BRADENTON, Fla. — A Jefferson County, Ala., circuit court judge Thursday ordered U.S. Bank to release $27.4 million so the county could make an arbitrage rebate payment on the 2004 fixed-rate school warrants that the county defaulted on earlier this month.

The judge also ordered U.S. Bank — trustee for the school warrants the county sold in 2004 and 2005 — to honor the county’s written request for the release of funds for future arbitrage rebate payments.

The judge’s order was in response to a request for an emergency order and a lawsuit filed by Jefferson County on Wednesday.

The lawsuit, filed by Balch & Bingham LLP, said the county anticipated making a $153,083 arbitrage payment for the 2005 school warrants in early April.

No reason was given in initial documents filed by the county as to why U.S. Bank was withholding the funds, but the documents said failure to make the payment would cause the county and bondholders irreparable harm, including the possible loss of the warrants’ tax-exempt status.

U.S. Bank spokeswoman Jennifer Wendt declined to comment, citing the bank’s policy not to discuss pending litigation. The county’s attorneys also did not respond to requests for a comment.

The county sold $650 million of limited obligation school warrants in December 2004 and $400 million of similar warrants in February 2005 secured by a dedicated sales tax. Imposition of the sales tax was subject to several legal challenges when the debt was sold, so proceeds were placed in escrow for two years.

Jefferson won the legal challenges and finally distributed the proceeds to 11 area public schools. In its lawsuit Wednesday, the county claimed $48 million on deposit with the trustee was always intended to pay any arbitrage rebates.

U.S. Bank contended its authority to disburse funds was limited to paying for school improvements and indebtedness, and certain trust expenses, and that it would not release funds for arbitrage rebates unless ordered by a court, according to the ruling handed down yesterday.

Although available court documents made no mention of a default, Jefferson County and U.S. Bank earlier this month each filed material event notices advising investors that a default occurred involving all the outstanding school warrants.

The county’s disclosure said that the default resulted from a rating downgrade of Ambac Assurance Corp., which provided a surety bond for $29.4 million that was held by the trustee as part of the debt service reserve fund for the 2004 and 2005 school warrants.

“The county has been unable to deliver a replacement surety bond or letter of credit as required by the trust indenture … nor has it been able to deposit sufficient cash within the time required to cure the deficiency in the reserve fund requirement caused by the ratings downgrade of the surety bond,” Jefferson County disclosed.

The county said it deposited $3.3 million in the reserve fund on Dec. 21, bringing its balance to $58.35 million.

The reserve fund is required to have approximately $84 million, which means it is now deficient by approximately $25.6 million.

In addition to problems with the school warrants, Jefferson County continues to be in default on some of its outstanding $3.2 billion of variable- and auction-rate sewer warrants.

For more than two years, the county has been unable to restructure the sewer debt.

Its credit ratings have been at junk levels through most of the financial crisis because of the sewer system’s inability to make interest rate payments that rose to unaffordable penalty rates and concern that the county would attempt to resolve the problem by filing for bankruptcy.

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