BRADENTON, Fla. - The insurers of Jefferson County, Ala.'s nearly $3.2 billion of troubled sewer debt have filed a motion in federal court seeking to dismiss claims that negligence and fraud by the insurers have pushed the county to the brink of bankruptcy.

Financial Guaranty Insurance Co. and Syncora Guarantee Inc. filed the motion last week as part of their suit to have a court-appointed receiver placed in charge of the county's sewer system. The county has refused to raise sewer rates and has defaulted on some sewer debt payments related to $2 billion of auction-rate securities and $850 million of variable-rate securities now held by liquidity banks. Forbearance agreements delaying some debt payments expire Oct. 31.

In response to the insurers' suit seeking a receiver, filed Sept. 16, the county entered a three-count counterclaim charging that the bond insurers were negligent because of their rating downgrades, that they breached contracts by failing to provide investment-grade insurance, and they committed fraud by failing to disclose risks associated with their own investment portfolios that ultimately led to rating downgrades.

Jefferson County is seeking a jury trial and more than $100 million in compensatory and punitive damages.

In addition to failing to state the proper grounds for the counterclaims, the county failed to state a claim upon which relief can be granted, the insurers said in a five-page motion for dismissal.

"The insurance policies referred to in the counterclaim insure, subject to their terms, the holders of Jefferson County sewer warrants and not the county," the insurer's motion said. "The county does not have standing to sue for some or all of the relief requested."

The counterclaim also should be barred, in whole or in part, because of the applicable statute of limitations, the motion said.

U.S. District Judge R. David Proctor has ordered Jefferson County to respond to the motion for dismissal by Wednesday, and may consider hearing oral arguments.

Proctor still has under consideration an emergency motion filed by FGIC and Syncora to appoint a receiver for the sewer system and a hearing is scheduled Nov. 17 on that matter.

Jefferson County, in which the largest city is Birmingham, said in court documents that the appointment of a receiver could force it into bankruptcy, a position favored by some local elected officials. Last week, Republican county commissioners Jim Carns and Bobby Humphreys voted to pass a resolution authorizing a bankruptcy filing.

Although the resolution before the County Commission failed on a 3-to-2 vote, the issue of Jefferson County filing the largest municipal bankruptcy in U.S. history makes national and even international news on a regular basis since the county began negotiating in mid-February with creditors on ways to restructure the sewer debt.

The possibility of bankruptcy also has been raised numerous times since Alabama Gov. Bob Riley stepped in Aug. 26 to become "facilitator" of the county's negotiations with creditors.

Riley, a Republican, said last week that he is concerned about the possibility of Jefferson County filing bankruptcy and how it might negatively impact the entire state. His comments were made at the 2008 Economic Summit for Alabama Leaders in Birmingham sponsored by the Business Council of Alabama and the University of Alabama's Culverhouse College of Commerce.

Riley recently brokered a sewer debt restructuring deal with creditors, which has met with resistance from state lawmakers who would need to approve it.

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