Angry Creditors Given OK to Appeal Alabama County’s Bankruptcy
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Angry Creditors Given OK to Appeal Alabama County’s Bankruptcy

April 18, 2012


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The bankruptcy filing of Alabama’s Jefferson County could be in jeopardy after a federal judge recently opened the door for the county’s biggest creditors to challenge the filing in court, according to a report from Reuters.

Sources indicate that Federal District Judge Inge Johnson announced this week that the county’s creditors, including the Bank of New York Mellon, have the court’s permission to appeal the county’s eligibility to file for bankruptcy.

Jefferson County’s bankruptcy filing last November was an extraordinary event because it involves more than $4 billion in debt, which makes it the largest municipal bankruptcy filing in U.S. history.

Last month, after initial challenges from creditors, U.S. Bankruptcy Judge Thomas Bennett ruled that the county met the eligibility requirements to file for Chapter 9 bankruptcy. In addition, other analysts have noted that municipal bankruptcy filings are not unprecedented, though they are certainly rare.

Despite Judge Bennett’s orders, and the history of other cities and counties seeking debt relief in bankruptcy court, Jefferson County’s creditors still plan to appeal the county’s eligibility for this form of debt relief.

In their appeal, creditors will likely argue that the county is not eligible for bankruptcy relief because its debt comes mostly from warrants, and not bonds, as required by Alabama bankruptcy law.

In response to allegations of the flawed nature of the debt, bankruptcy attorneys for Jefferson County have dismissed the creditors’ claims, and many observers believe that an appellate court will allow the county to continue with its bankruptcy filing despite the creditors’ objections.

The county’s biggest source of debt is the $3.14 billion worth of sewer system debt that has crippled the area’s financial health. After years of unsuccessful bargaining with its creditors, the debt related to the construction of a new sewer system finally forced the county into bankruptcy.

The sewer system boondoggle also proved embarrassing for a number of county officials. Sources indicate that four former county commissioners were found guilty on various charges related to scandalous financing for the project.

The past commissioners’ sins have left the county on the road to financial ruin, and bankruptcy may offer its only path to recovery.

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