LEH Lehm Bros Hldgs

Lehman Brothers Holdings Inc. (LEHMQ) sparred in court Thursday with Bank of America Corp. (BAC) and Barclays PLC (BCS, BARC.LN) over the future of the Archstone apartment company if a big stake in the firm ends up in the hands of its biggest rival, Sam Zell's Equity Residential (EQR).

The banks are trying sell half of their combined 53% stake in Archstone to Equity Residential. Lehman, which owns the rest of Archstone, is balking at the deal.

Thursday, a Barclays lawyer pressed the case that Lehman already had signed off on a possible sale to Equity Residential by the banks back in 2009 and referenced a judge's prior characterization of Zell's company as an "elephant in the room."

"Your honor, in 2009, Lehman put up a sign that said 'elephants welcome,'" Orrick Herrington & Sutcliffe LLP's Joseph J. Frank, the Barclays lawyer, told Judge James Peck of U.S. Bankruptcy Court in Manhattan.

Frank said Lehman "doesn't like EQR, and they don't want to pay a market price for the second half of the banks' interest."

A key issue in the dispute is an option for Equity Residential to buy the other half of the banks' Archstone stake if Lehman exercises its right of first refusal to buy the first half. Essentially, Lehman wants to step in and buy the 26.5% stake Zell is buying for the same $1.33 billion. Lehman then wants to buy from the banks the other 26.5% of Archstone for that same $1.33 billion price.

The banks have no problem with Lehman stepping in and buying half of their stake for $1.33 billion, but they want Lehman to pay a higher "market" price if it wants to buy the second half.

"They will still be saving boatloads," said Frank, the Barclays lawyer. Another key issue at Thursday's hearing was a large breakup fee that would be paid to Zell if a bidding war ensued for the second half of the banks' stake.

At Thursday's hearing, Peck is considering whether to issue a preliminary injunction that would halt the Zell deal. The banks and Lehman spent much of the morning figuring out how to proceed with the hearing, eventually deciding to admit all filings in the case as evidence to be sorted out by Peck while only one witness would take the stand rather than several.

The hearing was expected to be a two-day affair, with closing arguments tentatively set for Friday.

Lehman, which is still under bankruptcy protection, needs court approval to match Zell's bid. A preliminary injunction, it said, would give it time to make a $66 million right-of-first-refusal deposit and close a purchase by Jan. 23.

Under the terms of the deal, Equity Residential could buy only 26.5% of Archstone, and it could never end up with the banks' entire 53% interest. Lehman, however, could buy the banks' entire stake, in effect "doubling down" on its Archstone investment. The banks' lawyers said Lehman is only upset that the parameters of the deal could force it to pay more than Zell would.

Cleary Gottlieb Steen & Hamilton LLP's Lawrence B. Friedman, a Bank of America lawyer, said Thursday it is clear the banks' and Lehman's interests are currently misaligned: Lehman wants to own Archstone for the medium- and long-term, while the banks want to sell quickly.

The $1.33 billion Equity Residential deal values Archstone at about $16 billion, including $11 billion in debt.

Lehman led a $22 billion leveraged buyout with real-estate investor Tishman Speyer for Archstone in 2007 near the height of the real-estate bubble, with Bank of America and Barclays providing financing. The two banks gained their ownership stakes after the collapse of the commercial-real-estate market led to a restructuring of the deal.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)

-By Joseph Checkler; Dow Jones Newswires; 212-416-2152; joseph.checkler@dowjones.com

-Patrick Fitzgerald contributed to this article.

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