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Judge clears way for Alabama county bankruptcy

By Michael Connor

(Reuters) - Alabama's Jefferson County can go ahead with its $4.23 billion bankruptcy case, the biggest ever by an American municipality, a federal judge ruled.

The late Sunday ruling by U.S. Bankruptcy Judge Thomas Bennett opens the road for the county to restructure more than $3 billion in debt incurred as a result of an expensive sewer-system overhaul, as well as other liabilities.

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

Creditors had argued the county, home to Alabama's biggest city of Birmingham, was ineligible for bankruptcy because it had the wrong type of debt. The ruling differs from a case in another Alabama town that was thrown out for the same reason.

Lawyers for each side said the ruling was unlikely to spur negotiations toward a resolution of the dispute being tracked by America's $3.7 trillion municipal bond market.

"I expect this will be appealed but I am not sure it will do anything for negotiations," said a lawyer for the creditors, who spoke on condition of anonymity. "We all knew the judge would rule this way."

Bennett's ruling strengthens Jefferson County, since the county will now be able to draft a workout plan, said Melissa Woodley, finance professor at the Brock School of Business at Samford University in Birmingham.

"The creditors cannot propose a plan. The judge can force the creditors to take the plan, if he finds it fair and equitable. The judge has a reputation for taking a hard look at the numbers and, at the end of the day, it is a numbers problem," Woodley said.

Jefferson County filed for bankruptcy on November 9 after a tentative agreement unwound that might have cut the county's debt load by $1 billion. County finances have been savaged by massive sewer-system debt, political corruption and the loss of a vital local jobs tax.

Creditors such as JPMorgan Chase argued that Jefferson County was ineligible for bankruptcy because the county had no bond debt as required by state law. Like most Alabama counties, Jefferson County only had warrants, a form of debt popular in the state since the 1930s that does not require direct voter approval.

Bennett's ruling differs from a 2010 case involving the Alabama city of Prichard, in which another federal bankruptcy judge voided the city's Chapter 9 case because it had no bonded debt, bankruptcy lawyers said.

"We have two bankruptcy judges in Alabama coming out opposite ways," said Mark Berman, a bankruptcy and public finance partner at Nixon Peabody LLP. "The take-away for Alabama municipalities is continued uncertainty as to whether counties with no bond indebtedness can file Chapter 9."

Lawyers for the two sides next face off at court hearings scheduled for April 11-13 in Birmingham over the size of payments due creditors from the county's sewer system. Analysts have said the dispute may yield a ruling affecting investors' confidence in tax-free revenue bonds caught up in bankruptcies.

"People are concerned that this might change the ground rules, how you do municipal financing," said Alfredo Perez, of Weil Gotshal & Manges LLP in New York.

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. Costs continued to rise as interest rates increased.

Cases brought by other U.S. municipalities, such as Harrisburg, Pennsylvania, have been thrown out by other federal judges in recent months. The city of Stockton, California, last week decided to default on its debt in an effort to avoid becoming the most populous U.S. city to file for bankruptcy.

In a written order rejecting creditors' arguments, Bennett said Jefferson County "is insolvent, desires to effect a plan of adjustment of its debts and has negotiated in good faith."

The November 9 filing gave Jefferson County temporary relief from creditors' demands and shelter for some of the last of its operating cash, but it now outranks California's Orange County in 1994 at $1.7 billion as the biggest U.S. local government bankruptcy.

A spokesman for BNY Mellon, the trustee for creditors in the Jefferson County case, had no immediate comment on Bennett's ruling. A JPMorgan spokesman was not immediately available.

(Reporting By Michael Connor in Miami; additional reporting by Verna Gates and Melinda Dickinson in Birmingham and Hilary Russ in New York; Editing by Andrea Ricci)

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