Judge Orders Briefs in Jefferson County, Ala.'s Bankruptcy Appeal

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BRADENTON, Fla. - Attorneys involved in an appeal of Jefferson County, Ala.'s Chapter 9 bankruptcy must file final written briefs to determine if the appeal will be dismissed.

U.S. District Court Judge Sharon Lovelace Blackburn ordered the briefs Monday after oral arguments from attorneys representing the county and the appellants.

The appeal "is constitutionally, equitably, and statutorily moot" because the bankruptcy plan of adjustment is in place, argued the county attorneys who filed the motion for partial dismissal of the appeal.

Further challenge of the plan is moot, county attorneys have said, because it was approved by U.S. Bankruptcy Judge Thomas Bennett in November, paving the way a month later for the sale of $1.8 billion in 40-year sewer refunding warrants to write down $3.1 billion in related debt.

The plan was largely implemented by December and allowed the county to exit bankruptcy. Except for the appeal, the case has dwindled mostly to resolving individual claims.

At Monday's hearing, the county's attorneys told Blackburn that the plan cannot be overturned because it is already in place, and even if it included a provision that is unconstitutional the appellants failed to follow the proper process to challenge it.

Blackburn said the position seemed "shocking," according to people at the hearing.

"I feel that was kind of getting smart with her, like telling her 'who do you think you are if you think I can't go further'" with the appeal, said Birmingham City Councilor Sheila Tyson, who attended the hearing.

Tyson, who represents some of the poorest districts on the county's sewer system, has been a long-time opponent of the debt amassed by the county, which runs the sewer system in unincorporated Jefferson County and its municipalities, which include Birmingham, the county seat. Her name is not among more than a dozen signed onto the appeal because she was sick the day papers were signed, she said.

"I prayed through the whole hearing," Tyson said, adding that she fights the urge to give up. "You can't predict what these judges will do especially with a delicate case like this. Hopefully, you know, we will prevail with the verdict."

Matt Lembke, who argued the county's case before Blackburn, said he thought the hearing was "very thorough."

"The judge asked a lot of good probing questions, and the county feels like it was able to make its points as to why the appeal should be dismissed," he said.

Former broker-dealer Calvin Grigsby with Grigsby & Associates Inc., now a financial advisor and attorney for appellants, said he believed Monday's hearing went well. He described the courtroom as being "packed" with plaintiffs' supporters. Tyson said more than 100 protestors with placards lined sidewalks for several blocks near the courthouse.

"The county's position is that because the plan 'appears' too complicated to unwind the court cannot fashion an effective remedy on appeal, so the appeal has to be dismissed as moot," Grigsby said, adding those arguments are wrong.

According to Grigsby, the appellants' claims are not constitutionally moot because they have an ongoing constitutional challenge. The claims are not equitably moot because the court can fashion an effective remedy if Blackburn rules that the sewer refunding warrants sold in 2002 and 2003 are void because they were illegally issued.

Blackburn could side with appellants "by having the old swap warrant holders who got refinancing proceeds disgorge the excess debt created by criminal activity or just by sending it back to Judge Bennett to come up with a plan that reflects her [Blackburn's] opinion," said Grigsby.

He also said the claims are not statutorily moot because the U.S. Code "only protects an administrative priority on debt used to finance the county [and] not debt used to refinance prepetition debt held by private investors."

Grigsby said Blackburn "truly believes the deal with only four loans and some trade debts is complicated."

"I tried to show her that there are only four warrant debts, which are not interrelated - sewer warrants, GO warrants, school warrants, and the Bessemer Lease - and our appeal is only about one of them," he said. Grigsby has said previously that his case is solely about the sewer warrants, and that is the only portion of the county's plan that needs to be undone.

Grigsby said he also argued Monday that increasing the county's sewer debt to $14.7 billion "in sewer fee increases" is inequitable.

The $14.7 billion amount is based on the fees ratepayers are to pay over the 40-year sewer revenue restructuring financing plan that the county provided as part of its plan to exit bankruptcy. It was also sent to sewer warrant holders in a material event notice on EMMA last year.

"The financing plan includes the $6.6 billion in debt service and the $4.4 billion in operating expenses, and the $3.7 billion in additional annual charges for extra coverage and, if not needed, pay-as-you-go capital improvements" over the 40-year plan, he said. "What the county owes, and passes through to the ratepayers under the rate covenant in the indenture, has all three components - warrant debt, operating costs and additional coverage - and not just the debt service on the new warrants.

"The new indenture pledges all three items or the entire $14.7 billion, and the enforcement of these sewer charges has been etched in stone and out of the hands of future commissions since the original plan of adjustment was filed in June 2013," Grigsby added.

In the plan of adjustment, Judge Bennett accepted the county's proposal to have the bankruptcy court retain jurisdiction over the plan after its implementation, to adjudicate any and all controversies, suits, or issues, "including implementation or enforcement of the approved rate structure and issuance of the new sewer warrants under the new sewer warrant indenture."

Even though Jefferson County's sewer system creditors took $1.4 billion in haircuts in the adjustment plan, the county has more long-term sewer debt now than existed prior to the credit crisis when defaults occurred, according to a finance expert who did not want to be named.

"The face amount of the debt is less now, but interest payments are substantially more so the combined effect is a material increase in debt," the expert said, adding that includes accreted payments from capital appreciation warrants associated with the current sewer debt structure.

But arguments concerning the merit of the new debt, and the legality of the old sewer refunding warrants, were not part of Monday's hearing.

Whether the merits of the appeal are eventually heard depends on how Blackburn rules on the motion for partial dismissal in the coming weeks.

According to Tyson, appellants likely will appeal if Blackburn dismisses their appeal.

County attorneys have said in court filings that the only issue that should proceed to the briefing stage is the bankruptcy court's denial of the appellants' claim against the county for $1.63 billion sought on behalf of about 130,000 sewer system customers. The $1.63 billion is the amount that Grigsby says sewer system ratepayers were overcharged due to the illegal issuance in 2002 and 2003 of the sewer warrants and swaps as well as corruption.

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