Lehman Brothers Holdings Inc. affiliate Archstone LB Syndication Partner LLC has launched a lawsuit against banks trying to sell their interest in Archstone Enterprise LP, which owns, operates and develops multifamily apartment properties.
The lawsuit was filed on Dec. 15 in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan against Banc of America Strategic Ventures Inc., Bank of America NA, Barclays Capital Real Estate Inc., Barclays affiliate BIH ASN LLC and Archstone Equity Holdings Inc.
Lehman Brothers holds a 47% interest in Archstone Enterprise, while BofA and Barclays hold the remaining 53% stake.
The banks are trying to sell a portion of their equity stake -- 26% -- to Archstone's largest competitor, Equity Residential, for $1.325 billion in cash, with the option to buy the remainder.
But closing a sale is contingent on the remaining significant Archstone owner (Lehman Brothers) not exercising its right of first offer.
According to the lawsuit, Lehman Brothers sent the banks its notice of intent to exercise its right of first offer on Dec. 14. Lehman Brothers has until Jan. 23 to seek bankruptcy court approval of the deal, provide a $66 million deposit and then close the deal by paying the $1.325 billion balance, two days later.
The lawsuit was filed so Lehman Brothers could obtain an injunction against the banks to keep them from consummating the equity transaction with Equity Residential.
Judge James Peck of the Manhattan court is set to consider the approval of a preliminary injunction against BofA and Barclays at a Dec. 21 hearing, court papers said.
The lawsuit also seeks to clarify the terms of its right of first offer and make the banks perform their obligations under the agreement.
According to the suit, the banks have been attempting to sell their interest in Archstone since this summer and in the process of doing so, has committed numerous breaches of its agreements.
Lehman Brothers claims that the banks deprived it of its contractual right to information required to make an informed choice concerning it's largest real estate investment, the lawsuit said.
The former investment bank didn't receive information about the sale process on a "regular basis and in a commercially reasonable manner," the lawsuit said.
Spokesmen for Barclays and BofA refused to comment.
Equity Residential is a general partner of ERP Operating LP. Sam Zell is the chairman of Equity Residential's board of trustees.
Archstone holds one of the largest residential real estate portfolios in the nation.
As of Sept, 30, the Archstone portfolio included 48,922 wholly-owned and stabilized apartment units as well as 1,332 apartment units under construction, land sites for the potential development of 5,279 apartment units and 9,423 apartment units owned in unconsolidated joint ventures with third parties.
The debtor has sought to approve Gleacher & Co. Securities Inc. to help the former investment bank monetize its interest in Archstone Enterprise. Peck is set to consider the request on Dec. 21.
Separately, Lehman Brothers on Dec. 14 received court approval from Peck to sell its equity in Neuberger Berman Group LLC in a deal that is expected to yield $1.5 billion for creditors of the liquidating investment firm.
Lehman Brothers and certain nondebtor affiliates own 93% of the preferred equity and 49% of the common equity in Neuberger Berman. NBSH Acquisition LLC, formed by Neuberger Berman's management, owns the remaining common (51%) and preferred equity (7%).
Under the deal, Lehman Brothers will monetize its total equity in the asset management firm by 2017.
Neuberger Berman must obtain third-party financing to repurchase Lehman's preferred interest. Lehman agreed to reduce its preferred dividends retroactively from 2011 to a level approximating the average interest rate on the new debt.
NBSH would receive cash for its vested equity and an interest-bearing promissory note for its nonvested preferred equity.
Neuberger Berman would be entitled to purchase up to 10% of Lehman's common interest at an agreed-upon value at the closing of the deal. Each year after that, a portion of Neuberger Berman's excess cash flow would be used to purchase more of Lehman's common interest, subject to an annual cap of 26% of Lehman's common interest after the initial sale of 10% of the interest.
According to debtor counsel Garrett Fail of Weil, Gotshal & Manges LLP, if Neuberg Berman doesn't purchase the entire 26% per year, they will be allowed to make up the shortfall in later years.
Lehman must monetize its interest by April 30, 2017, court papers said.
Lehman's governance in Neuberger Berman would also change due to its reduced equity stake. Lehman would retain two seats on Neuberger Berman's board until its interest is less than 15% of the firm's total common equity and would retain one board seat as long as it has any equity.
The deal would generate $845 million at closing and between $300 million and $450 million from future purchases of the common equity. Inclusive of about $160 million in preferred dividends and tax distributions that Lehman has already received, the deal is expected to yield $1.5 billion, Fail said.
Lehman said it would also receive dividends on its Neuberger common equity holdings while the debtor owns it.
The Lehman estate will receive at least two-thirds of the money when the transaction closes and the remainder over time, Fail said.
Lehman had been seeking to sell Neuberger Berman before it filed for Chapter 11. While the debtor negotiated a stalking-horse agreement in October 2008 that would have yielded $745 million, Lehman ultimately pursued a different strategy in December 2008, in which a team of its management led by George Walker, Lehman's former global head of investment management, paid about $814 million in new preferred shares for the company. Lehman retained 93% of the preferred equity and 49% of the common equity. The deal closed in May 2009.
Lehman said its decision to break the original stalking-horse bid has led to more than double the anticipated proceeds from the deal.
Lehman, which owned investment banking, asset management, real estate and other assets, filed for bankruptcy on Sept. 15, 2008, after the collapse of a federal government-led effort to save it. The New York debtor had suffered massive mortgage securities losses.
Peck on Dec. 6 confirmed the liquidation plan, which allows Lehman to unwind its remaining holdings, including real estate, commercial loans and private equity and principal investments, in the years following the effective date of the plan.
Debtor counsel is also Lori R. Fife of Weil, Gotshal & Manges.
Lazard advised the debtor in connection to the Neuberger Berman deal.
Lehman's counsel in the Archstone lawsuit is William A. Maher and Paul R. DeFilippo at Wollmuth Maher & Deutsch LLP.