Bankrupt Alabama county asks for second look at lawyer fees

Mon Jul 9, 2012 2:53pm EDT

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(Reuters) - Alabama's Jefferson County wants a federal judge to take a second look at a June 29 ruling favoring Wall Street creditors in order to clarify how the cash-strapped local government can pay $1 million a month in fees to its bankruptcy lawyers.

The county, which last November initiated the biggest U.S. municipal bankruptcy, said Judge Thomas Bennett's ruling clearly barred setting aside county revenues in reserve funds for estimated professional fees but did not forbid using the revenues for paying lawyers for completed work.

The county's bankruptcy lawyers said in a written filing on Friday that they may eventually appeal the judge's 43-page ruling and requested immediate guidance so accurate payments can be made to JPMorgan Chase and other creditors holding $3.2 billion of debt tied to Jefferson County's sewer system.

"Absent guidance as to whether legal fees actually incurred (as opposed to 'an estimate for professional fees and expenses') are operating expenses that may be properly deducted, the county will not be able to make the required calculations," the county's bankruptcy lawyers said.

The judge set a July 25 hearing on the county's request.

In last month's ruling, closely watched by America's $3.7 trillion tax-free debt market, Bennett sharply curbed set-asides by the county from money owed creditors for depreciation, amortization and estimated legal fees. The ruling aggravates a cash crunch for Jefferson County, which may exhaust its general fund within three months.

The county had been very aggressive in holding back payments to the sewer system's warrant holders and rattled assumptions of investors that interest payments on revenue bonds continue in municipal bankruptcies.

Bank of New York Mellon and other creditors had argued that the county had been illegally using money for purposes beyond ensuring efficient operation of the system that serves 130,000 customers.

Jefferson County, the home of Birmingham, Alabama's business hub, filed a $4.23 billion bankruptcy claim on November 9. Its massive sewer debt, aggravated by political corruption and loss of local tax in a court case, fueled the financial crisis.

(Reporting by Michael Connor in Miami; Editing by Dan Grebler)

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