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Bankruptcy Over, But Jefferson County, Ala., Will Remain in the News

BRADENTON, Fla. — In a formal notice to the bond market Monday, Jefferson County, Ala., announced "substantial" consummation of its plan of adjustment and the discharge of the nation's second-largest municipal bankruptcy case.

The legal fights, however, are far from over with two local groups in the process of filing appeals.

Alabama's most populous county filed for what was then the nation's largest municipal bankruptcy in November 2011. It has since been eclipsed by Detroit's Chapter 9 filing in July.

The stage for Jefferson County's financial meltdown was essentially set in early 2008 when Jefferson County's $3.2 billion of variable- and auction-rate sewer warrants collapsed along with associated interest-rate swaps when liquidity in the bond market dried up amid the global financial crisis.

While creditors and county officials tried to negotiate restructuring the sewer deals outside of court, an indifferent state government gave Jefferson County the final push over the cliff.

The county lost its legal battles to retain a state-approved occupational license that provided major support for the county's general fund. With Alabama lawmakers refusing to help by approving a replacement revenue stream, the county ran out of liquidity in late 2011 and was forced into bankruptcy with a total of $4.1 billion of long-term debt.

At the time, Jefferson County's attorneys predicted that the case, complicated by the massive sewer debt, would take three years to adjudicate. In the end the county emerged a year earlier than predicted.

The bankruptcy case cost the county about $25 million in fees to lawyers, consultants, and advisors.

On Dec. 3, after closing on the sale of $1.78 billion of new sewer warrants and using the proceeds to write down the old debt, Jefferson County substantially implemented its plan of adjustment to win release from bankruptcy, but not the court's oversight.

While the plan to adjust the county's debt was approved by the United States Bankruptcy Court for the Northern District of Alabama it contains what may be a novel approach.

The court retained exclusive jurisdiction over numerous aspects of the plan, "including implementation or enforcement of the approved [sewer] rate structure, issuance of the new sewer warrants under the new sewer warrant indenture," and other elements such as decisions that modify, reverse, revoke, or vacate the confirmation order approving the plan.

"One feature of the plan is unusual…and that is the potential for the bankruptcy court to hear disputes over rate related matters over an extended number of years," bankruptcy attorney John Whitlock at Edwards Wildman Palmer LLP said recently.

"It is not uncommon for a bankruptcy court to retain jurisdiction to hear disputes over a plan's implementation, but the time period for such disputes tends to be confined to a relatively short period of time," he said.

When the plan was confirmed and largely implemented, all debts, claims and disputes that existed when the case began were discharged, including two cases brought by local groups identifying themselves as ratepayers of the county's sewer system.

A group of 13 people who include current and former Birmingham City Council members, two state lawmakers, and others on the county's sewer system, known as the Bennett ratepayers, have said they would file an appeal.

They are challenging the old sewer debt and swaps, which no longer exist, as well as the new plan of finance for the sewer system implemented through the recent bankruptcy court-approved financing.

The Bennett group plans to appeal a number of opinions, orders, judgments, and rulings of the bankruptcy court, including those pertaining to their case and the court's orders on the use of sewer system revenues and confirmation of the plan.

A separate group of three sewer system customers, referred to as the Wilson ratepayers, said they also would file a direct appeal of the bankruptcy confirmation order and other actions of the court.

The Wilson group said in court papers that their appeal would ask if the bankruptcy court erred in denying their claim by ruling that "there was no direct pecuniary interest which would support such a claim in spite of direct case law which gives rise to a right to repayment if the underlying sewer rate structure" was found to unreasonable, discriminatory, confiscatory, or otherwise unlawful under Alabama's constitution.

The Wilson ratepayers are also seeking a ruling on whether the confirmation of the plan of adjustment properly extinguished their case, and also barred prosecution of a remaining count pending in state court.

The appeals are in the process of being filed and no time frame has been given as to when the district court will begin to consider them.

"The county remains extremely confident in its legal position," said Jefferson County Commission President David Carrington when asked recently to comment on having to defend the bankruptcy plan.

Carrington pointed out that the county has already sold new sewer warrants to implement the plan of adjustment.

Whitlock said it can take months for an appeal to be heard and during that time the plan can be substantially implemented.

"In many cases, the appeal becomes moot once the plan is implemented, and so the appeal is then dismissed as moot rather than being decided on the merits," he said. "In some cases, depending on the issue in the appeal, the consummation of the plan does not make the appeal moot, and if the confirmation order is overturned on appeal, the debtor might have to rework its plan, if that is even possible."

Given that the bankruptcy court retained exclusive jurisdiction over Jefferson County's confirmation and adjustment plan it is not clear what would happen even if an appeal was successful.

A ruling of the district court can be appealed to the Eleventh Circuit Court of Appeals, and a ruling there can be appealed to the U.S. Supreme Court.

"As you can imagine, the appeals process could take many months or even years," Whitlock said.

The bankruptcy court is far from the only legal venue where Jefferson County's woes have been heard, as the tangled sewer financing that unraveled in 2008 had already spurred criminal prosecutions for corruption.

The aging sewer system, ordered rebuilt by federal court order many years ago, was beset by corruption, investigations and trials that sent nearly two dozen elected officials, contractors, county employees, and bankers involved in the sewer bond deals to jail for bribery and fraud.

Perhaps one of the most well-known of those that faced a multitude of criminal charges was Larry Langford, the former mayor of Birmingham. Before becoming mayor, Langford was president of the county commission when he orchestrated refinancing of the sewer debt to avoid large rate increases on sewer system customers.

Langford, 65, was convicted on 61 federal charges in October 2009 for bribery, money laundering, mail and wire fraud, conspiracy, and filing a false tax return.

He is serving a 15-year prison sentence in Kentucky, and was ordered to pay $119,985 to the Internal Revenue Service for taxes he failed to pay on bribes, forfeit $241,843, and pay court costs.

Montgomery bond dealer Bill Blount along with Langford's friend and local lobbyist Al LaPierre were named along with Langford in a criminal indictment. Blount and LaPierre took plea deals in return for much shorter prison sentences.

Another highlight of Jefferson County's saga was the November 2009 settlement announced by the Securities and Exchange Commission with JPMorgan over securities law violations that involved an unlawful payment scheme so the bank would be selected to underwrite the sewer deals, and that the firm's affiliated bank be chosen as the main swap counterparty.

Without admitting or denying the charges, JPMorgan settled the SEC's charges paying Jefferson County $50 million and forfeiting more than $647 million in claimed termination fees. The bank also paid $25 million to the SEC's Fair Fund established to compensate those harmed by the scheme, which was eventually given to the county.

JPMorgan also accepted steeper haircuts than other creditors in the bankruptcy adjustment plan.

The SEC also brought charges against Charles LeCroy and Douglas MacFaddin, two former JPMorgan managing directors. The SEC said the two made more than $8 million in undisclosed payments to close friends of certain county commissioners and broker-dealers to help JPMorgan get work on the sewer deals, and swaps.

Along with the appeals Jefferson County faces, the federal case against LeCroy and MacFaddin also promises to keep the county's saga in the news well into 2014.

The bankers' case has been delayed because certain witnesses connected to municipal bond bid rigging in other cases have been prevented from giving depositions.

LeCroy is currently contesting the SEC's jurisdiction over swaps, and arguing that a statute of limitations to bring charges against him has expired.

The trial for LeCroy and MacFaddin, however, could take place by mid-year.

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