Court Declares Ratepayers’ Challenge to Jefferson County Bankruptcy Plan Equitably Moot

In Bennett v. Jefferson County, Alabama, 2018 WL 3892979 (11th Cir. Aug. 16, 2018), the Eleventh Circuit held that the doctrine of equitable mootness barred a challenge by ratepayers to Jefferson County’s bankruptcy plan, representing the first time the court has applied the doctrine to a Chapter 9 municipal bankruptcy.

Jefferson County declared bankruptcy in 2011, having run up some $3.2 billion in debt in connection with the construction and refinancing of its sewer system.  In 2013, the County successfully negotiated a deal under which it would pay off its debt by issuing approximately $1.785 billion in new sewer warrants and commit to a court-enforced 40-year series of sewage rate increases.

The plan was confirmed over the objection of some ratepayers on November 22, 2013, and its effective date was December 3, 2013.  Bankruptcy law ordinarily imposes an automatic 14-day stay on a confirmation order, but in this instance, the County moved to waive the stay, the ratepayers did not object, and the bankruptcy court exercised its discretion to waive the stay.  The ratepayers filed their notice of appeal on December 1, 2013.  Once again they did not request a stay; nor did they ask for the appeal to be expedited.  The County issued the bonds on December 3, 2013.

On appeal to the district court, the ratepayers argued that the plan impermissibly impinged upon the political process by removing their say on their water rates for the next 40 years.  The County argued that its issuance of the bonds had mooted the appeal.  The district court held that equitable mootness did not apply to a Chapter 9 bankruptcy plan and that the appeal would not be moot even if the equitable mootness doctrine were applicable.  It certified this decision for interlocutory appeal.

The Eleventh Circuit considered the appeal and reversed the district court.  The appeal was live for Article III purposes because the court could grant relief by modifying the County’s commitment to rate hikes.  However, it was equitably moot.  Writing for the court, Judge Adalberto Jordan first examined the roots of the doctrine, recognizing that it owes more to judges’ equitable and prudential considerations than to the text of the Bankruptcy Code, but explaining that it has gained acceptance across several federal courts of appeals.  Judge Jordan also pointed out that “mootness” is a misnomer:  the doctrine applies to “moot” an appeal not when relief is impossible but when the consequences of granting that relief would be so great as to be inequitable to those who had relied on the plan, especially third parties.

In light of the doctrine’s equitable roots, Judge Jordan found it appropriate to join the Sixth Circuit and several lower courts in holding it applicable to Chapter 9 bankruptcies.  Reliance interests have just as much need for protection in the context of a municipal bankruptcy, and sovereignty interests do not merit a blanket rule against equitable mootness in the Chapter 9 setting.  Indeed, when (as here) the sovereign seeks to protect its bankruptcy plan, sovereignty interests cut in favor of applying the doctrine.  Although the court was sensitive to the argument that the ratepayers’ constitutional rights were at stake, it reasoned that constitutional rights can be waived by inaction in other contexts.

Having concluded that the doctrine of equitable mootness can apply to a Chapter 9 plan, the court had little difficulty in concluding on the balance of the equities that this appeal was moot.  Altering the County’s commitment to its planned rate increases could have inequitable effects on the County, its citizens, and purchasers of the new bonds.  The ratepayers, on the other hand, had passed upon several opportunities to request a stay or an expedited appeal.  The court rejected the ratepayers’ argument that seeking a stay would have been pointless because of the size of the bond required; there were other potential avenues for relief such as a preliminary injunction.  Finally, the merits of the ratepayers’ political-process argument were weak; governments at all levels often bind their ratepayers for years into the future.

Posted by Nick Boyd.

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