By Michael Connor
Jan 30 (Reuters) - Wall Street creditors on Wednesday asked
a U.S. judge overseeing America's biggest municipal bankruptcy
to knock down a legal hurdle keeping them from pushing Alabama's
Jefferson County for higher sewer rates to service $3.14 billion
of defaulted debt.
In testimony coming a day after county officials returned
from private talks with some creditors in New York, lawyers
representing banks, insurers and hedge funds questioned County
Manager Tony Petelos about procedures used by county officials
to set sewer rate increases in November.
Those increases, totaling about 5.9 percent, were too low to
pay interest and principal on the sewer debt, according to the
creditors seeking an exemption to an automatic stay that bars
lawsuits during a federal Chapter 9 bankruptcy case.
JPMorgan Chase, Bank of New York Mellon and other creditors
want hikes of 22 percent or more and have requested that U.S.
Bankruptcy Judge Thomas Bennett permit them to pursue a lawsuit
on the rates in Alabama state court.
County officials have said in legal papers that the November
hike would raise system revenue by $8.5 million a year and could
be followed by other increases as part of a settlement with
Creditors have accused the county of keeping the sewer rates
low as a tactic to show lower revenue and eventually to win
better terms in any plan for exiting bankruptcy. The county has
argued that the rate increases in November were reasonable and
that they were decided after an extended process that included
consulting experts in sewer fees.
Two of the county commissioners who okayed the November
hikes, Commission President David Carrington and Commissioner
Jimmie Stephens, met on Monday in New York with holders of the
county's sewer warrants.
"The discussions were cordial, comprehensive and
substantive," the commissioners said in a written statement. "At
the end of the meeting, the participants agreed that the meeting
was beneficial and that additional conversations would be held
in the very near future."
The commissioners declined to discuss details and did not
identify the creditors who were at the meeting. It was at least
the third closed-door session in recent months. Large sewer debt
creditors include hedge funds Brigade Capital Management LLC and
Fundamental Advisors LP.
The talks are aimed at developing a plan of adjustment,
which spells out the treatment of bondholders, vendors and
others owed money when Alabama's most populous county exits
So far no solution has emerged for the bankruptcy but one
possible template in the talks may be a 2011 terms sheet, which
was developed by some creditors and the county before the
landmark Chapter 9 filing. It envisioned a $1 billion reduction
in county debt but was never implemented.
The pre-bankruptcy terms included three years of sewer rate
hikes of as much as 8.2 percent annually and a refinancing of
about $2.05 billion of county sewer warrants into a 40-year debt
backed by a pledge from Alabama's state government.
Now into a second year, the $4.23 billion bankruptcy filed
by Jefferson County in 2011 is closely tracked in America's $3.7
trillion tax free market for legal precedents that may weaken
(Additional reporting by Melinda Dickinson and Verna Gates)
Follow us on Twitter @ReutersLegal | Like us on Facebook