BRADENTON, Fla. — Lehman Brothers Special Financing Inc. claims the Bank of New York Mellon is improperly withholding swap payments associated with $3.2 billion of defaulted sewer warrants sold by bankrupt Jefferson County, Ala.

Lehman claims that just over $1 million in swap payments are on parity with sewer warrants, and that it should be paid along with sewer system creditors.

BNY Mellon, trustee for the sewer warrants, has refused to make the payments and said they were subordinate to what is owed warrant holders, along with a termination payment, according to a court filing Wednesday.

“LBSF is owed $1,002,754.41 plus interest in periodic payments. These periodic payments enjoy parity status with the payments due to the sewer warrant holders,” said Lehman, which also is in bankruptcy. “Nevertheless, the trustee has and continues to refuse to treat the periodic payments as on parity with the payments due the warrant holders.”

Lehman said it is not demanding the early swap-termination payment because it is subordinate to debt service.

The amount of the termination payment was not included in court documents, but county officials said in early 2009 that Lehman estimated it was nearly $60 million.

In the Chapter 9 case, Jefferson County listed Lehman as having a long-term, non-recourse claim totaling $65.56 million.

Peter Shapiro, managing director of Swap Financial Group LLC, said swaps are commonly structured so that periodic payments are on parity with debt service, and termination payments are subordinate.

“This is very typical,” said Shapiro, who also confirmed that Jefferson County’s swap documents provided for that kind of structure.

Lehman said the trustee has refused to make swap payments because the swap agreement and the termination valuation statement included a single total, and therefore both amounts should be subordinated to debt service.

The trustee also said that default remedy provisions in the indenture did not specifically refer to parity swaps collections after a default, according to Lehman.

BNY Mellon declined to comment.

Lehman is asking the bankruptcy judge to determine that the periodic swap payments are on parity with debt service on the sewer warrants, and that the trustee is obligated to make the swap payments.

On Tuesday, Jefferson County filed a notice stating that it would appeal the bankruptcy judge’s ruling that limited the amount of sewer system revenues it could use for fees and expenses before paying debt service.

The county is already appealing the judge’s ruling earlier this year that protected payments to sewer warrant holders while the Chapter 9 case continued. That appeal is pending before the 11th Circuit Court of Appeals.

Meanwhile, Judge Thomas Bennett this week reportedly indicated during a hearing that he is not inclined to allow the city of Birmingham and Mayor William Bell to file a lawsuit in order to stop the county from closing inpatient care at Cooper Green Mercy Hospital for the indigent.

In late August, commissioners decided to close the county-owned hospital because it is draining the general fund with deficits. Cooper Green also gets revenue from a dedicated sales tax.

Commissioners are in the process of revamping indigent health care by possibly providing outpatient care at the hospital, opening clinics, and paying for other local hospitals to provide inpatient services.

Bennett said in a hearing Wednesday that Alabama law requiring that the county provide indigent care does not specify how that care is provided, according to published reports. A formal ruling has not yet been issued.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.