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Jefferson County launches record Chapter 9 case

by Kelsey Butler | Published November 10, 2011 at 12:37 PM

A failed restructuring of some $3.14 billion in debt related to its sewer system has flushed Jefferson County, Ala., into bankruptcy court after a lengthy flirtation.

The county filed for Chapter 9 protection on Wednesday, Nov. 9, in the U.S. Bankruptcy Court for the Northern District of Alabama in Birmingham.

The filing is the largest ever under the section of the U.S. Bankruptcy Code for municipalities, Jefferson County said in a statement Wednesday, surpassing the December 1994 filing of the County of Orange, Calif. Jefferson County, with a population of nearly 700,000 to make it the largest in the Yellowhammer State, will restructure more than $4 billion in debt, compared with $1.7 billion for the southern California county. Orange County was hurt by wrong-way derivatives bets that lost it $1.6 billion.

Judge Thomas B. Bennett was set to preside over a first-day hearing Thursday. Up for consideration were to be motions to establish case management procedures, set a deadline for objections to the petition and fix a date for filing a list of creditors.

In the statement, David Carrington, president of the Jefferson County Commission, said the decision to file for bankruptcy was a "necessary one reached after much thoughtful consideration."

He continued: "The county has negotiated extensively and in good faith with its creditors and their representatives about restructuring the county's debts out-of-court. Despite the county's best efforts, those negotiations have not produced a deal that fairly treats the county and its citizens, and there is no reason to believe that further out-of-court negotiations will lead to a fair, acceptable result."

The commission authorized the Chapter 9 filing by a majority vote at a Wednesday hearing. In court papers, Jefferson blamed the filing on more than 3-1/2 years of severe financial setbacks.

The decision to file for bankruptcy comes after negotiations on restructuring the
hefty amount of debt related to the sewer system broke down, "despite Herculean efforts," court papers said. All sewer creditors and a receiver would not agree on a settlement after more than seven weeks of talks.

The county's troubles began when its credit rating was downgraded in February 2008, which resulted in the acceleration of $105 million in Series 2001-B warrants and a substantial part of the $3.14 billion in warrants issued for the county's sewer system.

When it could not pay the accelerated sewer debt, buyers and insurers of the debt sued, leading an Alabama court to appoint a receiver to take control of the sewer system, the statement said. John S. Young Jr. LLC in September 2010 was tapped as receiver of the system, court papers show.

In addition, in March the Alabama Supreme Court deemed the county's occupational tax, which accounted for more than 40% of revenue, invalid. The commission subsequently cut more than $30 million in yearly expenses from the county's budget by laying off more than 500 employees, eliminating 160 vacant positions, closing four satellite courthouses and reducing services provided by the county's sheriff's office, the statement said.

Another blow came when tornadoes on April 27 forced Jefferson County to use $20 million in cash reserves and decreased revenue. (Of that amount, the county has been reimbursed about $7.28 million by the Federal Emergency Management Agency, court papers said.)

The county's financial woes were compounded on June 21 when the receiver demanded it pay him $75 million from the its general fund. Although the receiver and the county ultimately worked out the general terms of a refinancing in September, the parties could not reach a definitive deal with creditors. The county in court papers said some creditors that recently acquired sewer warrants were unwilling to restructure their claims as proposed.

With the negotiations over the sewer debt stalled, the county said in the statement that without the bankruptcy filing, it would have faced renewed efforts by the receiver to collect the funds, which would have impaired its ability to provide certain services to its residents.

The county said in the statement its cash reserves are "dangerously low," and the spending cuts have "resulted in a drastic decline in basic services provided" to citizens.

Carrington said in the statement that the Chapter 9 filing would not interfere with Jefferson's governmental operations or services to its residents.

Jefferson said it would continue to "vigorously" pursue a claim against J.P. Morgan Securities Inc. related to the sewer debt. Jefferson in 2009 sued J.P. Morgan in Alabama state court for bribery and fraud related to the debt. The bank led in the marketing and structuring of the sewer debt.

The Securities and Exchange Commission on Sept. 2, 2009, entered an order settling the matter, requiring the lender to waive swap termination fees related to the debt and make a $50 million payment to the county, court papers said. In its statement, Jefferson said the lender has already paid more than $75 million to the county and waived about $647 million in swap termination fees.

Jefferson said its bankruptcy involved more than $4 billion in debt and reported more than $1 billion in assets in its petition, stating that it had $207.2 million in the county's general fund. The county's largest unsecured creditors are holders of various sewer warrants, court papers show. Bayerische Landesbank and J.P. Morgan Chase Bank NA, both owed $52.13 million for Series 2001-B warrants, lead the pack. Depository Trust Co., National Public Finance Guaranty Corp. and U.S. Bank NA share a $51.02 million claim for Series 2004-A warrants. Depository Trust, National and Bank of New York Mellon Trust Co. NA hold a $46.75 million claim for Series 2003-A warrants. Kenneth Klee, Lee Bogdanoff and David Stern of Klee, Tuchin, Bogdanoff & Stern LLP and James Bailey, Jay Bender, John Darby, Christopher Hawkins and Jennifer Henderson of Bradley Arant Boult Cummings LLP are debtor counsel.

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Jefferson County launches record Chapter 9 case

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