Aug. 13 (Bloomberg) -- Accredited Home Lenders Holding Co. shares fell 35 percent after buyout firm Lone Star Funds said it wouldn't go through with its planned $400 million purchase of the subprime mortgage lender. Accredited said today it's suing to force Lone Star to honor the agreement.

The shares dropped $3.09 to $5.82 in Nasdaq Stock Market composite trading. Lone Star, which agreed to pay $15.10 per share in June, said in a statement last week that it won't complete the takeover because of the ``drastic deterioration in the financial and operational condition'' of San Diego-based Accredited since the deal was announced. As recently as a year ago, the stock was above $30.

``It's not surprising that they're doing what they can to get out of this,'' said Bose George, an analyst with KBW Inc. in New York. ``Now it's going to be up to the courts to decide whether they have a right to get out of it.''

Accredited had been counting on the takeover by Dallas-based Lone Star to bolster its finances, and auditors said earlier this month that the company may not survive if the deal collapses. Other independent mortgage companies are encountering difficulty trying to sell themselves as demand dries up from investors for their home loans. H&R Block Inc. last week delayed the sale of its Option One Mortgage unit from October to December.

Loss Expected

Since Accredited's deal with Lone Star was announced, Wall Street traders who package home loans into mortgage-backed bonds have cut the prices they're willing to pay. Accredited last week said it expects to report a loss of at least $40 million for the second quarter, compared with a $41 million profit a year earlier. The company underwrote $1.7 billion of loans, down from $4.1 billion in the 2006 quarter.

In today's statement, Accredited said that all conditions of the merger have been satisfied, assuming shareholders tender more than half of the company's shares by the 12 a.m. deadline on Aug. 14.

The suit, filed Aug. 11 in Delaware Chancery Court, seeks to force Lone Star to go through with the transaction. Accredited accused the company of getting ``cold feet'' and said deterioration of the mortgage market isn't grounds for aborting the deal. Judson Scaggs, a Wilmington, Delaware-based lawyer for Accredited, wrote in a letter today to Chancery Court Judge William Chandler that the company seeks a trial by mid-September.

Inherent Risks

The agreement ``made it clear that a buyer had to accept the risks inherent in the industry at this historical moment and that industry conditions and the condition of the capital markets do not provide a basis for Lone Star to walk away from its obligations,'' Accredited said in the complaint.

In a separate statement today, Lone Star said it believes ``the facts will fully support its position'' and that it ``looks forward to presenting these facts'' in court.

Larry Hamermesh, a professor at Widener University School of Law in Wilmington, said Accredited may have an argument, pointing to a decision in the Delaware Chancery Court in 2001 involving Tyson Foods Inc.

In that case, Judge Leo Strine ruled against Tyson after the world's largest meat processor tried to invalidate a $4.7 billion buyout of Iowa beef processor IBP Inc. Strine concluded that Tyson had ``buyer's remorse'' and forced it to complete the purchase.

George, the KBW analyst, said the suit may allow Accredited to ``get some value out of'' the merger agreement, either by forcing Lone Star to go through with the deal or prompting the buyout firm to offer a settlement.

``There's a big discrepancy between the acquisition price and what the company's worth right now, so it's in their interest to see if they can work something out,'' George said. ``If the deal breaks completely, given that the small-cap mortgage lenders are obviously having a very hard time, it could be very difficult for them, and survival is an issue.''

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: August 13, 2007 16:31 EDT