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Municipal Bankruptcy Proponents Win Victory in State Supreme Court

A state Supreme Court decision in a watershed municipal bankruptcy case could serve as a guide for communities there and beyond to eliminate at least one argument for creditors attempting to derail Chapter 9 proceedings.

Regarding the largest Chapter 9 filing in U.S. history, the Alabama Supreme Court ruled this week to uphold Jefferson County's right to declare municipal bankruptcy. At the heart of the issue was whether a municipality had the right to file for bankruptcy if it did not issue bonds. The court held that as long as the municipality in question had the right to issue bonds, even if it didn't actually follow through with such an action, then a Chapter 9 filing was fair game.

"I'm not surprised," said Bruce Nathan, Esq., of Lowenstein Sandler PC. "The judge really did thoroughly analyze Alabama statutory history."

Nathan noted that perhaps the key thing for creditors to watch will be whether Jefferson County pays its vendors, and how much during this process. Unlike in Chapter 11 reorganizations, in Chapter 9 a municipality does not need a judge's permission to pay prepetition claims. The case is almost certainly being monitored by other communities teetering on insolvency. Perhaps chief among them is Stockton, CA, which would become the largest Chapter 9 in U.S. history should it file.

Jefferson County officials and creditors had been fighting for weeks regarding the eligibility of the filing, which exceeded $4 billion. Jefferson County has been reeling financially from the botched sewer retrofit venture that has left the county, which includes the city of Birmingham, with massive debt and little ability to make proper payments while continuing to operate all of its services.

Brian Shappell, CBA, NACM staff writer