On April 20, 2012, the Supreme Court of Alabama held that Ala. Cod. § 11-81-3 (1975) does not require that an Alabama municipality have prepetition bond indebtedness as a condition of eligibility to file for bankruptcy under Chapter 9.  The Supreme Court of Alabama issued its decision in response to a certified question from the District Court for the Southern District of Alabama regarding whether the City of Prichard, Alabama was authorized to file for Chapter 9 under Alabama law.  See City of Prichard v. Scott A. Balzer, Case No. 1:10-0622-KD-M (Ala. Apr. 4, 2012).

This decision effectively overturns the prior decision of the Bankruptcy Court for the Southern District of Alabama regarding the interpretation of section 11-81-3 of the Alabama Code.  See In re City of Prichard, Alabama, Case No. 09-15000-WSS (Bankr. S.D. Ala. Aug. 31, 2010).  In that case, the bankruptcy court held that the City was not authorized to file for Chapter 9 under Alabama law because the City did not have prepetition refunding or funding bond indebtedness.  Not only will this decision impact the City’s bankruptcy case, this decision also will influence the outcome of the pending appeal in Jefferson County’s bankruptcy case regarding whether Jefferson County was authorized to file for bankruptcy under section 11-81-3 of the Alabama Code.

Background

Prichard is a small city in Mobile County, Alabama with a population of approximately 23,000 people.  The City’s financial troubles arose from underfunded pension obligations.  The City’s current pension plan, which arose from its prior bankruptcy, required the City to inject $16 million into the pension fund.  Due to budgetary constraints, the City could not satisfy that obligation.  Similarly, the City did not have sufficient funds to satisfy its approximately $1.8 million in annual pension obligation.  Therefore, faced with mounting pension obligations and associated litigation, the City filed for Chapter 9 on October 27, 2009.

Thereafter, certain of the City’s employees filed a motion to dismiss the City’s Chapter 9 case on the basis that the City was not specifically authorized to file for bankruptcy under Alabama law.  Specifically, the employees argued that Ala. Cod. § 11-81-3 requires the City to have refunding or funding bond indebtedness as a condition of eligibility to file for Chapter 9.  The employees reasoned that because the City’s financial problems arose from underfunded pension obligations and not outstanding bond indebtedness, Alabama law did not specifically authorize the City to file for Chapter 9 as required by section 109(c)(2) of the Bankruptcy Code.  The bankruptcy court agreed, and in an oral ruling, held that the City was not authorized to file for Chapter 9 under Alabama law because the City did not have refunding or funding bond indebtedness.  The City appealed, and pursuant to Rule 18 of the Alabama Rules of Appellate Procedure, the district court certified the issue to the Alabama Supreme Court.

Analysis

Section 11-8-3 of the Alabama Code provides that:

[t]he governing body of any county, city or town, or municipal authority . . . which shall authorize the issuance of refunding or funding bonds may exercise all powers deemed necessary by the governing body for the execution and fulfillment of any plan or agreement for the settlement, adjustment, refunding, or funding of the indebtedness of the county, city or town, or municipal authority . . . . Without limiting the generality of any of the foregoing powers, it is expressly declared that the governing body shall have the power to take all steps and proceedings contemplated or permitted by any act of the Congress of the United States relating to the readjustment of municipal indebtedness and the State of Alabama hereby gives its assent thereto and hereby authorizes each county, city or town, or municipal authority organized under Article 9, Chapter 47 of this title in the state to proceed under the provisions of the acts for the readjustment of its debts.”

Ala. Cod. § 11-81-3 (1975) (emphasis added).  In this case, the employees argued that clause “which shall authorize the issuance of refunding or funding bonds” in the first sentence requires that a governing body have outstanding refunding or funding bonds to file for Chapter 9.  The employees further argued that the term “governing body” as used in the second sentence should be read to mean a governing body that has issued refunding or funding bonds.  Therefore, because the City did not have any prepetition refunding or funding bonds, the employees concluded that the City was not authorized to file for Chapter 9 under Alabama law.

The Supreme Court of Alabama rejected the employee’s narrow reading of section 11-8-3 of the Alabama Code.  The court reasoned that “the second clause of the second sentence of § 11-81-3 does not speak in terms of governing bodies.  Rather, it clearly states that the State of Alabama authorizes ‘each county, city or town, or municipal authority’ . . . to file for federal bankruptcy protection.”  City of Prichard v. Scott A. Balzer, at 11-12 (emphasis in original).  Therefore, the Supreme Court of Alabama held that by passing section 11-8-3 of the Alabama Code, “the legislature intended to authorize every county, city, town or municipal authority organized under Article 9, Chapter 47 of Title 11, Ala. Code 1975, to proceed under the federal bankruptcy provisions.”  Id. at 12.

Implications for Jefferson County

This decision could have a significant impact on the ability of Jefferson County, the largest municipal debtor in United States history, to remain a debtor under Chapter 9.  As discussed in Jefferson County: To Save a Mocking Bird, the Bankruptcy Court for the Northern District of Alabama recently held that Alabama law specifically authorized Jefferson County to file for Chapter 9, notwithstanding the fact that Jefferson County had no prepetition bond indebtedness.  In re Jefferson County, Alabama, Case No. 11-05736-TBB (Bankr. N.D. Ala. Mar. 4, 2012).

Subsequently, a number of parties appealed the Jefferson County bankruptcy court’s ruling, arguing that the bankruptcy court misinterpreted section 11-8-3 of the Alabama Code and utilizing the same line of reasoning that the Supreme Court of Alabama rejected in Prichard.  In fact, in its motion for leave to appeal, the Indenture Trustee for the holders of certain warrants issued by Jefferson County specifically requested that the District Court for the Northern District of Alabama certify the identical question that was raised in Prichard to the Supreme Court of Alabama to determine whether Jefferson County is authorized to file for Chapter 9 under Alabama law.  Consequently, if Jefferson County’s creditors maintain their appeal, the District Court for the Northern of District of Alabama likely will follow Supreme Court of Alabama’s guidance and find that Jefferson County was specifically authorized to file for Chapter 9 under Alabama law.