CORRECT: Judge Denies Lehman Bid To Halt Banks' Archstone Sale To Zell

A judge on Friday said Bank of America Corp. (BAC) and Barclays PLC (BCS) could move forward with a $1.33 billion sale of half their stake in the Archstone apartment company to Sam Zell's Equity Residential (EQR), calling Archstone co-owner Lehman Brothers Holdings Inc.'s (LEHMQ) bid to halt the deal an attempt to get the stake for itself at a lower price.

Judge James Peck of the U.S. Bankruptcy Court in Manhattan said Lehman couldn't prove it would face irreparable harm if the sale went through. Lehman was seeking a preliminary injunction that would have halted the banks' sale of half of their 53% Archstone stake to Zell, a stake that Lehman most likely will end up purchasing anyway.

Rather than a sale to Zell, Peck called the banks' deal "a disguised sale of 100% of the banks' interest to Lehman," which has a right of first refusal to buy half the banks' stake and a similar right to buy the other half later. "I see that and I think everybody in the courtroom does too," he said.

A key issue in the dispute was an option for Equity Residential to bid on the remaining half of the banks' Archstone stake if Lehman exercises its right of first refusal to buy the first half. Essentially, Lehman wants to step in and pay the banks the $1.33 billion to acquire the 26.5% stake that Zell is trying to buy. Lehman then wants to purchase from the banks the other 26.5% of Archstone for that same price and stave off a bidding war with Equity Residential.

Lehman, which is still under bankruptcy protection, needs court approval to match Zell's bid. Peck, in ruling that the Zell sale process could go forward, said "it is not a negative for Lehman to be put in a position of acquiring all of the equity. Rather, this truly is about the price," echoing earlier comments from a lawyer for Barclays.

Lehman's own real estate co-head Thursday gave a "conservative" estimate of about $1.445 billion to purchase the second half of the banks' stake.

Edwards Wildman Palmer LLP's Craig M. White, a lawyer for Equity Residential, said during his closing argument that Zell's participation in the sale process would allow the banks to demand a higher price for the second half of their stake.

But Wollmuth Maher & Deutsch LLP's Paul R. DeFilippo, a Lehman lawyer, said Friday that Zell's goal was to buy half of the banks' stake and then use its new voting rights to eventually own all of it "at Lehman's expense," something White later denied.

A Barclays lawyer, Orrick, Herrington & Sutcliffe LLP's Joseph J. Frank, shot down a key Lehman argument, saying Equity Residential would never be able to acquire more than half of the banks' stake, or 26.5% of Archstone.

"The only entity that can do that is Lehman," said Cleary Gottlieb Steen & Hamilton LLP's Lawrence B. Friedman, an attorney for Bank of America.

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

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.

Lehman wants to sell shares in Archstone, which owns stakes in more than 70,000 apartments, to the public. Proceeds of an initial public offering would flow to the failed investment bank's creditors.

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

-By Joseph Checkler; Dow Jones Newswires; 212-416-2152; [e-mail]

--Patrick Fitzgerald contributed to this article.