Bloomberg News

Zell Company Seeks to Intervene in Lehman’s Archstone Case

January 03, 2012

(Updates with rising fee in seventh paragraph.)

Dec. 29 (Bloomberg) -- Sam Zell’s Equity Residential told a judge it urgently needed to intervene in court proceedings over Lehman Brothers Holdings Inc.’s Archstone to protect its right to buy half of a stake in the real estate company held by Bank of America Corp. and Barclays Plc.

An Equity Residential affiliate, ERP, this month got a 30-day right to set the price for the second 26.5 percent of the banks’ stake, according to a filing today in federal court in New York. Lehman said in a lawsuit it is entitled to take over that right without compensating ERP, said in the filing.

“ERP seeks to intervene in this action to protect contractual rights it holds that are directly threatened by the relief Lehman is seeking,” it said. ERP said it is entitled to a so-called breakup free if Lehman buys the bank’s whole 53 percent stake.

The dispute over bankrupt Lehman’s largest real estate asset intensified on Dec. 15, when Lehman sued the banks for breach of contract, saying they colluded to sell a stake to Zell’s company, Archstone’s “largest competitor” in the apartment business. Barclays and Bank of America failed to inform Lehman about all the terms of the deal, said Lehman, which currently owns 47 percent of Archstone.

Second Piece

Lehman a day earlier told the banks it would buy the first half of their Archstone stake for about $1.3 billion, meeting a deadline to do so after Zell offered to buy that piece of the banks’ stake. That left Zell with an option on the second piece of the banks’ stake.

If Zell chooses, he could set the price for the second piece higher than $1.3 billion, according to today’s filing. That would make it more expensive for Lehman to buy the banks’ entire stake. Lehman aims to sell Archstone 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.

ERP’s breakup fee would rise as the price of the second tranche rose. The fee is set at $1 for every dollar of price increase between $1.325 billion and $1.365 billion, falling to 50 cents for every dollar of increase up to $1.445 billion, according to the filing.

Court Hearings

The Zell company is the “elephant in the room,” U.S. Bankruptcy Judge James Peck said at a Dec. 21 court hearing in Manhattan. If Lehman buys the first half of the banks’ Archstone stake, and not the second half, that would saddle Lehman with an asset whose biggest rival had a stake in the company, he said.

At the same time, 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.

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 put itself in a box, Bank of America lawyer Lawrence Friedman told Peck.

Peck scheduled more hearings on the dispute for January. He said today that he must receive objections to the Zell company’s request by Jan. 4 at 5 p.m. New York time.

Ownership Interest

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.

Kimberly Macleod, a Lehman spokeswoman, declined to comment on today’s filing.

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).

--Editors: Stephen Farr, Charles Carter

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net.

To contact the editors responsible for this story: Stephen Farr at sfarr@bloomberg.net.


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