Alabama Cities, Counties Can Go Bankrupt, High Court Says

Alabama cities and counties without bond debt can file for bankruptcy, the state Supreme Court said in a ruling that supports Jefferson County’s entering court protection last fall.

The ruling lays to rest one argument that creditors used to try to get the case thrown out.

The U.S. Bankruptcy Code allows states to limit or bar municipal bankruptcies. The Alabama high court ruled that state law doesn’t require cities and counties to have outstanding “refunding bonds or funding bonds” before entering bankruptcy.

“I think most observers have assumed this bankruptcy will proceed,” Matt Fabian, a Connecticut-based managing director at Municipal Market Advisors, said today in an e-mail message. “That doesn’t mean the creditors shouldn’t keep pursuing all their options to encourage an earlier settlement.”

Jefferson County entered bankruptcy in November after government officials and creditors failed to implement a tentative agreement that would have required the county’s sewer debt, which was largely responsible for the filing, to be cut by about $1 billion.

Since then, creditors holding more than $3 billion in sewer warrants have argued the county’s action violated state law because Jefferson County does not currently have any debt that is labeled as bonds.

‘Good News’

“It’s good news,” Jefferson County Commission President David Carrington said of today’s ruling. “This decision puts the eligibility question behind us once and for all.”

The state Supreme Court’s ruling today came in a case involving the city of Prichard, Alabama. The legal issues were the ones facing Jefferson County, which filed court papers supporting the city near the southern end of the state.

“It is clear that the Legislature intended to authorize every county, city, town and municipal authority” to file for federal bankruptcy protection, the court said in its decision, made public today.

“We frankly were surprised it was ever an issue,” said David Stern, an attorney for the county.

The judge overseeing the bankruptcy in Birmingham, Thomas B. Bennett, ruled earlier this year that Alabama law allows the county to remain in bankruptcy. Warrant holders had appealed that ruling and other decisions Bennett has made in favor of Jefferson County.

The creditors’ opposition to Jefferson County’s bankruptcy is being led by Bank of New York Mellon Corp., the trustee for more than $3 billion in sewer debt.

Kevin Heine, a spokesman for BNY Mellon, declined to comment.

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

To contact the reporter on this story: Steven Church in Wilmington, Delaware, at schurch3@bloomberg.net.

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

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