Jeffco creditors proposing Supreme Court questions

Jay Reeves, Associated Press
December 29, 2011

BIRMINGHAM, Ala. (AP) -- Wall Street creditors are suggesting ways the Alabama Supreme Court could sort out legal questions in Jefferson County's record-setting bankruptcy case.

The Bank of New York Mellon and other companies, in papers filed late Wednesday, recommended questions that a federal judge ask the justices to clarify whether Jefferson County is eligible under state law to file a municipal bankruptcy. Attorneys representing taxpayers filed similar questions.

U.S. Bankruptcy Judge Thomas Bennett sought the suggestions during a hearing earlier this month. Bennett is considering a request by creditors to dismiss the bankruptcy, which they argue is not authorized under Alabama law.

Jefferson County filed the largest municipal bankruptcy in U.S. history last month over more than $4 billion in debt after years of negotiations with creditors failed to produce a settlement. Most of the debt stems from borrowing that went to pay for upgrades to the county's sewer system.

Lenders contend Alabama law permits bankruptcy only for bond debt, and that Jefferson County has a different type of debt called warrants. A decision by the judge to side with their arguments and dismiss the bankruptcy could send the county and creditors back into out-of-court negotiations over the debt.

The county argued during the hearing before Bennett that state law allows local governments to file municipal bankruptcies regardless of the type of debt involved. The bankruptcy will move ahead if the judge sides with Jefferson County and refuses to dismiss the case.

Bennett said past court rulings don't provide a clear-cut answer on the question, so he might ask the Alabama Supreme Court to settle the issue in an opinion. He asked attorneys in the bankruptcy case to provide him with suggested questions to the justices.

Attorneys for both creditors and taxpayers want Bennett to ask the Supreme Court directly whether state law allows Jefferson County to file bankruptcy for warrant debt. Additionally, taxpayer attorneys suggested asking whether the county can seek municipal bankruptcy regardless of the type of debt it has now since it had bonded indebtedness as recently as the 1950s.

County officials say sewer customers will face higher bills regardless of how the judge rules. The county is facing budget shortfalls that already have resulted in layoffs, service cutbacks and long lines for basic courthouse services.