Jefferson County, Alabama, won approval to exit bankruptcy, becoming the first U.S. municipality since the Great Depression to use the power of a federal court to impose principal losses on creditors, who agreed to forgive more than $1.4 billion in debt.
“The plan is confirmable and will be confirmed,” U.S. Bankruptcy Judge Thomas Bennett said today in Birmingham, the county seat.
Bennett’s decision will encourage other cities or counties to cut debt using the U.S. Bankruptcy Code’s Chapter 9, which covers municipalities, R. Dale Ginter, a bankruptcy lawyer at Downey Brand LLP in Sacramento, California, said in an interview.
“There will be more Chapter 9 bankruptcies,” said Ginter, who represented retired workers in the 2008 bankruptcy of Vallejo, California. “Politicians would rather have cities and counties go into bankruptcy than make hard decisions and then face voters.”
After battling in court for 20 months, creditors owed $2.7 billion, including New York-based JPMorgan Chase & Co. (JPM:US) settled with the county in June by agreeing to accept less. A rise in interest rates forced more concessions, which were announced last month. The plan also imposes several years’ worth of rate increases on sewer users.
The judge took almost an hour to read his decision from the bench in the new courtroom he moved into this year. After a short break, he began working with attorneys for supporters and opponents of the plan to prepare a written order that lays out the legal justifications for his approval.
When Bennett issues his written ruling, the county can close on $1.84 billion in new financing on Dec. 3 that will be used to pay creditors owed more than $3 billion. With the closing, the active part of the case will end, leaving only minor legal issues to be addressed, Patrick Darby, an attorney for the county, said in an interview.
Within minutes of Bennett’s decision, protesters opposed to the sewer rate increases were outside the courtroom heckling County Commission President David Carrington, who led the voting bloc that backed the bankruptcy.
“You’re a crook,” Charles Hicks, a Birmingham resident, said to Carrington during a brief shouting match.
The case can be traced to an aging sewage system that federal regulators ordered fixed in the 1990s. To pay for the repairs, Jefferson County began borrowing money and refinancing old debt, issuing more than $3 billion in warrants and interest-rate swaps by 2003.
Local elected officials accepted bribes from construction contractors and financial advisers seeking business with the county. By 2010, 21 people, including four county commissioners, had been convicted or pleaded guilty to corruption-related charges, according to Peggy Sanford, a spokeswoman for the U.S. Attorney’s Office in Birmingham.
In 2009, JPMorgan signed a $722 million settlement with the U.S. Securities and Exchange Commission for its role in helping arrange the sewer debt.
Since filing the $4.2 billion case in November 2011, the county has spent more than $24 million on attorneys and other advisers. Bennett today called the tally “reasonable” considering the litigation involved.
The judge rejected final arguments against the exit plan, which is built on the June settlement with JPMorgan and other creditors. After that agreement was arranged, the only organized opposition came from two sets of lawyers fighting to save the lawsuits they filed against the bank on behalf of sewer ratepayers.
They told the judge that the rate increases needed to implement the settlement were too high for residents to afford. With plan approval, their lawsuits, which are now on hold, will end.
Rejecting the plan would have blown up the settlement with creditors, because the county had agreed to halt the lawsuits in return for a reduction in principal on the $3 billion in sewer debt. Under the settlement, the sewer debt will drop to $1.98 billion, according to court documents.
The bankruptcy court will retain jurisdiction for the 40-year life of the new sewer warrants. That will allow the trustee for the warrant holders to seek authority to force any sewer rate increases that may be needed to pay the debt.
One of the attorneys suing JPMorgan, Calvin B. Grigsby, said he plans to appeal Bennett’s decision.
Grigsby said he spent “a couple hundred thousand” dollars fighting the bankruptcy. One of his supporters, Birmingham city council member Sheila Tyson, said she would try to convince the city to help fund Grigsby’s planned appeal.
The case is In re Jefferson County, 11-bk-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
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