Oct. 27 (Bloomberg) -- Discover Financial Services said that a $1.2 billion payment that it may owe to Morgan Stanley related to a legal settlement is in ``dispute.''

Visa Inc. and MasterCard Inc., the world's largest credit card networks, said today in statements distributed by PR Newswire that they will pay $2.75 billion to Discover to resolve a lawsuit that was settled earlier this month.

Morgan Stanley, which spun off Discover last year, was expecting to recover a share of the settlement. Under its agreement with Morgan Stanley, Discover was to pay it the first $700 million recovered. The bank was also to receive half of any settlement proceeds above $1.5 billion, up to a maximum of $1.5 billion, according to regulatory filings.

Discover said in its statement announcing the Visa and MasterCard accord that it has ``notified Morgan Stanley that Morgan Stanley is in breach of the agreement,'' without elaborating. ``The amount of Morgan Stanley's special dividend is a matter of dispute,'' the Riverwoods, Illinois-based company said.

``There is absolutely no basis for Discover's claim that the agreement was breached,'' Mark Lake, spokesman for New York- based Morgan Stanley, said today in a statement. The firm ``is due to receive approximately $1.2 billion pretax,'' he said.

Morgan Stanley filed a lawsuit in New York State Supreme Court last week seeking a declaratory judgment ``to resolve this issue definitively,'' he said.

Lawsuit

The payments stem from a Discover lawsuit against MasterCard and Visa accusing them of blocking banks from issuing their cards. The parties settled on Oct. 14 without disclosing the terms.

Discover said today that it will receive about $862 million in the current quarter and as much as $472 million a quarter in 2009. The quarterly payments are contingent upon Discover achieving ``certain performance levels in network sales volume,'' the company said.

``This settlement will enable Discover to further strengthen its capital base,'' Discover Chief Executive Officer David Nelms said in a third statement. The company will develop its business by ``broadening global acceptance, expanding network volume and growing our deposit franchise,'' he said.

Visa said in a statement that it will pay $1.8875 billion. Of that, $1.7425 billion will come from an existing escrow account. MasterCard said in its statement that it will pay $862.5 million to settle. MasterCard will take a $515.5 million after-tax charge, according to its statement.

`Reasonable Terms'

``Resolving this longstanding case on reasonable terms is in the best interest of Visa and our clients, cardholders and shareholders,'' Visa CEO Joseph Saunders said in the statement.

``We chose to settle this lawsuit to avoid the uncertainty and distraction of a lengthy jury trial,'' MasterCard general counsel Noah Hanft said in that company's statement.

Visa, based in San Francisco, is the largest credit-card company, with 51 percent of the U.S. credit- and debit-card market last year, according to the Nilson Report, which tracks the industry from Carpinteria, California.

MasterCard, based in Purchase, New York, is the second- largest card company with 28 percent of the market. New York- based American Express is third with 17 percent, according to the newsletter. Discover's share of the market was 3.8 percent.

Visa had agreed with MasterCard to pay the bigger share of any settlement, primarily based on relevant business volumes.

American Express, which sued MasterCard and Visa separately, settled for $1.8 billion from MasterCard in June and $2.25 billion from Visa and its bank partners last year.

The case is Discover Financial Services Inc. v. Visa USA Inc., 04-cv-07844, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in New York at dglovin@bloomberg.net

Last Updated: October 27, 2008 20:45 EDT