BRADENTON, Fla. – Two years after filing what is now the second-largest municipal bankruptcy in the country, Jefferson County, Ala., won approval of the plan allowing it to emerge from Chapter 9.
U.S. Bankruptcy Judge Thomas Bennett confirmed the plan of adjustment Thursday, which restructures nearly all of Jefferson County’s $4.1 billion of outstanding debt.
Before approving the plan, Bennett struck down all objections, and said the plan is feasible, including future operations of the sewer system, according to social media reports from the courtroom.
Bennett’s decision sanctioning $1.4 billion in concessions granted by sewer system creditors holding $3.2 billion of outstanding defaulted sewer debt came after a two-day hearing in Birmingham, which is the county seat.
The plan will settle $3.2 billion in defaulted sewer warrants and another $960 million of school, lease, and general obligation warrants, nearly all of which will be paid in full.
The approved plan allows the county’s finance team to close on $1.8 billion in refunding sewer warrants on Dec. 3. The warrants were sold earlier in the week in anticipation of the confirmation approval.
The county will use $1.7 billion of proceeds to reduce the sewer system’s outstanding principal to about $1.74 billion.
The sewer system’s largest creditor, JPMorgan, will receive $273 million, which is about 22% of $1.21 billion in sewer warrants held by the bank.
Other sewer system creditors, including hedge funds, will be paid 65% to 80% of their investment with the lower amount going to those who opted to retain their insurance wrap.
Jefferson County bankruptcy attorney Kenneth Klee said during the hearing that closing on the warrants Dec. 3 is designed to moot any appeals that may be filed. At that time, outstanding sewer warrants that were partly the basis for litigation by one group of sewer system ratepayers would no longer exist.
The confirmation plan itself cancels $650 million of swap termination claims that were also subject to litigation.
The sewer debt was the heart of litigation filed by two groups of sewer system ratepayers and local elected officials. Their attorneys participated in objecting to the plan at the confirmation hearing, and said they may appeal the judge’s ruling.
Joshua Firth, an attorney with Birmingham-based Hollis, Wright, Clay & Vail PC who represents the Wilson ratepayers, told The Bond Buyer Thursday that a final decision on an appeal would be made after consulting other attorneys on the case.
Attorney Calvin Grigsby, who represents another group of ratepayers and local elected officials, said he would consult with his clients to determine if an appeal would be filed. He also said that three issues are appealable, including that the plan is “validating and condoning the corrupt procurement of the 2002C, 2003B, and 2003C swap warrant deals.”
According to the county’s plan, the settlement with sewer system creditors “compromises, settles, and resolves all disputed matters concerning the costs associated with the allegations of fraud and corruption, allegations of past acts, including acts of fraud and corruption.”
If Bennett approves an order proposed by the county in the coming days, the plan will confirm the reasonableness of the sewer rate increases planned over the next 40 years, and it will validate the 2013 sewer warrants insulating them from future legal challenges.
The plan also terminates the receiver that was appointed by a state court to oversee the sewer system before the county filed for bankruptcy. The county will also pay the receiver’s “unpaid reasonable fees,” including fees for counsel and experts.
Since Jefferson County filed for bankruptcy in November 2011, the county will have paid $21.6 million in legal fees and expenses, and another $3.3 million in other expenses for experts. Bennett said Thursday the expenses are reasonable. Additional expenses are anticipated, the county said in a court filing.