BIRMINGHAM, Alabama (Reuters) - Lawyers on opposing sides of the debt crisis in Alabama’s Jefferson County traded blame on Tuesday for the biggest municipal bankruptcy in U.S. history as they girded for a crucial court hearing next week.
But a week after county commissioners opted for bankruptcy, both sides acknowledged that the framework deal for a debt restructuring announced in September was never more than the bare bones of a potential agreement.
Kenneth Klee, whose law firm, Klee, Tuchin, Bogdanoff & Stern LLP, represents the county, said the preliminary deal to settle its more than $3 billion sewer debt fell apart largely because Wall Street creditors rejected calls for a face-to-face meeting with commissioners to agree on final terms.
“We asked them to get together for an in-person meeting to sign up a deal. They refused to do so and none of them ever signed the deal document,” Klee said.
He also said John Young, a receiver appointed by a local judge to manage the county’s debt-laden sewer system on behalf of creditors, helped trigger the bankruptcy vote by the elected commissioners last Wednesday by making fresh demands at a meeting the night before.
“The receiver came back with additional demands for the first time that had not been made before. And those additional demands were unacceptable to the commission,” Klee said.
“They compared the (proposed) deal to Chapter 9 and chose to go into Chapter 9 because Tuesday night the receiver materially changed the terms of the deal. It wasn’t the creditors, it was the receiver,” he said.
But an attorney for the receiver, Young, disputed Klee’s account of what happened at the meeting on November 8.
“There was nothing new discussed at that meeting,” said Patton Hahn, an attorney with Baker, Donelson, Bearman, Caldwell & Berkowitz, the firm that represents Young.
The saga of the bankruptcy in the county of Alabama’s biggest city, Birmingham, includes a long thread of corruption and fraud as a sewer system upgrade originally projected to cost as little as $250 million wound up saddling the county with unsustainable debts worth billions.
Bad bond and refinancing deals and construction problems helped inflate the debt balloon.
Federal Judge Thomas Bennett in Birmingham will hold a hearing next Monday on an emergency motion from Young for relief from an automatic stay to try to keep the receiver’s control over the debt-stricken sewer system.
Klee, a professor of law at UCLA, was one of the principal writers of the 1978 U.S. Bankruptcy Code. His firm was hired by Jefferson County on July 26 and he helped prepare the 1994 case of the previous U.S. municipal bankruptcy record holder, Orange County, California.
Klee said last-minute demands from Young centered on proposed hikes in the rates for sewer and water services in the county, already among the highest in the country.
Klee said Young had previously promised concessions from creditors that never materialized, including $69 million originally pledged on behalf of Lehman Brothers Holdings.
Creditors were insisting on being paid back $2.19 billion of the $3.14 billion debt, rather than the $2.05 billion that the commissioners had agreed to, he said.
“The fact of the matter is, the commission was not going to live with a $2.19 billion proposal, which is where we were,” Klee said, explaining why the bankruptcy trigger was pulled on November 9 after more than three years of negotiations.
The preliminary debt restructuring agreement collapsed in part because the flat-broke county was already grappling with insolvency and a failure by the Republican-controlled state legislature to hold a special session to bail it out.
“The county is insolvent, it’s indisputably insolvent. There’s been an acceleration of $105 million in general obligation warrants and the county had less than that in its general fund,” Klee said.
“The county had to do it (file for Chapter 9 bankruptcy) because it was the best avenue available to protect the interests of the citizens of Jefferson County, both in terms of solving the sewer debt crisis and in terms of getting a general fund fix,” Klee added.
Hahn said Klee’s assertion that a proposed increased hike in sewer rates had torpedoed any deal was inaccurate.
“The settlement documents that were being worked on were consistent with the September 16 term sheet and the receiver and his counsel were confident that the changes that were being discussed would be worked out,” Hahn said.
He added that he personally represented Young at the meeting with Klee and that the receiver -- the former president of American Water Services, the largest investor-owned U.S. water and wastewater utility company -- was not present.
Klee has described next Monday’s hearing as “critical” to Jefferson County’s reorganization efforts since it could affirm its rights to set water and sewer rates again and regain control of the sewer revenues.
Bennett also has a December 15 deadline for a hearing on whether the county is eligible to file for Chapter 9, under the U.S. Bankruptcy Code section covering municipal bankruptcies.
If the county prevails, Klee said, it would then hope to restart negotiations with its creditors, led by JPMorgan Chase & Co, in mid-December or sometime in January.
Writing by Tom Brown; Editing by Gary Hill