Bondholders May Be Forced to Pay for Cities' Bankruptcy Litigation

Alabama ruling could apply to any municipal bankruptcy with debt being paid by pledged revenues such as parking fees or water and sewer charges.

Detroit bondholders may have a new worry after a judge ruled that Jefferson County, Alabama, could have paid legal bills for its bankruptcy from cash that was going to pay warrant holders owed $3 billion.

The ruling should concern bond investors whose revenue was previously protected from use by municipalities, said R. Dale Ginter, a bankruptcy lawyer at Downey Brand LLP in Sacramento, California. It may force those bondholders to reconsider waging an extensive legal fight to protect their interests, said Ginter, who represented retirees in the bankruptcy of Vallejo, California.

‘A Change’

“This is a change from what people were assuming,” said Matt Fabian, managing director of Concord, Massachusetts-based Municipal Market Advisors. “It absolutely affects Detroit.”

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