BRADENTON, Fla. — Bankrupt Jefferson County, Ala., is alleging that the trustee for its defaulted sewer warrants improperly took $584,742 from a construction fund last week.
The county is seeking contempt charges and punitive damages against the trustee, Bank of New York Mellon, in a counterclaim filed in advance of what is called an "adversarial" hearing Wednesday.
The hearing was scheduled after BNY Mellon filed a complaint in February claiming that the county is using sewer revenues for improper expenses such as attorney fees for its bankruptcy case.
In the counterclaim filed late Monday regarding the construction funds, Jefferson County said "it appears that the pilfered funds were used to pay lawyers or expert witnesses to testify against the county in this adversary proceeding."
"It is difficult to imagine a more adverse use of the county's own money," Jefferson County said, adding that it wants to hold the trustee "liable for its wrongful conversion of the county's property and its willful violation" of the automatic stay accompanying the county's bankruptcy case.
BNY Mellon could not immediately be reached for comment.
Tuesday afternoon the Birmingham News reported a federal district judge ruled that the county's creditors could appeal the county's eligibility to file for Chapter 9. The county's bankruptcy Judge Thomas Bennett ruled March 3 that the county met all the conditions to file a petition, including meeting the definition of Alabama law that requires bonds to be outstanding.
Creditors argued that the county only has warrants outstanding, and that does not meet the state's definition.
The county filed for Chapter 9 in November and the stay automatically halted collections by creditors and legal actions except those pertaining to the case itself. The county has $4.2 billion of debt outstanding, including $3.14 billion of mostly defaulted variable- and auction-rate sewer warrants.
Jefferson County said the construction funds were withdrawn before it had any notice or opportunity to object, and that the funds were transferred without the required approval of the county.
The county is also asking the court not to require the county to use general fund revenues or other assets to subsidize payments to sewer warrant holders. If required to use those sources to pay the sewer debt, the county is asking to have the warrants voided.
In another allegation, Jefferson County said that BNY Mellon had attempted to "seize" escrowed funds.
The current tussle over sewer revenues developed after Judge Thomas Bennett on Jan. 6 stripped the receiver of his power to run the sewer system. Bennett said the county could operate the system, and that warrant holders could continue receiving sewer revenues for debt payments, though the county could use funds for operations.
Bennett did not specify what constituted operations.
On Feb. 3, BNY Mellon filed a complaint for declaratory judgment, alleging that Jefferson County had misused sewer system revenues that otherwise would be used to pay debt service.
The complaint said the county was withholding funds for depreciation and amortization, and to pay professional fees and expenses arising from the bankruptcy case, which are not operating expenses as defined by the indenture.
In an amended complaint filed later, the trustee said withholding sewer revenues for non-operating expenses is "an unlawful taking under the Fifth and Fourteenth Amendments to the United States Constitution."
Arguments in the adversarial complaint will be heard by Bennett starting Wednesday. He has set aside three days for the hearing, if needed.