BRADENTON, Fla. — Jefferson County, Ala., on Friday filed a notice of cross appeal and said that it may challenge a bankruptcy judge’s ruling that allows sewer revenues to be used for debt service payments.
The county said it also may object to Judge Thomas Bennett’s decision to grant some parties standing in the bankruptcy case, including the state court-appointed receiver, John Young.
The cross appeal was filed in bankruptcy court in Birmingham “out of an abundance of caution” in response to eight appeals, the county said.
Eight parties have said they want to appeal some of Bennett’s rulings, including those on Jan. 6 and Jan. 20 that stripped the receiver of the power to run the sewer system, and turned it back over to the county.
In keeping with legal precedent in past municipal bankruptcies, Bennett also held that the special revenues securing the sewer warrants were not subject to the automatic stay that accompanied the Chapter 9 filing.
The judged ordered the payment of debt service on the sewer warrants after certain operating expenses are paid.
Though it is not yet clear why Jefferson County believes there are grounds to reconsider the special revenue pledge, the potential cross appeal is something investors should watch, said Richard Ciccarone, managing director and chief research officer for McDonnell Investment Management.
“My concern here is that in a bankruptcy a lot of surprises can be assured because lawyers look for technicalities and loopholes, and interpretations of gray areas,” Ciccarone said. “It’s very difficult to anticipate all the loopholes that may occur.”
“This is charting new territory here for investors in some ways,” he added.
While Bennett has ruled on some issues, such as the receiver’s status and authorizing payment of the warrants, some issues are still outstanding, such as the amount of net revenues that will be made available for debt service.
There are also outstanding motions pertaining to relief from the automatic stay, which will be heard in hearings April 4-6.
In addition to Young, the trustee for the sewer warrants, Bank of New York Mellon, three bond insurers and various banks have filed appeals of Bennett’s rulings.
Those include the judge’s ruling late last year barring attorneys from basing their arguments supporting the receiver from being premised on the Rooker-Feldman Doctrine and the Johnson Act of 1934.
Rooker-Feldman prevents a federal court from undoing rulings of a state court, while the Johnson Act essentially prohibits federal courts from taking actions that directly and indirectly affect the rates of utilities organized under state laws.
Bennett also has not determined if Jefferson County is eligible to file for bankruptcy. Creditors and others are challenging if Alabama law permits the filing because the county only has warrants outstanding, not bonds as cited in state law.
Jefferson County filed the largest municipal bankruptcy in the country on Nov. 9, with a total of $4.2 billion of warrants outstanding.
