BRADENTON, Fla. - With the first hearing in the appeal of Jefferson County, Ala.'s bankruptcy set for May, history indicates that litigants could face an uphill battle proving their case, according to a legal expert.
Appellate courts typically uphold the bankruptcy judge's actions, said bankruptcy attorney James Spiotto, managing director of Chapman Strategic Advisors LLC and co-publisher of Muninetguide.com.
"It depends on the merits of the appeal but generally the bankruptcy courts have been getting it right," said Spiotto, who represented a creditor in Jefferson County's case but has since withdrawn from it.
David Carrington, president of the County Commission, said Tuesday there is "not a doubt" in his mind that the debt adjustment plan will survive the appeal.
The appeal ultimately will determine if U.S. Bankruptcy Judge Thomas Bennett properly confirmed the county's plan of adjustment on Nov. 22.
After the plan was confirmed, Jefferson County officially exited Chapter 9 in December after closing on the sale of $1.8 billion of new sewer refunding warrants. The proceeds were used to write down $3.14 billion in old sewer warrants.
The sewer debt is at the heart of three appeals filed by 13 litigants known as the Bennett ratepayers whose lead plaintiff is Jefferson County Tax Assessor Andrew Bennett. Their attorney is Calvin Grigsby, a former broker-dealer whose firm, Calvin Grigsby & Associates, is registered as a municipal advisor.
The first motion hearing in the bankruptcy appeal is slated for May 15 before federal Judge Sharon Lovelace in U.S. District Court in Birmingham.
Grigsby, who is working on contingency, has repeatedly told the court that his clients are elected state, and local officials and residents who are creditors of the county, and who represent a presumed "class of creditors" on the county's sewer system.
However, Jefferson County's attorneys argued in filings that two of the appeals, which relate to adversary proceedings in the main bankruptcy case, should be dismissed because they became moot when discharged by the adjustment plan. Those motions will be heard at the hearing in May.
The court should consider the only portion of the appeal that is not moot, county attorneys said, and that is whether the bankruptcy court erred in disallowing the proofs of claim for $1.63 billion filed by the Bennett ratepayers.
Grigsby argued that it is not equitable for two of his appeals to be struck down as moot because the law does not apply to challenges of the lien on sewer revenues that existed before the county filed for bankruptcy.
"Under the doctrine of equitable mootness, an appeal should not be dismissed, if the implementation of that relief would be inequitable," he said in a filing last week in preparation for the hearing. "The ratepayers are the only group affected in their pocketbooks by the indebtedness restructured by the confirmed plan of adjustment."
During an interview Wednesday, Grigsby said that his appeals should also go forward because during the bankruptcy case they were procedurally mishandled when he was denied the opportunity to have a trial on the adversarial cases, which would have allowed him to discuss the merits and call experts.
The county used a "tactical maneuver" to place his cases on hold before trial could be held, and had the cases dismissed at the confirmation hearing, he argued.
"This is a situation where the consumers don't seem to have a voice in what's going on, and they are the ones paying the bills," said Grigsby. "My heart goes out to them."
Grigsby, who worked on civil rights issues in 1965, said many of the customers on the county's sewer system are poor, disabled, or single mothers. "That's why I'm involved [in this case]," he said.
In previously filed court documents, Grigsby has consistently cited a number of reasons why ratepayers are due to get refunds, or lower sewer bills. Those reasons include the fact that the sewer system refunding warrants sold in 2002 and 2003, and related swaps, were tainted by corruption resulting in markups and overcharges.
He has also said that Alabama law requires that new sewer debt issued in Jefferson County should have been approved by voters before the refundings occurred. Because that didn't happen, the refunding debt was not properly issued.
"I've got a lot of facts to show that the original warrants that were issued were invalid," he said.
Some of the arguments may be difficult to prove on appeal because of events that occurred years ago, which the district judge may take into consideration, according to Spiotto.
Before the county filed for bankruptcy in November 2011, a state court found that the sewer system refunding warrants were valid, and appointed a receiver over the sewer system with the power to raise rates, he said. The receiver was later removed by the federal bankruptcy judge.
The original sewer debt was also validated by a state court, said Spiotto.
Jefferson County's official statements for the sewer refundings in question also state that Alabama law authorizes any county "to issue, without an election, refunding warrants for the purpose of refunding refundable debt then outstanding."
The new sewer refunding warrants the county sold in December were also validated by the federal judge who confirmed the debt adjustment plan.
"Historically, unless you have some real clear issue, and it's generally decided at the lower court level, taxpayer lawsuits haven't gone very far for unpopular causes," Spiotto said of municipal bankruptcy appeals.
Additionally, "there are some federal bankruptcy court cases that do not generally allow class action types of claims," he continued. "They have to be individual claims."
"I think it's a bridge too far," he said, referring to the appeal. "I don't think you can litigate it any more."
In addition to the expense of defending the appeal, Alabama's most populous county faces a new financial burden since a federal receiver was appointed last October's to resolve a 30-year-old complaint over discriminatory hiring practices. The receiver recently asked for $24 million to rectify hiring problems. Amid softening revenues, the funding request will be "problematic" for the cash-strapped county, according to Carrington.
The federal receiver recently asked for $400,000 in the current fiscal year to hire five employees for the county's human resources department. The receiver also asked for $9.8 million in fiscal 2015, and estimates that $13.75 million will be needed in 2016.
"The county will be able to internally absorb this year's budget request since there are budgeted monies available for more than 400 open positions that still need to be filled in coordination with the receiver and the Personnel Board," Carrington said. "Next year's budget for the receiver will be much more problematic and will most probably require shifting general fund department allocations with associated reductions in service levels, using a significant portion of one-time monies for one-time expenditures, and aligning the county's capital priorities."
The county's annual unaudited financial and operating report to bondholders for fiscal 2013 shows that general sales and use tax revenues increased by $873,516 to $97.4 million over the previous year. The county's fiscal year ends Sept. 30.
The report, released Monday, also shows that while assessed property values increased, ad valorem tax collections decreased by $6.6 million to $540.05 million. Educational sales tax collections, which secure warrants issued for school improvements, also declined by $1 million.
Meanwhile, the mayor of Trussville threatened to sue Jefferson County last week because state law requires counties to maintain roads within city limits, according to the Birmingham News.
The Jefferson County Commission passed a resolution in 2009, a year after the county's financial crisis began, announcing that it would no longer maintain its roads in municipalities.
County officials reportedly said they hoped a resolution could be worked out with various cities to avoid the cost of litigation.
