The United States 11th Circuit Court of Appeals on Tuesday tentatively scheduled oral arguments for the week of June 3 in the appeal involving Jefferson County, Ala.’s sewer system receiver.
Nine petitioners, including Bank of New York Mellon as the trustee for $3.14 billion of outstanding defaulted sewer warrants, are appealing bankruptcy Judge Thomas Bennett’s ruling in early 2012 that stripped a state court-appointed receiver of the right to run Jefferson County’s sewer system.
The issue is important to the bond market because there is no known precedent for the treatment of a receiver, a common method of protection for bondholders, in a Chapter 9 bankruptcy case.
Bennett ruled that the sewer system belonged to the county, which should control it during the bankruptcy case. A state court judge had appointed John S. Young as receiver of the system in late 2010 after BNY Mellon filed suit due to ongoing, uncured defaults and the county’s failure to raise sewer system rates.
Others granted permission to appeal Bennett’s ruling were Assured Guaranty Municipal Corp., Financial Guaranty Insurance Co., Bank of America, Syncora Guarantee Inc., Bank of Nova Scotia and JPMorgan.
Jefferson County has filed a cross appeal in the same case in an attempt to overturn an interpretation of the Chapter 9 bankruptcy code that has so far protected those who invested in revenue bonds issued to finance essential infrastructure.
The county is appealing the long-held interpretation of bankruptcy code section 922(d) in which “pledged special revenues” are protected during a Chapter 9 bankruptcy.
That interpretation, which federal Judge Thomas Bennett upheld early last year, essentially protects pledged revenues securing the county’s sewer warrants and enables investors to be paid while the Chapter 9 case proceeds.
Jefferson County does not agree, and said in an appeal Oct. 9 that investors who hold sewer system warrants should wait until the end of the bankruptcy case to get paid.
The appeal is one of many moving parts in the nation’s largest-ever municipal bankruptcy, which was filed in November 2011 after the county rejected a settlement with creditors who offered to take a more than $1 billion haircut.
Attorneys for the county and creditors are preparing for a hearing in Bennett’s courtroom beginning next Wednesday over sewer rate increases announced by Jefferson County commissioners in November.
The new rate structure is expected to generate a 5.9% increase in revenues. For most residential customers, the increase will be less than $2 a month.
BNY Mellon said in a brief Friday that it will demonstrate that the county designed and implemented a process to adopt new rates “in a transparent attempt to imprint an appearance of formality onto what was nothing more than a litigation strategy designed to impair the value of the trustee’s and warrant holders’ collateral.”
The trustee has asked Bennett to allow for the reappointment of the receiver or order the county to immediately implement a new rate structure that would result in an initial 22% increase in system revenues.
BNY Mellon said it would proffer in court “two revenue models that demonstrate that the system can, with reasonable rates, generate sufficient system revenue to repay the indebtedness and the costs of operating the system.”