April 27, 1995
TO: MONEY MARKET FUNDS AD HOC COMMITTEE No. 3-95
SEC RULES MEMBERS No. 31-95
CREDITOR'S RIGHTS SUBCOMMITTEE
RE: BANKRUPTCY COURT DECISION CONCERNING RIGHTS OF ORANGE
COUNTY NOTE HOLDERS
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The United States Bankruptcy Court for the Central District of California has ruled that the
holders of certain tax-exempt notes issued by Orange County do not have a lien on the CountyGs revenues
acquired after the date it filed for bankruptcy protection. A copy of the courtGs decision is attached.
The holders of certain tax anticipation notes (TRANs) issued by Orange County petitioned the
court to lift the automatic stay to file a complaint in state court to force the County to set aside certain
revenues for payment on the notes. The note holders asserted, among other things, that unless the County
was required to set aside such funds, it would have insufficient revenues to pay the note holders on the
July 1, 1995 maturity date.
In denying the note holdersG motion, the court determined that they had a security interest, rather
than a statutory lien. Under Section 552(a) of the Bankruptcy Code, a security interest acquired prior to
the filing of a bankruptcy petition does not reach property acquired by the debtor once the petition is
filed. In contrast, a statutory lien continues to apply to such property. The fundamental difference
between a security interest (which is a lien created by an agreement) and a statutory lien is the consent of
the debtor to the granting of the lien. After analyzing the relevant documents (i.e., the resolution adopted
by the CountyGs Board of Supervisors authorizing the County to issue the TRANs, the contract between
the County and the underwriter, and the TRANs), the court concluded that an agreement between the
parties, and not the statute, created the lien. Accordingly, the court found that the note holders do not
have an interest in the CountyGs post-petition revenues.
Amy B.R. Lancellotta
Associate Counsel
Attachment