A federal bankruptcy judge rejected Lehman Brothers Holdings Inc's bid to block a company run by billionaire Sam Zell from buying part of apartment company Archstone, impeding Lehman's efforts to ultimately buy the entire company at a lower price.

Lehman, which owns 47 percent of Archstone, had been hoping to buy the rest from Bank of America Corp and Barclays Plc for $2.65 billion.

It said it would suffer irreparable harm if the banks sold half their stake, or 26.5 percent, to Zell's Equity Residential for $1.325 billion, because it would force Lehman to partner with Equity Residential, a key real estate competitor.

The banks argued Lehman can still acquire their stake through a built-in right to match Zell's offer, and that its bid to block the deal was merely an attempt to lower the price.

The 47 percent Archstone stake is one of Lehman's most valuable assets. Lehman has sought to buy the remainder so it can then sell the company as a whole and use proceeds to repay creditors after it emerges from Chapter 11 bankruptcy.

U.S. Bankruptcy Judge James Peck, presiding over a court hearing on Friday, said Zell's company is free to try to purchase half of the banks' stake.

Lehman can match Zell's offer, which would trigger an option allowing Zell to then buy the other half of the banks' stake. Lehman can match that offer, too, but would have to put up enough money to overcome a likely price increase and a hefty breakup fee.

Still, the structure ultimately gives Lehman the ability to acquire the full stake.

I see that, and I think everybody in the courtroom does, Peck said, calling the deal a disguised sale of all the banks' stake to Lehman.

The lack of irreparable harm to Lehman makes this a ruling I am comfortable making today, he added.

Lehman will presumably exercise its right to match Zell's $1.325 billion offer for the initial stake, considered a below-market price, triggering Zell's option for the second stake.

Lehman had hoped to offer the same amount for both halves of the banks' stake -- a total of $2.65 billion -- but the transaction is structured such that Zell could raise the price to nearly $1.45 billion, according to testimony from Lehman real estate chief Jeffrey Fitts.

I have to assume that as a public company, (Equity Residential) is going to exercise the option if the world doesn't come to a crashing halt for nearly $1.45 billion, Peck said.

The judge did not rule on damages, potentially opening the door for Lehman to argue later that the transaction was structured to hurt its bottom line.

A Lehman spokeswoman declined to comment. Representatives for Equity Residential and Archstone could not immediately be reached for comment.

REAL ESTATE SAGA

Lehman's Chapter 11 filing on September 15, 2008 remains by far the largest bankruptcy in U.S. history, and was a major factor in that year's global financial meltdown.

Once the fourth-largest U.S. investment bank, Lehman last month won Peck's approval for its reorganization plan. It hopes to emerge from Chapter 11 protection and start paying creditors an estimated $65 billion within the next few months.

Archstone owns nearly 60,000 apartments in the United States and 14,000 in Germany. Lehman bought Archstone in 2007 in a $22 billion buyout for which Bank of America and Barclays provided debt and equity financing. Those banks later became part owners when the buyout was restructured.

Lehman had argued that giving Equity Residential an ownership stake in Archstone would hurt creditors because Zell would have effective veto power over how the company is run.

It accused Bank of America and Barclays of collusion and breach of contract governing any sale of Archstone. Bank of America and Barclays countered by accusing Lehman of trying to buy their stake on the cheap.

Zell's interest in Archstone came amid rising property values in the U.S. apartment sector, as a growing number of Americans unable or unwilling to buy homes end up renting.

The case is Archstone LB Syndication Partner LLC et al v. Banc of America Strategic Ventures Inc et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-2928. Lehman's bankruptcy case is In re Lehman Brothers Holdings Inc, in the same court, No. 08-13555.

(Reporting by Jonathan Stempel and Nick Brown; editing by Carol Bishopric)

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