Creditor sues Alabama county over sewer revenue

Mon Feb 6, 2012 1:22pm EST

Feb 6 (Reuters) - Bank of New York Mellon has sued Alabama's bankrupt Jefferson County, accusing the county of improperly cutting the amount of money owed to holders of its sewer-system debt.

BNY claimed in a lawsuit filed Friday in U.S. Bankruptcy Court in Birmingham that the county is improperly charging attorneys' fees and other costs against the system's net revenue.

The bank is indenture trustee of $3.6 billion of sewer system warrants, debt that was the main cause of Jefferson County's landmark bankruptcy filing in November. An indenture trustee handles administrative aspects of loans, including watching to make sure the loan is paid.

A U.S bankruptcy judge last month returned control of the system to county officials from a state-appointed receiver.

The lawsuit claims that reducing the system's net revenue due creditors by deducting certain costs, which include depreciation and amortization, money for planned capital expenditures and other non-operating costs violated the creditors' rights.

A creditor source who spoke on condition of anonymity said Jefferson County has made payments since resuming control but at a reduced rate. The system has monthly cash flow of about $9 million, the source said.

Jefferson County, which is home to Birmingham, Alabama's biggest city, and is a regional business hub, has cut yearly spending by $100 million and plans an additional $40 million in budget reductions.

U.S. Bankruptcy Judge Thomas Bennett required county officials to continue payments to creditors from the system's revenue but did not specify amounts.

The BNY lawsuit asks Bennett to bar Jefferson County from charging any expenses beyond labor and other customary operating costs from the monthly amounts due to sewer system warrant holders.

A bankruptcy attorney for the county was not immediately available to comment on the lawsuit.

On Nov. 9, after a tentative agreement with creditors unwound, Jefferson County filed the biggest U.S. municipal bankruptcy case, saying it was overwhelmed by $4.23 billion of debt mostly caused by borrowing for the county sewer system.

Creditors such as JPMorgan Chase opposed the filing, and a federal judge has yet to rule on whether or not the county is eligible for Chapter 9 federal bankruptcy protection.

Jefferson County defaulted on the sewer warrants in 2008.

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