On August 16, 2018, the United States Court of Appeals for the Eleventh Circuit issued an opinion in the chapter 9 case of Jefferson County, Alabama, reversing the decision of the District Court and ruling that the doctrine of equitable mootness applies in municipal bankruptcies.

In Jefferson County’s chapter 9 case, the bankruptcy court confirmed the County’s chapter 9 plan over the objection of a group of sewer ratepayers, which provided for the issuance of approximately $1.8 billion of new sewer warrants with maturities that ranged up to 40 years. The chapter 9 plan included a provision that the bankruptcy court would retain jurisdiction throughout the life of the new sewer warrants to enforce a covenant that the county must raise sewer rates in sufficient amounts to cover debt service of the new sewer warrants. On December 1, 2013, two days before the effective date of the chapter 9 plan, the ratepayers filed a notice of appeal to the District Court but did not file a stay pending appeal or request that the appeal be expedited. On Dec. 3, 2013, pursuant to the bankruptcy court’s confirmation order, the County issued the new sewer warrants and creditors received distributions on their prepetition claims.

In a decision dated September 30, 2014, Judge Blackburn of the United States District Court for the Northern District of Alabama issued an order and opinion denying the County’s motion to dismiss the ratepayer appeal as moot, rejecting county’s arguments that the appeal was Constitutionally, statutorily and equitably moot. The doctrine of “equitable mootness” generally provides that an appeal from a plan confirmation order is moot when the plan has been “substantially consummated,” i.e., creditors have been paid under the plan and/or new debt has been issued to third parties in accordance with the plan. In such situations, courts reject bankruptcy appeals as their rulings have been implemented and would be too complicated and burdensome to undo. However, the District Court opined that the doctrine of equitable mootness has no applicability in the chapter 9 context as “substantial consummation” is a business-like consideration involving private business entities rather than governmental units or public sector agencies.

The Eleventh Circuit disagreed with the District Court and sided with the County that the ratepayers’ appeal from the bankruptcy court’s order confirming the chapter 9 plan is barred by the doctrine of equitable mootness.  The Eleventh Circuit reasoned that because the doctrine is “driven by its principles rather than any particular codification or arbitrary limitation,” and because the court has already applied the doctrine in other types of bankruptcies, the court saw no reason to reject it in chapter 9 cases. The Eleventh Circuit further explained that the principles of equitable mootness will at times have greater significance in the municipal context because of the number of people affected by a municipal bankruptcy.  Further, the Eleventh Circuit focused on the failure of the ratepayers to ask “any court,” i.e., the bankruptcy court, the District Court or the Eleventh Circuit itself – to stay the implementation of Jefferson County’s confirmed chapter 9 plan. In addition, the ratepayers never requested that the appeal be expedited. This, the court observed, was a critical consideration in applying the doctrine of equitable mootness and rejecting the ratepayers’ appeal of the confirmation order.

Turning to Jefferson County, the Eleventh Circuit noted that almost $1.5 billion had been distributed through a comprehensive securities clearinghouse system to pay countless creditors on their prepetition claims. Further, that in reliance of an unstayed confirmation order, the County and many investors took “irreversible” and significant steps which would be seriously undermined if the provision that the bankruptcy court may force the County to raise sewer rates would be stricken from the chapter 9 plan. Also, the Eleventh Circuit noted that the ratepayers were mistaken that this provision impermissibly binds future County officials as governmental actions that have long-lasting financial effects are common place, such as long-term construction projects and long-term bond issuances etc.  Therefore, the Eleventh Circuit reversed the District Court order and remanded the ratepayers’ appeal from bankruptcy court’s confirmation order for dismissal.

With the Eleventh Circuit’s decision, many constituencies that were affected by the Jefferson County chapter 9 plan, including numerous investors of the new sewer warrants, can now, five years after the fact, breathe a sigh of relief. Of importance as well is that the decision succinctly articulates the principles of the doctrine of equitable mootness and its applicability in future municipal bankruptcy cases.