BRADENTON, Fla. – After more than five years in federal court, 2017 could be the year that Jefferson County, Ala., sheds its long-running bankruptcy case and its appeal.
It depends on a pending ruling from the 11th Circuit Court of Appeals.
Appellate Judges Gerald Bard Tjoflat, Beverly Martin and Adalberto Jordan heard oral arguments Dec. 16 on a pivotal question that could resolve a case that has seen more than 7,000 pages of documents filed: did U.S. District Judge Sharon Blackburn err in September 2015 when she rejected a motion by the county to dismiss an appeal of its 2013 bankruptcy plan brought by a group of ratepayers on the county's sewer system?
During the 30-minute session with attorneys in Atlanta, the jurists seemed focused on two issues in the appeal of Blackburn's ruling brought by Jefferson County, according to an audio recording of the arguments obtained by The Bond Buyer.
The judges expressed doubts that the ratepayers appealing the case didn't follow protocol when the county's bankruptcy plan of adjustment was confirmed by U.S. Bankruptcy Judge Thomas Bennett on Nov. 22, 2013, by not requesting a stay of the plan before filing their appeal.
They also lobbed a series of questions to attorneys for both sides about whether future federal court oversight of the county's bankruptcy plan affords adequate opportunity for challenges to be brought in the future.
Eleven days after Bennett confirmed the plan, the county closed on $1.8 billion of new, 40-year sewer warrants sold in the bond market to write down $3.2 billion of old sewer debt, resulting in an overall 40% haircut to bondholders.
"The court was clearly concerned that the ratepayers did not ask for a stay, but that the ratepayers are now seeking to modify the plan after it was consummated," said bankruptcy attorney John Whitlock with Locke Lord LLP, who reviewed the recording of the arguments.
Whitlock is not involved in the case.
"It is still not clear to me how the court will rule on the unusually long, up to 40-year reservation of exclusive jurisdiction, but the ratepayers' argument they could not have applied for a stay is unconvincing," Whitlock said.
A central issue in the case is Jefferson County's contention that the appeal brought by the ratepayers was mooted by closing on the sale of the new sewer warrants, a step that largely consummated the complex plan of adjustment.
Blackburn rejected the argument and questioned the constitutionality of a provision in the plan that allows the bankruptcy court to retain oversight of its implementation as long as the sewer debt remained outstanding – as ratepayers contended.
The 40-year oversight provision was a cornerstone of the county's restructuring bid and a major security provision encouraging investors to purchase the warrants because it allows a bankruptcy judge to enforce the indenture requiring county commissioners to set sewer rates necessary to support the outstanding debt.
"The creditors who put in the new money bargained in this case for the exclusive jurisdiction of the bankruptcy court to enforce the approved rate covenant," Jefferson County's attorney, Kenneth Klee with Klee, Tuchin, Bogdanoff & Stern LLP, told the three-judge appellate panel on Dec. 16.
"Now what [the ratepayers] are trying to do, now that the investors put in the new money, they want to change the deal after the fact and that's the reverse of equity," Klee said. "That would be inequitable."
The fact that the ratepayers did not request a stay of the county's bankruptcy plan, a step used to delay proceedings in court cases, became a focus of attention during the hearing.
"My concern is if you can appeal without a stay then you're kind of abusing the bankruptcy court, the district court, and this court," one judge said.
The ratepayers did not request a stay because it was "beyond their ability to pay," said their attorney, Paul Avron with Berger Singerman LLP.
Avron later added that a request for a stay would never have been granted because of the "county's need to close on this deal expeditiously."
He also said there were other issues that the ratepayers wanted to address in their appeal, including that future sewer rate increases should be the decision of future county commissioners to make.
Imposing a 40-year mechanism for court oversight of local sewer decisions is a violation of ratepayers' rights, Avron said.
If ratepayers had sought a stay, a lot of problems could have been avoided, one judge said.
Klee argued that the 40-year provision in the bankruptcy plan "simply enforces the indenture." It does not set sewer rates, he said.
When Klee was asked why the ratepayers' appeal should not go forward, he said that relief cannot be granted because the bankruptcy court hasn't exceeded its jurisdiction overseeing the plan's implementation.
Jefferson County Commission President Jimmie Stephens, who was in Atlanta when the oral arguments were presented, said he was pleased with the proceedings.
"I feel that the county stated its position very clearly and on the point of law," Stephens said. "I am very encouraged and look forward to a successful conclusion to this case."
In deciding the outcome of the appeal, Whitlock said the court has several options.
The court could determine the ratepayers' appeal is moot because they did not try to get a stay, he said.
The appellate court could determine that "equitable mootness" – a doctrine that prevents an appellate review of a consummated bankruptcy plan - should not apply in Jefferson County's case based on reasons cited by other courts.
Whitlock also said the judges could "carve out a reason why in this particular case the ratepayers did not have to apply for a stay," and allow the appeal to go forward in order to challenge the bankruptcy court's 40-year oversight provision.
In the six weeks since oral arguments took place, attorney Calvin Grigsby, on behalf of the ratepayers who appealed the case, has filed several requests to supplement the appellate record, contending that information necessary for the court to rule was missing and that ratepayers could not have requested a stay based on when the sewer warrants priced.
In a Jan. 20 filing, Grigsby argued that the ratepayers could not have stopped the sale of the warrants by requesting a stay because the syndicate wire was issued Nov. 19, 2013, the purchase contract was executed Nov. 20, 2013, and the confirmation order of the bankruptcy plan was issued Nov. 22, 2013.
Under the Municipal Securities Rulemaking Board's Rule G-11 regarding primary offerings, Grigsby said the date of a sale in a negotiated deal means "the date on which the contract to purchase securities from an issuer is executed."
Whitlock said that argument is "weak" because the sale document for the 2013 sewer warrants allowed purchasers to cancel their orders if an appeal was filed.
Jefferson County has objected to Grigsby's filings.
The court has not issued a ruling about whether to accept them.
"In this case, the court could take some time to determine how to rule on the mootness argument, so it is not possible to predict how long it will take the court to make a final decision," Whitlock said. "On the other hand, the court has what it needs to decide whether to accept additional documents, and could rule on that issue any time now."
