BRADENTON, Fla. — An appeals court may provide an answer to one of the key questions raised in the ongoing appeal of the Jefferson County, Ala. bankruptcy exit plan.
U.S. District Judge Sharon Blackburn on Tuesday gave the county permission to ask the appellate court to weigh in on a recent ruling that involves a key piece of protection for bondholders, but not on the terms that the county had sought.
Both sides in the case hailed the decision.
Blackburn said that the county can file a petition with the 11th Circuit Court of Appeals in Atlanta.
Attorneys for Jefferson County wanted to ask the appellate court to determine if Blackburn could strike a selected provision of the county's plan of adjustment without the county's consent.
Blackburn on Sept. 30 had acknowledged that the county had already issued new sewer warrants to retire the outstanding debt, and that some parts of the bankruptcy plan "may be impossible to reverse." But she rejected the county's contention that the appeal was moot because the plan was largely consummated.
Blackburn also said that she would consider the constitutionality of the plan that cedes the county's future authority to set sewer rates to the bankruptcy court.
That provision — a cornerstone of the county's bankruptcy plan of adjustment — was offered as a security feature when the county issued $1.8 billion of sewer refunding warrants to write down $3.2 billion of outstanding sewer debt in order to exit the nation's second-largest municipal bankruptcy on Dec. 3, 2013.
On Tuesday, Blackburn reframed the question the county wanted to pose to the appellate court to include the ratepayers who have appealed the county's bankruptcy exit plan.
Blackburn said the county can ask the 11th Circuit "whether the ratepayers' appeal of the confirmation order is moot either constitutionally, statutorily, and/or equitably" because the plan had been consummated.
She also wants the appellate court to determine if the appeal is moot because the ratepayers failed to obtain a stay from the bankruptcy court that would have delayed implementation of the plan as they sought an appeal.
Blackburn's ruling is good news for the county, said County Commissioner Jimmie Stephens, who was reelected Nov. 4 along with four other board members who were involved in the bankruptcy filing. Stephens was elected as board president on Nov. 12.
"Jefferson County looks forward to a speedy resolution of this matter," he told The Bond Buyer in an email.
The county has until Dec. 12 to file a petition with the 11th Circuit Court of Appeals.
The underlying case is on hold until the appellate court rules.
"I think this was a wise and thoughtful decision by Judge Blackburn in the interest of all parties," said Calvin Grigsby, who represents the ratepayers on the county's sewer system. "It allows the so-called 'mootness' defense to the ratepayers' appeal to be resolved once and for all."
For the ratepayers, going to the 11th Circuit at this stage of the case "is more efficient" than waiting until the legal challenge ran its course where it could be reversed on the question of mootness, Grigsby said.
The issue before the 11th Circuit is whether bankruptcy courts, in confirming a Chapter 9 plan of adjustment, can be the final determiner of issues that involve certain rights of citizens and state powers over utilities rates if the plan is not stayed on appeal and implemented, said municipal bankruptcy expert and attorney James Spiotto.
In recent Chapter 11 court decisions, judges have determined that issues on appeal are moot after implementation of a plan that has not been stayed by the court, he said.
There also are provisions in the bankruptcy code guiding Chapter 11 cases with respect to state regulatory approval of utility rates under state law. Those cases require that a utility commission approve of rate changes in a confirmed plan or that the plan is subject to the commission's approval.
In Jefferson County's bankruptcy appeal, Blackburn's ruling seeks to clarify the limits of the bankruptcy court's jurisdiction over sewer rates, and who has the power to enforce them, said Spiotto, who is managing director of Chapman Strategic Advisors.
"The district court appears to be saying that you have constitutional and state statutory rights, and you have the 10th Amendment limitation over the jurisdiction of the bankruptcy court in Chapter 9 as opposed to Chapter 11, therefore can constitutional or a state statutory issue be mooted by the bankruptcy court's confirmation of a plan and the implementation of that plan precluding any review at the district court or appellate level," Spiotto said.
"The plan [of adjustment] just can't run over those rights given the limitations of the jurisdiction of the bankruptcy court regarding constitutional and state statutory issues," he said.
The appellate court's ruling could be a step in determining how far the doctrine of mootness can go in Chapter 9 bankruptcy cases and whether the district court can review the rate enforcement provision of the plan.
In certifying the question to the appellate court, the district court is approaching it from the standpoint that if the mootness doctrine is not applicable to this situation, the reviewing court can strike a portion of the plan where the bankruptcy court is not believed to have jurisdiction, Spiotto said.
Grigsby said there are so many errors in the confirmation order the bankruptcy court approved that it could only survive if the mootness doctrine does not apply in the ratepayers' appeal.
"This is a case where the new sewer warrants were issued not because of need for post-petition debt but to manufacture a mootness argument so sewer rate increases could be crammed down on ratepayers with no legal recourse," he said.
If the appellate court rules that the ratepayers' case is not moot, Grigsby said his clients will finally get the chance to have the district court review the case on the merits.
"I am looking forward to getting the mootness issue resolved at the 11th Circuit," he said.
Jefferson County filed for Chapter 9 bankruptcy in November 2011 citing a total of $4.1 billion in long-term debt. Of that amount, $3.2 billion was related to the sewer system.
U.S. Bankruptcy Judge Thomas Bennett confirmed the county's plan of adjustment on Nov. 22, 2013, and the county emerged from the nation's second-largest municipal bankruptcy on Dec. 3, 2013 after closing on $1.8 billion of 40-year sewer refunding warrants.
Most, if not all, investors likely purchased the new warrants because of the provision requiring the federal court to retain jurisdiction even though it was an untested legal theory, Municipal Market Advisors managing director Matt Fabian told The Bond Buyer in a recent interview.
"This is why we said a non-investment grade rating was more appropriate," he said.
In advance of last year's sale, Standard and Poor's assigned investment grade ratings of BBB and BBB-minus to the senior and subordinate warrants, while Fitch assigned junk ratings of BB-plus and BB.
S&P analysts said at the time that its triple-B ratings recognized clearly significant ongoing challenges that the county must address, but that the ratings were "forward-looking" and not meant to be punitive or a reward for exiting bankruptcy.
Moody's Investors Service, which was not asked to rate the warrants, said in a special comment that the debt should be rated in the B or Ba range, reflecting "substantial-to-high credit risk."
Analysts at Moody's also questioned the court's jurisdiction to act if future county commissioners failed to increase sewer rates.
"While the bond trustee could then ask the court to compel the county to enforce its bankruptcy plan, we are not aware of a precedent for a federal court to compel public utility rates of this nature, given the federalism issues involved in this bankruptcy," analysts said.
In September, when Blackburn said she could prohibit enforcement of the court's oversight of sewer rates, she also noted the comments of all three rating agencies.
Fabian said he believed S&P's investment grade ratings were based on Jefferson County's ability to pay debt service, backed by the ability of the court to force the county to raise rates, and not on the county's willingness to pay bondholders.
If the court's jurisdiction is lost, bondholders may worry about the county's willingness to make payments, and S&P likely will downgrade its ratings, he said.
If the county fails to set the sewer rates necessary to pay back the debt, bondholders could ask an Alabama state court to enforce the rate-setting provision in the plan of adjustment, Spiotto said.
