Group of Residents, Officials File $1.63B JeffCo Claim

BRADENTON, Fla. — More than a dozen Birmingham residents, including two City Council members and two Alabama lawmakers, on Monday filed a $1.63 billion claim in Jefferson County’s Chapter 9 bankruptcy case.

The residents are also seeking a class certification that would expand their claim to include the 130,000 people who pay taxes and other assessments for the county’s sewer system, which is in default on $3.14 billion of variable- and auction-rate warrants.

The potential class represents ratepayers who paid recoverable overcharges due to illegally issued sewer warrants and associated swaps, and who are obligated to pay any future rate increases authorized by any plan of reorganization, according to court documents.

“Creditors base their claims on wrongful gain or unjust enrichment on the part of certain bank warrant holders, credit enhancers, lenders and interest rate swap participants, and sundry professionals,” including the Bank of New York Mellon, trustee for the warrants, the complaint alleged.

It also said that the county passed along the costs of its “complicit financial wrongdoing” to ratepayers, and the recovery of $1.63 billion in damages would compensate them for the costs of wrongful issuance of the debt and swaps.

The complaint alleged BNY Mellon failed to review or obtain certifications for some of the sewer warrants.

“In its role as trustee, BNY Mellon is confident it has fulfilled its duties as outlined in the governing agreements,” said bank spokesman Kevin Heine.

Jefferson County’s attorney, Kenneth Klee, could not be reached for comment.

The $1.63 billion claim is based on allegations of overcharges and markups related to the sewer refunding warrants and associated swaps, as well as violations of certain indentures and the Alabama constitution, according to the attorney representing the claimants, Calvin Grigsby, president of broker-dealer firm Grigsby & Associates Inc.

Grigsby said he has been retained by the named members of the claim, and is advancing his legal fees to be reimbursed if the claim is successful.

He appeared at a public meeting just over a year ago in Birmingham and laid out some of the legal theories underpinning the claim filed Monday, he said in an interview.

The work examining the county’s sewer deals actually began in 2008 when Grigsby worked with the County Commission during unsuccessful negotiations with creditors to restructure the sewer debt.

“I had to look at the swaps and the whole deal,” he said. “I did calculations on the markups, and looked at indentures.”

Though the negotiations failed, Grigsby said he worked without pay to assist the county so he would be considered as one of the underwriters on the restructuring deal.

“This is done all the time with clients analyzing a financial problem,” he said. “If you do a bond deal, then you get picked to [underwrite] the bond deal.”

That restructuring deal did not happen, and Grigsby said he became the “messenger” to file Monday’s claim based on his research. It includes allegations that a large amount of the sewer warrants are invalid because of constitutional violations and corruption that elicited “swap profits” linked to uneconomical refundings.

“There’s so much stuff about this deal that shows you what [Jefferson County] bought,” he said. “It bought having everyone look the other way to allow the warrants to be issued in violation of the actual indenture authorizing the warrants.”

Grigsby said if the claim is approved by the bankruptcy court, then checks can be sent to each ratepayer on the sewer system. He also said the amount recovered could be used to write down the amount of the outstanding sewer debt. In that case, the remaining warrants could be refinanced so that sewer rate hikes would not be necessary.

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