Lehman Sues Barclays, Bank of America for Archstone Deal Contract Breach

Lehman Brothers Holdings Inc. sued Bank of America Corp. (BAC) and Barclays Plc (BARC) for breach of contract after they agreed to sell a stake in apartment landlord Archstone to Sam Zell’s Equity Residential, Archstone’s “largest competitor,” according to court papers.

Lehman told the banks it would buy half of their stake in Archstone, its biggest real estate asset, for $1.33 billion, meeting a deadline to exercise its right to make the purchase, according to a lawsuit filed yesterday. The suit seeks to clarify the terms of Lehman’s right to buy the stake, to make the banks carry out their obligations under agreements in place, and to postpone deadlines for the purchase, Lehman said in the suit filed in U.S. Bankruptcy Court in Manhattan.

The former securities firm, which received approval for a $65 billion liquidation plan, has the right to match Zell’s offer. The two banks had agreed to sell 26.5 percent of Archstone to Equity Residential (EQR) and granted the Chicago-based company an option to buy the second half of their stake in the apartment owner for $1.33 billion or more.

“In violation of several significant contractual provisions, defendants have conspired to sell their combined approximately 53 percent interests in Archstone to Archstone’s largest competitor -- Equity Residential,” Lehman said in the suit. Having “breached the Archstone agreements and the covenant of good faith and fair dealing implied therein, defendants should not be allowed to benefit from the terms of those agreements,” Lehman said.

Sale Information

The banks also failed “to provide information about the sale process to plaintiffs on a regular basis and in a commercially reasonable manner,” it said.

Even after notifying Lehman about the proposed deal with Zell, the banks omitted key information, Lehman said.

Kerrie McHugh, a spokeswoman for Charlotte, North Carolina- based Bank of America, and Brandon Ashcraft, a spokesman for London-based Barclays, declined to comment on the lawsuit.

Suing the banks, Lehman wants an injunction that would stop them from completing any transfer to Zell’s company. In addition, it seeks to divest the banks of their voting rights in Archstone, and to recover damages and legal fees from them.

According to Lehman, the banks have been negotiating for months with Zell and other parties about selling their Archstone stake. Lehman’s original agreement with the banks gave it until Jan. 23 to get court approval for its purchase, make a $66 million deposit and complete the deal, paying the balance of the $1.33 billion, it said.

Tishman Buyout

Lehman seeks to sell or liquidate Archstone for at least $6 billion, according to a person with knowledge of the plan. Its strategy depends on taking control of Archstone, said the person, who asked not to be named because the deliberations are private.

Should Lehman buy half the stake held by the banks, Equity Residential probably would bid “at least” $1.45 billion for the second half, to maximize its potential breakup fee of $80 million under the purchase agreement, said Andrew McCulloch, senior analyst at Green Street Advisors Inc., a Newport Beach, California-based researcher of real estate investment trusts.

“We place a very high probability on EQR bidding for the remaining 26.5 percent stake,” McCulloch wrote in a report yesterday. Equity Residential would have about 30 days -- until late February -- after Lehman completes its purchase to make its offer, he said. “A final resolution to the Archstone saga is still likely months away.”

No Price Determination

Lehman must complete its purchase of the first interest before Equity Residential decides whether to make a bid for the second stake, Marty McKenna, an Equity Residential spokesman, said yesterday.

“There’s certainly been no determination about a price for the second piece,” he said.

Archstone was acquired by Lehman in a $22 billion leveraged buyout with Tishman Speyer Properties LP in October 2007 as commercial real estate prices peaked. Lehman, Bank of America, Barclays and other lenders assumed or provided secured loans, according to the lawsuit.

Lehman, whose share of the secured debt was more than $3 billion, filed for the biggest bankruptcy in U.S. history in September 2008 as credit markets froze worldwide.

Archstone was twice restructured afterward, with the lenders committing another $485 million in 2009 and converting $5.2 billion of debt to equity in 2010, according to court papers.

In U.S., Germany

As of Sept. 30, Archstone had stakes in about 428 apartment complexes with about 74,000 units, including some under construction, according to the company. The total comprises 179 properties with about 60,000 units in the U.S. and 249 sites with about 14,000 units in Germany.

The case is In re Lehman Brothers Holdings Inc. (LEHMQ), 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The complaint is Archstone LB Syndication Partner LLC v. Banc of America Strategic Venture Inc. (In re Lehman Brothers Holdings Inc.), 11-02928, U.S. Bankruptcy Court, Southern District New York (Manhattan).

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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