Morgan Stanley won a key legal ruling in its battle with former credit-card subsidiary Discover Financial Services Inc. over almost $800 million Morgan Stanley says it is owed.
In a ruling on Monday, New York State Supreme Court Justice Barbara Kapnick ruled that Discover was obligated to pay the amount as a special dividend to Morgan Stanley.
At issue is money stemming from a $2.75 billion settlement payment Discover received from Visa Inc. and MasterCard Inc. as part of a 2004 lawsuit.
Morgan Stanley, which had acquired Discover in the 1990s as part of its merger with brokerage firm Dean Witter, spun off the card company into an independent entity in 2007. As part of the spin-off, the companies agreed that Morgan Stanley was entitled to receive a portion of Discover's settlement proceeds.
But Discover contended that Morgan Stanley had breached the spin-off agreement by meddling in the Visa-MasterCard settlement and declined to pay the dividend.
That prompted Morgan Stanley to file a suit against Discover in New York State Court last fall. Morgan Stanley claimed that it was owned $1.2 billion of the $2.75 billion settlement. After taxes, that comes to about $785 million, plus interest.
In Monday's ruling, Justice Kapnick wrote that "Morgan Stanley's alleged violation of" its spin-off agreement with Discover "cannot form a basis for excluding Discover's obligations" to pay the special dividend to Morgan Stanley.
The ruling means that Morgan Stanley stands to get that large one-time figure added to its bottom line in coming quarters, assuming the case isn't reversed on a potential appeal.
"We are pleased with the court's opinion, which confirms that Discover is in breach of contract and that there was never any basis for Discover to withhold payment to us," a Morgan Stanley spokesman said.
Lawyers representing Discover and a spokesman for the Riverwoods, Ill., company couldn't immediately be reached for comment.
Discover has sued Morgan Stanley over the settlement payment and that case is still pending.