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Jefferson County Sued by Trustee for Its Sewage Bonds

Jefferson County, Alabama, was sued for immediate payment by the trustee for its $3.2 billion debt tied to the county’s sewage system after some bond holders stopped consenting to a payment formula.

The Bank of New York Mellon Corp., the trustee, filed an adversary complaint yesterday in U.S. Bankruptcy Court in Birmingham, seeking a judge’s ruling it’s entitled to seek the accelerated payment on the county’s debt. The bank filed a separate request to be exempted from bankruptcy court restrictions on seeking payment.

The bank is responsible for collecting payments from the bankrupt county and passing them on to investors. It informed warrant holders on Feb. 1 that it would suspend payments on at least part of the $3.2 billion of debt from the county’s insolvent sewage system.

As of Feb. 1, certain warrant holders have refused to consent to a payment formula that had allowed the trustee to make certain payments, according to yesterday’s filing. As a result, the trustee didn’t have sufficient money in its debt-service fund, according to the filing.

The trustee is battling the county in bankruptcy court over control of sewer rates and in a U.S. appeals court over whether the county, or a receiver, should run the sewage system.

Sewer Rates

In 2011, the county filed for bankruptcy, preventing a court-appointed receiver, who represents the interest of the warrant holders, from raising sewer rates by 25 percent. After the filing, the bankruptcy court judge returned control of the system to county officials.

Warrant holders have appealed that decision, asking the U.S. Court of Appeals in Atlanta to put the receiver back in charge of the system.

Warrant holders claim the county is intentionally keeping rates low to boost its bargaining power over investors and force a write down of its debt. A consultant hired by the trustee testified Jan. 31 that the system could repay its debt by increasing rates above 20 percent for multiple years, followed by smaller increases.

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

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