Regional News

Judge: Jefferson County Can Proceed

DALLAS — Jefferson County is eligible for bankruptcy despites its lack of bond debt under a ruling issued late Sunday by U.S. Bankruptcy Judge Thomas Bennett.

The three-page ruling means the largest county in Alabama, which includes Birmingham, can continue its quest for bankruptcy protection over its inability to serve $4.23 billion of outstanding debt issued as warrants rather than bonds.

The next action in the largest municipal bankruptcy in U.S. history is expected in April, when creditors and the county are scheduled to meet at a bankruptcy court hearing to determine the size of payments due to the debt holders.

David Carrington, president of the Jefferson County Commission that filed the bankruptcy suit late last year, said Bennett’s ruling was “good news for the county.”

He said the decision is “another step forward in the ultimate resolution of Jefferson County’s financial crisis.”

The county filed for bankruptcy Nov. 9 with a total of $4.23 billion of debt in the form of warrants.

In addition to $3.14 billion of sewer warrants, Jefferson County’s outstanding debt includes $814.7 million of school warrants supported by a 1% sales tax, $200.5 million of general obligation warrants and $82.5 million of limited-obligation lease warrants.

Bennett overruled contentions by the county’s creditors that state law did not allow the county’s bankruptcy filing because the debt was issued as warrants rather than as bonds.

Bank of New York Mellon, trustee for the county’s defaulted sewer warrants, said in its objections to the bankruptcy filing that Jefferson County “is not, and cannot establish that it is specifically authorized under Alabama state law to seek relief under Chapter 9.”

The Mellon brief said state law specifically restricts bankruptcy only to restructure bonded debt.

In his ruling, Bennett said the bond-only restriction was a misinterpretation of the entire scope of Alabama law.

State statutes on municipal finance allow entities to file for federal bankruptcy protection without specifying whether the debt was issued as bonds or warrants, Bennett said.

“This authority is not limited to bond debt,” according to Bennett. “The word used by Alabama’s Legislature is 'indebtedness.’ ”

“The objectors’ arguments are unsupportable under any statutory interpretation made consistent with Alabama’s case law and statutes governing interpretation,” he said.

Objections to the county’s eligibility for bankruptcy were filed by a number of parties, along with the trustee and taxpayer’s group.

Objectors included Assured Guaranty Municipal Corp., Bank of America NA and Blue Ridge Investments LLC, Financial Guaranty Insurance Co., JPMorgan, Lloyds TSB Bank plc, Societe Generale, and State Street Bank and Trust Co.

In a Dec. 13 filing, the county called “absurd” the objectors’ contention that state law does not allow county-issued warrant debt to be restructured through bankruptcy.

“Were the objectors’ argument the law, a county struggling to service $3 billion in bond debt would be authorized to declare bankruptcy, but a county struggling to pay the same $3 billion in warrant obligations would not,” the county argued.

Judge Bennett suggested in February that direct appeals in the Jefferson County case should be filed with the federal 11th Circuit Court of Appeals in Atlanta rather than beginning with a federal district court.

“The implications of this court’s rulings in this case extend beyond county lines, and affect the finances and political dynamics of the entire state of Alabama,” he said.

In the memorandum attached to his ruling, Bennett pointed out that Alabama’s municipal bankruptcy laws were developed in the 1920s and 1930s by Rep. Amasa Coleman Lee, who was the father of author Harper Lee and the model for lawyer Atticus Finch in her novel “To Kill A Mockingbird.”



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