Creditors challenge Jefferson County bankruptcy

(Reuters) - Jefferson County, Alabama, has no legal grounds to be in municipal bankruptcy proceedings, the county's creditors argued in a court filing on Friday.

Bank of New York Mellon Corp, as the indenture trustee for the holders of county sewer warrants, asked U.S. Bankruptcy Judge Thomas Bennett to dismiss the bankruptcy case, claiming Jefferson County does not qualify for Chapter 9 relief under federal bankruptcy law.

The county must be authorized under Alabama state law to file for federal bankruptcy protection, and it fails to meet those eligibility requirements, the bank argued.

Under Alabama law, only municipalities that have outstanding bonds can file a Chapter 9 petition, the filing said. Jefferson County has no outstanding bonds, only warrants, and is therefore violating the "clear intent of the Alabama legislature," the creditors argued.

"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's chapter 9 petition must be dismissed," Bank of New York Mellon said in its filing.

Patrick Darby, a lawyer for Jefferson County, did not immediately respond to a request for comment.

Jefferson County filed for bankruptcy protection on November 9 in the largest municipal bankruptcy in U.S. history. The county's debt escalated in the mid-2000s when financing for a new sewer system soured amid widespread corruption and fraud charges.

The case is In Re: Jefferson County, Alabama, U.S. Bankruptcy Court for the Northern District of Alabama, No. 11-05736.

(Reporting by Terry Baynes; editing by Carol Bishopric)