Based on a recent court order, it appears that the Jefferson County bankruptcy is now going forward. U.S. Bankruptcy Judge Thomas Bennett issued an order last month stating that Jefferson County is authorized under Alabama law to file for bankruptcy. Lawyers for creditors had contended that Jefferson County was not eligible for bankruptcy. The question before the court was whether a city or county must have bond debt in order to be allowed under Alabama law to file for bankruptcy. Creditors including The Bank of New York Mellon (the indenture trustee for holders of the warrants issued to expand and improve the county sewer system) objected to the county’s petition to file for bankruptcy.
Judge Bennett denied the creditors’ objections and said in his order that any form of debt – bonds, warrants, promissory notes – can be the basis for an Alabama county to file for bankruptcy. Jefferson County has $4.23 billion in total debt including $3.14 billion in sewer debt. As a result, Alabama has earned a place in the record books, but it’s not a place to brag about. The case far eclipses the previous biggest municipal bankruptcy – a $1.7 billion filing by Orange County, Calif., in 1994 – even when inflation is factored in.
Jefferson County’s enormous debt does not include bonds, Judge Bennett wrote. He also stated that the vast majority of the county’s debt is in the form of warrants. But the Judge, in his opinion, addressed various aspects of more than 80 years of Alabama state law concerning bankruptcy. He noted in his opinion that until a 2010 ruling in a case involving the City of Prichard, no court had restricted the application of the Alabama bankruptcy law “to only municipal entities that had bond indebtedness as of the date of the filing of a bankruptcy case.”
Judge Bennett ruled in his formal order that Jefferson County is a municipality, and is authorized under the laws of Alabama “to be a debtor under Chapter 9 of the Bankruptcy Code.” Judge Bennett wrote further that the county is “insolvent, desires to effect a plan of adjustment of its debt, and has negotiated in good faith with creditors and failed to obtain the agreement of creditors holding at least a majority in amount of the claims of each class intended to be impaired under a plan of adjustment of its debt under Chapter 9 of the bankruptcy code.” The creditors, who also include JP Morgan Chase Bank, Bank of America, the Bank of Nova Scotia and bond insurers Financial Guaranty Insurance Company and Assured Guaranty Municipal Corp., can appeal the decision.
I don’t believe the bankruptcy of our state’s largest county is good for Alabama. Some see Judge Bennett’s eligibility ruling as a positive step forward in the ultimate resolution of Jefferson County’s financial crisis. But others – including this writer – see bankruptcy of Alabama’s largest county as a black eye for the entire state. It’s difficult to see how the county got into the financial mess that led to the filing for bankruptcy. It’s even more difficult to understand how the county’s political leaders refused to do whatever necessary to avoid bankruptcy.
Source: Birmingham News
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