Winston & Strawn recently won a significant victory in the chapter 9 bankruptcy of Jefferson County, Alabama, In re Jefferson County, 11-05736 (Bankr. N.D. Ala.), in a controversy anxiously monitored by the entire U.S. municipal bond market.
The firm represents Assured Guaranty Municipal Corp., one of the insurers of warrants that the County issued to pay for more than $3 billion of improvements to its municipal sewer system. These sewer warrants are secured by the net revenues from the sewer system. After the County filed its chapter 9 bankruptcy case in November 2011, it began deducting certain amounts from net revenues before disbursing them to warrant holders—deductions for reserves for depreciation, amortization, and future expenditures and an estimate for professional fees and expenses. The creditors of the sewer warrants, including our client, brought an adversary proceeding challenging the deductions as improper.
As this was an issue of first impression under the Bankruptcy Code that would have ramifications for municipal financing, the proceeding was closely watched by municipal market participants. After briefing and oral argument, the Court held that the County could not deduct such amounts from the net revenue disbursements to warrant holders. First, the Court ruled that the plain language of the indenture governing the sewer warrants does not permit deducting those amounts, as we argued at the hearing before the Court. And second, adopting an argument we advanced on behalf of our client, the Court ruled that the Bankruptcy Code provision allowing for a deduction of “necessary operating expenses,” section 928(b), is generally inapplicable to a pledge of net revenues (as opposed to a pledge of gross revenues). If the County had prevailed on this issue, the Court estimated that sewer warrant holders would receive at least $100 million less in net revenue disbursements during the course of the County’s bankruptcy.
The Winston & Strawn team was led by partners Lawrence Larose and Samuel Kohn in the New York office and associate Sarah Trum in the Houston office.