Alabama Municipal Bankruptcy - Trustee Can't Pay Creditors

Story first appeared on Fox Business News -

A lawyer for the creditors' trustee in America's biggest municipal bankruptcy on Friday said the trustee will not make a February 1 payment to owners of $3.14 billion of sewer debt issued by Alabama's Jefferson County.

Gerald Mace, an attorney for creditors' trustee Bank of New York Mellon, told a bankruptcy court hearing that the distribution could not be made because of a "lack of funds".

In a document filed on the Electronic Municipal Market Access (EMMA) on Friday, BNY Mellon lists as outstanding approximately $3.1 billion in principal of sewer revenue warrants affected.

The notice explains that "certain holders of bank warrants are not willing, at this time, to consent the trustee making distributions of principal with respect to Sewer Warrants coming due at maturity or resulting of mandatory sinking fund redemption in February and early March 2013...."

The county continues to make payments from sewer-system revenues to Bank of New York, which distributes the money to debt owners that include Wall Street banks, insurance companies and hedge funds, Jefferson County Manager Tony Petelos told reporters.

Lawyers for creditors and Jefferson County, which filed for Chapter 9 bankruptcy in 2011 mainly because of overwhelming debt on its sewer system, are battling in court over sewer fee hikes that would go in part to service the sewer warrants.

Creditors say a 5.9 percent increase in fees authorized in November by county officials was too low and are asking the judge overseeing the case for clearance to press a state court lawsuit for bigger hikes they say are needed to pay off the debt.

JPMorgan Chase, Bank of New York and other creditors are proposing hikes of 22 percent or more. County officials have said 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.