* Commissioner says terms of preliminary agreement changed
* Receiver accused of making "intolerable" demands
* Top bankruptcy lawyer sees upside to insolvency
By Matthew Bigg and Melinda Dickinson
BIRMINGHAM, Ala., Nov 10 From corrupt and
incompetent local officials to Wall Street's credit crisis and
toxic bonds, there was plenty of blame to go around on
Thursday, a day after Alabama's Jefferson County declared the
biggest municipal bankruptcy in U.S. history.
The county, once a leading industrial hub in the U.S. Deep
South, filed for bankruptcy court protection after failing to
reach final agreement on terms of a preliminary deal with
creditors led by JPMorgan Chase & Co in September to
settle $3.14 billion in sewer-system debt.
Federal Judge Thomas Bennett in Birmingham set a Dec. 15
deadline on Thursday for a hearing on whether the county is
eligible to file for Chapter 9, the section of the U.S.
Bankruptcy Code that covers municipal bankruptcies.
In another key hearing, set for Nov. 21, Bennett will rule
on an emergency motion from John Young, a receiver appointed by
the Jefferson County Circuit Court to manage the sewer system
on behalf of creditors, for relief from an automatic stay in
order to try to keep his control over the sewer system.
"It's critical to the reorganization efforts of Jefferson
County that the bankruptcy court keeps the automatic stay in
place and affirms the county's rights to set rates, gain
control of the sewer revenues and control of the sewer system,"
said Kenneth Klee, a bankruptcy expert whose law firm, Klee,
Tuchin, Bogdanoff & Stern LLP, is representing the county.
"This is a critically important hearing that will come on
very early in the Chapter 9 case." Klee said.
The head of the Jefferson County Commission, which voted
4-1 for bankruptcy, pointed to a $140 million decline in the
savings expected from the preliminary deal as the trigger for
"The terms were set, they were agreed upon, and the final
agreement wasn't parallel with those terms," said David
Carrington, the commission president.
Carrington also laid blame at the feet of Governor Robert
Bentley and the state's Republican-controlled legislature for
not calling a special session to raise taxes to help Jefferson
County settle its debt.
For the roughly 660,000 residents of Jefferson County,
which includes Birmingham, the state's largest city, bankruptcy
means a threat to essential jobs and services. More
immediately, it could also mean steep sewer system rate hikes,
an added burden on poor people already saddled with some of the
highest rates in the country.
Consequences of the filing include a likely increase in the
county's cost to raise funds in the bond market, at least
The impact of the bankruptcy was seen in the U.S. municipal
market on Thursday. More than $1 million of the county's thinly
traded sewer bonds due in August 2012 traded at 52 basis points
over Municipal Market Data's triple-A scale as an investor
required a higher yield, an MMD analyst said.
That was a big jump from the last time the issue traded on
Aug. 4 when a block of $3.5 million bonds changed hands at 7
basis points over MMD's triple-A scale.
"The name is getting people scared," said MMD analyst
The debt crisis could also have a contagion effect on
neighboring counties, while rattling the $3.7 trillion U.S.
municipal debt market.
Jessie Morris, a notary public waiting in a long lime
outside the Jefferson County courthouse in Birmingham on
Thursday, said bankruptcy would likely exacerbate the impact of
the economic downturn on cash-strapped county residents.
"It's been bad. You are trying to live from paycheck to
paycheck and pay your bills. People have lost jobs. This is
going to make it worse," she told Reuters.
"This is messed up," added longtime resident Angela Abreu,
a translator standing on the same line. "It's sad. Birmingham
is just getting pathetic."
Jefferson County's debt escalated in the mid-2000s when
bond issuance deals to upgrade its sewer system soured amid
widespread corruption, bribery and fraud charges that led to
some 22 convictions, which included elected officials and
Costs ballooned as interest rates rose, and the county had
teetered on the edge of insolvency since its debt was
downgraded in 2008. With more than $5 billion in total
indebtedness, the Chapter 9 filing on Wednesday surpassed that
filed by Orange County, California, in 1994.
Larry Langford, a Democrat and former mayor of Birmingham,
was sentenced to 15 years in prison last year for his role in
corrupt business deals that fueled the multibillion-dollar
sewer debt. Langford presided over the county commission during
the height of the bond swaps that led to the run-up of the
JPMorgan, which has said it wanted to avoid bankruptcy, has
already paid more than $75 million and waived about $647
million in fees as part of a settlement with the U.S.
Securities and Exchange Commission over charges of fraud in
connection with Jefferson County's sewer debt.
Carrington, who heads the five-member county commission,
said Jefferson County was continuing to pursue claims against
JPMorgan and some of its affiliates.
Other leading unsecured creditors of the county include
Bayerische Landesbank in Munich. JPMorgan holds
roughly $1.2 billion of the county's sewer debt, although it
says the bankruptcy will have no material impact on its
According to Carrington, a leading reason for the collapse
of the preliminary agreement was that the estimated savings
from the deal had shrunk by about $140 million.
The savings was direly needed because, apart from its sewer
bond debt, Jefferson County's general fund budget was slashed
to $217 million this financial year from $312 million last year
and there was a $40 million shortfall, Carrington said.
The county had also agreed to take $10 million out of its
reserve fund -- pushing it to the limit, he said.
In a court document supporting its claim for bankruptcy
relief, Jefferson County said its sewer rates had already more
than quadrupled over the last 15 years and said further steep
rate hikes demanded by the court-appointed receiver would
violate "reasonable" and "nondiscriminatory" provisions of
Alabama law. [ID: nN1E7A923R]
To subsidize the rate hikes from its own general funds, the
filing also said the receiver, Young, had demanded that the
county pay to him $75 million in general fund cash, the court
filing said. This was based "on the novel theory that he
(Young) -- not the county -- was the rightful recipient of the
$75 million received by the county from JPMorgan Securities,"
"The county therefore faced the intolerable circumstance of
having an unelected third party attempt both to impose
unreasonable sewer rate increases on the county's citizens and
to seize the last monies in the county's general fund reserves,
all for the benefit of the holders of the very indebtedness
that has wreaked havoc on county's solvency and financial
wherewithal," the filing said.
"The receiver's looming demand for the payment of $75
million from the county and the possibility that the receiver
might succeed with his efforts to seize all the county's
remaining restricted general funds rendered impracticable all
further negotiations with the county's creditors," it said.
Some analysts have said the action should not be viewed as
a harbinger of more bankruptcy filings in the municipal bond
market. Municipal bankruptcies remain rare. The crisis in
Jefferson County is more about a revamp of a sewer system that
went awry than something systemic to the municipal bond market,
those analysts argue.
What happens in Jefferson County, and in its federal
bankruptcy court could set something of a precedent for other
troubled municipalities after the recent high-profile debt
crisis in Pennsylvania's capital of Harrisburg, however.
Klee, a professor of law at UCLA, was one of the principal
draftsmen of the 1978 U.S. Bankruptcy Code. His firm was hired
by Jefferson County on July 26 and he said there were several
potential upsides to Wednesday's bankruptcy filing.
"At the end of the day, JPMorgan has an incentive to settle
in the bankruptcy and try to negotiate a third-party release,"
Klee told Reuters in a telephone interview.
"And at the end of the day the other creditors have an
incentive to settle with the county and try to target JPMorgan
in some litigation and recover ... that's the dynamic in play
there," he said.
"There's lots of incentive for JPMorgan to want to
negotiate with the county and for the county to want to
negotiate with JPMorgan," Klee said.
"It (the bank) can also write a check to help the county
with its general fund problem in the short run," he said.