Feb. 1 (Bloomberg) -- The trustee for Jefferson County, Alabama, warrant holders will suspend debt payments on at least part of about $3.2 billion in debt tied to the county’s insolvent sewage system, a lawyer said.
Bank of New York Mellon Corp., the trustee responsible for collecting payments from the bankrupt county and passing them on to investors, informed warrant holders of the halt today, attorney Gerald F. Mace said at a hearing in U.S. Bankruptcy Court in Birmingham, Alabama.
The trustee plans to ask the judge overseeing Jefferson County’s bankruptcy for permission to sue the county so it can accelerate repayment of the debt, Mace said. “We thought you ought to know,” Mace told U.S. Bankruptcy Judge Thomas Bennett.
Mace, an attorney with Waller Lansden Dortch & Davis LLP, declined to comment on the reasons for the suspension.
The notice informing warrant holders that they wouldn’t be paid claimed that the sewage system isn’t generating enough revenue to cover debt service.
The trustee is battling the county in Bennett’s court over control of sewer rates and in a federal appeals court over whether the county, or a receiver, should run the sewage system.
Also at the hearing today, U.S. Bankruptcy Judge Thomas Bennett said he would extend the court fight in order to give the county time to present its case later. He asked both sides to submit by Wednesday a new schedule for finishing the hearing.
The trustee is asking Bennett for permission to sue the county in state court, where a judge in 2011 gave control of the sewage system to a receiver. The trustee would then ask a state court judge to impose a rate increase high enough to raise revenues by 22 percent.
In 2011, the county filed bankruptcy, preventing the receiver, who represents the interest of the warrant holders, from raising sewer rates by 25 percent. After the filing, Bennett returned control of the system to county officials.
Warrant holders have appealed that decision, asking the federal appellate court in Atlanta to put the receiver back in charge of the system.
Warrant holders claim the county is intentionally keeping rates low in order to boost their bargaining power over investors and force a write down of the debt. A consultant hired by the trustee testified yesterday that the system could repay its debt by boosting rates above 20 percent for multiple years, followed by smaller increases.
Jefferson County adopted a 5.9 percent rate increase and may consider another boost, according to court documents. The county denied the trustee’s claim that it is limiting rate increases so that it can negotiate bigger cuts on what it must repay on the sewer warrants.
For months, the county and its major creditors have tried to negotiate a plan to cut the sewer debt and end the biggest-ever municipal U.S. bankruptcy.
Jefferson County filed for bankruptcy in 2011, a few months after warrant holders persuaded a state court to install a receiver to run the system and raise rates so the debt could be repaid.
After the bankruptcy filing, Bennett returned control of the system to the county. Since then, the county and the trustee have battled over how much money the county can spend on upgrading and operating the system and how much must go to warrant holders.
The case is In re Jefferson County, 11-05736, U.S. Bankruptcy Court, Northern District of Alabama (Birmingham).
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