Jefferson County Bankruptcy Should Be Dismissed, BNY Mellon, Creditors Say

Alabama’s Jefferson County doesn’t meet a legal requirement to remain in bankruptcy and its case should be dismissed, its creditors said in court filings.

Bank of New York Mellon (BK) Corp., as the indenture trustee for holders of the county’s sewer warrants, asked U.S. Bankruptcy Judge Thomas B. Bennett in Birmingham, Alabama, to throw the biggest U.S. municipal bankruptcy out of court, where the county is protected from creditors.

BNY Mellon argues that Jefferson County wasn’t authorized to file for bankruptcy because, under Alabama law, only counties, cities and towns that have issued funding or refunding bonds are eligible for Chapter 9 municipal restructuring. The county has only warrants, which are distinguished from bonds under Alabama law, the bank said in yesterday’s filing.

“In light of the county’s lack of funding or refunding bonds and the resulting failure of specific authorization to file its Chapter 9 petition, the county’sChapter 9 petition must be dismissed,” BNY Mellon lawyers said in the filing.

Jefferson County creditors including JPMorgan Chase (JPM) Bank NA, which owns more than $1 billion of the sewer warrants, Bank of America NA and Assured Guaranty Municipal Corp. filed court papers supporting BNY Mellon’s request for dismissal.

Legal Test

Bennett scheduled a two-day hearing starting Dec. 15 to decide whether the county meets the legal tests laid out in Chapter 9 of the U.S. Bankruptcy Code.

Jefferson County filed bankruptcy last month after county and state officials and bondholders failed to implement a tentative agreement that would have cut debt by about $1 billion. The county’s bankruptcy was caused by more than $3 billion in debt related a sewer system that doesn’t collect enough money from residents to pay its obligations.

Since the bankruptcy filing on Nov. 9, the county has battled bondholders and the receiver for control of the system and its finances. Bennett hasn’t ruled on what limits, if any, the bankruptcy imposes on the receiver, John S. Young Jr.

The case is In re Jefferson County, 11-05736-9, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).

To contact the reporters on this story: Michael Bathon in New York at mbathon@bloomberg.net; Steven Church in Wilmington at schurch3@bloomberg.net

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