BRADENTON, Fla. — A group of Jefferson County, Ala., residents told an appellate court in Atlanta that they were denied constitutional protections in the rush to end the county's "large and complicated" bankruptcy in 2013.
"The essence of our client's position to the 11th Circuit Court of Appeals is that our clients are entitled to their day in court on the merits of the legal issues presented by the Jefferson County plan of adjustment," attorney Paul Singerman, a partner with Berger Singerman LLP, one of three law firms representing the ratepayers, said in an interview.
It was "understandable that the bankruptcy court wanted to bring the case to closure," the group of ratepayers on the county's sewer system said in a Sept. 3 brief filed with the 11th Circuit Court of Appeals. "But fundamental constitutional issues simply cannot be trumped by such concerns."
The ratepayers are entitled to proceed with their appeal of the country's second-largest Chapter 9 bankruptcy case, Singerman said.
"They should now be given consideration of the merits of their argument because of the procedural efforts of the county to deny them appellate review," he said.
The ratepayers' brief is in response to Jefferson County's appeal of a September 2014 ruling by U.S. District Judge Sharon Blackburn, who rejected the county's contention that the ratepayer's bankruptcy appeal was moot based in part on the fact that the plan has been consummated.
Blackburn also said that she could consider the constitutionality of the plan of adjustment, which cedes the county's future authority to oversee sewer rates to the bankruptcy court.
Jefferson County appealed Blackburn's decision to the appellate court in Atlanta, and has asked for oral arguments to be held.
The ratepayers said in last week's filing that oral arguments are not necessary for the appellate court to make a determination in the case because the issue of mootness is legal in nature, and the law is plain that the retention of jurisdiction provision in the plan should be removed or declared unenforceable.
Jefferson County's plan of adjustment was confirmed on Nov. 22, 2013. It allowed the county to issue $1.8 billion in sewer refunding warrants to write down $1.4 billion in related sewer debt.
Once the sale of the new warrants closed that December, Jefferson County exited bankruptcy, saying that the plan had been consummated.
The county's plan contains an "offensive" provision that enables the bankruptcy court to retain jurisdiction over the plan for the 40 years that the sewer refunding warrants remain outstanding, said the ratepayers' brief.
The court's oversight is a prime security feature that lured investors to purchase the warrants in 2013, the county has said, adding that the complex plan and 2013 financing cannot be unwound.
Jefferson County has also argued that the appeal is constitutionally, equitably and statutorily moot since the plan has been carried out.
The ratepayers said no harm will befall the county if their appeal before Blackburn moves forward.
Even if the federal oversight provision is ultimately removed from the debt adjustment plan, the indenture for the 2013 sewer warrants provides more latitude to resolve a default, their brief said.
If a default occurred, "the trustee shall be entitled to petition the bankruptcy court or any other court of competent jurisdiction for an order enforcing the requirements of the confirmed plan of adjustment," according to the indenture.
Those requirements include increasing rates charged for services so that the sewer system generates sufficient revenue to cure any default.
The provision allowing the bankruptcy court to maintain oversight is central to Jefferson County's case, and it has broader implications for investors who rely on security enhancements as part of their investment decisions, municipal restructuring expert James Spiotto has said.
Plus, Jefferson County is not the first to avail itself of a provision in the bankruptcy code that allows the court to retain oversight of a financing plan.
The borough of Fort Lee, N.J., voluntarily sought and received 40 years of federal court oversight for refunding bonds that were issued as part of its bankruptcy plan in the 1930s, Spiotto said.
"The court took jurisdiction over the payment of the bonds between 1939 and 1979," he said. "It was viewed as being constructive because [Fort Lee] had the court making sure the contractual obligation was lived to up, if needed."
The question in Jefferson County's case involves an interpretation over what the bankruptcy code permits and whether the court's supervision is actually the act of setting rates or insuring that the county complies with the covenants that it promised, Spiotto said.
The county also argued in a June brief setting the stage for its appeal that the rates charged for sewer service are or not set by the adjustment plan or ordered by the bankruptcy court.
Sewer system rates have been set by resolutions approved by the Jefferson County Commission to fix rates and charges sufficient to cover the cost of providing sewer service, which includes funds for operations and maintenance, capital expenditures, and debt service on the 2013 warrants, the county said.
Neither the plan of adjustment or the judge's confirmation order "changes the substantive law of the state of Alabama with regard to the enforcement of rates established pursuant to contract or legislation," the county's attorneys have said.
"Rather, the plan merely retains the bankruptcy court as an available forum in which such substantive law may be enforced, using the same remedies available in Alabama state court," the county said. "In no event will the bankruptcy court ever set sewer rates; it is simply a forum to enforce the plan and related contracts - just as an Alabama state court could."
However, the ratepayers questioned the provision, partly based on the Johnson Act, which essentially prohibits federal courts from taking actions that directly and indirectly affect the rates of utilities organized under state laws.
The ratepayers said that removing the "retention of jurisdiction provision" from the county's bankruptcy confirmation order will not unlawfully impose a new, involuntary plan on the county and its residents because "the indenture explicitly contemplates that the purchasers of the new sewer warrants may seek relief from courts other than the bankruptcy court."
The group also said that their appeal is not equitably moot simply because the new sewer warrants have been purchased and are trading in the market.
The transaction would not have to be unwound if the district court struck the jurisdictional retention provision from the plan because bond purchasers can seek relief from other courts if the county fails to increase sewer rates, they argued.
The appellate court ordered the county to file a reply to the ratepayers brief by Sept. 28.
Jefferson County filed for Chapter 9 bankruptcy in November 2011 citing a total of $4.1 billion in long-term debt, which now stands as the second-largest municipal bankruptcy behind Detroit.
