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Judge may rule soon on bankruptcy for large Alabama county

By Vivian Kuo, CNN
updated 2:34 AM EST, Thu December 15, 2011
STORY HIGHLIGHTS
  • Jefferson County's application for Chapter 9 goes before a U.S. bankruptcy judge
  • The county is home to Birmingham, Alabama's largest city
  • The county is $4.2 billion in debt, including $3.1 billion for a sewer project
  • Bank of New York Mellon and other creditors filed motions for dismissal last week

(CNN) -- A decision on whether Alabama's Jefferson County can proceed in the largest municipal bankruptcy in U.S. history could be made by the end of this week.

On Thursday, a U.S. bankruptcy judge in Birmingham will begin a two-day hearing on whether the county meets the legal requirements to file for Chapter 9 relief.

Plagued for years by budget woes, Jefferson County narrowly avoided insolvency in September after reaching a deal with creditors on the billions borrowed for a sewer project.

In November, however, Jefferson County commissioners decided that their multibillion-dollar debts had become untenable and in a majority vote, resolved to go ahead and file for bankruptcy protection.

Commissioner Sandra Little Brown told CNN affiliate WTVM the vote was "a bitter ending" and that she felt the commissioners "were left with no other alternative."

The decision was "a necessary one reached after much thoughtful consideration," Commission President David Carrington said in a release.

"The County has negotiated extensively and in good faith with its creditors and their representatives about restructuring the County's debts out-of-court," Carrington said.

"Despite the County's best efforts, those negotiations have not produced a deal that fairly treats the County and its citizens, and there is no reason to believe that further out-of-court negotiations will lead to a fair, acceptable result."

The largest previous municipal bankruptcy case was filed in 1994 by Orange County, which owed approximately $1.7 billion to creditors, Jefferson County Commission said.

Jefferson County, which includes Alabama's largest city, Birmingham, is currently $4.2 billion in debt, including $3.1 billion for the sewer project -- making the filing more than twice as large than the previous case.

Bank of New York Mellon, one of its numerous creditors and the indenture trustee for the county's sewer warrants, filed a motion last week objecting to the eligibility of the county to maintain a case under the U.S. Bankruptcy Code, and said the case should be dismissed.

The county "fails to meet the requirement for specific authorization to file a petition under Chapter 9," court documents said.

The New York-based bank said that under Alabama law only counties, cities or towns that have refunding or funding bonds are eligible for the petition. Jefferson County does not have any such bonds and only has outstanding warrants, which are not the same under state law, BNY Mellon's lawyers argued.

Due to the "resulting failure of specific authorization to file its Chapter 9 petition, the County's Chapter 9 petition must be dismissed," the bank said.

Fellow creditors JPMorgan Chase Bank and Bank of America and others also filed motions joining in the objection to Jefferson County's eligibility for bankruptcy protection, and supported the dismissal of the case.

The county initially ran into trouble in part because of a swap agreement that caused its interest rates to spike during the financial crisis of 2008.

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