Sewer-Receivership Bid Should Be Denied, Jefferson County Says

BRADENTON, Fla. - An emergency request seeking a receiver for Jefferson County, Ala.'s troubled sewer system should be denied because the bond insurers making the request have "manifestly unclean hands" and such a move would force the county into bankruptcy, Jefferson County attorneys said yesterday in documents filed in U.S. District Court.

In a three-count counterclaim seeking a jury trial, Jefferson County said the insurers were negligent due to their rating downgrades, because they breached their contracts with the county by failing to provide investment-grade insurance, and because they committed fraud and fraudulent suppression by failing to disclose risks associated with their own investment portfolios.

The county is seeking compensatory damages of more than $100 million, plus punitive damages, interest, and costs in the counterclaim to the suit filed by trustee, the Bank of New York Mellon, and the two bond insurers that cover $2.8 billion of the $3.2 billion of outstanding sewer debt: Financial Guaranty Insurance Co. and Syncora Guarantee Inc.

U.S. District Court Judge R. David Proctor is scheduled to hold a hearing by teleconference this morning at 10:30 a.m. Central Daylight Time. It is not clear if he will rule on an emergency motion sought by the insurers to immediately appoint a receiver.

The insurers said in court documents that they face "imminent harm by having to pay substantial amounts of money on account of the county's defaults and its refusal to take the appropriate actions to raise sufficient revenue to pay its debt obligations on the warrants."

"The likely effect, should the emergency relief be granted, will be to force the county into bankruptcy forthwith," Jefferson County said in its response to the motion. "This may be what plaintiffs intended by filing this lawsuit and this motion, but it is clear that the harm to the county and the public which would result far outweighs any potential benefit to the plaintiffs."

Jefferson County said the insurers are not entitled to seek a receiver and that it has not defaulted on payment of any principal, nor are there events of continuing default required to consider appointment of a receiver. The county also said it is in compliance with rate covenants on the sewer debt.

"Plaintiffs have filed this audacious motion at a time when delicate and important negotiations are ongoing between the county and the major holders of Jefferson County's debt," the county's response said. "The insurers who filed this action participated in those negotiations and are well aware of the status of these negotiations. This motion endangers those negotiations and appears to have been filed for that purpose."

Alabama Gov. Bob Riley, who has stepped in to help facilitate continued negotiations on the restructuring of the county's sewer debt, met with creditors in New York earlier this week, but not bond insurers, the governor's communications director, Jeff Emerson, said yesterday.

"There were no new developments really," Emerson said when asked if anything came out of those talks. He said Riley did call Jefferson County on Monday and inquired about how much in surplus revenue the county receives from a one-cent sales tax levied for school construction. That tax and surplus collections currently pay off debt sold to build new local schools.

The tax was being discussed earlier this year as one source of revenue to help pay off the county's sewer debt, but such a move would require an act of the state Legislature to redirect those funds to the sewer system debt.

Jefferson County has been negotiating with creditors since February and since then the commission has approved half a dozen forbearance agreements to delay some payments, including swap termination payments. The latest forbearance expires Tuesday.

Commissioners also failed to get support for several proposed restructuring plans, and has hired and fired a number of negotiators and underwriters.

Bond insurers said they filed the lawsuit last week to remove politics from the process.

"Plaintiffs' failure to maintain their credit rating triggered Jefferson County's current financial crisis," the county charged in court documents.

"This is all about money, and plaintiffs are attempting by this lawsuit to disrupt settlement negotiations to get an advantage over other creditors and the county," documents said. "Under the facts of this case, plaintiffs' request should be denied because of plaintiffs' own conduct. Plaintiffs manifestly have unclean hands."

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