BRADENTON, Fla. — Federal bankruptcy Judge Thomas Bennett on Monday will hear the first major arguments in Jefferson County’s massive bankruptcy case to determine if a receiver should remain in charge of the county’s sewer system.
Alabama’s largest county filed a Chapter 9 petition on Nov. 9 after failing to reach a restructuring agreement with creditors over $3.14 billion of defaulted sewer warrants.
The action also placed $1.1 billion of the county’s general and limited-obligation warrants into bankruptcy.
The question of receivership could be one of many precedent-setting issues in the case, according to one legal expert.
In court documents supporting its petition, the county said an automatic stay of various proceedings and actions imposed by virtue of the bankruptcy code would require that the sewer system be relinquished by state court-appointed receiver John Young.
The stay “will stop the receiver’s reign over the sewer system, acting as an unelected agent for the interests of the very creditor constituencies so heavily responsible for the county’s present financial predicament,” the county said. “The automatic stay will restore control of the sewer system to the County Commission, which is uniquely responsible for balancing sometimes competing constituencies and concerns for the entire county’s well-being.”
The county demanded that Young turn control of the sewer system over by Nov. 10. In response, Young filed an emergency motion asking Bennett to allow him to remain in complete control of the system. He said the county relied on a portion of the bankruptcy code that did not apply to Chapter 9 cases.
Additionally, Young told the court that Chapter 9 does not permit a federal bankruptcy judge to exercise control over a state court-appointed receiver. He also said the county could not properly manage the sewer system.
Jefferson County said if the receiver remained in place, the county would be unable to exercise “its exclusive statutory right to formulate a Chapter 9 plan of adjustment to address over three quarters of its indebtedness.”
Alabama Circuit Judge Albert Johnson appointed Young as receiver in September 2010, saying that a receiver would stabilize the system finances and implement efficiencies that would generate more revenue for debt service than the county had produced. The receiver was sought by the Bank of New York Mellon, the trustee.
Young told the Municipal Analysts Group of New York on Thursday that he had a very good chance of retaining his position as receiver. “The law is on our side,” he said. If the bankruptcy judge removes the receiver, he said he would appeal.
Young also told analysts that more work needs to be done to drive efficiencies and increase sewer system rates. He predicted there would be no economic growth in and around Jefferson County until the bankruptcy is resolved, and that it would impact borrowing in the state.
Jefferson County’s bankruptcy has the potential to address several precedent-setting issues, beginning with the receivership issue, according to Karen Grande, a partner at Edwards Wildman Palmer LLP. Grande is special counsel to the state of Rhode Island in connection with municipal receivership and involved in Central Falls’ bankruptcy case there.
“The county commissioners have control over payment of the general obligation warrants and the school warrants,” Grande said. “Whomever gets control of the sewer system will be bound by the terms of the sewer indenture to apply encumbered sewer revenues to the operation and maintenance of the sewer system and then to the payment of sewer warrants.”
“At the end of the day, what the county and the receiver are really fighting over is the ability to increase, or not increase, sewer rates,” she said.
Bennett has not indicated when he will rule on the receivership question. He has scheduled hearings Dec. 15-16 on objections to the county’s bankruptcy filing.