Wall Street creditors asked a federal judge Thursday to throw out the record bankruptcy filed by Alabama's largest county over more than $4 billion in debt, arguing state law doesn't allow it.
Lenders claimed during a hearing and in court documents that Alabama law permits bankruptcy only for bond debt, and Jefferson County has a different type of debt called warrants. The county and creditors could be thrown back into out-of-court settlement talks if the judge agrees.
The county contends bankers are cherry-picking state law in hopes of getting the case dismissed, and that any government in the state can go bankrupt whether its debt is for bonds or warrants.
The Jefferson County Commission president, David Carrington, testified that municipal bankruptcy was the county's sole option after intense negotiations fell apart.
"We ran out of time," said Carrington.
U.S. Bankruptcy Judge Thomas B. Bennett ruled that the county met most requirements to file for bankruptcy, but he withheld a decision until after Christmas on whether state law allows it. He said he was inclined to allow the case to go forward to allow a faster route for appeals, which are certain to come no matter which way he decides.
It wasn't clear what his eventual ruling might mean to the county's 658,000 residents, but officials have said higher sewer bills are a certainty.
Employee layoffs and spending cuts already have resulted in long lines at courthouses, and Carrington said the county lacks the money to respond to a crisis like an ice storm after spending millions to clear roads and debris following the April tornadoes that killed about two dozen in the county.
Jefferson County filed the largest municipal bankruptcy in U.S. history last month after three years of negotiations failed to resolve a massive debt linked to borrowing for the county's sewer system.
Lenders led by the Bank of New York Mellon argued that state law allows bankruptcy only for bonds _ which the public must approve in a referendum _ and the county has a different type of debt called warrants, which commissioners can issue. Bennett said governments have issued a "proliferation" of warrants in recent years as a way to bypass voters.
Trying to bolster his claim that the county isn't eligible to file a municipal bankruptcy, creditor attorney Larry Childs attempted to show that none of Jefferson County's debt was for bonds. "Are you aware of any bonds the county has issued in the last 50 years?" Childs asked county attorney Jeff Sewell, who was testifying about county finances and procedures.
"Not that I'm aware of, no," said Sewell.
David Lemke, another lawyer representing creditors, cited a court's decision to dismiss a municipal bankruptcy filed by the Mobile County city of Prichard in 2009, and asked Bennett to toss the Jefferson County case. Prichard also lacked bond debt, he said, and the Alabama Supreme Court is currently considering the scope of the state law.
The county argued in court documents that the distinction doesn't matter, and that state law expressly gives it the power to file for bankruptcy. David Stern, a lawyer for the county, told the judge commissioners hoped to resolve the dispute quickly so the case can move ahead.
"We really want to take care of all the issues today," said Stern.
The county cited $4.15 billion in debt when it filed Chapter 9 bankruptcy, far exceeding the previous record set in 1994 by Orange County, Calif., over some $1.7 billion in debt. Jefferson County's financial problems resulted from a mix of outdated sewer pipes, the economy, court rulings and public corruption.
The county reached a preliminary deal with Wall Street bankers in September, but that agreement still required legislative approval. Officials never managed to craft a mix of revenue increases, budget amendments and other legislation required for the settlement to move forward, killing any hope that the county would avoid bankruptcy _ a stigma leaders said could tarnish the entire state.
The county's problems date back years. A federal judge forced Jefferson County to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards in the `90s, and officials used bonds to finance the improvements. Outside advisers suggested a series of complex deals with variable-rate interest that were later shown to be laced with bribes and influence-peddling.
Loan payments rose quickly because of increasing interest rates as global credit markets struggled, and the county could no longer afford its payments.