BRADENTON, Fla. — The Bank of New York Mellon on Friday filed a complaint for declaratory judgment alleging that Jefferson County, Ala., has misused sewer system revenues that otherwise would go to pay debt service.
The bank, trustee for the county’s $3.14 billion of defaulted sewer warrants, filed a lawsuit known as an adversary proceeding within the Chapter 9 case pending before federal bankruptcy Judge Thomas Bennett.
The suit charges that the county withheld sewer revenues in violation of Bennett’s rulings. Net revenues of the sewer system secure the defaulted warrants after the payment of operating expenses allowed by the indentures.
“The county has failed and refused to remit timely all the net revenues to the trustee and has improperly denied the trustee certain net revenues as required by the January order,” BNY Mellon’s suit said.
On Jan. 6, Bennett stripped the state court-appointed receiver over the sewer system of his power to run it, and returned the system to the county’s control.
Bennett also held that the special net revenue pledge the county made when it issued the sewer warrants remained in force, and that debt service payments would be paid while the bankruptcy case proceeded. If net revenues were insufficient to cover “the necessary operating expenses” of the system, Bennett said that debt service would be reduced.
BNY Mellon said that Jefferson County sent letters last month stating that it would withhold more than $9 million of net revenues for items purportedly for system operations that are “clearly excluded in the indenture’s definition of operating expenses,” including expenses never paid with operating revenues in the past.
The county withheld $7.35 million to establish a reserve for future capital expenditures for depreciation and amortization, which are “expressly excluded” from the indenture, according to the trustee.
Another $1.66 million was withheld “to pay for the county’s professional fees and expenses, including such fees and expenses arising out the county’s Chapter 9 bankruptcy case,” BNY Mellon said.
“These professional fees and expenses do not constitute operating expenses under the indenture or the January [court] order,” the trustee said.
Withholding the revenue was characterized by the bank as a “taking” under the U.S. Constitution.
“As a result of the county’s conduct and anticipated future conduct with respect to the system revenues, the flow of pledged special revenues to the trustee has been, and will continue to be, wrongfully interrupted by the county” in violation of state and federal laws, the indenture, the receivership order, and the Constitution, the trustee argued.
BNY Mellon asked that the judge enter a declaratory judgment supporting its claims, and defining “operating expenses.” Jefferson County had not responded to the suit by press time.
In related matters, a number of the county’s sewer warrant creditors filed issue papers Friday outlining reasons why they want to appeal many of Bennett’s rulings. Those rulings include the judge’s determination that the receiver lost control of the sewer system when the county filed for bankruptcy on Nov. 9.
In addition to stating that the judge erred, the filings argued that they were not being adequately protected because the county withheld revenues that previously were available to pay debt service.
The issue papers were filed by BNY Mellon, the receiver, Assured Guaranty Municipal Corp., Bank of America NA and its affiliate Blue Ridge Investments LLC, JPMorgan, and Financial Guaranty Insurance Co., as well as a group of liquidity banks consisting of Bank of Nova Scotia, Société Genérale, Regions Bank, BNY Mellon, State Street Bank and Trust Co., and Lloyds TSB Bank plc.
