By Michael Connor
(Reuters) - Alabama's bankrupt Jefferson County got some unexpected allies on Tuesday, when unsecured creditors lined up with the county in America's biggest municipal bankruptcy to fight a proposed September 28 deadline for a workout plan.
Assured Guaranty Municipal Corp, which insures some of the county's $3.14 billion of defaulted sewer-system warrants, on July 10 asked the federal judge overseeing the case to set a hard deadline for the county to develop an exit plan.
If Jefferson County, whose finances were ravaged by soured sewer-system debt and the 2011 loss of a local jobs tax, failed to produce an adjustment plan by a deadline set by Judge Thomas Bennett, the bankruptcy case could be thrown out, lawyers said.
Bennett has not ruled on the request by Assured, which argued the county has been dragging its heels in developing a workout plan on reorganizing its $4.23 billion of debt since declaring Chapter 9 bankruptcy on November 9.
On Tuesday, unsecured creditors Wells Fargo and National Public Finance Guarantee Corp, which insures county general obligation debt, filed briefs saying Assured's proposed deadline would hobble their efforts to secure payments.
Creditors without collateral rights need more time beyond September 28 "to request, receive, and evaluate information regarding the county's assets, liabilities, and operations," lawyers for Wells Fargo Bank and National Public Finance Guarantee, said.
In addition, the cash-strapped county government needs time to work out an operating budget and to lobby Alabama state lawmakers to restore the lost local jobs tax that is central to its revenue stream, the lawyers for Wells Fargo said. The jobs tax was declared unconstitutional.
"Imposing any deadline that would preclude a complete investigation of the county's finances and foreclose the possibility of meaningful negotiations ... could be highly prejudicial to unsecured creditors," Wells Fargo said.
Jefferson County, which has the sole right under Chapter 9 law to hammer out an adjustment plan, said in a separate filing that other municipal bankruptcies had much longer periods to develop plans.
Denouncing Assured's deadline request as a legal ploy, lawyers for Jefferson County said they were in talks with major creditors on a workout plan and were conducting public hearings on locally unpopular sewer-system rate hikes that would benefit bondholders.
"The county anticipates that it will continue to engage in a process of negotiation with the full spectrum of its creditors in the coming weeks and months," the county's lawyers said.
Jefferson County's workout plan, which must be judged fair to creditors and reasonable in light of its finances and obligations, must be approved by Bennett and can include reductions in bonds and other debt.
Jefferson County in June lost a courtroom fight over the size of payments due to creditors from the sewer system's monthly revenues. Bennett ruled county officials had been improperly holding back about $54 million a year.
Home of Birmingham, Alabama's business hub, Jefferson County filed for bankruptcy after a tentative agreement with creditors unwound. That deal might have delivered a $1 billion reduction in the county's debts and possibly eased hundreds of government job cuts and reductions in public services.
(Reporting By Michael Connor in Miami; Editing by Bob Burgdorfer)