DALLAS - Jefferson County, Ala., cannot protect its excess sewer revenue from bondholders to whom it owes $3.2 billion, a federal judge ruled Friday in a victory for the bankrupt county's creditors.
In a 43-page memorandum opinion, Bankruptcy Judge Thomas Bennett said the contract between the county and its creditors does not allow Jefferson County to set aside net revenue for legal fees, system repairs, or future expenditures.
Bennett wrote in his memorandum opinion that the money remaining in the sewer revenue account following payment of operating expenses is to be remitted to creditors owed $3.2 billion for sanitary system lending "without withholding of any monies for depreciation, amortization, reserves, or estimated expenditures that are the subject of this litigation."
"Operating expenses as determined under the indenture do not include a reserve for depreciation, amortization, or future expenditures, or an estimate for professional fees and expenses," Bennett said.
Sewer system charges paid by 150, 000 customers generate approximately $13.5 million a month. The creditors currently receive $5.5 million each month in debt service under a deal reached in February.
Attorneys for the county contended during a four-day hearing in April that the money left after paying debt service and the sewer system's operating expenses could be retained if needed. The county has been holding back $833,000 a month from the revenues.
The county argued that the system could hold onto net revenues needed to bring its sewers into compliance with federal regulations.
The trustee for bondholders successfully contended that the county could keep only enough revenues to pay expenses spelled out in bond documents.
Jefferson County Commission President David Carrington said the sewer system's operations will not be affected by Friday's ruling.
"The county can continue to operate the system, and the county's sewer professionals have the resources that need to continue providing vital services to the community," he said.
Bennett said in the ruling that he did not have enough information to decide whether it was fair for the county to use sewer revenues on capital expenditures or legal fees. The ruling was limited to whether estimated fees or reserves could be withheld.
The county was given some flexibility in Bennett's ruling, Carrington said.
"While we are a little disappointed, the judge did say we couldn't deduct estimated legal expenses from the creditors' payments," he said. "He didn't say we could not deduct actual legal fees."
Bennett noted that JPMorgan Chase & Co., which structured and underwrote the sewer bond issues, forfeited fees totaling $647 million and paid a $50 million fine to settle charges that the bank fraudulently obtained the county's sewer bond business.
"The court is not unmindful of the numerous criminal convictions involving previous Jefferson County commissioners, former employees of the county, and businesses and employees of businesses involved in the sewer system's projects and the funding for its projects," Bennett said.
The court is considering a plan of adjustment requested by the creditors that would match the sewer system revenues with its debt.