Bloomberg News

Jefferson County Receiver Says Removal Would Harm Muni Debt

November 18, 2011

(Updates with receiver’s comment in ninth paragraph.)

Nov. 17 (Bloomberg) -- The court-appointed receiver managing bankrupt Jefferson County’s sewer system said the municipal-bond market would be harmed if a federal judge strips him of his authority.

John S. Young Jr. was appointed by an Alabama judge last year to raise revenue and cut costs after a lawsuit by insurers and the sewer-bond trustee, Bank of New York Mellon Corp. Young said today that should U.S. Bankruptcy Court Judge Thomas B. Bennett remove him, investors would have weaker protection.

“If the receiver is taken away, the trustee and creditors have now lost their biggest potential remedy, biggest potential solution to the problem,” Young said in an interview in New York. “That would mean there’s a higher risk.”

Jefferson County, which owes $4.3 billion, became the biggest U.S. municipal bankruptcy last week after the county, the receiver, bondholders and state lawmakers failed to implement a tentative deal struck in September. Next week, Bennett will consider Young’s authority.

Since a state judge appointed him, Bennett may not return the system to the county, the receiver said in court papers. The U.S. Constitution’s 10th Amendment, which reserves for the states powers not given the federal government, trumps bankruptcy law, Young said.

Limited Powers

The receiver’s powers are limited by bankruptcy law, which prevents creditors from taking legal action to seize property owned by a debtor, according to Kenneth Klee, a lawyer for the county.

The bankruptcy code treats revenue pledged to pay for projects like sewers and toll roads as “special revenue,” which may not be diverted to retire municipal debt, according to a primer on the law written by lawyers at Orrick Herrington & Sutcliffe LLP, based in San Francisco.

An automatic stay, which prevents certain creditors from taking legal action against a municipality in bankruptcy, doesn’t prevent secured bondholders from applying the revenue from such assets to the debt they hold, the booklet says.

“Every month I write a check to the trustee for $10 million which they use to pay interest to bondholders,” Young said. If he is removed, Young said, “What happens to that money?”

Klee was out of his office and unavailable for comment. Klee’s partner, Lee Bogdanoff, declined to comment.

The case is In re Jefferson County, 11-05736-9, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).

--With assistance from Steven Church in Wilmington, Delaware Editors: Stephen Merelman, Ted Bunker.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.


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