Bank of N.Y. Mellon v. Jefferson Cnty. (In re Jefferson Cnty.)

• Decision Date: 09 October 2012
• Docket Number: Adversary No. 12–00016–TBB.,Bankruptcy No. 11–05736–TBB.
• Citation: 482 B.R. 404
• Parties: In re JEFFERSON COUNTY, ALABAMA, a political subdivision of the State of Alabama, Debtor. The Bank of New York Mellon, as Indenture Trustee, et al., Plaintiffs, v. Jefferson County, Alabama, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

482 B.R. 404

In re JEFFERSON COUNTY, ALABAMA, a political subdivision of the State of Alabama, Debtor.The Bank of New York Mellon, as Indenture Trustee, et al., Plaintiffs,

v.Jefferson County, Alabama, Defendant.

Bankruptcy No. 11–05736–TBB.

Adversary No. 12–00016–TBB.

United States Bankruptcy Court,

N.D. Alabama,

Southern Division.

Oct. 9, 2012.

James Blake Bailey, Patrick Darby, Christopher L. Hawkins, Jennifer Harris Henderson, Bradley Arant Boult Cummings LLP, Jay R. Bender, Birmingham, AL, Whitman L. Holt, Kenneth N. Klee, Robert J. Pfister, Klee, Tuchin, Bogdanoff & Stern LLP, David M. Stern, Los Angeles, CA, for Debtor and Defendant.

Larry Brittain Childs, Waller Lansden Dortch & Davis, LLP, Brian Malcom, Birmingham, AL, Ryan K. Cochran, Heath A. Fite, David E. Lemke, Waller Lansden Dortch & Davis, LLP, Nashville, TN, for Plaintiffs.

Amended Memorandum Opinion On Net Revenues And Applicability of 11 U.S.C. § 928(b)

THOMAS B. BENNETT, Bankruptcy Judge.

This declaratory judgment action is the reaction of The Bank of New York Mellon and those joining it as plaintiffs to a stance taken by Jefferson County, Alabama (hereinafter sometimes the County). The stand taken by the County is that the monthly withholding of millions of dollars that had not been, to the degree and scope now argued by the County, if at all, part of the calculus in determining how much of its sewer system's revenues are to be paid to warrant holders who/which lent to the County over a period of years $3,685,150,000.00. This litigation has been necessitated by actions taken by the County within days of January 2012 rulings by this Court. One was that the filing of the County's chapter 9 bankruptcy case effectively ended an Alabama court's receivership control over the County's sewer system properties. The Alabama court's receiver's control over the properties constituting the County's sewer system that had commenced in September 22, 2010, was in question from the November 9, 2011, County bankruptcy filing until this Court's January 6, 2012, ruling on the receiver's status. So, effectively, the County did not regain possession and control over the sewer system until sometime in early to mid-January 2012.

Cash and the ability to obtain it is perhaps one of the most critical needs of any enterprise, private or governmental. Without cash or ready access to it, even consistently profitable companies may not be able to survive over time. The obverse is that with cash or access to it even businesses that perennially lose money may continue to operate while continuing to lose more money. This adversary proceeding highlights some of the problems faced by the County. Its sewer system is an enterprise with large flows and stores of monies, but limited access to them.¹ The limited access is partly due to the contractual agreements, the County's default under the agreements, and the excessive debt incurred to fund rehabilitation and improvements to its sewer system. Many of the reasons for its sewer system's limited access to cash are the fault of prior commissioners and employees of the County. Others are the results of missteps by individuals and businesses involved in the funding and construction of the improvements and enhancements of the sewer system. This is the backdrop of this suit. An initial task is to set the contours of the disputes.

I. Declarations, Categories, Revenues, And Outcomes

The Bank of New York Mellon, as indenture trustee (hereinafter Indenture Trustee), along with Bank of America, N.A., Bank of Nova Scotia, Société Générale, New York Branch, The Bank of New York Mellon, State Street Bank and Trust Company, Lloyds TSB Bank PLC, JPMorgan Chase Bank, N.A., Syncora Guarantee Inc., Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company are plaintiffs in this declaratory judgment action against Jefferson County, Alabama. The Indenture Trustee along with the other named plaintiffs are collectively referred to as the Trustee.

As amended, the Trustee's complaint contained five counts. Three of the counts were severed by the Court and designated as a new adversary proceeding. The counterclaims of the County were severed along with the Trustee's three counts. The two remaining ones are counts I and II, which revolve around a fight over what expenditures for the County's sewer system are payable ahead of payments to those lenders who/which secured payment of interest and principal owed on the County's sewer system's warrants by obtaining a consensual lien against some revenues of the sewer system.

Count I is for a declaration that the contracted for scheme for how revenues of the County's sewer system are to be applied controls, that a bankruptcy subsection allowing subordination of contracted for payments of the kind at issue here is inapt, and that the County may not withholdpayment of monies falling into certain categories of disputed expenditures. Count II is an alternative request. Should a portion of the bankruptcy laws for municipal bankruptcies allow subordination of the contracted format for payments to holders of warrants of the County's sewer system, the Trustee seeks a ruling that the disputed categories of expenditures are not part of what is to be paid ahead of principal and interest on the warrants. The monies that the County asserts are payable ahead of disbursements to warrant holders have been classified by the Trustee and the County.

According to the parties there are six general categories of expenditures that are in dispute. As designated by the County and Trustee, they are (1) maintenance expenditures, (2) project expenditures, (3) other expenditures, (4) professional fees and related costs, (5) reserves for depreciation/amortization and future operating and/or capital expenditures, and (6) extraordinary items. The maintenance expenditures are for keeping the sewer system in good repair and good operating condition. Included within this category are expenditures for maintenance of the sewer system's existing collection system, i.e., pipes, manholes, and its plants and pumping stations. The County and the Trustee disagree on what are project expenditures. The Trustee asserts they are those expenditures that expand, modernize, update, or improve the sewer system, including those incurred to meet regulatory requirements and industry standards that expand, modernize, update, or improve the sewer system. The County contends project expenditures are those required to comply with regulatory requirements or industry standards and whether they expand, modernize, update, or improve the County's sewer system is irrelevant to whether they are properly payable ahead of warrant holders.

Other expenditures are those described in the “Joint Statement with Respect to April Hearing” (hereinafter the Joint Statement) as expenditures “on all other items,” including for vehicles and equipment to replace worn, lost, or destroyed vehicles and equipment and expenditures for what the parties call internal labor. Joint Statement at 4. Internal labor is labor performed by employees of the sewer system.

Professional fees and related costs is the next category and it is subdivided into two types. One is comprised of those professional fees and costs directly related to the efficient and economical administration of the sewer system exclusive of those related to the County's chapter 9 bankruptcy case. For instance, included are fees and costs incurred in defending against claims arising from the termination of a sewer system employee. This subclass of professional fees is not in dispute and all parties agree that they are properly payable ahead of payments to warrant holders. The second is the disputed one. It is all other professional fees. This subclass includes, but is not limited to, the County's professional expenditures for lawyers and others associated with its chapter 9 case “including both negotiation and litigation.” Id. This disputed subcategory of professional fees and costs entails mostly those associated with the County's chapter 9 case including litigation and negotiation of matters arising after its November 2011 municipal bankruptcy filing. Part of the disagreement on whether these are payable from revenues that would otherwise be available to pay the sewer system's warrant obligations is whether the disputed professional fees and costs are directly related to the sewer system's efficient and economical operation. Another part is whether they are extraordinary items within the sixth category of contested expenditures.

The category for what the parties call reserves for depreciation and amortization along with those for future operating and/or capital expenditures relates to what are monies withheld for (a) estimated future expenditures that may be incurred in some future time for each of the four earlier categories already described, plus (b) a calculation of an estimated amount for depreciation and amortization of the sewer system's assets. In any given period of time, this category does not entail any expenditures of monies. Rather, depreciation and amortization are non-cash items that under generally accepted accounting principles are part of operating expenses. See Government Accounting Standards Board Statement No. 34 (hereinafter GASB 34); see also Plaintiffs' Brief in Support of Counts I, II and V of Their Amended Complaint for Declaratory Judgment at 44–47 (“[D]epreciation and amortization may properly be accounted for as ‘operating expenses' under GAAP....”); Jefferson County's Trial Brief Regarding Appropriate Postpetition Net Revenues Payable to the Trustee at 4–5 (hereinafter County Trial Brief) (“[D]epreciation and amortization ... are universally recognized as operating expenses under generally accepted accounting principles.”). The reserve for future expenditures is what it says it is: deducting monies from current period revenues for estimated future expenditures. The...