Lehman Says Archstone Co-Owners Are Breaching Contract
05/08/2012| 01:44pm US/Eastern
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By Joseph Checkler
Of DOW JONES DAILY BANKRUPTCY REVIEW
Lehman Brothers Holdings Inc. (LEHMQ) lashed out at Sam Zell's deal with Bank of America Corp. (>> Bank of America Corp) and Barclays PLC (BCS) to extend Zell's option to buy their remaining stake in the Archstone apartment company, saying the stalling is "detrimental to Archstone's operations."
Continuing a fight over the banks' remaining 26.5% stake in Archstone, majority owner Lehman said Zell-owned Equity Residential's (EQR) move to extend until May 21 the closing of its purchase from the banks has "compounded" what was already a breach of contract by the banks. In exchange for the extension, Equity Residential agreed to pay $1.485 billion for the stake, up from $1.44 billion. Lehman has a right of first offer for the stake and will all but certainly be the one that ends up with it.
"The continued cloud of uncertainty hanging over Archstone, further exacerbated by the extension of time...has the potential to damage Lehman and Archstone," Lehman lawyers said in a Monday filing with U.S. Bankruptcy Court in Manhattan. Spokesmen for the banks and Equity Residential didn't immediately respond to requests for comment.
The fight continues one that resulted in a two-day trial in January, with a judge ultimately allowing Lehman to exercise a right of first offer provision to buy half of the banks' then-53% stake in Archstone for $1.33 billion, the amount Zell tried to pay Barclays and Bank of America for the same stake.
Lehman now owns 73.5% of Archstone and wants the banks' other 26.5% for the same $1.33 billion price. Lehman is suing the banks for breach of contract, saying they violated agreements made after the collapse of the commercial-real-estate market led to them gaining their Archstone stakes.
At the January bankruptcy-court trial, lawyers for Zell and the banks argued that Lehman's legal strategy was to attempt to fend off Equity Residential from trying to bid on the second half of the banks' stake, which would prevent a bidding war between the two sides. While Lehman has the right to buy the stake, Equity Residential could essentially bid up its biggest rival. The banks want the eventual winning bidder, most likely Lehman, to pay a higher "market" price.
In 2007, Lehman led a $22 billion leveraged buyout with real-estate investor Tishman Speyer for Archstone, with Bank of America and Barclays providing financing. The later restructuring led to the banks' gaining their stakes.
In their Monday filing, Lehman lawyers said, "The Archstone governance regime is ill-suited to owners with divergent interests."
Lehman wants eventually to sell shares in Archstone, which owns stakes in more than 70,000 apartments, to the public. Proceeds of an initial public offering would flow to the failed investment bank's creditors.
A judge last year approved Lehman's historic $65 billion creditor-payback plan, and creditors started receiving distributions last month.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)
-By Joseph Checkler, 212-416-2152; joseph.checkler@dowjones.com; Twitter: @JoeCheckler
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