Alabama court says bonds not needed for muni bankruptcies

Reuters News
Posted: Apr 20, 2012 5:43 PM
Alabama court says bonds not needed for muni bankruptcies

By Verna Gates

(Reuters) - Jefferson County and other Alabama local governments do not have to have bonds as debt to file for Chapter 9 federal bankruptcy, the state's top court said on Friday.

In a 13-page opinion supporting Jefferson County, which last November filed the biggest U.S. municipal bankruptcy, the Alabama Supreme Court said another distressed local government, the City of Prichard, was eligible for Chapter 9 filing under Alabama law even though Prichard had no outstanding bonds.

Lawyers for JPMorgan Chase and other big creditors of Jefferson County maintain that state law barred Jefferson County from filing its $4.23 billion bankruptcy because its massive sewer-system and other debt was in the form of warrants.

The U.S. bankruptcy judge overseeing the Jefferson County case ruled against the creditors last month but appeals of that decision are under way.

"It is clear that the legislature intended to authorize every county, city, town, and municipal authority ... to file for federal bankruptcy protection," the Alabama justices wrote in the opinion issued in Montgomery.

State law, they added, "does not require that an Alabama municipality have indebtedness in the form of refunding bonds or funding bonds as a condition to eligibility to proceed under Chapter 9 of Title 11 of the United States Code."

A small municipality in southern Alabama, Prichard filed for Chapter 9 bankruptcy protection in 2009 but was declared ineligible after city workers argued that it did not have any bonded debt, as required by Alabama law.

Jefferson County officials welcomed the state court's ruling, which would mean savings at a time the county is pressing state legislators to restore a jobs tax vital to Jefferson County's general fund budget.

"That saved us a ton of attorney fees. I feel real good about it," Jefferson County Commissioner Sandra Little Brown said. "I am now hoping and praying for a general fund fix."

Jefferson County filed for bankruptcy after the unwinding of a tentative agreement that might have cut the county's debt load by $1 billion. County finances have been savaged by massive sewer-system debt, political corruption and the loss of a vital local jobs tax.

Creditors battling the case said Jefferson County was ineligible because it had no bond debt as required by state law. Like most Alabama counties, Jefferson County only had warrants, a form of debt popular in the state since the 1930s that does not require direct voter approval.

(Reporting by Verna Gates; Additional reporting by Michael Connor in Miami; Editing by Dan Grebler and Andrew Hay)