By Michael Connor
(Reuters) - A U.S. judge overseeing America's biggest municipal bankruptcy on Thursday turned down a request by Wall Street creditors for documents used by policymakers in Alabama's Jefferson County to set sewer-system rates creditors say are too low.
Lawyers for Bank of New York Mellon, acting as trustee for holders of $3.14 billion of sewer debt at the heart of Jefferson County's 2011 bankruptcy, argued the documents were vital for a hearing next week on creditor efforts to raise sewer rates.
Creditors said moderate and locally unpopular rate hikes passed by county commissioners on November 6 were too low and insufficient to make principal and interest payments on the county's sewer bonds.
After a hearing in Birmingham, Alabama, U.S. Bankruptcy Judge Thomas Bennett sided with the county's attorneys and denied the creditors' request for the papers prepared for the county commissioners by a sewer-rates expert and other consultants, according to lawyers.
Lawyers for the county said the creditors' request was meritless and went against laws that allowed policymakers privacy in making some decisions.
"The trustee would run roughshod over the privileges protecting the county's communications with its lawyers and the lawyers' communications with retained experts," the county said in a brief.
Lawyers for the county, which is home to Birmingham and is negotiating privately with creditors on a possible resolution of the bankruptcy, are scheduled to face off again before Bennett in a hearing that begins next Wednesday and may last three days.
Creditors want permission from Bennett to pursue in state court their demands for higher sewer rates. The creditors are now barred by the county's Chapter 9 federal bankruptcy filing from launching new legal claims.
At the end of an earlier hearing on Thursday, Bennett put off a final decision on whether or not $90 million held in three sewer system accounts can be considered collateral that could be turned over to creditors.
The county's attorneys deny the $90 million is collateral and contend it is needed for capital spending for the sewer system.
Jefferson County has cut hundreds of jobs since filing for bankruptcy and has reduced government services in a financial crisis blamed on overspending on the sewer system, political corruption and the loss of a local tax on wages.
(Additional reporting by Verna Gates and Melinda Dickinson in Birmingham; editing by Jim Marshall)
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