Lehman Brothers Holdings Inc., which asked a judge today to stop Bank of America Corp. and Barclays Plc from transferring a stake in Archstone to Sam Zell’s Equity Residential, was told to sit down with the banks and resolve the disputes.
Bankrupt Lehman told the banks last week that it would buy half of their Archstone stake for about $1.3 billion. It also sued them for breach of contract, saying they collude to sell a stake to Zell’s company, Archstone’s “largest competitor,” and failed to inform Lehman about all the terms of the deal. Lehman currently owns 47 percent of Archstone.
U.S. Bankruptcy Judge James Peck said at a hearing today he was “mystified” by the lawsuit. Lehman should be holding “business meetings” with the banks, not suing them, he said. He set a court conference for later today, telling the parties to sort out issues of fact before it started.
Archstone, which Lehman acquired in a $22 billion leveraged buyout with Tishman Speyer Properties LP, has ownership interests in hundreds of apartment developments from Washington and New York to San Francisco. Lehman is seeking to sell Archstone, its biggest real-estate asset, for $6 billion to help pay creditors with claims of about $370 billion, and to do that must gain control of the company, according to a person familiar with the plan.
Lehman would have to spend at least $2.6 billion to buy the banks’ whole stake in Archstone, Peck said. That would force it to own 100 percent of the real estate company, which might not be in the best interests of creditors waiting for a payout, he said.
The Zell company is the “elephant in the room,” Peck said. If Lehman buys the first half of the banks’ Archstone stake, and not the second half, Equity Residential has an option to buy the second half. That would saddle Lehman with an asset whose biggest rival had a stake in the company, he said.
By striking the deal with Zell, the banks “have put Lehman in a box,” he said.
Lawyers for Barclays and Bank of America told Peck that Lehman hadn’t placed restrictions on any type of buyer in the Archstone agreements it helped to draw up. The defunct firm had put itself in a box, Bank of America lawyer Lawrence Friedman told Peck.
Option to Buy
Barclays and Bank of America had agreed to sell 26.5 percent of Archstone to Equity Residential for $1.3 billion, granting the Chicago-based company an option to buy the second half of their stake for the same price or more, if Lehman took the first piece. Lehman has the right to match Zell’s offer and met a deadline last week for saying it would buy the first piece of their stake.
Kerrie McHugh, a spokeswoman for Charlotte, North Carolina-based Bank of America, and Brandon Ashcraft, a spokesman for London-based Barclays, have declined to comment on the lawsuit.
According to Lehman, the banks have been negotiating for months with Zell and other parties about selling their Archstone stake. Lehman’s original pact with the banks gave it until Jan. 23 to get court approval for its purchase, pay a $66 million deposit and close the deal, paying the balance of the $1.3 billion, it said in the Dec. 15 suit.
In a separate filing, Lehman accused the banks of doing “side deals” with Zell. They participated in a $1 billion bond offering by Equity Residential, Lehman said.
Lehman and Tishman bought Archstone 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 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.
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., 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).