Dismissed Detroit Appeal Could Factor in Jefferson County Case

BRADENTON, Fla. – The outcome of an appeal of Jefferson County, Ala.’s bankruptcy case could be influenced by a recent court decision in Detroit.

U.S. District Judge Bernard Friedman tossed out an appeal by Detroit’s retirees on Sept. 29, settling the last petition challenging the country’s largest municipal bankruptcy.

In an order dismissing the pensioner’s appeal, Friedman based his decision on equitable mootness, a legal concept in which he agreed that unraveling Detroit’s massive exit plan would hinder its success, harm parties that agreed to it, and “throw the city into financial chaos.”

A judge reached the opposite conclusion last year in Jefferson County’s case, in a precedent-setting decision.

U.S. District Judge Sharon Lovelace Blackburn rejected the equitable mootness argument by Jefferson County’s attorneys, saying that the policy objectives of a Chapter 9 case were different from a Chapter 11 case, according to bankruptcy attorney John Whitlock with Locke Lord LLP.

“Judge Friedman disagreed with the aspect of the Jefferson County decision that concluded that the doctrine of equitable mootness does not apply in Chapter 9, but rather is a Chapter 11 doctrine,” said Whitlock, who is not involved in Jefferson County’s case.

Jefferson County is appealing Blackburn’s ruling to the 11th Circuit Court of Appeals, where the resolution in Detroit’s case will not go unnoticed.

“The cogent analysis in the Detroit opinion is directly on-point and should be followed by this court,” Bankruptcy attorney Kenneth Klee wrote in an Oct. 1 letter bringing Friedman’s ruling to the attention of appellate jurists.

Klee is one of many attorneys representing Jefferson County.

Both Jefferson County and Detroit agreed to multi-billion-dollar plans of adjustment “comprised of interlocking components built on a series of heavily-negotiated compromises between the debtor and its creditors,” Klee said.

Both plans were substantially consummated shortly after confirmation and appealed, Klee noted, pointing out the precedent-setting conclusion about the mootness issue in Jefferson County.

The impact of Detroit’s case remains to be seen.

“I would expect that the 11th Circuit might cite Judge Friedman’s analysis if the 11th Circuit agrees that the equitable mootness doctrine is applicable to Chapter 9 proceedings,” Whitlock said. “But the 11th Circuit may also ignore it or mention it only in passing, coming as it does from a court in a different circuit.”

In an amicus brief in Jefferson County’s case, the Securities Industry and Financial Markets Association said the Alabama ruling threatens the stability of the municipal market because it departs from accepted law regarding Chapter 9 cases and traditional interpretations of mootness.

The ruling diminishes the attractiveness of Chapter 9 for municipalities to adjust debt and “stifles the willingness of investors to trust an emerging debtor and buy newly-issued bonds…for fear of change in the negotiated terms by a reviewing court,” SIFMA said.

In determining that mootness did not apply in Jefferson County, Blackburn said she planned to examine the constitutionality of a provision in the county’s exit plan allowing the bankruptcy court to oversee the repayment of refunding sewer warrants issued in 2013 to write down associated debt.