Cash-starved U.S. municipalities seek $1 billion from Lehman

People stand next to windows, above an animated sign, at the then Lehman Brothers headquarters in New York September 16, 2008.

WILMINGTON, Delaware (Reuters) - New York City leads a list of cash-strapped cities and states that have submitted claims for nearly $1 billion from bankrupt financial firm Lehman Brothers Holding Inc, according to court documents.

New York City's Department of Finance entered a claim for approximately $627 million for unpaid taxes as well as interest and penalties against Lehman Brothers, which is the largest U.S. bankruptcy filing in history.

While New York dominates the list in terms of money claimed, it has plenty of company. Local and state governments entered claims for more than $975 million with the bankruptcy court in Manhattan for unpaid taxes, breach of contract and investments, such as commercial paper, that were issued by Lehman Brothers.

The City of Chicago entered several claims for $44.3 million, Arizona entered a claim of $39.4 million and Long Beach, California, is seeking $20 million.

The state of California, where politicians only recently reached a deal to close a $26.3 billion budget hole, entered a claim for $22 million in unpaid taxes stretching back to 2003.

The claim from New York City, which recently cut spending by $3 billion to balance its budget, covers unpaid taxes from 1996 through May.

New York City said in its claim that it discovered the tax claim during an audit. The city is listed as a creditor in earlier filings with the bankruptcy court, but the size of the claim was listed as "undetermined."

The types of claims the local governments have entered will determine the likelihood of full repayment.

The County of San Mateo, in California, entered a claim of $155 million. Local governments pool unneeded funds with the county, which invested some of that money in notes issued by Lehman Brothers.

San Mateo's claim will likely be lumped with the general pool of unsecured creditors, which rank behind secured claims and tax claims in terms of repayment.

That money was earmarked for expanding the community college, improving roads and building a rail system. "That will not be accomplished," said Mary McMillan, the county's deputy manager.

New York City, however, may not be repaid in full, despite the nature of its claim as a tax lien.

"There is a priority for tax claims in bankruptcy," said Stephen Lubben, a professor with Seton Hall Law School in Newark, New Jersey. "Priority is somewhat limited. It has to be for really recent tax claims. That may be an issue with New York City."

A spokesman for New York City's finance commission said audits of major taxpayers with complicated returns, such as Lehman, can take years though the city is trying to speed the process.

"There are many factors that can also draw out the process -- concurrent IRS audits, the complexity of State tax laws, and quality of records examined," the spokesman said.

The court has given until September 22 to file claims.

According to court documents, about 53,000 claims have been filed. Local and state governments make up a small portion of the claims ranging from Lehman Brothers Bank, which claims $2.19 billion, and Boise Land & Timber LLC, which claims $833.8 million, to the City of Memphis, Tennessee, which is claiming $8.91 for unpaid taxes.

The case is In re Lehman Brothers Holding Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555.

(Additional reporting by Joan Gralla in New York)