UPDATE 6-Blackstone sued for $8 bln over Extended Stay role

* Blackstone accused of siphoning $2.1 billion in LBO

* Lawsuit alleges value stripped in sale of Extended Stay

* $6.3 billion in punitive damages sought

* Complaint also names Citi, Bank of America as defendants (Adds punitive damages sought; adds quote from complaint)

By Tom Hals

WILMINGTON, Del., June 15 (Reuters) - Blackstone Group LP (BX.N) was sued for more than $8 billion for allegedly siphoning money from the leveraged buyout of Extended Stay America Inc [ESAIN.UL], a deal blamed for the hotel chain's bankruptcy, according to court documents.

A trust representing creditors of the hotel chain accused the private equity group of skimming $2.1 billion from the sale of the chain. The trust also asked the court for $6.3 billion in punitive damages because it alleged Blackstone and others maliciously breached their duties to Extended Stay creditors.

Blackstone teamed with Citigroup Inc (C.N) in 2007 to sell the chain of about 680 hotels for $8 billion to little-known private equity investor David Lichtenstein, a "mark" who was willing to overpay, according to the lawsuit.

The lawsuit filed on Tuesday in Manhattan's bankruptcy court is seeking to recover funds to benefit creditors who lost money in the bankruptcy. It also names as defendants individual managers employed by Blackstone.

Extended Stay was "dominated, controlled and ultimately exploited by the sellers and the buyer," said the complaint, which also names Lichtenstein as a defendant for dividend payments the company made after the buyout.

"The grossly inflated purchase price was engineered by the Blackstone-affiliated sellers looking to maximize their profits, working in concert with a buyer that assumed little to no risk of loss," the lawsuit said.

Lichtenstein put up little of his own cash for the deal, which loaded up Extended Stay with too much debt and so many restrictions on its finances that the chain landed in bankruptcy just two years later, the complaint said.

Extended Stay emerged from bankruptcy in October after selling the chain for $3.93 billion to an investment group that included Paulson & Co and Centerbridge Partners, both hedge funds, and Blackstone.

The lawsuit was filed as Blackstone is close to clinching a deal to buy German outdoor clothing and equipment maker Jack Wolfskin, sources told Reuters. The deal could be worth as much as $1 billion, one source said. [ID:nLDE75E1E8]

The lawsuit alleges the participants in the leveraged buyout knew or should have known the deal would render Extended Stay insolvent and could potentially wipe out its creditors.

Blackstone said the lawsuit was without merit.

"The real cause of the company's bankruptcy was an economic tsunami," Blackstone said in a statement.

The company said it "would not have taken the unusual step of retaining an equity participation in Extended Stay" if it had known at the time of the sale that the recession was coming.

Creditors of bankrupt media company Tribune Co TRBCQ.PK are planning to pursue similar claims against the shareholders who sold into a leveraged buyout led by real estate entrepreneur Sam Zell. [ID:nN03157967]

Creditors have had some success bringing claims against sellers involved in failed buyouts, for example reaching a settlement in the case of Best Products Co in the 1990s.

The selling shareholders generally defend themselves by arguing they sold in good faith and without any knowledge the sale would render the company insolvent, according to legal experts.

That defense becomes more difficult for large shareholders, who are more likely to understand the risks of the transaction.

The lawsuit by the trust also blames Citigroup for assuring Lichtenstein of the soundness of the deal, even after Lichtenstein's own independent valuation contradicted projections provided by Blackstone.

"Citigroup dismissed that valuation and questioned Lichtenstein's judgment in relying on a relatively obscure source over the collective 'wisdom' of Citigroup," the complaint said.

The complaint said Citigroup had a conflict of interest because it was advising Lichtenstein while coordinating Blackstone's IPO.

The lawsuit said Citigroup wanted to position Blackstone for its IPO in part by closing the Extended Stay sale.

Citigroup declined to comment.

The bankruptcy trust was set up to allow Extended Stay to emerge from bankruptcy while creditors continue to pursue legal claims, including those against the parties responsible for the bankruptcy.

The trust also sued Bank of America Corp (BAC.N), which funded the buyout. Bank of America declined to comment.

Blackstone shares ended down 2.5 percent at $16.59 on the New York Stock Exchange, while the broader market was down about 1.5 percent.

The trust's case is The Extended Stay Litigation Trust v The Blackstone Group LP, et al, U.S. Bankruptcy Court, Southern District of New York, Adv. Pro. No. 11-02254. Similar complaints were also filed under the numbers 11-2255 and 11-2256.

The main bankruptcy case is Extended Stay Inc, U.S. Bankruptcy Court, Southern District of New York, No. 09-13764. (Additional reporting by Santosh Nadgir in Bangalore; editing by Lisa Von Ahn, Dave Zimmerman and Andre Grenon)