The most important slow country boy in America

December 20, 2012 | Bankruptcy, Bonds, Capital markets, Infrastructure, Innovations, Jefferson County, Law, US News, Workouts

By:David A. Smith

 

Bad facts make bad law.

– Litigation proverb

 

And my word, are the facts bad here

 

The law is a continent endlessly being explored.  Beachheads are established; some areas are colonized, gridded and platted, and well settled.  As the society of settled law expands, the frontiers of unknown law push outwards, always applying the same principles but sometimes creating new laws to deal with newly discovered environments. 

 

Into the unknown

 

Bad times, recessions, and business failures force open new territories, which is why over the next half-decade some extremely important law will be fashioned.  While the law should be the same regardless of who reads it, its application will depend on the facts to be found, and that makes the judge who will be finding them quite possibly the most important slow country boy in America, as flatteringly profiled by the Wall Street Journal (November 23, 2012):

 

Judge Pens New Bankruptcy Chapter

 

A year into Jefferson County, Ala.’s historic bankruptcy, its elected leaders are playing tug of war with the brightest lawyers hired by Wall Street banks to protect their $3.2 billion investment in the county’s sewer system.

 

But it is a self-described “slow country boy from West Virginia” who is driving the largest municipal bankruptcy case in U.S. history.

 

Beware self-deprecation by someone who has power.  It may simply be designed to draw you into expounding your arguments to the point where they become absurd.

 

Does this seem absurd to you?

 

U.S. Bankruptcy Court Judge Thomas Bennett, 63 years old, has pushed the rare Chapter 9 case into unexplored parts of bankruptcy law, applying a blunt and unconventional style to a legal battle that threatens to shift the landscape for municipal-bond investing.

 

‘Threatens to’?  Why is bringing order and clarity to unexplored territory a threat?  That’s just yellow-journalist prose, pumping up the melodrama without purpose.

 

Hey, Melo, what’s the drama?

 

“I suspect before that case is finished there will be a lot of new law made in it, and [Bennett] will be instrumental in the process,” said Judge John T. Copenhaver Jr. of the U.S. District Court for the Southern District of West Virginia, who at age 87 is the nation’s longest-serving federal judge.

 

Judge Copenhaver is right; Jefferson County’s case may well define the respective rights and powers of different creditor classes in a municipal bankruptcy, and in particular the three-way relationship among:

 

It’s okay when it’s a three-way?  With a government body in the middle there’s some leeway?

 

  1. Bondholders, who put up money in good faith based on firm pledges from government bodies.
  2. Government bodies, which made promises they cannot keep based on public-choice calculations by people who are now out of office, in jail, or dead.
  3. Citizens, who incited the government bodies to give them these benefits, often failing to appreciate what their goodies might actually cost. 

 

“There isn’t anyone east of Orange County who has any vast experience in a Chapter 9 case,” referring to the California county that previously held the record for the country’s largest municipal bankruptcy.

 

Isn’t it appropriate the man who soured Orange County is named for a lemon?

 

The Jeffco bankruptcy fight over creditors’ rights is an enormous legal and financial issue.  It’s the first infrastructure municipal bankruptcy (as far as I know, Harrisburg isn’t there yet) as distinct from a pension-obligation municipal bankruptcy, the largest municipal bankruptcy, and the issues are stark: poor voters on one side, national banks and the entire municipal bond system on the other.

 

Before this assignment, one of Judge Bennett’s biggest cases during his 17 years on the bench involved a Chapter 11 filing by a poultry farm with six million live chickens.

 

More journalistic sophistry.  As the remaining story makes clear, Judge Bennett is thoroughly qualified and knowledgeable (he’s a former president of the National Conference of Bankruptcy Judges).

 

His 18 years of private practice in West Virginia exposed him to a handful of small municipal bankruptcy cases, but only for special taxing districts—not for a 658,000-resident county that is home to the city of Birmingham.

 

Bankruptcy is bankruptcy – the decimal points and significant digits change the stakes but not the principles. 

 

Judge Bennett first heard about the spot on Birmingham’s bankruptcy bench in a mass-mailed flier. His appointment in 1995 to a 14-year term came as a surprise to the attorneys there who didn’t expect an outsider.

 

I’ve written before about bankruptcy, whose modern form was invented in about 1650 (in Massachusetts) as a device to revive the flow of capital within an economy.  Several ideas are key to bankruptcy:

You won’t get these in a law school textbook

 

So the question arises: Are Jefferson County’s citizens creditors, and if so, what type of creditors?  If they’re creditors, they’re entitled to protection.

 

Jefferson County filed for bankruptcy protection in November 2011 in an attempt to trim payments to J.P. Morgan Chase & Co. and other bondholders who extended $3.6 billion that the county began borrowing in 1997 to stop its sewer system’s more than 3,000 miles of pipe from leaking raw sewage into Alabama rivers.

 

I’m amazed that the Journal’s author keeps getting essential elements of bankruptcy wrong.  Bankruptcy isn’t per se an attempt to cut JP Morgan’s debt, it’s a means to resolve competing claims not all of which can be satisfied.  It’s an enforceable means of settling multiple disputes – debtors, county, state, ratepayers.

 

As the case has proceeded, county officials have cut government jobs and limited work on its streets and leaky sewer pipes. The county has threatened to shut down major operations at its hospital for the poor, and the line of people waiting to renew licenses and permits often wraps around the municipal building.

 

Yes, that’s what happens when you go bankrupt, whether you’re a county or a country.

 

For banks and other financial firms, the fear is that the case could create law that would scare off investors in the $3.7 trillion municipal-bond market.

 

Indeed; or it could put the fear of God into debtors.  Uncertainty doesn’t really help anybody, but the detrimental reliance is a big issue too.

 

Judge Bennett—whose house is connected to a septic tank that is not hooked into the sewer system—has played an active role as lawyers squabble over every technicality.

 

Here’s why the judge won’t take no crap

 

Judge Bennett, unsurprisingly, is one of those who lives in a better neighborhood, and whose opting out of Jeffco’s sewer system made it so expensive and uneconomic.  (In saying this, I’m not being in the slightest way critical; only about 1 in 5 Jefferson County residents is on the sewer.)

 

He forced the county’s $1,050-per-hour private attorney to interpret the fine print of municipal accounting rules to construct legal arguments around the county’s desire to make bondholders pay for most of the bankruptcy costs.

 

Attorneys in litigation normally charge 150% for deposition and 200% for court.  Maybe the $1,050 an hour isn’t so completely horrible.  Then again, maybe it is.

 

That’s not so horrible, is it?

 

The county’s request, an unprecedented attempt to have creditors cover Chapter 9 costs, remains unresolved.

 

I predict the county will lose.

 

Asking a bowling ball makes me cross-eyed

 

If lawyers from outside the Birmingham bar “start with an assumption that someone who practiced in West Virginia and is now a judge in Alabama is not sophisticated enough, they are in for a rude shock,” said Frederick Schauer, a longtime Harvard professor who now teaches the University of Virginia’s law school, of his former student.

 

In for a rude Schauer?

 

Indeed, his controlling style has rattled some attorneys, who have granted him a nickname: the smartest man in the room.

 

If that means anything – it’s more journo-drama prose – I think it means that the judge is keeping the attorney on a short leash, which is where they should be. 

 

Who’s the attorney, who’s the judge?

 

But Judge Bennett’s brusque style is distinct from the fraternal culture common in bankruptcy courts in Manhattan and Delaware. In one of the first hearings, he denied a request from Wall Street lawyers who asked for more time to organize a round of arguments, telling them that they should expect to have a “full-time job at least for the next 30 days in this case.”

 

Attorneys often forget that the goal of trial is not to dazzle us with their putative erudition but to present their case – and for a bankruptcy judge, the principle of fairness triumphs over all.

 

Judge Bennett took the bench in 1995 after working at a firm in Charleston, W.Va., where he represented such clients as Exxon and coal firm Massey Energy Co.  Thomas Heywood, a former colleague, described him as always being “three or four chess moves” ahead of opposing lawyers. “Ambiguities and the unknown, those are of natural interest to Tom,” Mr. Heywood said. “That’s how his mind works.”

 

That’s a good place for a judge here.

 

As former president of the National Conference of Bankruptcy Judges, he testified before Congress in 2007 about the foreclosure crisis.

 

Judge Bennett testifying in 2007, before things got Really Bad

 

“If you’re a big-time lawyer and making a lot of money, he expects you to know what you’re talking about,” said P. Michael Pleska, a retired attorney who worked with Judge Bennett in private practice.

 

As you should.

 

But as residents worry about ballooning sewer costs and the county’s creditors clamor for repayment, Judge Bennett has at times taken months to write opinions. “Like I said, I’m a slow country boy,” Judge Bennett said at a hearing. “I may have to educate myself a little bit.”

 

Better educate yourself a lot, judge.

 

Judge Thomas Bennett, who is overseeing the largest municipal bankruptcy case in U.S. history, in his office in Birmingham, Ala.

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