Jefferson County Lawyer Kenneth Klee Is ‘Walking History of Bankruptcy’

Photographer: Jean Shifrin/Bloomberg Markets via Bloomberg

Jefferson County Commissioners Bettye Fine Collins, left, and Jim Carns, right, participate in a pre-commission meeting at the Jefferson County Courthouse in Birmingham. Close

Jefferson County Commissioners Bettye Fine Collins, left, and Jim Carns, right,... Read More

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Photographer: Jean Shifrin/Bloomberg Markets via Bloomberg

Jefferson County Commissioners Bettye Fine Collins, left, and Jim Carns, right, participate in a pre-commission meeting at the Jefferson County Courthouse in Birmingham.

Kenneth Klee, then a young lawyer helping Virginia Republican M. Caldwell Butler rewrite the federal bankruptcy code, was about to go on a Mexican vacation in 1975 when he got a call from his office in the U.S. House of Representatives.

New York City was preparing to file bankruptcy in the middle of a fight with city unions over expensive labor contracts. Klee was ordered back to Washington to quickly draft the section of the code governing municipal bankruptcies.

One of his contributions to the proposed law made clear that cities could cancel union contracts, a right that was in doubt under court rulings at the time, Klee said in an interview. Giving New York that power helped persuade the unions to compromise in labor talks, Klee said. The labor deal kept the city out of bankruptcy.

“Ken Klee is literally a walking legislative history of bankruptcy,” said New York bankruptcy attorney Martin J. Bienenstock of Dewey & LeBoeuf LLP, in an interview. Bienenstock has worked opposite Klee in bankruptcy cases including Texaco Inc.

Klee, 62, may have a chance to participate in the biggest municipal bankruptcy in U.S. history this week if Jefferson County, Alabama, decides to file for protection from its creditors. Klee and his Los Angeles law firm, Klee, Tuchin, Bogdanoff & Stern LLP, were hired July 26 to represent the county. County commissioners may decide today to file.

Kenneth Klee, 62, may have a chance to participate in the biggest municipal bankruptcy in U.S. history this week if Jefferson County, Alabama, decides to file for protection from its creditors. Photograph: Courtesy of Kenneth Klee Close

Kenneth Klee, 62, may have a chance to participate in the biggest municipal bankruptcy... Read More

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Kenneth Klee, 62, may have a chance to participate in the biggest municipal bankruptcy in U.S. history this week if Jefferson County, Alabama, decides to file for protection from its creditors. Photograph: Courtesy of Kenneth Klee

Jefferson County, home to Birmingham and more than 658,000 residents, has been under fiscal stress for more than three years after a $3 billion sewer-bond refinancing collapsed during the credit crisis.

Orange County

Klee helped prepare the case of the current municipal bankruptcy record holder, Orange County, California. His law partner, Lee Bogdanoff, and their former partners, Bruce Bennett and James Johnston, took over after the bankruptcy was filed and represented Orange County when Klee went to Cambridge, Massachusetts, to teach at his alma mater, Harvard Law School.

Klee grew up in the Los Angeles neighborhood known as Beverlywood, near Beverly Hills, and attended public schools before going to Stanford University. He later pursued a law degree because his father told him “you can always go from law into business, but you can’t go from business into law,” Klee said. He lives in West Los Angeles.

Lawyers who work for him say Klee maintains a low-key style even when questioning hostile witnesses.

“He is a consummate gentleman,” said Robert J. Pfister, one of Klee’s partners. “I have never heard him raise his voice.”

Tribune

Last year Klee was appointed as an examiner in the case of Tribune Co., the biggest U.S. newspaper bankruptcy. Klee was asked to analyze allegations that the company’s bankers, including JPMorgan Chase & Co (JPM), knew that if they loaned Tribune more than $8 billion as part of a 2007 leveraged buyout, it would fail.

Typically such an examination involves reviewing documents and testimony collected previously by parties involved in the bankruptcy. Klee decided his firm would gather the facts independently, in part by conducting 37 interviews of the key participants in Tribune’s buyout in 38 days. Witnesses questioned by Klee included Sam Zell, the real estate billionaire who organized the buyout, and Jamie Dimon, Chief Executive Officer of JPMorgan.

The report concluded that part of the two-step buyout was vulnerable to a challenge by creditors. The evidence Klee collected has been used by all of the creditors who are fighting about how to reorganize Tribune. The two competing reorganization plans both rely on his conclusions to bolster their cases.

County Woes

The report cost about $12 million and took 70 people about four months to produce, he said.

The woes of Jefferson County intensified when the Alabama Legislature refused to act after a court struck down a local occupational tax in March. The tax generated about a quarter of Jefferson’s general-fund revenue, and losing it forced officials to put more than 500 employees on unpaid leave.

County commissioners have said that they’re prepared to file for protection if bondholders, including JPMorgan, don’t respond this week to a proposal to restructure the sewer debt.

“Do I want to do it? No. Am I willing to do it? Yes,” said Commission President David Carrington. “The citizens of Jefferson County deserve closure.”

$4.2 Billion of Debt

Jefferson County has about $4.2 billion of sewer, school and general obligation debt. That eclipses the amount of outstanding bond debt issued by Orange County, which filed for bankruptcy in 1994 with more than $1 billion in debt after it lost about $1.5 billion in its investment pool.

In a July 21 interview in Birmingham, Klee said an out-of- court settlement would be best for the county. Still, he said, the county’s real threat of filing Chapter 9 should get the attention of the Legislature and creditors.

“I am convinced that this commission has the gumption,” he said. “They’re prepared to do what they have to do.”

The county has proposed cutting the amount of debt it must repay to about $2 billion and agreeing to sewer-rate revenue increases of 8 percent for the next three years. The state would create a public utility to issue new bonds backed by sewer revenue and enhance the creditworthiness of the debt.

Previously, debt holders and companies that insure the bonds proposed refinancing as much as $2.4 billion and raising sewer fees more than 25 percent for at least three years.

Progress

“There has been progress on negotiations,” said Jennifer Ardis, press secretary to Alabama Governor Robert Bentley, in an e-mail. “State officials have been in touch with creditors and have received some information but are still waiting for more. Both David Perry and the governor feel that we are within striking distance of a deal but bankruptcy is still a possibility.” David Perry is the state finance director who is trying to arrange a deal to avoid bankruptcy.

Commissioners have said they will reject any proposal that requires them to raise sewer revenue by 10 percent or more. Sewer rates in the county have increased more than fourfold from 1997 to 2008, they said.

Klee, who’s charging the county $975 an hour, acknowledged that filing bankruptcy will be expensive for the county and may last for years. He said it would be the biggest municipal bankruptcy in U.S. history, “by far.”

Adjusting Schedules

A Chapter 9 filing by Jefferson County wouldn’t automatically erase its debt. In previous Chapter 9 cases, municipalities have repaid creditors in full, while also adjusting payment schedules and making other modifications.

Forcing creditors to take less than they are owed is typical in most Chapter 11 bankruptcies.

Jefferson County commissioners are scheduled to meet July 28 at which time they may approve a resolution to file bankruptcy. The meeting will come a day before the end of a 30- day standstill period in which the county and creditors agreed to pursue a settlement.

Jefferson’s fiscal difficulties are tied to a sewer-debt refinancing that unraveled in 2008, when investors dumped the county’s floating-rate bonds after companies that insured them lost their top credit ratings. Banks providing backstop guarantees that allowed investors to sell their bonds demanded accelerated payments on $800 million of debt that the county couldn’t make.

Corruption

The financing and construction of the system was rife with corruption. Larry Langford, a former county commissioner, was convicted of accepting bribes for arranging the 2003 sewer refinancing with JPMorgan and is serving a 15-year sentence.

Two of his associates pleaded guilty, and two JPMorgan bankers are fighting Securities and Exchange Commission charges that they made $8 million in undisclosed payments to friends of commissioners. The associates owned or worked at local broker- dealer firms that didn’t do any work on the deals, a refinancing of the county’s sewer debt, the SEC alleged.

In all, 21 former county officials or contractors have been accused or convicted of crimes related to sewer-improvement projects, a federal judge said in 2009.

In Alabama, Klee may find people interested in another part of his life: a ministry he set up that incorporates yoga and other meditation-related practices. Klee began studying how meditation and prayer can affect healing in 1997.

To contact the reporters on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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