By Ilaina Jonas and Jonathan Stempel

NEW YORK (Reuters) - A New York judge has put on
hold a foreclosure auction for equity in Manhattan's giant
Stuyvesant Town and Peter Cooper Village apartment complexes, a
victory for senior lenders owed nearly $3.7 billion after the
property's owner defaulted.

In an order released Thursday, Justice Richard Lowe of the
New York State Supreme Court in Manhattan halted a planned Aug.
25 auction on the equity in the owner of the property, which
houses 25,000 people. He set a Sept. 2 hearing on the matter.

The proceedings escalate a high-stakes battle for the
iconic property that pits William Ackman, one of the nation's
best-known hedge fund investors, against senior creditors
represented by two of the largest U.S. lenders: Bank of America
Corp and US Bancorp.

A joint venture created by Ackman's Pershing Square Capital
Management LP and Boston-based Winthrop Realty Trust
had sought the foreclosure auction on the equity after buying a
$300 million junior loan for just $45 million, or 15 cents on
the dollar.

That loan is secured by shares in the property's owner, not
the property itself. Pershing owns 77.5 percent of the venture,
PSW NYC LLC, while Winthrop owns 22.5 percent.

CWCapital Asset Management LLC, a special servicer
overseeing the property after underlying mortgages went into
default, is foreclosing on the property, and had planned an
auction in the second half of September, court documents show.

Bank of America and US Bancorp, acting as trustees for
senior lenders, had sought to block the foreclosure on the
equity, saying a $3.66 billion foreclosure judgment on the
property that they obtained in June should be paid off first.

"We remain confident in our right to acquire control of the
property owner while preserving the first mortgage lender's
collateral" and ensuring "long-term stability and
affordability" for tenants, the PSW NYC joint venture said in a
statement after Lowe issued his order.

MIDDLE-CLASS BASTION

Originally built by MetLife Inc for returning World
War Two veterans and middle class New Yorkers, Stuyvesant Town
and Peter Cooper Village house residents in 11,227 apartments
spread over 56 buildings, and sit on 80 acres overlooking the
East River in New York City.

The complexes were sold in 2006 to an entity created by a
group led by Tishman Speyer Properties for $5.4 billion, but
the borrowers defaulted on their loans in January.

According to the banks' Aug. 18 complaint, the joint
venture's foreclosure plan violates an inter-creditor agreement
by letting junior creditors get paid before more senior
creditors, including holders of a $3 billion first mortgage.

"The future of this iconic enclave in the Borough of
Manhattan is in imminent jeopardy," the complaint said.

The senior mortgage has been packaged into commercial
mortgage-backed securities, whose holders included Fannie Mae
and Freddie Mac.

"Everyone associated with the property assumes that it is
currently worth far less than the $3.66 billion that is owed to
the senior lenders," lawyers for CWCapital said in a court
filing. They estimated the property's worth at "more than $2
billion."

The case is Bank of America NA et al v. PSW NYC LLC, New
York State Supreme Court, New York County, No. 651293/2010.
(Reporting by Ilaina Jonas and Jonathan Stempel in New York;
Additional reporting by Grant McCool; Editing by Richard Chang
and Matthew Lewis)