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, Bloomberg News reported yesterday. 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, Calif. 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, Calif. “It puts a lot of leverage in favor of the debtor,” Ginter said. “It puts bondholders in the position of paying for both sides of their litigation.” The ruling could apply to any municipal bankruptcy with debt being paid by pledged revenues such as parking fees, airport lease payments or water and sewer charges, Ginter said. Detroit is in talks to get bondholders and current and former city workers to accept $2 billion in exchange for wiping out the $11.5 billion they may be owed.
