Dow Jones and Company is reporting that Lehman Brothers Holdings Inc. has filed a bankruptcy-exit plan for the California real estate projects that it funded for SunCal Companies. This marks the latest move in the long-running bankruptcy battle between SunCal and its former financial backer, according to Patrick Fitzgerald, writing for the Dow Jones Daily Bankruptcy Review.

Before Lehman Brothers filed for bankruptcy in September 2008, the company invested some $2.3 billion in SunCal holdings. Under bankruptcy law, secured lenders like Lehman Brothers that have valid liens on a company's assets can bid the amount the company like SunCal owes the secured lender. This allows the secured lender to purchase those assets when put up for auction — a practice called credit-bidding.

Dow Jones says that SunCal is asking bankruptcy Judge Erithe A. Smith, who is overseeing the Chapter 11 cases, to bar Lehman from credit bidding on the projects that the investment bank funded.

SunCal has filed its own Chapter 11 plan that proposes to pay off all its creditors in full, except Lehman Brothers and some of its real estate affiliates, Fitzgerald says. SunCal hopes to have Lehman's secured claims subordinated to those of unsecured creditors and its liens on the properties voided. SunCal's plan could be derailed if Smith allows Lehman to credit-bid.

According to Dow Jones, SunCal intends to fund its exit from bankruptcy through the sale of some of its projects to hedge fund D.E. Shaw for up to $200 million. Lehman has balked at such a sale.

If Lehman Brothers Holdings, Inc. is to be believed, SunCal projects are hopelessly insolvent. Lehman's attorney told Judge Smith that SunCal's debts of $2.4 billion offset its collective value, which lies somewhere between $350 million to $600 million.

Lehman says that its plan serves as a counterpoint to SunCal's Bruce Elieff's proposal. Elieff controls SunCal projects; he and his wife have personally guaranteed payment of approximately $230 million of bond debt.

Lehman's lawyers allege in recent court filings that SunCal's plan is "designed primarily to provide Elieff the personal benefit of reducing or eliminating his personal liability with respect to the bond obligations."

Although more than 20 of SunCal's real estate ventures went into Chapter 11 when Lehman stopped funding them, the developer did not file for bankruptcy protection. Smith is slated to rule if creditors can vote on Lehman Holdings and SunCal's plans at an Oct. 15 hearing.

Last year's real estate crisis sent the value of Lehman's SunCal investments on a downward spiral. The investment bank hoped that spinning off properties in its commercial real-estate portfolio, including more than 20 owned by SunCal, would stop the spiral. Bankruptcy put a halt to the plan.

Lehman's bankruptcy caused SunCal to suspend operations at the former Oak Knoll Naval Hospital in Oakland in September of last year. SunCal and the city of Oakland had been negotiating approval conditions for the 167-acre mixed-use development that included 960 homes, retail and open space.

On Sept. 15, Donald Mitchell, Sequoyah Hills-Oak Knoll Neighborhood Association president, filed two claims with the United States Bankruptcy Court, Southern District of New York against Lehman Brothers Holdings Inc., in the amount of $115 million. In court documents Mitchell said he was suing "for the extreme hazard that exists at Oak Knoll as a result of SunCal/Lehman LLC abandoning the property last year in violation of city ordinances and federal statutes."

When SunCal ceased work on Oak Knoll in September 2000, company spokesman Joe Aguirre said that his company regretted that Lehman Brothers bankruptcy filing required the company to suspend work at Oak Knoll, but ending work was necessary "to protect our many consultants and contractors."

SunCal could not move forward with assurance of continued funding, Aguirre said at the time. "We cannot ask these professionals to work without having proper assurances of future payment."

Aguirre said the company remained committed to Oak Knoll and intended to resume work there as soon as possible. He brought up the possibility of SunCal's collaborating with D. E. Shaw & Co., the investment company that invested $10 million in Alameda Point in 2008.