be used to pay back the 11 cents still owing the schools, cities and other
creditors under the Comprehensive Settlement Agreement. All of the Option A
promises are, "good faith promises," and are not effectively binding on the County.
None of these promises are tied to sales tax revenues.
If the County does make good on its recovery note promise, that could add
another 3 to 4 cents to the City's recovery, without any effort on the City's part. The
same could be said if the County succeeds in reaching a healthy settlement with
Merrill Lynch. Recovery of the last 11 cents will be extremely difficult whether or not
the City is an Option A or Option B participant. However, if the City Council chooses
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Honorable Mayor and Members of the City Council
City of Tustin
April 25, 1995
Page 3
to be an Option A participant, its claim will automatically be recognized as an 11
cents on the dollar claim in the Orange County bankruptcy. Option B participants
would have to establish the value of their claim in that proceeding.
Under the Comprehensive Settlement Agreement, there are several
opportunities to change your mind on Option A and Option B. Under the Settlement
Agreement, a participant may change their option up to 11 days after the court
approves the Settlement Agreement. In addition, a participant choosing Option B may
change to Option A up to June 5, or an earlier date on which the County gives notice.
The County has told everyone that it intends to give notice when the 11 day window,
previously mentioned, closes. Accordingly, if the City Council wishes to change to
Option B, it must do so now before the 11 day window closes. The May 1, 1995
City Council meeting is the last opportunity for the City to make a timely switch to
Option A. If the City Council chooses Option A, it may yet switch back to Option B,
if the County does not make good on their recovery notes on June 5th. In that case,
the City would have until June 8, 1995 to change its election back to Option B.
LEJ:cas
CC'
William A. Huston, City Manager
Ron Nault, City Treasurer
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