Oct. 5 (Bloomberg) -- Wachovia Corp. asked a federal judge to let a takeover offer from Wells Fargo & Co. proceed and to ignore a state ruling that Citigroup Inc. says makes it the only legal bidder.

The $700 billion federal bailout of the banking industry passed by Congress includes language that permits Wells Fargo to step in, Wachovia's lawyers told U.S. District Court Judge John Koeltl today at an emergency hearing in Manhattan. Citigroup disputed that claim in court filings.

Koeltl said that it ``appears'' Wachovia has the superior argument. He declined to make a ruling on the dispute, giving the parties until Oct. 7 to file briefs on the matter. Lawyers for both sides said they were prepared for a trial in the case.

``This is a matter of considerable urgency,'' David Boies, a lawyer for Wachovia, told Koeltl.

Citigroup, the biggest U.S. bank by assets, is bidding for Wachovia while trying to rebuild after $61 billion of losses tied to the collapse of mortgage markets. The bank wants to buy parts of Wachovia for about $2.16 billion. Wells Fargo is bidding about $15 billion for the whole company. Wachovia said the Wells Fargo bid is a better deal for investors, its workers and taxpayers because, unlike Citigroup, it doesn't rely on U.S. assistance.

State Court

A state judge extended Citigroup's sole right yesterday to negotiate with Charlotte, North Carolina-based Wachovia, the New York-based bank said yesterday in a statement. New York State Supreme Court Justice Charles Ramos issued an emergency order that preserves Citigroup's Sept. 29 ``exclusivity agreement'' with Wachovia ``until further order of the court.''

The accord was set to expire tomorrow. The two banks were scheduled to appear before Ramos on Oct. 10, according to the statement.

A state appeals court is scheduled to hear arguments over the order today at 5:30 p.m. New York time, Koeltl said.

Koeltl said at the start of the hearing today that he wasn't certain what was being asked of him and that another judge would be assigned to the case tomorrow morning.

Boies argued that the federal bailout law permits Wachovia to entertain a superior bid. Citigroup's attorney, General Counsel Michael Helfer, disagreed.

``We believe Mr. Boies is reading the statute exactly backwards,'' he told Koeltl. ``When they signed an agreement, it does not permit them to accept another offer.''

Going Ahead

Both Wells Fargo and Wachovia affirmed plans to go ahead with their merger earlier today, saying nothing in the New York state court order derails their deal. The two banks ``have a firm, binding merger agreement,'' Wells Fargo said today in its statement.

``That agreement represents a transaction that, in stark contrast to Citigroup's proposal'' benefits shareholders and taxpayers, the company said.

Wachovia said in federal court that Ramos lacked jurisdiction to halt the Wells Fargo bid.

The case is Wachovia v. Citigroup, U.S. District Court, Southern District of New York (Manhattan)

To contact the reporters on this story: Patricia Hurtado in Brooklyn, New York, at pathurtado@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: October 5, 2008 17:38 EDT