Courts considering the issue are now unanimous: The doctrine of equitable mootness applies in chapter 9 just like it does in chapter 11 as the result of an August 16 Eleventh Circuit opinion in the wake of the Jefferson County, Ala., municipal bankruptcy.
The Jefferson County Chapter 9 Plan
Until Detroit sought chapter 9 protection in 2013, Jefferson County’s filing in 2011 had been the largest-ever municipal bankruptcy. The county listed long-term debt of $4.23 billion, including about $3.2 billion in defaulted sewer bond debt where the bondholders could look only to the sewer system for payment. The county’s chapter 9 plan, confirmed in November 2013, reduced sewer debt to about $1.8 billion from $3.2 billion.
To pay off the old sewer bondholders at a substantial discount, the county issued about $1.8 billion in new sewer bonds. The plan locked in rate increases to be paid by sewer customers every year for 40 years and gave the bankruptcy court continuing jurisdiction to compel the rate increases. The county implemented the plan a few days after confirmation, issuing new bonds in the process.
Ratepayers had objected to confirmation and appealed the confirmation order to the district court, but the county filed a motion to dismiss the appeal, arguing that the appeal should be dismissed on the grounds of equitable mootness.
District Judge Says No Equitable Mootness in Chapter 9
District Judge Sharon Lovelace Blackburn of Birmingham, Ala., wrote a 50-page opinion in September 2014 denying the motion to dismiss the appeal. She held that equitable mootness was not applicable in a chapter 9 municipal bankruptcy, although she said that “some parts of the confirmation order may be impossible to reverse,” such as the validity of the newly issued bonds.
Still, reversal meant that she might later void the provisions in the plan locking in annual rate increases that had been included for the benefit of the purchasers of the new sewer bonds.
Judge Blackburn allowed an interlocutory appeal, resulting in the August 16 opinion by Circuit Judge Adalberto Jordan.
Eleventh Circuit Joins Two Other Courts
Judge Jordan said that the Supreme Court has neither endorsed nor rejected the concept of equitable mootness in chapter 11 cases. He said that every circuit to consider the issue has allowed some formulation of equitable mootness.
The Eleventh Circuit, Judge Jordan said, has applied equitable mootness in chapter 11 and “assumed without deciding that it applies in chapter 7 cases.” The appeals court had not addressed the question in chapter 9, however.
Judge Jordan said the “correct result was to join the Sixth Circuit,” which had upheld the use of equitable mootness in 2016 in the context of Detroit’s municipal bankruptcy. Similarly, the Ninth Circuit Bankruptcy Appellate Panel employed equitable mootness in the Stockton, Calif., debt adjustment in 2015.
Seeing “no reason to reject the doctrine here,” Judge Jordan said there was “no respect in which [the] principles [of equitable mootness] are bound to come into play any less in the chapter 9 context than in the contexts of chapters 11 or 13.”
Indeed, he said, “these principles will sometimes weigh more heavily in the chapter 9 context precisely because many people will be affected by municipal bankruptcies.”
Having decided that equitable mootness applied in chapter 9, Judge Jordan proceeded to rule that it required dismissal of the appeal in Jefferson County’s case. He said that the ratepayers never sought a stay pending appeal and had not attempted to expedite the appeal, although those facts in themselves were not determinative.
The appeal had to be dismissed, according to Judge Jordan, because “the County and others have taken significant and largely irreversible steps in reliance on the unstayed plan.” Even if the appellate court only struck the bankruptcy court’s continuing jurisdiction, he said it “would seriously undermine actions taken in reliance on the confirmation order.”
To bolster his conclusion, Judge Jordan “briefly” looked at the merits and saw no injustice in allowing the county to bind elected officials decades into the future. He noted how elected officials “can bind their successors . . . to all kinds of unavoidably long-lasting financial effects, sometimes irreversibly.”