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

• Decision Date: 27 June 2013
• Docket Number: AP No.: 12-0016-TBB,Case No.: 11-05736-TBB
• 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

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.

Case No.: 11-05736-TBB

AP No.: 12-0016-TBB

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION

Dated June 27, 2013

Chapter 9

Memorandum Opinion on Professional Fees and Expenses, the Indenture's Operating

Expenses, and 11 U.S.C. § 928(b)'s "Necessary Operating Expenses"

I. Words, Phrases, And Meanings Be They Plain or Not

Some of what the law is about is words and their usage. From the view of one version of objectivity, language is objective in the sense that it allows people to agree across areas of disagreement.¹ For instance, resort to calling a word's or phrase's meaning plain when there is no plain meaning is a method to reach agreement on the outcome of a legal dispute despite not having a consensus on the underlying reasons for a ruling. Saying something has a plain meaning when it does not sometimes avoids a fight over the meaning of words that could otherwise forestall reaching a decision.² Unfortunately, the opposite frequently happens. The malleable and mutable meaning of words or imprecision in their use often causes disagreementfor which invocation of the plain meaning principle does not facilitate achieving an agreed-upon outcome.³

The problem presented to this Court is similar to the latter sort. It is a dispute arising from the ability of parties to utilize the elasticity in the meaning of words and how they are used along with their placement in an agreement to support differing views of what was agreed to more than a decade ago.

More specifically, it arises from the language of the Trust Indenture between Jefferson County, Alabama ("the County") and AmSouth Bank of Alabama as trustee dated as of February 1, 1997 ("the Indenture"), the relevant portions of which for this opinion have been incorporated into eleven supplemental indentures (collectively, the Indenture and the eleven supplemental indentures are referred to as the "Indentures").⁴ The Bank of New York Mellon (hereinaftersometimes referred to as "the Trustee") has been substituted for AmSouth Bank of Alabama as the trustee under the Indenture. The dispute this Court addresses is the extent to which professional fees actually incurred by the County during its municipal bankruptcy are payable out of revenues generated from the County's sewer system ("Sewer System"). A little background of earlier decisions of this Court involving the Indenture and 11 U.S.C. §§ 901, 902, 922, & 928 helps one understand the genesis of the disputes that remain in this adversary proceeding while setting forth definitions, other sections of the Indenture, and prior rulings that need to be taken into account as part of resolution of the issues addressed in this opinion.

II. The Antecedents A/K/A Case History and Definitions

In prior proceedings, this Court has had to resolve disputes over (i) what revenues of the Sewer System are subject to a lien securing the County's repayment of warrants issued by it, (ii) one or more of the terms defined in the Indenture, and (iii) how the Sewer System's revenues are to be applied under the Indenture to obligations incurred by the County as part of the issuance of warrants financing the rehabilitation, upgrading, and expansion of the Sewer System. The current outstanding balance of the warrants is approximately $3.2 billion.

The first opinion was in the context of various challenges made by the Trustee, an Alabama Court's receiver ("Receiver") for the Sewer System, the insurers of some of the County's payment obligations owed to warrant holders under the Indentures, certain liquidity banks, and others against the County that were filed within hours of the commencement of the County's chapter 9 bankruptcy. Although there were numerous challenges by these parties, they may be grouped into several categories: those relating to (1) the status of the Receiver vis-a-vis the Sewer System after the County's bankruptcy filing, (2) whether and the extent to which the Sewer System constitutes property of the County as a municipal debtor, (3) modification of the automatic stays of 11 U.S.C. §§ 362(a), 922(a) along with their asserted inapplicability to the Sewer System and certain of its revenues, (4) statutory and case-based abstention regarding the Sewer System properties and the Receiver's status, and (5) the scope of the exception to the applicability of the § 362(a) and § 922(a) stays under 11 U.S.C. § 922(d)'s language specifying the continued, post-petition "application of pledged special revenues . . . to the payment of indebtedness secured by such revenues." See In re Jefferson Cnty., Ala., 474 B.R. 228, 235 (Bankr. N.D. Ala. 2012) ("the First Opinion").

As it impacts this discussion, one holding in the First Opinion is that "pledged special revenues" referenced in 11 U.S.C. § 922(d) encompass all revenues of the Sewer System that remain following payment of its operating expenses, as this term is defined in the Indenture, the Net Revenues Available for Debt Service ("Net Revenues"), that were in the possession of the Trustee, the Receiver, or the County as of the filing of the County's chapter 9 case and all Net Revenues of the Sewer System received after the filing of the County's case, not just those in the possession of the Trustee as of the petition date. In re Jefferson Cnty., Ala., 474 B.R. at 271.Due to the lack of sufficient evidence regarding the Sewer System's revenues and expenses, this Court declined to rule on the amount of the Net Revenues--the amount of monies flowing initially to satisfy debt service following payment of Sewer System operating expenses--and suggested that the parties attempt to agree on the dollar amount of System Revenues payable to the Trustee on behalf of the warrant holders and others. Such an agreement was not forthcoming.

Failing to agree on the amount of Net Revenues payable to the Trustee under the Indenture for the benefit of the warrant holders and others precipitated another piece of litigation and another opinion by this Court. See The Bank of New York Mellon, et al. v. Jefferson Cnty., Ala. (In re Jefferson Cnty., Ala.), 482 B.R. 404 (Bankr. N.D. Ala. 2012) ("the Second Opinion"). The subject matter of the Second Opinion was whether under the Indenture estimated reserves for depreciation, amortization, future expenditures (in particular estimated legal and professional fees and costs relating to the County's chapter 9 case), and anticipated capital expenditures (collectively, "the Reserves") are within the Indenture's definition of Operating Expenses ("Operating Expenses") or could otherwise constitute an Indenture-permitted reduction in System Revenues to arrive at the amount of monies that are to be paid to warrant holders (hereinafter "Parity Security Holders") and for certain other purposes (hereinafter the warrant payments and those for certain other purposes are sometimes referred to as payments for/to the Parity Security Holders).

Additionally, the Second Opinion addressed whether the provisions of 11 U.S.C. § 928(b) allow subordination of the Indenture-granted lien on the Net Revenues to the Reserves should they not be part of Operating Expenses. Effectively, a determination that the Reserves are either within Operating Expenses under the Indenture or constitute "necessary operating expenses" under § 928(b) either (i) places into Operating Expenses monies that under the Indenture would otherwise be Net Revenues payable to Parity Security Holders and then to other purposes, or (ii) subordinates the lien on Net Revenues to allow some of what are Net Revenues to be used for the Reserves. Such a placement or subordination would result in a reduction in the monies otherwise available from Net Revenues and give the County more funds to use for Sewer System purposes. This is why the issue was and remains important to all of the parties involved in this case.

This Court held in the Second Opinion that the structure of the Indenture creates a flow of certain revenues received by the Sewer System, those defined as System Revenues under Indenture § 1.1. System Revenues are defined as

. . .the revenues derived from the Sewer Tax and all revenues, receipts, income and other moneys hereafter received by or on behalf of the County from whatever source derived from operation of the [Sewer] System, including, without limitation, the fees, deposits and charges paid by users of the [Sewer] System and interest earnings on the Indenture Funds (other than the Rate Stabilization Fund) and any other funds held by the County or its agents that are attributable to or traceable from moneys derived from the operation of the [Sewer] System, but excluding, however, any federal or state grants to the County in respect of the [Sewer] System and any income derived from such grants.

Indenture § 1.1 (emphasis in original).

The System Revenues are permitted to be utilized during a specified period for payment of those items that are defined as Operating Expenses under Indenture §1.1. Indenture § 11.1. As with the determination of System Revenues during a given period, the amount of Operating Expenses is period-by-period. Generally, they are those for a given month. Id. Coupled with this is that Operating Expenses is defined in one subsection of the Indenture to exclude, among other items, depreciation, amortization, plus certain items which under generally accepted accounting principles are (i) chargeable to a fixed capital account or (ii) characterized as extraordinary items. See Indenture § 1.1.

Excluding certain tax revenues, what is left of the System Revenues for a given period following payment of Operating Expenses is subjected to a lien granted under § 2.1 of the Indenture. Section 2.1 contains the County's grant, bargain, sale, conveyance, assignment, transfer, and pledge to...