Barclays Plc (BARC) resumed its 3 1/2-year fight with Lehman Brothers Holdings Inc.’s defunct brokerage over $3 billion in assets tied to the bank’s purchase of Lehman’s North American business.

The U.K.’s second-largest bank and the brokerage made arguments today in a hearing before U.S. District Judge Katherine Forrest in Manhattan. Forrest didn’t say when she will rule in the case.

Forrest had asked the two sides whether she should treat the final sale document as a binding contract, which both read and understood before signing, and whether Barclays should have gotten any cash, according to a court order this week telling lawyers what to focus on at the hearing.

Both sides are appealing a bankruptcy court ruling that followed a 2010 trial.

In that decision, U.S. Bankruptcy Judge James Peck told Barclays to return $2 billion in margin assets to Lehman brokerage trustee James Giddens. At the same time, Peck ordered Giddens, who is also handling the MF Global Inc. brokerage liquidation, to give Barclays at least $1.1 billion, and possibly another $769 million.

‘Real Money’

“Three billion dollars is real money, even for a financial institution,” said Stephen Lubben, a bankruptcy law professor at Seton Hall University in Newark, New Jersey, who writes articles on the Lehman case. “I tend to think Judge Peck’s original ruling will be upheld on this.”

The fight comes as Barclays Chief Executive Officer Robert Diamond forgoes about 11 percent of his compensation until the bank improves profitability, and hedge funds that had Lehman brokerage accounts wait to be paid. The brokerage is being liquidated separately from its parent, which officially exited bankruptcy last month, and has been gathering money to pay the hedge funds and other remaining customers.

The final sale document Forrest mentioned, called a clarification letter, allocated the margin to Barclays in a single bracketed phrase that Giddens, of Hughes Hubbard & Reed LLP, claimed not to have seen. Giddens’s lawyers signed the document and testified in court on his behalf.

Bankruptcy Court Approval

William Maguire, a lawyer representing Giddens, told Forrest today that the trustee couldn’t bind Lehman to an agreement that would have an adverse effect on the firm without review by the bankruptcy judge.

“Any material adverse change requires further approval by the bankruptcy court,” Maguire said.

“It was absolutely clear that this was far and away the best deal, to the trustee and to all the people the trustee served,” said David Boies, who represents Barclays. “Nobody wanted to unscramble these eggs back then.”

It was only after the markets recovered that the trustee wanted to change terms of the arrangement, Boies told Forrest.

Barclays, the sole bidder for New York-based Lehman’s business in the 2008 financial crisis, emerged from the trial facing far less of a payout than sought by the trustee, who demanded about $7 billion from the bank.

The Lehman brokerage’s parent separately tried to recover an $11 billion “windfall” it alleged Barclays made on the 2008 purchase. The parent got nothing and dropped an appeal of Peck’s ruling on the windfall claim, saying it wanted to move ahead with its liquidation plan, which may pay the average creditor less than 18 cents on the dollar in the next few years.

Lehman Brothers Holdings filed the biggest bankruptcy in U.S. history in 2008, listing assets of $639 billion.

The district court case is Giddens v. Barclays Capital Inc., 11-cv-06052, U.S. District Court, Southern District of New York (Manhattan).

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

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net