Judge Thomas B. Bennett ruled on Friday that operating expenses for Jefferson County’s sewer system must be paid before receiver John S. Young can distribute revenues to bondholders. The ruling imposes new limits the power of the receiver, who had previously been granted a greater degree of authority by the state court that appointed him.
In explaining his ruling, Bennett noted that the elected officials responsible for prior mismanagement had since been replaced, and that the new crop of officials was not “of the same ilk.”
Commissioner Jimmie Stephens, head of the finance committee, welcomed the decision as a victory for the county.
Bondholders who had hoped to gain a strong advocate in Young may view the ruling as a setback. Some in the municipal bond market, including Matt Fabian, a managing director at Municipal Market Advisors of Concord, Massachusetts, believe revenue bonds have grown riskier due to this ruling.
Crucially, the ruling does not disrupt the bondholders’ lien on sewer revenue. If that had been the case, Fabian said, the consequences for revenue bonds within the wider municipal bond market would be far-reaching.
Jefferson County filed for Chapter 9 bankruptcy in November of 2011. The state court and Young had assumed control of the sewer system over a year prior to the filing. When an agreement between state and county officials, the receiver, and bondholders could not be reached, the county initiated bankruptcy proceedings.
Corruption contributed to the circumstances which led to the state court’s appointment of Young as receiver. A former commissioner has been convicted of accepting bribes in connection with a failed plan to refinance the sewer. JP Morgan Chase, the firm responsible for the refinancing plan, has agreed to pay a $722 million settlement to the Securities and Exchange Commission over the affair.
Bloomberg’s report on Bennett’s ruling can be found here.