Financial Guaranty Insurance Co (3360Q)., which insured $1.6 billion of sewer bonds in Jefferson County, Alabama, joined a lawsuit against the bankrupt county.
The company, whose parent, FGIC Corp. (3360Q), is also in bankruptcy, won court permission to become part of a lawsuit filed last month by Bank of New York Mellon Corp., trustee for more than $3 billion worth of county sewer bonds.
The lawsuit seeks to force the county to turn over all revenue paid by sewer users after operating expenses are deducted. The county’s definition of operating expenses amounts to “an unlawful taking of the trustee’s and sewer warrant holders’ property,” Bank of New York said in its complaint.
Jefferson County’s bankruptcy may inflict losses on municipal bond insurers, who must pay investors if the county fails to repay the sewer debt.
After the county filed bankruptcy in November, bond insurer Syncora Guarantee Inc. said the case may have a “material adverse impact” on its financial condition. Financial Guarantee was forced to acquire $101.5 million in sewer bonds after the county defaulted and has so far paid at least $3.3 million in claims, the company said in court papers filed today in U.S. Bankruptcy Court in Birmingham.
By joining the lawsuit, Financial Guarantee will be able to make its own legal arguments before the judge overseeing the suit and the bankruptcy, Thomas B. Bennett.
The county and the trustee disagree about how much money should go into operations and maintenance for the sewer system. Bondholders are entitled to any money left over after those costs are paid by the sewer fees collected from county residents and businesses.
Jefferson County, which has a population of about 660,000, filed the biggest municipal bankruptcy in U.S. history in November.
The filing came after county, state officials, the receiver and bondholders failed to implement a tentative agreement to cut sewer debt by about $1 billion, increase rates and win assistance from the Alabama Legislature.
The case is Bank of New York Mellon v. Jefferson County, 12-00016. The bankruptcy is In re Jefferson County, 11-05736-9. Both are in U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
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