Banks Say Lehman Had No Problem With '09 Zell-Archstone Deal

The banks that want to sell their stake in the Archstone apartment company to Sam Zell's Equity Residential (EQR) over the objections of the biggest owner, Lehman Brothers Holdings Inc. (LEHMQ), say Lehman had already approved a possible sale to Zell in 2009.

Sounding the latest note in a score expected to crescendo at a Thursday court hearing, Bank of America Corp. (BAC) and Barclays PLC (BCS, BARC.LN) both said Lehman knowingly agreed to omit any restrictions as to who could buy a stake in Archstone, including No. 1 competitor, Equity Residential, in 2009.

Lehman in 2009 "expressly agreed that [Equity Residential] could come off the 'do-not-sell list' and expressly agreed that any Archstone owner could sell to [Equity Residential]," Barclays said in a Tuesday court filing, referring to a possible 2009 sale that never came to fruition. The banks, which own the 53% of Archstone not owned by Lehman, are now trying to sell half their stake to Equity Residential for about $1.33 billion.

Lehman is suing the banks for alleged breach of contract and is asking a judge for an injunction to block any transfer of the banks' interests in Archstone to Equity Residential, Archstone's largest competitor.

Judge James Peck of U.S. Bankruptcy Court in Manhattan will hear arguments on whether the deal can go forward, starting Thursday. Peck last month said he was "troubled" by the plan, calling it a "sale to a threat" rather than a neutral party.

Lehman has said a sale of the stake to Zell would create a "contentious partnership" that would "inevitably impair the value of Archstone."

But back in 2009, according to Barclays and Bank of America, Lehman had no problem with such a deal and shouldn't have a problem now. The banks say Equity Residential and Lehman could get into a bidding war, which would drive the price up for their stake.

"And that's what this litigation is all about: Lehman's attempt to use this court to rewrite the parties' contracts and thereby avoid paying a market price for complete control of Archstone," Barclays said in its filing.

Lehman, which didn't immediately respond to a request for comment, has said the sale to Zell values Archstone at least $1 billion lower than it could be.

Lehman, which is still under bankruptcy protection, needs court approval to match Zell's bid. A preliminary injunction, it says, will give it time to make a $66 million right-of-first-refusal deposit and close a purchase by Jan. 23.

A key issue in the dispute is an option for Equity Residential to buy the other half of the banks' Archstone stake if Lehman exercises its right of first refusal to buy the first half.

Under the terms of the deal, Equity Residential could only buy 26.5% of Archstone, but it could never end up with the banks' entire 53% interest. Lehman, however, can buy both halves of the banks' stake, in effect "doubling down" on its Archstone investment. The banks have said Lehman is only upset that the parameters of the deal could force it to pay more than Zell would.

The deal calls for Equity Residential to pay about $1.33 billion for the banks' stake and places a value on the company of about $16 billion, including $11 billion in debt.

Lehman led a $22 billion leveraged buyout with real estate investor Tishman Speyer for Archstone in 2007 near the height of the real estate bubble, with Bank of America and Barclays providing financing. The two banks gained their ownership stakes after the collapse of the commercial real estate market led to a restructuring of the deal.

Last month, Peck signed off on Lehman's $65 billion Chapter 11 plan. Proceeds from an Archstone initial public offering and other property sales would eventually flow back to Lehman creditors under the plan.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)

-By Joseph Checkler, Dow Jones Daily Bankruptcy Review; 212-416-2152; [e-mail]

--Patrick Fitzgerald contributed to this article.