On March 4, 2012, Judge Thomas B. Bennett of the United States Bankruptcy Court for the Northern District of Alabama held that Alabama law specifically authorized Jefferson County to adjust its debts under Chapter 9 of the Bankruptcy Code. Through a detailed analysis of Alabama law, Judge Bennett demonstrated that while the barriers to Chapter 9 may be daunting, they are not insurmountable (at least not in Alabama).
In this case, the Court had found previously that the County satisfied four of the five eligibility requirements set forth in section 109(c) of the Bankruptcy Code.[1] That is, the Court found that the County: (i) was insolvent, (ii) desired to effect a plan of debt adjustment; (iii) had negotiated with creditors in good faith and (iv) failed to obtain an agreement with the majority of the class of creditors intended to be impaired under the proposed plan of debt adjustment. Thereafter, the Indenture Trustee for holders of certain warrants issued by the County sought to dismiss the County’s bankruptcy case on the basis that the County was not specifically authorized to file for bankruptcy under Alabama law as required by section 109(c)(2) of the Bankruptcy Code.
The Indenture Trustee took the position that the County was not authorized to file for Chapter 9 because the County did not have any outstanding bonds as required by section 11-81-3 of the Alabama Code. Section 11-81-3 provides, in relevant part, that “[t]he governing body of any county . . . which shall authorize the issuance of refunding or funding bonds may exercise all powers deemed necessary . . . for the execution and fulfillments of any plan or agreements for the settlement adjustment, refunding, or funding of indebtedness of the county . . . .” Ala. Code. § 11-81-3. The Indenture Trustee argued that the Court should assign a past tense reading to the phrase “which shall authorize” and conclude that the Alabama authorization statute only applies to municipalities with outstanding bonds.
After a lengthy discussion of statutory interpretation under Alabama law, the Court found that section 11-81-3 of the Alabama Code permits any city, county or town in Alabama to restructure its debts, regardless of the type of indebtedness. In support of this conclusion, the Court found that the Indenture Trustee’s restrictive interpretation of section 11-81-3 contradicted the plain language of the statute. The Court reasoned that section 11-8-3 provides for the settlement or adjustment of indebtedness in general and is not restricted to bond indebtedness. The Court also found that the phrase “which shall authorize” could not be read in the past tense because under the Alabama Code, all words used in the past tense are intended to include the present and future tenses as well. Finally, the Court concluded that the legislative intent behind section 11-81-3 was to provide all counties with the authority and tools to adjust various forms of indebtedness, including warrants, and that the Indenture Trustee’s reading of section 11-81-3 would frustrate that purpose. Based on this reasoning, the Court held that the County was authorized to file for Chapter 9 under Alabama law.
This decision is noteworthy because it is directly at odds with a recent decision out of the United States Bankruptcy Court for Southern District of Alabama in which the bankruptcy court held that the City of Prichard was not authorized to file for Chapter 9 under section 11-81-3 of the Alabama Code because the city had no outstanding bond debt. See In re City of Prichard, Alabama, Case No. 09-1500-WSS (Bankr. S.D. Ala. Aug. 31, 2010). That decision was appealed to the Southern District of Alabama, and the district court has certified the issue of whether bond indebtedness is a prerequisite to section 11-81-3 to the Supreme Court of Alabama. If the Alabama Supreme Court finds that bond indebtedness is a prerequisite to section 11-81-3, there would be a strong argument that Jefferson County, which has no outstanding bond debt, is not authorized to file for Chapter 9 under Alabama law. In that case, the largest municipal debtor in United States history may find itself fighting to maintain that dubious distinction.
[1] For a discussion of the origins of the County’s financial problems, see Jefferson County: The Bankruptcy Court Always Wins.
This entry was posted in Chapter 9
