* Demands return of cash transferred to Citi ahead of Ch. 11 filing
* Says Citi trying to use cash to offset "inflated" claims
By Nick Brown
Feb 9 (Reuters) - Lehman Brothers Holdings Inc has sued Citigroup Inc to recover $2.5 billion transferred in the months leading up to Lehman's historic collapse, saying Citigroup is wrongfully keeping the money at the expense of other creditors.
In a complaint filed late Wednesday in the U.S. Bankruptcy Court in Manhattan, Lehman said Citigroup demanded the money as economic conditions worsened in 2008, largely to protect itself in case of problems in Lehman's trading accounts.
But when Lehman filed its record-breaking $639 billion bankruptcy on Sept. 15 of that year, Citigroup wrongfully kept the money, claiming it could use it to offset nearly $2 billion in other claims.
Lehman said those claims are rooted in swap agreements between the companies, and are "inflated" by more than $1 billion. It said Citigroup acted in a wrongful attempt to ensure that it got paid ahead of other creditors.
The 21-count complaint seeks a return of the money and a reduction or disallowance of claims by Citigroup, the third-largest U.S. bank by assets.
Citigroup rejected Lehman's allegations, saying it demanded the cash deposits to protect shareholders from any losses in case of Lehman's demise, which it did not want to occur.
"Citi went out of its way to try to help Lehman prior to its bankruptcy filing," spokeswoman Danielle Romero-Apsilos said in a statement.
Lehman's Chapter 11 restructuring plan will pay out about $65 billion to creditors, and was approved by U.S. Bankruptcy Judge James Peck in December.
The company, once Wall Street's fourth-largest investment bank, hopes to emerge officially from bankruptcy and begin making payouts soon.
The lawsuit is Lehman Brothers Holdings Inc et al. v. Citibank NA et al., U.S. Bankruptcy Court, Southern District of New York, No. 12-1044. The bankruptcy is In re Lehman Brothers Holdings Inc in the same court, No. 08-13555.