NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEHMQ.PK, which owns nearly half of real estate company Archstone, urged a judge on Thursday to allow it to buy the remaining stake without having to fight a bidding war with billionaire Sam Zell.
The hearing in U.S. Bankruptcy Court in Manhattan is the first major showdown in a lawsuit filed last month by Lehman seeking to block Zell’s Equity Residential from taking a 26.5 percent stake in the apartment company.
Lehman, which owns 47 percent of Archstone, argues that deal would transfer a large enough stake to Equity Residential to effectively give Zell veto power over how the company is run.
The deal “looks at the world from Equity Residential’s perspective, not Lehman’s,” Lehman lawyer Paul DeFilippo told Judge James Peck. “And we’re here to determine whether Lehman’s rights were violated, not whether Equity’s were.”
Lehman’s Archstone stake is a key part of its plan to exit bankruptcy and pay back creditors. The $65 billion payback plan involves liquidating assets for the benefit of creditors and Archstone is among Lehman’s most valuable pieces.
While the payback plan will go forward regardless of Archstone’s fate, Lehman argues giving Zell’s firm an ownership stake would stunt creditor returns from Archstone.
The hearing, expected to run through Friday, will determine whether the Equity Residential deal is put on hold while further litigation plays out.
Lehman criticized a portion of the sale deal that governs its right to match Zell’s offer for the 26.5 percent stake. If Lehman exercises that right, Zell would have the option to buy the second half of the banks’ stake. Lehman could counter that offer, too, but would have to put up enough money to overcome a hefty breakup fee.
Lehman argued it should have the first bite at the second half of the stake. According to Lehman, by exercising its right to match Zell’s offer on the first tranche, it also inherits Zell’s option for the second.
The banks’ lawyers responded with accusations that Lehman is trying to get the banks’ full stake on the cheap.
Lehman “just doesn’t like” Equity Residential, said Joseph Frank, an attorney for Barclays. “They don’t want to pay a market price for the second half of the banks’ interest.”
The only witness who testified on Thursday was Jeffrey Fitts, Lehman’s co-head of real estate. He said it would be hard to gauge Lehman’s loss if forced to bid against Zell. The court should halt the deal rather than risk having to set money damages if it is later derailed, he said.
Attorneys for the banks said Fitts was not present when the deal was drawn up and should not be allowed to interpret it.
“There is only one person competent to tell us what this provision means, and that’s you,” Frank told the judge.
Archstone owns nearly 60,000 apartments in the United States and 14,000 in Germany. Lehman bought Archstone in 2007 in a $22 billion buyout. The banks, which had supplied debt and bridge equity on the deal, subsequently became part owners after the deal was restructured.
Zell’s interest comes in the midst of a recovery in the U.S. apartment sector, where values have been on the rise as more Americans shun home ownership in favor of renting.
Lehman’s bankruptcy on September 15, 2008, contributed to the global financial meltdown. The company hopes to officially emerge from Chapter 11 protection and begin paying back creditors within the next few months.
The case is Archstone LB Syndication Partner LLC et al v. Banc of America Strategic Ventures Inc et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-2928.
Lehman’s bankruptcy case is In re Lehman Brothers Holdings Inc, in the same court, No. 08-13555.
Reporting by Nick Brown; editing by Andre Grenon