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Bennett v. Jefferson County

United States Court of Appeals, Eleventh Circuit

August 16, 2018

ANDREW BENNETT, Jefferson County Tax Assessor, Bessemer Division, RODERICK V. ROYAL, Former Birmingham City Council President, MARY MOORE, Alabama State Legislator, JOHN W. ROGERS, Alabama State Legislator, WILLIAM R. MUHAMMAD, et al., Plaintiffs - Appellees,

          Appeal from the United States District Court for the Northern District of Alabama D.C. Docket No. 2:14-cv-00213-SLB, Bkcy No. 11-bkc-05736-TBB9

          Before TJOFLAT, MARTIN, and JORDAN, Circuit Judges.


         Generally speaking, the doctrine of equitable mootness "permits courts sitting in bankruptcy appeals to dismiss challenges (typically to confirmation plans) when effective relief would be impossible." Ullrich v. Welt (In re Nica Holdings, Inc.), 810 F.3d 781, 786 (11th Cir. 2015). We have applied the doctrine in the Chapter 11 reorganization context, see, e.g., First Union Real Estate Equity & Mortg. Invs. v. Club Assocs. (In re Club Assocs.), 956 F.2d 1065, 1067-71 (11th Cir. 1992), and in Chapter 13 cases, see, e.g., Hope v. Gen. Fin. Corp. of Ga. (In re Kahihikolo), 807 F.2d 1540, 1543 (11th Cir. 1987), and we have assumed without deciding that it applies in Chapter 7 cases, see Nica Holdings, 810 F.3d at 786 n.4, but until today we have not been asked to apply the doctrine in a Chapter 9 municipal bankruptcy case.


         Municipal bankruptcy proceedings are usually complicated affairs, and the Chapter 9 proceeding for Jefferson County, Alabama-involving about $3.2 billion in total sewer-related debt-has proved to be no different. A detailed chronology can be found in Bennett v. Jefferson County, 518 B.R. 613, 616-26 (N.D. Ala. 2014), and In re Jefferson County, 474 B.R. 228, 236-45 (Bankr. N.D. Ala. 2012), but the relevant facts and procedural history are set forth below.


         Jefferson County filed for bankruptcy in November of 2011. In June of 2013, following 18 months of negotiations, the County announced that it had come to an agreement in principle with almost all of its major creditors.

         The final settlement, reached in November of 2013, provided that the County would issue and sell in public markets new sewer warrants (through an indenture) in the amount of approximately $1.785 billion, with the proceeds and other funds being used to redeem and retire the prior sewer warrants (which, again, totaled about $3.2 billion) at a reduced and compromised amount of about $1.8 billion.

         Pursuant to the settlement, the County would cut over $100 million in general fund expenditures, the creditors would write off a significant amount in outstanding debt, and the County (or the bankruptcy court if the County failed to act) would implement a series of single-digit-percent sewer rate increases over 40 years. The County would not be able to decrease sewer rates in a given fiscal year unless it could somehow offset the decrease (by, for example, increasing its customer base). Over the course of these 40 years-the planned time period for retiring the new sewer warrants-sewer rates would increase about 365%, which is not far off of the national increase in inflation in the previous 40 years. With respect to non-sewer debt, warrants would be repaid in full on terms favorable to the County through the exchange of existing general obligation warrants and school warrants for new warrants. See Bennett, 518 B.R. at 623-25.

         At the confirmation hearing before the bankruptcy court on November 21, 2013, a group of Jefferson County ratepayers objected to the County's proposed plan. They argued that the plan validated corrupt government activity (e.g., bribery) that procured the execution of some of the prior sewer warrants and led to the debt crisis; that the plan, by taking the ability to set rates out of the hands of elected Jefferson County commissioners, infringed on their rights to vote and to be free from overly burdensome debt without due process; and that the plan was not feasible because it was imposed over a service area with a declining population and falling income levels, and because it increased costs for a long period of time without any consideration of the users' ability to pay. See id. at 626. One of the claims asserted by the ratepayers was that certain of the prior sewer warrants were invalid because they violated provisions of the Alabama Constitution and the United States Constitution. See id. at 626-27.

         The bankruptcy court entered a confirmation order over the ratepayers' objections on November 22, 2013, the day following the hearing. The order in part dismissed pending claims, and barred any and all persons from commencing or continuing any action to assert the claims made by the ratepayers prior to the start of, or in, the Chapter 9 bankruptcy proceeding.

         In the confirmation order, the bankruptcy court retained jurisdiction for the 40-year life of the new sewer warrants to, among other things, adjudicate controversies regarding the validity of actions taken pursuant to the plan, including implementation or enforcement of the approved rate structure and issuance of the new sewer warrants, and enter any necessary or appropriate orders or relief (including mandamus). See Bankr. D.E. 2248 at 67-68. The disclosure statement for the indenture contained similar language describing the bankruptcy court's retention of jurisdiction.

         The plan's effective date was December 3, 2013. Although Bankruptcy Rule 3020(e) normally imposes an automatic 14-day stay on the operation of a confirmation order, at the confirmation hearing the ratepayers did not object to the County's motion (filed two weeks earlier) to waive the automatic stay. In the absence of an objection, the bankruptcy court exercised its discretion under Rule 3020(e) to waive the automatic stay when it entered the confirmation order. See Bennett, 518 B.R. at 626.

         The ratepayers filed their notice of appeal on December 1, 2013, two days prior to the plan's effective date. But they did not ask the bankruptcy court, or the district court, for a stay of the confirmation order pending appeal. Nor did they request that their appeal be expedited. On December 3, 2013, pursuant to the terms of the order, the County issued the new sewer warrants. The proceeds from the sale of these warrants went in part towards retiring the prior sewer warrants, with more than $1.454 billion going into a clearinghouse system to pay individual and institutional investors. See id.


         In the district court, the County moved to dismiss the ratepayers' appeal, arguing in relevant part that any challenges to the confirmation order were constitutionally, statutorily, and equitably moot because the plan had been consummated and the transactions that were completed could not be unwound. The ratepayers responded that their appeal was not moot because, among other things, the bankruptcy court could not constitutionally retain jurisdiction to conform (if necessary) sewer rates to the plan over a 40-year period. In the ratepayers' view, such rates had to be set in compliance with Alabama law. As the district court explained, the ratepayers wanted to "avoid . . . paying rates set by a [County] Commission wh[ich] can be taken to the bankruptcy court if it enacts rates in violation of" the approved rate structure. Bennett, 518 B.R. at 631 n.21. The district court rejected each of the County's mootness arguments.

         First, the district court concluded that the appeal was not moot under Article III. Although the consummation of the plan might limit the scope of relief available to the ratepayers, the court concluded that it could fashion "'some form of meaningful relief.'" See id. at 631 (quoting Church of Scientology v. United States, 506 U.S. 9, 12 (1992)).

         Second, there was no "statutory mootness" under 11 U.S.C. § 364(e). Under Eleventh Circuit precedent, said the district court, § 364(e) protects "only transactions authorized by § 364(c) or (d)," and it did not believe that the issuance of the new sewer warrants to pay off the prior sewer warrants was a transaction authorized by § 364(c) or (d). Id. at 632. See also id. at 633 ("Neither subsection (c) nor subsection (d) authorizes the bankruptcy court to allow the County to obtain credit or incur debt by giving the lender or the bankruptcy court unlawful or unconstitutional ratemaking authority.").

         Third, the district court ruled that the appeal was not equitably moot despite the failure of the ratepayers to seek, let alone obtain, a stay of the confirmation order. The court thought that the doctrine of equitable mootness, which is prudential in nature, was in some tension with the Supreme Court's reaffirmation of the principle that federal courts have a "virtually unflagging" obligation to hear and decides cases within their jurisdiction. See id. at 634. But it did not need to confront those potential concerns because it held that equitable mootness does not apply to constitutional challenges to a confirmation order in a Chapter 9 proceeding: "In the case of a Chapter 9 reorganization plan[, ] finality and reliance may be required to yield to the Constitution and the interests of the public in the provision of governmental services." Id. at 636. And "applying the doctrine of equitable mootness as the County espouse[d] would prevent both state and federal Article III courts from deciding . . . 'knotty state law' and constitutional issues and would prevent any review of a federal bankruptcy court's assumption of jurisdiction to enforce its unreviewed actions." Id. at 637. Although the court recognized that "some part or parts" of the confirmation order might be "impossible to reverse," the "County's ceding of its future authority to set sewer rates to the bankruptcy court" as a term of the new sewer warrants was "not one of those parts." Id. If it agreed with the ratepayers that the bankruptcy court's retention of jurisdiction was unconstitutional, the court could declare that provision invalid and prevent its enforcement. See id.

         Finally, the district court explained that, even if the doctrine of equitable mootness applied in Chapter 9 bankruptcy proceedings, it would nevertheless deny the County's motion to dismiss. The court could, as it had noted, grant the ratepayers some relief by striking the terms providing for the bankruptcy court's retention of jurisdiction and authority to set sewer rates in the future. Moreover, the ratepayers' failure to obtain a stay, though significant in the equitable mootness analysis, was not dispositive. There had been a rush to ...

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