The travails of Jefferson County, Alabama are well known. Ordered by a federal court to upgrade its sewer system in the late 1990’s, the project was marred by corruption, cost overruns and financing with complex derivatives that ultimately saddled the County with over $3 billion in debt. In addition, an occupational tax that provided the primary source of its unrestricted general fund revenues was invalidated, and the County faces both huge refund claims and operating revenue shortfalls. There is no dispute that Jefferson County is deeply insolvent, and there was little surprise when the County filed a petition under Chapter 9 of the Bankruptcy Code in early November in the Northern District of Alabama, commencing the largest municipal bankruptcy case in history. 

For all of its problems, however, the County may not be eligible for Chapter 9 protection. The County’s bankruptcy petition has been challenged and a colorable issue exists as to whether the County can satisfy the strict requirements which must be met in order for a municipality to use Chapter 9 to seek adjust its debts. Among other things, those requirements, set forth in Section 109(c) of the Bankruptcy Code, state that a municipal entity seeking to be a debtor under Chapter 9 must demonstrate that it “is specifically authorized . . . by State law . . . to be a debtor under such chapter.”  In Jefferson County’s case, the question is whether the nature of its debt obligations fall within the parameters of the Alabama authorization statute, Alabama Code Section 11-81-3. As strange as it sounds, Jefferson County’s staggering debt may not be the right kind of debt to enable it to utilize Chapter 9 of the Bankruptcy Code. 

Jefferson County issued its debt in the form of warrants; it has no outstanding bond debt. The differences between warrants and bonds may be highly technical but they are evidently cognizable under Alabama law. The debt holders opposing the Chapter 9 petition contend that the first sentence of Alabama Code Section 11-81-3 only authorizes a Chapter 9 filing by the “governing body of any county, city or town . . . which shall authorize the issuance of refunding or funding bonds”, and that the distinction between bonds and warrants is sufficient to render Jefferson County ineligible for Chapter 9, since it cannot show that has been “specifically authorized” to use Chapter 9 under Alabama law. One bankruptcy judge in the Southern District of Alabama recently dismissed the Chapter 9 case of another Alabama municipality that had no outstanding bond debt. The federal district judge hearing the appeal of that dismissal has certified the question to the Alabama Supreme Court.    

The County argues in response that the second sentence of Alabama Code Section 11-81-3, which contains express language that “authorizes each county, city or town . . . to proceed under the provisions of the acts for the readjustment of its debts”, is not limited by the reference to bond debt in the first sentence. It alternatively contends that even if the first sentence of Section 11-81-3 does provide such a limitation, the County’s previous issuances of bonds, even if not currently outstanding, satisfies the requirement. 

Judge Thomas Bennett, the bankruptcy judge overseeing the Jefferson County case, has indicated that he may also certify the issue to the Alabama Supreme Court.