Alabama County Given the 'OK' to Move Forward With Largest Municipal Bankruptcy in U.S. History

Despite objections from county bondholders, it appears that Jefferson County, AL, will be filing for Chapter 9 bankruptcy after all.

Back in December, The Blaze reported that Alabama's largest county had filed for Chapter 9 because it had gone broke trying to finance a new EPA-mandated sewage system:

Sewage and water rates (on average) have increased faster than inflation because the federal government has demanded that cities replace their “worn-out” sewer facilities to meet federal clean-water standards.

When a federal judge forced Jefferson County to upgrade its outdated sewer system, officials decided to finance the project with bonds.

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The sewage system was supposed to cost $300 million. However, since the project started in 1996, the costs have risen to $3.1 billion after various problems and a series of bond and derivatives deals fell through in 2008.

Unsurprisingly, a large amount of corruption was involved.

JP Morgan Securities and two of its former directors have been fined for trying to bribe to Jefferson County employees and politicians in a bid to win business financing for the sewer project. Six former Jefferson County commissioners have been found guilty of accepting bribes, along with 15 other state officials.

As a result of the bad investments and government corruption, current county commissioners have been forced to file for Chapter 9 bankruptcy (which gives the county the right to stop paying some bills temporarily so that it can organize its finances), the largest municipal bankruptcy in U.S. history.

The filing was hotly contested by the county bondholders because it was estimated that they would lose as much as $4.5 million a month in repayments. Back in December, creditors argued that Alabama state law doesn’t allow the county to file for Chapter 9.

“Lenders claimed during a hearing and in court documents that Alabama law permits bankruptcy only for bond debt, and Jefferson County has a different type of debt called warrants,” Bloomberg last December.

However, despite objections from its creditors, it appears Jefferson County has been given the green light.

A judge has cleared the way for Jefferson county to move forward with the largest municipal bankruptcy in U.S. history, overruling creditors' claims that state law didn't allow the county to file the case.

"This is good news for the county," said David Carrington, president of the Jefferson County Commission that last year authorized the landmark bankruptcy filing, according to Reuters.

U.S. Bankruptcy Judge Thomas Bennett issued his order late Sunday, allowing Jefferson County to remain in bankruptcy as it attempts to sort out more than $4 billion debt linked to borrowing for the county's sewer system.

Bennett's decision could be reviewed by the 11th U.S. Circuit Court of Appeals, which already has been asked to consider another question in the case.

Jefferson County Commission president David Carrington signs Chapter 9 bankruptcy papers (Photo Source: AP Photo)

Home to the state's largest city of Birmingham and more than 650,000 people, Jefferson County filed the largest municipal bankruptcy ever in November after three years of negotiations failed to result in a settlement to pay off the debt.

Trying to stop the bankruptcy in a move that could have resulted in more negotiations, a dozen lenders led by trustee The Bank of New York Mellon claimed Alabama law permits bankruptcy only for bond debt.

“Lenders claimed during a hearing and in court documents that Alabama law permits bankruptcy only for bond debt, and Jefferson County has a different type of debt called warrants,” Bloomberg reported.

The county argued that bankers were misapplying state law in hopes of getting the case dismissed, and that any government in the state can go bankrupt no matter what kind of debt it has.

Bennett ruled Jefferson County is an insolvent municipality under state law and negotiated in good faith to resolve its debts, so the bankruptcy can move ahead.

Jefferson County cited $4.15 billion in debt when it filed Chapter 9 bankruptcy, far exceeding the previous record set in 1994 by Orange County, CA, over debt totaling $1.7 billion.

The Associated Press contributed to this report.