BRADENTON, Fla. - As Jefferson County, Ala., was poised to default on its debt payments yesterday, a federal judge set a hearing for Friday in the lawsuit seeking to have a receiver appointed for the county's financially troubled sewer system.

A hearing will begin at 9:30 a.m. Central Daylight Time Friday in the U.S. courthouse in Birmingham to discuss the status of the case, U.S. District Judge R. David Proctor said in an order yesterday afternoon.

Proctor also said the hearing would be used to develop a schedule for discovery, the submissions discussed in telephone conferences, and schedule the hearing regarding the appointment of a receiver.

No other details were in the judge's order, including what submissions have been discussed.

Proctor held conference calls with attorneys of all affected parties on Friday and Monday, and had planned to schedule a two-day settlement conference, according to his order on Friday. He asked participants not to discuss the case with the media, according to county commission president Bettye Fine Collins' office. No formal gag order has been issued, according to court records.

The federal suit was filed Sept. 16 by the county's bond trustee, Bank of New York Mellon, and Financial Guaranty Insurance Co. and Syncora Guarantee Inc., which said the county failed to enact sewer rate increases sufficiently to pay debt service.

In a counterclaim seeking a jury trial, Jefferson argues that the bond insurers are responsible for the financial difficulties that could force them to file the largest municipal bankruptcy in U.S. history. The county also seeks more than $100 million in compensatory and punitive damages.

Meanwhile, forbearance agreements delaying some sewer and general obligation debt payments, as well as swap termination payments, expired yesterday with county officials once again threatening not to extend those agreements or make required payments.

Officials said some $83.5 million is owned but would not be paid. It was not clear if that amount included both sewer and GO debt.

The county recently defaulted on an accelerated repayment schedule for $120 million of Series 2001B GO variable-rate warrants that have been held by banks due to failed remarketing, although the county had entered into a forbearance agreement, which expired yesterday.

Jefferson's $3.2 billion of sewer debt - mostly in troubled variable- and auction-rate securities - propelled it into a financial crisis after failed auctions and remarketings that accompanied the subprime meltdown. Downgrades of bond insurers led to accelerated repayments and swap termination events. All the sewer debt, and nearly all of the county's other debt, is considered junk by rating agencies.

Alabama Gov. Bob Riley recently stepped in as facilitator after the County Commission failed to negotiate restructuring of the sewer debt.

"The governor has updated commissioner Collins but we have no other comments because negotiations are ongoing," Riley's press secretary, Tara Hutchison, said late yesterday afternoon.

Jefferson County's case has become an international media spectacle not only because of its potential significance should the state's largest county file for bankruptcy, but because the sewer system itself has been riddled with corruption since the massive rehabilitation program got under way more than a decade ago.

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