FGIC Joins JeffCo Suit

Bond insurers came and went last week in the Bank of New York Mellon’s legal challenge in Jefferson County’s bankruptcy case.

BNY Mellon, trustee for $3.14 billion of the Alabama county’s defaulted sewer warrants, filed a complaint on Feb. 3 in the Chapter 9 case pending before Judge Thomas Bennett. It alleged that the county misused sewer system revenues that otherwise would be used to pay debt service.

Assured Guaranty Municipal Corp. filed a motion to intervene in the case the day it was filed. Assured, which said it has net exposure of $731.8 million to the county’s obligations, withdrew its motion to intervene last week.

At the same time, Financial Guaranty Insurance Co. filed a motion to intervene, saying that it has exposure to $1.6 billion of sewer warrants, or 51% of the principal outstanding it insures.

FGIC also owns $101.5 million of warrants acquired after the county defaulted on certain payments, has paid out $19.8 million under its municipal bond debt-service reserve fund policies after county defaults, and has paid $3.3 million in claims.

BNY Mellon’s suit was filed about a month after Bennett returned the sewer system to the county, and relieved the state court-appointed receiver of his duties to run the system. Bennett did not say how much the county must allocate toward debt service, but that payments would be made after deducting operating expenses.

The trustee’s suit claimed that the county planned to use the revenue for expenses not permitted by the indenture, such as legal fees associated with the bankruptcy.

In an amended complaint last week, BNY Mellon said warrant holders are entitled to receive all system revenues net of operating expenses defined in the indenture, and that no provision in the bankruptcy code allows that amount to be expanded.

Jefferson County denied misusing any revenues.

Bennett has scheduled a hearing April 11 that could run several days.

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Bankruptcy Alabama
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