BRADENTON, Fla. - As Jefferson County, Ala., commissioners meet today to consider a seven-day extension of their sewer and general obligation forbearance agreements, officials face a protracted and expensive legal battle in federal court as creditors seek proposals from potential receivers to run the financially troubled system, according to a legal expert.

The battle is the federal lawsuit filed Sept. 16 by the county's bond trustee, the Bank of New York Mellon, and Financial Guaranty Insurance Co. and Syncora Guarantee Inc. FGIC and Syncora insure about $2 billion of the $3.2 billion of outstanding sewer system debt.

U.S. District Court Judge R. David Proctor has scheduled a procedural hearing Friday in Birmingham that will set the stage for appointing a receiver and moving forward with litigation that could take a year or more to resolve. Birmingham, the state's largest city, is the Jefferson County seat.

The county's creditors have already begun seeking proposals from potential receivers, which they will present for the judge to consider most likely in a future hearing.

"The appointment of a receiver is intermediate relief prior to trial that [the plaintiffs] will probably get," said Jeffrey Cohen, a lead attorney for Cohen & Associates PC in Denver whose work includes municipal bankruptcy and creditor's rights. Cohen is not affiliated with either Jefferson County or its creditors.

Jefferson County's sewer ratepayers would pay for the receiver, who most likely would be given authority to increase rates.

"It's really not economically viable or a good thing because you have another layer of expense that's put on the system that otherwise would not be there," Cohen said.

Cohen believes a receiver would be appointed before litigation begins on substantive issues in the lawsuit between the plaintiffs and the county, which has filed a counterclaim seeking a jury trial and more than $100 million in compensatory and punitive damages.

"The receiver will have authority most likely to enforce covenants of the bond documents," Cohen said. "There is a rate covenant in the bond documents. So the receiver will raise rates in a mathematical calculation."

Jefferson County commissioners have said for months that they cannot afford to make debt service payments on the sewer system's $2 billion of troubled auction-rate securities and $850 million of variable-rate securities now held by liquidity banks. Penalty interest rates rising to as much as 10% and accelerated repayment of the variable-rate debt together have pushed the county into a financial crisis.

Commissioners, who refused to raise sewer rates, have negotiated with creditors to restructure the debt for the past seven months. And they have threatened to file the largest municipal bankruptcy in U.S. history. If they do, a court-appointed receiver would be abolished.

Alabama Gov. Bob Riley in August got involved in talks with county creditors and has served as facilitator in negotiations. Talks are continuing.

It is conceivable that the governor could be successful negotiating a deal to restructure the county's debt, or ultimately advising the county to file for bankruptcy, before the suit goes to trial.

"It's very, very expensive and time-consuming to have the process being contemplated now," Cohen said, referring to receivership. "The creditors want the county to move off square one and do something. I understand why the creditors did it, but it's not resolving the problem."

The problem is restructuring the troubled debt, which a receiver will not do.

"By filing suit, we're trying to identify processes outside of bankruptcy that would remove this from the political scrutiny this has received over the past seven months," Syncora president Edward Hubbard said the day the suit was filed.

While there is no time frame for the judge to act, he most likely will give urgency to plaintiff's emergency motion to appoint a receiver.

"The receiver will occur before resolution of the counterclaims," Cohen said.

The county charges in its counterclaim that its bond insurers caused the financial crisis because of their own rating downgrades related to the exposure to subprime mortgage investments. Cohen said bond insurers typically are not vicariously liable for torts brought by issuers, and there may be exclusions in their policies.

Commissioners meet in special session today to consider a seven-day extension of their sewer and general obligation forbearance agreements, which expired on Tuesday. The county has $120 million of variable-rate GOs also being held by liquidity banks.

In the forbearance agreements with liquidity banks and swap counterparties, the county acknowledges that it is in default and creditors agree to forbear or refrain from taking action against the county to seek payment that is due.

In a notice to board members yesterday, commission president Bettye Fine Collins that the latest forbearance agreements do not require the county to make any payment. The county and bond insurers have made some payments in connection with previous forbearance agreements.

Commissioners on Tuesday approved a $655.7 million budget for fiscal 2009, which began yesterday. The budget, which Collins said was balanced, offers county employees a 2% pay increase.

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