BRADENTON, Fla. — Jefferson County is not eligible to file for bankruptcy because it has no debt outstanding that qualifies under the Alabama law that authorizes municipalities to file for Chapter 9, creditors argued in court filings last week.
That argument, and potentially other objections to the largest Chapter 9 filing in the nation’s history, will be heard Thursday in Birmingham by federal bankruptcy Judge Thomas Bennett. The hearing may continue Friday, if needed.
“The county is not, and cannot establish that it is specifically authorized under Alabama state law to seek relief under Chapter 9,” Bank of New York Mellon said in a brief filed last week. BNY Mellon is trustee for the county’s $3.14 billion of sewer warrants, which are in default.
Jefferson County filed for bankruptcy on Nov. 9 with a total of $4.23 billion of debt in the form of warrants. In addition to the sewer warrants, the debt includes $814.7 million of school warrants secured by a one-cent sales tax, $200.52 million of general-obligation warrants and $82.5 million of limited-obligation lease warrants.
Alabama’s law, which authorizes cities and counties to file for bankruptcy, requires the municipality to have funding or refunding bonds outstanding, BNY Mellon said.
Alabama cities and counties are authorized to issue bonds and warrants. The essential difference between the two is that voters must approve the issuance of bonds, but not warrants, according to a financial adviser the state.
Though state law allows warrants to be issued, warrants are not specifically cited in the law allowing municipalities to file for bankruptcy, BNY Mellon argued. That position is supported by creditors holding the sewer warrants, including banks and insurers.
A group of taxpayer’s that successfully won a suit striking down Jefferson County’s occupational tax also filed a brief last week, arguing that warrants do not qualify as a form of indebtedness that gives the county the right to file for bankruptcy.
The taxpayer’s group has a contingent claim of $100 million against the county that is under review by the Alabama Supreme Court. The claim represents what the taxpayer’s believe they are owed as refunds from occupational taxes that were paid, and which were ruled unconstitutional.
Briefs filed last week also cited several cases supporting the argument that warrants are not an authorized form of indebtedness that the county can file for bankruptcy protection from.
One case cited was the city of Prichard, Ala., which filed for bankruptcy protection from what it owed to city retirees through their pensions. Prichard’s case was dismissed by bankruptcy Judge William Shulman last year because the city did not have any bonds outstanding.
The Alabama Supreme Court recently agreed to hear an appeal in Prichard’s case over the interpretation of the state law authorizing bankruptcy, and whether a municipality must have funding or refunding bonds outstanding or if other forms of indebtedness are allowed.
At issue in Prichard’s case is whether the debt owed to pensioners qualifies as an indebtedness in a bankruptcy filing under state law.
Jefferson County has filed a friend-of-the-court brief in Prichard’s case though the county currently has no bond debt outstanding.
With the Prichard case pending before the state’s highest court, the taxpayer’s group suggested that Bennett may want to ask the Alabama Supreme Court whether Jefferson County is authorized to file for bankruptcy due to the question about warrants.
It is not clear if the interpretation of Alabama’s bankruptcy law pending before the state Supreme Court could impact or slow the county’s case.
There have been 11 municipal bankruptcy filings in Alabama, including two counties, five cities, two utility districts, and two special authorities, according to published reports.
BNY Mellon said there may have been Chapter 9 cases where the municipality did not have bonds outstanding but the cases were not dismissed because there was no objection to their eligibility.
“To the best of the trustee’s knowledge, the only case in Alabama, prior to [Jefferson County’s] case, where a lack of bonds was raised as an objection to specific authorization was the city of Prichard case,” BNY said.
Objections to the county’s eligibility for bankruptcy were filed by a number of parties, along with the trustee and taxpayer’s group. Those include Assured Guaranty Municipal Corp., Bank of America NA and Blue Ridge Investments LLC, Financial Guaranty Insurance Co., JPMorgan, Lloyds TSB Bank plc, Societe Generale, and State Street Bank and Trust Co.