June 5, 2012 / 7:57 PM / 5 years ago

UPDATE 1-Alabama group wants $1.6 bln in bankruptcy case

(Adds quotes from Bank of New York)

By Michael Connor

June 5 (Reuters) - Local politicians in Alabama's bankrupt Jefferson County are pressing a new $1.6 billion claim on behalf of 130,000 sewer system customers they say were cheated by corrupt county workers and Wall Street creditors.

Working against a U.S. Bankruptcy Court deadline on Monday for claims in Jefferson County's landmark, $4.23 billion bankruptcy case, Roderick Royal, the president of the Birmingham City Council, and 13 others on Monday filed a claim against creditors of Jefferson County and its sewer system.

The filing argues that the sewer system's rate payers, including the two-thirds who live in low-income Birmingham, were hurt by Wall Street financing techniques and the corruption of more than 20 office holders and others convicted of crimes.

The filers, who include state representatives and the Jefferson County tax assessor, claim the rate payers had so far paid $1.6 billion unnecessarily because of a "continuing pattern of misconduct and criminal activity by managerial personnel of the county acting in collusion with other wrongdoers, including many of the top 20 creditors."

One of the county's biggest creditors, JPMorgan Chase , agreed in 2009 to a $722 million settlement with the U.S. Securities and Exchange Commission over charges of illegal payments made to secure county financing work. Larry Langford, a former county commissioner, was convicted of taking bribes.

The filing requests class-action status on behalf of the system's customers and said any money recovered would be used to prevent rate hikes by reducing the roughly $3 billion of sewer-system debt at the heart of Jefferson County's Nov. 9 municipal bankruptcy filing, which was the biggest by any U.S. local government.

"My personal feeling is that it will be dismissed," Jefferson County Commission President David Carrington said of the claim on Tuesday. "If it's not, it will be interesting."

Thomas Bennett, the U.S. bankruptcy judge handling the case, was likely to view the $1.6 billion in alleged damages as excessive and dismiss the suit, a local lawyer involved in the bankruptcy said on condition of anonymity.

Bank of New York, which is the indenture trustee for creditors in the bankruptcy case, declined to comment in detail on the filing but "is confident it has fulfilled its duties," BNY spokesman Kevin Heine said.

The filing adds a new front to the battles in the case. Last week, Bennett issued an order approving a continuation of a deal struck Feb. 15 that required the county to make $5.5 million in monthly payments to creditors on its sewer debt through May.

In April, the county skipped a $15 million general obligation bond payment for the first time, as officials said they needed the money to pay for basic government services.

State legislators in May spurned a bid by the county to revive a wages tax that would have delivered an estimated $60 million a year in revenue.

On Monday, Jefferson County commissioners scheduled a public hearing for June 12 on possible sewer rate hikes. (Additional reporting by Melinda Dickinson in Birmingham; Editing by Dan Grebler and Andrew Hay)

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