Appellate proceedings currently under way in the Jefferson County, Alabama bankruptcy case could decide important issues concerning the finality of a municipal debtor’s plan of adjustment and whether the terms of a confirmed plan can be changed on appeal. In other words, if a municipal debtor’s plan of adjustment is confirmed and substantially performed, can a court reviewing the plan on appeal retroactively change the deal?
The United States District Court for the Northern District of Alabama declined to dismiss an appeal of the confirmed plan of Jefferson County, notwithstanding the lack of a stay of the plan pending the appeal and the substantial performance of the plan. Instead, in connection with Jefferson County’s motion to dismiss the appeal, the court held that it could strike an important provision from the plan in the appeal and thus modify the confirmed plan. Bennett v. Jefferson County, Ala., No. 14-213 (U.S. Dist. Ct. N.D. Ala. Sept. 30, 2014) (the “District Court Dismissal Order”).
In an order entered yesterday, the Eleventh Circuit Court of Appeals agreed to hear the appeal of the District Court Dismissal Order. Jefferson County, Ala. v. Bennett, et al., No. 14-90024 (11th Cir., Apr. 22, 2015).[1]
Confirmed Plan of Adjustment
In November 2011, Jefferson County (the “County”) filed the largest municipal bankruptcy case in the United States. The amounts at stake in the County’s bankruptcy case were later surpassed with the bankruptcy filing by the City of Detroit, Michigan in July 2013. As has been widely reported, the County’s primary debts related to warrants issued to finance the rehabilitation of the County’s sewer system. The costs of the rehabilitation, and rates payable by users of the County’s sewer system, significantly increased over time. The County also entered into interest rate swaps relating to the warrants which were designed to lower the County’s borrowing costs, but the swaps reportedly had the effect of further increasing the County’s debt load. The County filed bankruptcy on November 9, 2011.
The County’s Amended Plan of Adjustment dated November 6, 2013 (the “Plan”) provided for the issuance of new sewer warrants (the “New Sewer Warrants”) to refund prior sewer warrants. The Plan also required the County Commission, the state body with authority to set sewer rates, to set future sewer rates and rate increases payable by users of the sewer system sufficient to pay the New Sewer Warrants (such provision, the “Approved Rate Structure”). Specifically, the Plan provided that:
the Confirmation Order shall constitute a conclusive finding and determination that the Approved Rate Structure complies with the requirements of [the] Bankruptcy Code . . . and applicable state law, and is appropriate, reasonable, non‑discriminatory, and legally binding on and specifically enforceable against the County in accordance with the Plan and under all applicable state and federal laws. From and after the Effective Date, the County Commission shall adopt and maintain the Approved Rate Structure . . . as necessary for the County to satisfy the obligations arising under the New Sewer Warrants . . ., including increases in sewer rates to the extent necessary to allow the timely satisfaction of the County’s obligations under the New Sewer Warrants . . . .
Plan at § 4.3 (In re Jefferson County, Ala., No. 11-5736, Dkt. # 2182 (Bankr. N.D. Ala.)). The Plan also provided that “the Bankruptcy Court shall retain exclusive jurisdiction to enforce the Approved Rate Structure . . . , to require the County to otherwise comply with the New Sewer Warrants and the New Sewer Warrant Indenture, and to hear and adjudicate any action or proceeding enforcing, challenging, or collaterally attacking the Approved Rate Structure.” Id. at § 5.11.
The Plan was confirmed by the United States Bankruptcy Court for the Northern District of Alabama. In re Jefferson County, Ala., No. 11-5736 (Bankr. N.D. Ala. Nov. 22, 2013) (the “Confirmation Order”). Similar to the Plan, the Confirmation Order required the County Commission to “adopt and maintain the Approved Rate Structure.” Id. at 48. If the County Commission fails to enact the necessary sewer rate increases in compliance with the Approved Rate Structure, the Plan provides the bankruptcy court with exclusive jurisdiction to order compliance with the Plan, including the Approved Rate Structure, and otherwise adjudicate disputes over the Approved Rate Structure. Based on the Confirmation Order and the terms of the confirmed Plan, the County offered and sold the New Sewer Warrants to third‑party investors. The New Sewer Warrants provided the County’s exit financing from its bankruptcy case. After the issuance of the New Sewer Warrants, the confirmed Plan was substantially performed.
District Court Appeal
Arguments on Appeal
Following entry of the Confirmation Order, certain ratepayers in Jefferson County (the “Ratepayers”) appealed the bankruptcy court’s Confirmation Order to the district court. The Ratepayers argued, among other things, that the confirmed Plan’s provision authorizing the bankruptcy court to order compliance with the Approved Rate Structure in the event the County Commission failed to enact future sewer rate increases, and the bankruptcy court’s retention of jurisdiction over the bankruptcy case for this purpose, infringed the constitutional rights of the Ratepayers and citizens of Jefferson County. More specifically, the Ratepayers asserted the federal court’s Confirmation Order effectively took rate-making authority out of the hands of elected state County Commissioners and improperly deprived the Ratepayers of their right to vote for County Commissioners who have authority to set rates. The Ratepayers also asserted that the Plan’s imposition of future rate increases violated their right to be free of burdensome debt without due process. The Ratepayers did not request or obtain an order staying performance of the Plan pending the appeal.
Generally speaking, an appeal of a plan that has been substantially performed is often dismissed on the basis that the appeal is moot. Unless the appellant requests and is successful in obtaining a stay of a confirmed plan pending an appeal, the plan will typically be performed by the debtor notwithstanding the appeal. In most cases involving a confirmed plan that has been performed, an appeal is considered moot because the plan was not stayed, performance of the plan cannot be unwound on appeal, and thus the relief sought in the appeal (including unwinding transactions that have been performed) is no longer available. The “mootness” of the appeal often leads to its dismissal.
In response to the Ratepayers’ appeal, Jefferson County filed a motion with the district court to dismiss the appeal.[2] The County asserted the appeal as to the validity of the Approved Rate Structure was constitutionally moot.[3] The County argued the Confirmation Order and Plan were not stayed pending appeal, the New Sewer Warrants were issued under the Plan, and the Plan was substantially consummated. The County also asserted the Plan was comprised of complex and interconnected provisions and thus could not be altered or modified on appeal without upsetting the Plan as a whole. Thus, the County argued, the appeal relating to the Plan and the Approved Rate Structure should be dismissed as moot because the district court no longer had an ability to provide the Ratepayers with effective relief on appeal.
The County also argued the appeal was equitably moot because third parties purchased the New Sewer Warrants in reliance on the Plan’s provisions, the terms of the Confirmation Order and the absence of a stay of the Plan pending the appeal. Thus, the County asserted the Plan should be considered final, and the County and holders of the New Sewer Warrants should be permitted to rely on the Plan’s finality.[4]
District Court Order
The District Court Dismissal Order rejected the County’s mootness arguments and denied the County’s motion to dismiss the appeal. Instead, the district court held the Ratepayers’ appeal was not mooted by the Plan’s performance because the district court could, if necessary, prohibit the enforcement of the Approved Rate Structure in the Plan, notwithstanding the substantial consummation of the Plan. The district court reasoned:
The fact that the Confirmation Order has taken effect – the New Sewer Warrants have [been] issued and the Old Sewer Warrants have been retired – does not extinguish the controversy, although it may limit the scope of relief available. If, as the Ratepayers contend, the Confirmation Order’s rate-structure provision is unconstitutional, the court may strike it. Indeed, the bond rating company Fitch noted this problem with the New Sewer Warrants and rated the creditworthiness of those warrants accordingly. The Ratepayers have a legally cognizable interest in not paying rates ordered by the bankruptcy court that is acting pursuant to an unconstitutional (the court must assume for now) Confirmation Order, and, thus, they are not precluded from pursuing their appeal. Stated differently, the court could “fashion some form of meaningful relief,” by vacating the portion of the Confirmation Order that retains jurisdiction in the bankruptcy court to order rate increases according to the Approved Rate Schedule.
District Court Dismissal Order at 20-21 (citation omitted).
The district court also held that the concept of equitable mootness does not apply in a Chapter 9 municipal bankruptcy case. The district court reasoned that equitable mootness is a Chapter 11 concept invoked by courts to protect a confirmed plan involving private parties. In distinguishing a Chapter 9 case from a Chapter 11 case, the district court stated:
“The bankruptcy of a public entity,” such as the County, “is different from that of a private person or concern. Unlike any other chapter of the Bankruptcy Code, Chapter 9 places federal law in juxtaposition to the rights of states to create and govern their own subdivisions.”
. . . .
The prudential concerns of a Chapter 9 plan are different from the prudential concerns of a Chapter 11 plan. “[T]wo policies underlying Chapter 11” are “preserving going concerns and maximizing property available to satisfy creditors.” The policy underlying Chapter 9 “is not future profit, but rather continued provision of public services.” These major differences in the purposes of Chapter 9 and Chapter 11 reorganizations alter analysis of whether equitable considerations should factor into this court’s decision to hear the Ratepayers’ appeal.
Id. at 38-39 (citations omitted). The district court further held that the Ratepayers’ appeal of the Plan should proceed even when considering equitable principles, noting that “the equities lie with the Ratepayers, and the questions they raise about the legality and constitutionality of the Confirmation Order affect public and political interests – not merely private interests – and, thus, counsel for Article III review of the Confirmation Order.” Id. at 46 (citation omitted).
Eleventh Circuit Appeal
Following the District Court Dismissal Order, the County filed a motion with the district court for leave to file an interlocutory appeal of such order to the Eleventh Circuit Court of Appeals. The district court granted this request, and the County then requested the Eleventh Circuit to hear a permissive interlocutory appeal of the district court order. The County reasserted its constitutional mootness argument and argued that equitable mootness should apply in a Chapter 9 bankruptcy case. Both the National Association of Bond Lawyers (NABL) and the Securities Industry and Financial Markets Association (SIFMA) filed amicus briefs with the Eleventh Circuit supporting the County’s request that the Eleventh Circuit hear the County’s appeal.
The Eleventh Circuit agreed to hear the appeal. The appeal proceedings could decide whether a municipal debtor’s confirmed plan of adjustment that is substantially consummated is considered final, or whether a court reviewing such a confirmed plan on appeal has the authority to modify the plan notwithstanding the plan’s substantial performance.
The results of the appeal proceedings could have broad application not only in the County’s case, but also with other financially troubled municipalities eligible for Chapter 9 bankruptcy relief. On the one hand, a ruling upholding the District Court Dismissal Order could arguably chill the willingness of creditors of a municipal debtor to agree to concessions in reliance on the terms of a confirmed plan, the willingness of lenders to extend post-petition financing to a municipal debtor in reliance on the finality of a post-petition financing order or confirmed plan and the willingness of investors to purchase a municipal debtor’s bonds issued under a confirmed plan (at least without first determining that no appeal has been filed during the applicable appeal period).[5] Such a ruling could also result in municipal debtors seeking to discharge debt rather than requiring ratepayers or taxpayers to in effect refinance municipal debt through future rate or tax payment obligations. On the other hand, a ruling reversing the District Court Dismissal Order and upholding the finality of a municipal debtor’s plan that has been confirmed and substantially performed could have opposite effects. Such a ruling could facilitate a municipal debtor’s ability to obtain post-petition financing by supporting the financing with a secure revenue stream. A ruling upholding a municipal debtor’s plan which requires the payment of future rate or tax obligations could also arguably encourage municipal debtors to refinance debt with future ratepayer or taxpayer obligations or negotiate out-of-court settlements instead of seeking to discharge debt in bankruptcy, especially if a bankruptcy filing could result in a restructuring of debt payable from future revenues rather than a discharge of debt. However, the effect of any ruling in the County’s appeal proceedings on other municipal debtors will depend not only on the nature of the ruling, but also the facts and circumstances present in a particular case or transaction.
Additional Information
For more information on this and other bankruptcy questions, please contact your Kutak Rock attorney or the author of this Client Alert.
[1] The Eleventh Circuit appeal will proceed under case number 15-11690.
[2] The Ratepayers’ appeal included the Confirmation Order and additional orders of the bankruptcy court. The County’s motion to dismiss sought dismissal of the Ratepayers’ appeal as it relates to the Confirmation Order, among other portions of the appeal, but not dismissal of the appeal in its entirety. This memorandum focuses only on the appeal proceedings as they relate to the Confirmation Order and confirmed Plan.
[3] Generally speaking, the concept of constitutional mootness in the context of an appeal is based on the requirement in Article III of the United States Constitution that federal courts hear and decide only a live “case or controversy.” If no live case or controversy is presented for which a federal court may grant relief, then the court lacks jurisdiction over the appeal and is required to dismiss the appeal as moot.
[4] The County also asserted the New Sewer Warrants constituted post-petition financing under Bankruptcy Code Section 364 that, like the Plan itself, was not stayed and could not be upset on appeal after the financing was performed.
[5] It may also be necessary to determine whether relief is potentially available under the grounds set forth in, and the extended period for relief under, Fed. R. Civ. P. 60.