Creditors: Jefferson County's Bankruptcy Is No Good
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Creditors: Jefferson County’s Bankruptcy Is No Good

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December 23, 2011

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In the short time since its filing for bankruptcy, Jefferson County, Alabama, has already faced hurdles in bankruptcy court. According to reports from BusinessWeek.com, one of the county’s creditors, Bank of New York Mellon Corp., has raised a case against the country’s largest municipal bankruptcy filing on record, citing the state’s own laws regarding municipal bankruptcies.

Apparently, Alabama law declares that only municipalities that have issued funding or refunding bonds can enjoy the protection of the bankruptcy court under the Bankruptcy Code’s Chapter 9. Jefferson County, it seems, issued only warrants, which Alabama law distinguishes from bonds.

The bank asserted in bankruptcy court documents that, because Jefferson County doesn’t meet Alabama’s statutory guidelines for bankruptcy, its Chapter 9 case should be dismissed. If the court rules in favor of the Bank of New York Mellon Corp., Jefferson County would lose the bankruptcy court’s protection and the bank may be able to collect more money from the county.

If Jefferson County is permitted to proceed with its bankruptcy, however, it could renegotiate debts with the bank and other creditors, and potentially settle its debts for less than it currently owes.

A hearing in bankruptcy court will determine whether or not Jefferson County will be able to proceed with its bankruptcy petition.

Other Challenged Municipal Bankruptcy Filings

Jefferson County is not the only municipality to have its bankruptcy filing challenged in recent months. After filing for Chapter 9 bankruptcy protection in October, Harrisburg, Pennsylvania, had its petition challenged in court by the state’s governor and the city’s mayor.

In that case, the court ruled that Harrisburg was not eligible to receive protection from the bankruptcy court; however, reports from Reuters indicate that city council members plan to appeal the ruling.

Both Jefferson County and Harrisburg initially filed their bankruptcy petitions because of debt related to infrastructure that the city ultimately could not afford. In the case of Harrisburg, the debt was for an untenable trash incinerator; in Jefferson County, the debt accrued when the county failed to bring in sufficient money from residents for an overhauled sewer system.


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