Eight creditors holding various claims related to Jefferson County, Ala.’s defaulted sewer debt filed notices late Monday saying that they want to appeal the county’s eligibility to file a Chapter 9 bankruptcy petition.

Federal Judge Thomas Bennett on March 3 ruled that the county met the conditions to file the largest municipal bankruptcy in U.S. history.

The county filed a petition in November after failing to negotiate a settlement to restructure $3.14 billion of sewer debt.

A number of creditors challenged the petition, and said that the county government did not qualify because Alabama law authorizes municipalities to file for bankruptcy only if they have refunding or funding bonds.

All of Jefferson County’s total long-term debt of $4.2 billion was issued as warrants.

In Alabama, a city or county can issue bonds only after receiving local voter approval. Warrants do not have to be approved by voters.

In a memorandum supporting his ruling, Bennett said, “Alabama’s grant of authority and assent to its counties commencing a bankruptcy case applies to all of its counties and is not constrained by the types of debts outstanding on the day a bankruptcy case is initiated.”

In seeking to appeal the eligibility ruling, the sewer trustee, Bank of New York Mellon, said “the county had no bond debt on the date it filed its Chapter 9 petition [and] its bankruptcy case must be dismissed.”

BNY Mellon also pointed out that the bankruptcy petition filed by the Alabama city of Pritchard was dismissed by another federal judge because the city had no bonds outstanding.

The ruling in Pritchard’s case was appealed to the Alabama Supreme Court, where it is pending.

“If the appellate court determines that the county is not eligible…then the county’s Chapter 9 case will be dismissed and the parties will avoid tremendous costs and unnecessary litigation,” according to the trustee.

BNY Mellon also said that resolving the issue could assist other municipalities in Alabama in determining their eligibility to file for bankruptcy.

Along with BNY Mellon, similar appeals of the eligibility ruling were filed by JPMorgan, Assured Guaranty Municipal Corp., Financial Guaranty Insurance Co., and a consortium of six liquidity banks consisting of the Bank of Nova Scotia, Societe Generale, BNY Mellon, State Street Bank and Trust Co., and Lloyds TSB Bank plc.

In February, Bennett allowed another series of appeals to advance to the 11th Circuit Court of Appeals in Atlanta over his decision to remove the state court-appointed receiver from the county’s sewer system.

Bennett ruled that the receiver lost control of the sewer system the moment the county filed for bankruptcy, and returned control of the system and its revenues to the county.

Hearings are scheduled April 11 on legal challenges by creditors who contend that the county plans to use sewer system revenues for expenses that are not allowed under the indenture for the warrants.

Last week, Bank of New York Mellon filed another notice raising a constitutional issue.

The bank argued that the county’s use of revenues for expenses not allowed by the indenture amounted to an “unlawful taking” in violation of the Fifth and Fourteenth Amendments to the U.S. Constitution. 

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