BRADENTON, Fla. — The federal judge in Jefferson County's bankruptcy case on Monday struck down two arguments by the receiver in charge of the Alabama county's sewer system supporting the contention that the receiver should remain in place.
The receiver, John Young, had argued that the court should abstain from exercising authority over him pursuant to the "Rooker-Feldman Doctrine" and the "Johnson Act."
Judge Thomas Bennett said based on arguments of counsel during two days of hearings last week that "portions of the [receiver's] motions premised on the Rooker-Feldman Doctrine and the Johnson Act of 1934 … are denied." He offered no other explanation.
Young and his attorney, Patton Hahn with Baker, Donelson, Bearman, Caldwell & Berkowitz PC, declined to comment on the judge's ruling.
The Rooker-Feldman Doctrine would have barred arguments under the premise that an Alabama judge violated the state's constitution when Young was appointed receiver with the authority to set sewer system rates.
Alabama Circuit Judge Albert Johnson appointed Young as receiver to take charge of Jefferson County's sewer system in September 2010. At the time, the county argued that the appointment would violate Alabama's constitution.
However, Johnson cited a number of bond covenant violations and defaults on bond payments when he appointed Young with the authority to set "reasonable" sewer rates.
The county did not appeal the ruling at the time.
Receivership of the system was sought by the Bank of New York Mellon, the trustee for nearly $3.2 billion of defaulted variable- and auction-rate sewer bonds at the time.
Before Young was appointed, BNY Mellon and the two biggest insurers of the sewer debt, Syncora Guarantee Inc. and Financial Guaranty Insurance Co., unsuccessfully sought receivership in federal court.
In June 2009, federal Judge David Proctor cited the Johnson Act as the primary reason why he would not appoint a receiver, though Proctor agreed that the trustee and insurers had prevailed on the facts.
Proctor told them to pursue their case in state court.
The Johnson Act under the federal code essentially prohibits federal courts from taking actions that affect the rates of utilities organized under state laws.
"The judge has denied only portions of the motions," said Karen Grande, a partner at Edwards Wildman Palmer LLP, who is special counsel to Rhode Island's municipal receivership program, and involved in the Central Falls bankruptcy case there. "I believe the judge was merely narrowing the issues to be argued."
Young has other arguments supporting the contention that he should remain in place, according to court documents. He has said that the court lacks authority to remove him because the bankruptcy code — which governs the turnover of property in the hands of a receiver — is not applicable to Chapter 9.
In addition, he has argued that he is an officer of the state court, and that the bankruptcy court cannot divest him of rate-making authority properly granted prior to the county filing for Chapter 9.
Young also contends that the automatic stay associated with a bankruptcy filing, which halts the payment of debts, does not apply to the exercise of creditors' rights to the special revenues of the sewer system to pay debt service.
The bankruptcy judge has given parties in the case until Friday to file supplemental briefs regarding the receivership issue.
Jefferson County filed the largest municipal bankruptcy in the country on Nov. 9. It has $4.2 billion of debt outstanding, which includes general obligation as well as school and sewer revenue warrants.
