(CN) - Alabama's Jefferson County can file for Chapter 9 bankruptcy protection from creditors that funded $4 billion worth of infrastructure improvements, including a $3.1 billion sewer system upgrade, a federal judge ruled.
Creditors, including the Bank of New York Mellon, objected to the November 2011 bankruptcy filing, arguing that Jefferson County is not eligible for Chapter 9 protection because the county has no outstanding bond debts.
A 2010 bankruptcy case in the U.S. Bankruptcy Court for the Southern District of Alabama denied a municipality's petition after determining that it was unclear if state law required outstanding bond indebtedness as a precondition to municipal bankruptcy.
The case, In re City of Prichard, Ala., was appealed to the U.S. District Court for the Southern District of Alabama, which asked the Alabama Supreme Court to address the alleged requirement of bond indebtedness. That decision is still pending.
But U.S. Bankruptcy Judge Thomas Bennet answered the question for himself in approving Jefferson County's filing Sunday.
Relying on omissions and tweaks to Alabama's code made by successive state code commissioners, Jefferson's creditors, and other courts, had read a requirement into the law where none existed, Bennet said.
While Alabama has always recognized the difference between bonds and warrants - in that warrants were simply orders to municipal officials to pay money authorized by the local government and bonds were a transferable promise to pay at a future date - this is a distinction without a difference for the creditors, Bennet found.
Historically Alabama's code had not distinguished between the kinds of debts counties were authorized to issue and reorganize - including through bankruptcy, the judge noted.
The creditors had said a difference was implied, pointing to a code section titled "Municipal and County Bonds" that defined the kinds of debt counties could issue. Bennet said, however, that this reading ignored the plain language of the text.
"The text of the section delineates the authority to enter into and fulfill a plan or agreement for the settlement, adjustment, refunding, and funding of indebtedness, which by the literal language is not limited to bonded indebtedness," Bennet wrote.
Acting as a tour guide to the long history of revisions to Alabama law, Bennet showed that, over time, the parts of the code defining warrants as municipal debt had become divorced from sections defining the authority to issue bonds. These latter sections had been cross-referenced on their own as the definition of debt used in determining eligibility for bankruptcy.
"It is important to understand that the placement [of qualifying debt for bankruptcy] in the Codes of Alabama by the Code Commissioner codification process could have been, and originally was, outside The Municipal Bond Code and its successor Alabama Code provisions governing issuing bonds," Bennet wrote.
Regardless of what was intended at the time, Bennet said, "its location via the Code Commissioner codification process, along with the current captions for it, are meaningless."
Given that all of the creditors' claims relied on section titles and dislocations of code, rather than legislative intent, Bennet said their "arguments are unsupportable under any statutory interpretation made consistent with Alabama's case law and statutes governing interpretation."
Before Jefferson County's bankruptcy filing, Orange County, Calif., was the biggest bankrupt government entity ever, with $1.2 billion debt declaration in 1994.
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