Alabama's Jefferson County hires bankruptcy lawyers

BIRMINGHAM, Alabama (Reuters) - Alabama's Jefferson County on Tuesday hired outside bankruptcy lawyers ahead of a critical decision on its debt that could result in what would be the largest municipal bankruptcy in U.S. history.

The hiring of Klee, Tuchin, Bogdanoff & Stern, LLP, the law firm that helped Orange County, California, through its landmark bankruptcy in 1994, appears to signal that bankruptcy has moved sharply up the agenda for Jefferson County.

The county faces $3.2 billion of claims from soured sewer debt and has been crippled by a bond debt crisis that has dragged on since 2008 and a more recent crippling shortfall in its general fund.

Jefferson County, which is home to Birmingham, Alabama's biggest city, agreed to pay an immediate retainer of $50,000 to the law firm and an additional payment of $450,000 if the county seeks Chapter 9 bankruptcy court protection from JP Morgan and other creditors.

Tuesday's vote also authorizes total payments of as much as $2 million if the county files for bankruptcy.

The general fund shortfall and related outstanding general fund warrants, or bond debts, involves tens of millions of dollars rather than billions, but commissioners and analysts say it presents the most immediate crisis the county faces.

The county this month made what Council President David Carrington has described as an "extremely complex" settlement proposal to creditors, but gave no details. JP Morgan Chase, the county's biggest creditor, declined to comment.

Another commissioner described as roughly accurate a report that the proposal included shaving $1.3 billion from the debt and agreeing not to raise sewer revenues by more than 10 percent.

The county commission is scheduled to hold a special session on Thursday with agenda items including bankruptcy, a settlement and an extension of a 30-day "standstill" period established to pursue talks with creditors. That agreement is set to expire on Friday.

(Reporting by Melinda Dickinson; Writing and additional reporting by Michael Connor in Miami; Editing by Leslie Adler)