Morgan Stanley Loses Appeal in Citigroup Capmark Suit

A federal appeals court in Manhattan upheld a ruling against Morgan Stanley & Co. (MS) in a breach-of- contract suit accusing it of failing to pay a Citigroup Inc. (C) unit $245 million under a swap agreement.

Citibank NA arranged the swap for protection in the event that a collateralized debt obligation based on a line of credit provided to an entity called Capmark defaulted, according to the ruling today.

Citibank sued in 2009, alleging that Morgan Stanley refused to pay the shortfall owed under the swap after Capmark defaulted on its loan agreements and the $366 million CDO was liquidated. In 2011, U.S. District Judge Shira A. Scheindlin ordered Morgan Stanley to pay $245 million plus interest.

The appeals court rejected Morgan Stanley’s argument that it wasn’t obligated to pay because Citibank NA ordered the CDO liquidated without Morgan Stanley’s permission.

Lauren Onis, a spokeswoman for New York-based Morgan Stanley, declined to comment on the appeals court ruling.

“We are pleased with the decision of the Second Circuit of Appeals affirming the judgment in our favor,” Danielle Romero- Apsilos, a spokeswoman for New York-based Citigroup, said in an e-mailed statement.

The case is Citibank N.A. v. Morgan Stanley & Co. International Plc, 11-2592, U.S. Court of Appeals for the Second Circuit.

To contact the reporter on this story: Christie Smythe in New York at csmythe1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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