Panel Affirms Summary Judgment Ruling In Securities Suit Against Morgan Stanley

by Tara Arick on October 3, 2012 · 0 comments

in Banking,Contract Law

A federal district court did not err in granting Citibank N.A.’s motion for summary judgment in a securities lawsuit regarding Morgan Stanley & Co. International’s failure to pay on a Credit Default Swap (CDS), a Second Circuit U.S. Court of Appeals panel ruled Oct. 2 in affirming “substantively for the reasons stated by the District Court in its careful and comprehensive opinions” (Citibank, N.A. v. Morgan Stanley & Co. International, PLC, Nos. 11-2592 and 11-2806, 2nd Cir.).

Citibank N.A. sued Morgan Stanley & Co. International in the U.S. District Court for the Southern District of New York, contending that Morgan Stanley breached the terms of a 2006 agreement (the Capmark credit agreement) involving a collateralized debt obligation (CDO) swap transaction by failing to pay Citibank “nearly $ 250 million as a result of a payment default” on the Capmark credit agreement.

“Citibank purchased the CDS from Morgan Stanley for the precise purpose of protecting against the risk of the losses that have materialized but which Morgan Stanley now refuses to pay, in breach of its contractual obligations under the CDS,” Citibank averred.

Hedge Against Losses

Citibank further asserted that “[t]he purpose of the CDS was to hedge against losses Citibank might suffer between July 2006 and August 2009 under [the Capmark credit agreement]. . . . In exchange for this protection, Citibank paid Morgan Stanley approximately $ 750,000 over the three-year term of the CDS Confirmation.”

Both parties cross-moved for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c); in May 2010, the District Court granted Citibank’s motion and denied Morgan Stanley’s cross-motion, relying solely on the transaction documents and finding them “unambiguous.”

While the Rule 12(c) motions were pending, Morgan Stanley amended its answer, adding counterclaims for equitable estoppels and reformation, and in August 2010, Citibank moved for judgment on the pleadings with regard to the counterclaims. The District Court granted Citibank’s motion motions with respect to the equitable estoppel claim but denied the motion with regard to the reformation counterclaim.

Summary Judgment

Both parties then moved for summary judgment, and the District Court denied Morgan Stanley’s motion on the reformation counterclaim and granted Citibank’s motion for summary judgment.

Morgan Stanley then appealed to the Second Circuit, which affirmed, disagreeing with Morgan Stanley’s argument that the District Court erred in granting Citibank’s summary judgment motion.

“First, in affirming the District Court’s grant of summary judgment on the contract claims, we do not rely on or consider Citibank’s argument that ? 6.07 of the Capmark Credit Agreement is inapplicable because only one lender was involved in this case. Like the District Court, we assume without deciding that ? 6.07 applies despite Citibank’s argument,” the panel said.

Without Merit

Moreover, the panel determined that each of Morgan Stanley’s remaining arguments are without merit.

Circuit Judges Jon O. Newman, Jos? A. Carbranes and Chester J. Straub joined in the summary order.

Citibank is represented by Gregory P. Joseph, Peter R. Jerdee, Sandra M. Lipsman and Rachel M. Cherington of Gregory P. Joseph Law Offices LLC in New York.

Morgan Stanley is represented by Kathleen M. Sullivan, Michael B. Carlinsky, Jonathan E. Pickhardt, William B. Adams and Andrew S. Corkhill of Quinn Emanuel Urquhart & Sullivan in New York.

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