Jefferson County: The Bankruptcy Court Always Wins

In re Jefferson Country, Alabama, Case No. 11-05736 (TBB) (Bankr. N.D. Ala. Jan. 6, 2012).

On January 6, 2012, Judge Thomas B. Bennett of the Bankruptcy Court for the Northern District of Alabama held that (i) the Alabama state receivership court lost possession and control over Jefferson County’s property interests in its sewer system immediately upon the filing of the County’s chapter 9 bankruptcy case and (ii) special revenue warrants are exempt from the automatic stay and must continue to be serviced during the course of a chapter 9 case. This decision highlights the loss of control that municipal bondholders face when a municipality files for bankruptcy relief under chapter 9 of the Bankruptcy Code and the special treatment afforded to special revenue bonds in chapter 9.

The County’s financial woes stemmed from the combination of a crushing debt load and the untimely loss of certain unearmarked tax revenues. The vast majority of the County’s debt was attributable to approximately $3.6 billion in warrants issued by the County between 1997 to 2003 to finance the overhaul of its sewer system. Initially, the warrants bore fixed rates, however, starting in 2001, the County began issuing variable rate and auction rate warrants hoping to lower its interest rates. The auction rate securities market dried-up in 2007, and by April 2008, the County could not make principal payments on certain of its outstanding warrants. In response, the Indenture Trustee for the holders of the warrants filed suit in Alabama state court seeking to enforce the terms of the indenture. The Alabama court granted partial summary judgment in favor of the Indenture Trustee and appointed a receiver over the County’s sewer system to administer the sewer system in accordance with the indenture. The Receiver was granted exclusive control of the sewer system and was empowered to fix and charge sewer rates. Although the Receiver implemented many needed reforms, the Receiver was unable to decrease meaningfully the sewer system’s mounting debt....