Alabama County Files Largest Ever Chapter 9 Municipal Bankruptcy: Is This A Trend?

Last week, Jefferson County, Alabama filed for bankruptcy relief under Chapter 9 of the Bankruptcy Code as case number 11-5736 in the Northern District of Alabama. This represents the 12th municipal entity to file a Chapter 9 Bankruptcy this year, following on the heels of a recent Chapter 9 filing by the City of Harrisburg, Pennsylvania last month. ¹ Based on the total amount of debt scheduled, this case represents the largest municipal Bankruptcy filing in U.S. history ² , rivaling the bankruptcy filed by Orange County, California (case number 94-22272 filed in the Central District of California on December 6, 1994). Debts related to Jefferson County's sewer system, alone, exceed $3.1 billion. According to the County's bankruptcy counsel, Kenneth Klee, the filing came as a result of the inability of the County and its creditors to reach a deal to restructure the County's debt, despite negotiations over the past several months. Jefferson County had previously defaulted on bonds, which were used to refinance the county's sewer system. "There was an impasse reached," Klee stated to Bloomberg News in an interview last week. "None of the creditors -- zero-- signed up to the deal that we have been negotiating for six weeks."

By seeking Chapter 9 relief, the County may now have the ability to restructure and renegotiate its debt obligations over creditors' objections. In addition, Chapter 9 gives the County the option of assuming or rejecting executory contracts, which potentially encompass a whole range of potential obligations, including ongoing service contracts, vendor agreements and perhaps even existing agreements with public employee unions.

Many other municipalities around the country will be watching this case closely, as they are faced with their own budget shortfalls, resulting from cuts in state and federal funding, as well as ever-increasing obligations for retirement benefits and health insurance for their workers and retirees. Whether the decision to utilize Chapter 9 for debt relief becomes a trend or a cautionary tale remains to be seen. We will continue to monitor the case as it progresses and will provide further updates as events warrant.

1 Bloomberg News, November 9, 2011
2 Id