Judge Allows Bankruptcy for Ala. County

(BIRMINGHAM, Ala.) — A judge has cleared the way for an Alabama county to move forward with the largest municipal bankruptcy in U.S. history, overruling Wall Street claims that state law didn't allow the county to file the case.

U.S. Bankruptcy Judge Thomas E. Bennett issued his order late Sunday, allowing Jefferson County, the state's largest 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.

(MORE: A Crappy Wall Street Deal Produces Nation's Largest Ever Municipal Bankruptcy, Finally)

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.

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. Lenders asked Bennett to throw out the case during a hearing December, arguing that Alabama's 1901 Constitution doesn't allow Jefferson County to file a municipal bankruptcy.

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. Jefferson County has a different type of debt called warrants, they argued.

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, Calif., over debt totaling $1.7 billion. Jefferson County's financial problems resulted from a mix of outdated sewer pipes, the economy, court rulings and public corruption.

County officials say higher sewer rates will result from the debt. Faced with budget shortfalls after courts threw out a separate job tax, the county has cut staff, reduced services and closed outlying courthouses as it attempts to balance its books. Residents routinely wait in lines for hours to conduct simple business like renewing their car tags.

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