Dec. 16 (Bloomberg) -- The federal judge overseeing Jefferson County’s bankruptcy is considering asking the Alabama Supreme Court for advice on whether to dismiss the biggest U.S. municipal bankruptcy.
U.S. Bankruptcy Judge Thomas B. Bennett in Birmingham said he may ask the state’s highest court how to interpret a state law that creditors claim bans Alabama counties from entering bankruptcy unless they have issued “refunding or funding bonds.”
The answer he gets is likely to determine whether the county can remain in bankruptcy, lawyers told Bennett yesterday in court. At the end of that hearing, Bennett said he could not immediately rule on whether to dismiss the bankruptcy case as requested by investors who hold more than $3 billion worth of sewer warrants at the heart of the county’s financial troubles.
Creditors including Bank of New York Mellon Corp. and JPMorgan Chase & Co. objected to the November filing. They claim Jefferson County doesn’t have any debt that is officially labeled as a bond; its bankruptcy was caused mainly by more than $3 billion in sewer warrants.
One Alabama town, Prichard, had its bankruptcy petition thrown out because its debt didn’t include funding bonds, according to court papers. That case is on appeal to the Alabama Supreme Court.
Bennett said it was his “inclination” to seek guidance from the Alabama Supreme Court by sending the justices a number of technical questions about state law. He said he would not make a decision before Christmas.
Distinction, if Any
“If the creditors are right, the outcome will turn on the distinction, if any, between bonds and warrants,” Dale Ginter, a lawyer who represented retired city workers in Vallejo, California’s bankruptcy, said in an e-mail. “Financial instruments are occasionally given different names -- even if the economic impact is the same.”
Jefferson County contends that limiting the bankruptcy option in Alabama to municipalities with bonds is “absurd.”
“Were the objectors’ argument the law, a county struggling to service $3 billion in bond debt would be authorized to declare bankruptcy, but a county struggling to pay the same $3 billion in warrant obligations would not,” the county argued in court papers filed Dec. 13.
Bennett asked both sides to submit proposed questions for the Alabama Supreme Court on whether bond debt is required before a municipality can file for bankruptcy in the state.
A lawyer for BNY Mellon said that should Bennett send questions to the state court, he should dismiss the bankruptcy petition first. Allowing the case to continue while waiting for an answer from the state high court “leaves the parties in limbo,” David Lemke said in court.
The county urged Bennett to allow it to stay under court protection should he send questions to the state justices.
Bennett said that if he declines to seek advice and simply rules to allow or reject the bankruptcy, his decision may be appealed, causing more delay than sending so-called certified questions to the state Supreme Court.
“At a minimum we’re facing one or two appeals rulings one way or another,” Bennett said in court yesterday.
The hearing yesterday opened with county attorney Jeffrey Sewell saying that the county has spent about $10 million on legal related to the sewer debt since 2008.
Later, David Carrington, president of the county commission, testified that the bankruptcy filing was necessary because the county was burning through $3 million in cash a month.
Bondholders and other creditors claim the state law authorizing bankruptcy is explicit and should be applied to Jefferson County the same way it was applied to Prichard.
Bondholders have asked Bennett to dismiss the bankruptcy, which gives the county the right to stop paying some bills temporarily while it reorganizes its finances. Under Chapter 9 of the U.S. Bankruptcy Code, the county may seek court approval for a plan to reduce what it owes creditors.
The hearing yesterday focused on whether the county meets legal tests laid out in Chapter 9. Those tests include whether Jefferson County is insolvent, whether it negotiated with creditors before seeking bankruptcy and whether the filing was authorized by state law.
Bennett said the county has proven that it meets all the tests except whether state law authorized the filing. The reason he is considering seeking advice from the state Supreme Court is to help him make that final ruling.
Jefferson County filed last month after county, state officials, the receiver and bondholders failed to implement a tentative agreement that would have required the sewer debt to be cut by about $1 billion.
Jefferson County was the 13th entity to file a Chapter 9 bankruptcy this year. Three other filings were by municipalities: Boise County, Idaho; Central Falls, Rhode Island; and Harrisburg, Pennsylvania.
The rest were special-purpose districts and public-benefit corporations. A bankruptcy judge dismissed Harrisburg’s case, saying it wasn’t properly authorized under state law.
Jefferson County’s bankruptcy is opposed by BNY Mellon, the trustee for the sewer debt, and creditors JPMorgan, which owns more than $1 billion of the sewer warrants, Bank of America Corp. and Assured Guaranty Municipal Corp. A group of taxpayers who are suing Jefferson County also seeks to dismiss the bankruptcy.
“In light of the county’s lack of funding or refunding bonds and the resulting failure of specific authorization to file its Chapter 9 petition, the county’s Chapter 9 petition must be dismissed,” BNY Mellon said in a court filing.
The county’s sewer system doesn’t collect enough money to pay obligations on more than $3 billion in related debt. Since the Nov. 9 bankruptcy filing, the county has battled bondholders and the sewer system’s receiver for control of the system and its finances. Bennett hasn’t ruled on what limits, if any, the bankruptcy imposes on the receiver, John S. Young Jr.
The case is In re Jefferson County, 11-05736-9, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
--With assistance from Michael Bathon in Wilmington, Delaware. Editors: Stephen Farr, John Pickering
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