BRADENTON, Fla. - An Alabama Supreme Court ruling and an amendment to the state's constitution could prevent Jefferson County's bond insurers from getting a receiver appointed to oversee the county's financially ailing sewer system, a Denver attorney believes.
The court ruling and constitutional amendment, both of which occurred before Jefferson County sold $3.2 billion of sewer system debt, also could raise questions about whether the county properly disclosed them to investors when the debt was sold, said Jeffrey Cohen with Cohen & Associates PC, whose work includes municipal bankruptcy and creditors' rights. He is not affiliated with Jefferson County or its creditors.
A hearing on the receivership issue is scheduled Monday in Birmingham federal court.
The case was filed Sept. 16 by the county's bond trustee, the Bank of New York Mellon, and Financial Guaranty Insurance Co. and Syncora Guarantee Inc. FGIC and Syncora insure about $2 billion of the $3.2 billion of outstanding sewer system debt.
A receiver is the only way to resolve the sewer system's financial crisis, FGIC and Syncora said in court documents. They hope to prove that the county knew for years that the sewer system was not generating enough revenue to pay its debts. In addition to setting higher rates, the insurers have suggested other ways a receiver could generate more revenue for the sewer system.
But an Alabama Supreme Court case and an amendment to the state constitution granting Jefferson County sole power to raise sewer rates - both of which occurred before the county sold the sewer debt - could become central issues in the receivership case, according to Cohen.
"You've got an indenture allowing the appointment of a receiver that could be void as violating state law," he said. "The area is unclear enough that a trial court would be circumspect in entering an order."
Cohen said the judge most likely would deny the insurer's request for a receiver, forcing them to appeal and seek clarification from a district court of appeal.
The issues also could raise questions about whether the county properly disclosed existence of the legalities when the bonds were sold.
"You have bond documents that now don't mean what they say," Cohen said. "This should have been in the official statements and discussed in great depth that Jefferson County sewer rates are subject to a state constitutional amendment and the state Supreme Court opinion. We've scoured the official statements and never seen them."
"The disclosure is clearly less than what would be appropriate, I would think," he added.
U.S. District Court Judge R. David Proctor has scheduled several days for the receivership hearing, which will not address counterclaims filed by Jefferson County seeking a jury trial and more than $100 million in damages against FGIC and Syncora.
Jefferson County claims the insurers were negligent and that resulted in their downgrades, that they breached their contracts with the county by failing to provide investment-grade insurance, and that the insurers committed fraud by failing to disclose risks associated with their investment portfolios and residential mortgage-backed securities.
The insurers have filed a motion to dismiss the counterclaims that is pending.