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City National Bank of Florida v. Morgan Stanley DW

June 9, 2006

CITY NATIONAL BANK OF FLORIDA, A NATIONAL BANKING CORPORATION, PLAINTIFF,
v.
MORGAN STANLEY DW, INC., DEFENDANT/THIRD-PARTY PLAINTIFF,
v.
CASE INVESTMENTS, LLC AND DAVID S. SOLOMON, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION AND ORDER

Plaintiff City National Bank of Florida ("City National") brings this breach of contract action against Morgan Stanley DW, Inc. ("Morgan Stanley") to recover for a shortfall in the repayment of a loan made to third-party defendant Case Investments LLC ("Case"). The loan was secured in part by a Morgan Stanley brokerage account maintained by Case. As part of the securitization agreement, Morgan Stanley was prohibited from allowing Case to trade in the account without written authorization from City National. City National claims that Morgan Stanley allowed unauthorized transactions, and, as a result, when the account was liquidated the value of the assets was $98,204.21 less than the amount required to pay Case's obligation on the loan. Plaintiff moves for summary judgment. For the reasons set forth below, the motion is denied.

Background

The following facts are undisputed.*fn1 In April 2003, City National made a loan of $925,000 to Case, a company controlled by third-party defendant David S. Solomon. On or about April 22, 2003, Case executed, among other things, a promissory note, an indemnification agreement, and a commercial pledge and security agreement. The pledge agreement designated certain Case accounts as collateral for the loan (the "pledged accounts"). Among these was brokerage account number 614-018389 (the "brokerage account"), maintained by Case through defendant Morgan Stanley.

On July 30, 2003, City National, Case, and Morgan Stanley signed agreements pertaining to each of the pledged accounts. The stated purpose of the brokerage account agreement (the material terms of which appear to be identical to those of the agreements regarding the other pledged accounts) is to "perfect the Creditor's security interest in the Pledged Account by granting Creditor control over the account."*fn2 Section 1 of the agreement instructs Morgan Stanley to:

(i) establish the Pledged Account, which shall be a cash security account which is to be known as "[Creditor Name] f/b/o [Borrower Name]."

(ii) transfer the assets listed in Exhibit A attached hereto and made a part hereof into the Pledged Account. Section 2 states that:

Once Morgan Stanley performs the transfer to the Pledged Account, Borrower will not have any control over the Pledged Account. Borrower will not have the authority to trade in the Pledged Account unless Creditor authorizes such trading through Morgan Stanley's Trading Authorization form. Creditor may revoke the authorization at any time by delivery of (i) written notice to Morgan Stanley or (ii) delivery of a Notice of Exclusive Control as set forth in provision 4. (Emphasis supplied.)

Section 3 requires the Creditor to notify Morgan Stanley in writing if there is "a suspected error on the monthly statement or trade confirmation." If no such notification is received within 10 days, "Morgan Stanley may presume the statement correct."

Section 7(a) acknowledges and limits Morgan Stanley's liability, stating in relevant part:

Except for permitting a transfer of assets from the Pledged Account in violation of section 2, Morgan Stanley will not be liable to Creditor for complying with instructions from Borrower, in compliance with an executed Trading Authorization form, if the instructions are received by Morgan Stanley before Morgan Stanley receives a Notice of Exclusive Control in accordance with section 4. (Emphasis supplied.) Finally, in section 10, the parties agree that any dispute arising out of the agreement will be adjudicated by New York State or Federal courts applying the law of the forum.

City National never submitted written authorization allowing Case to withdraw money from or make trades in the brokerage account. Nonetheless, between December 2003 and July 2004,*fn3 43 wire transfers were made from the brokerage account to another account maintained by Case. City National did not contest any of these transfers. In August 2004, six withdrawals totaling $141,000 were made from the brokerage account. In September 2004, an additional $79,700 was transferred from the account.

After the August and September withdrawals, the value of the pledged accounts was below City National's margin requirements for the loan. On September 23, 2004, Barbara Ward, Vice President of City National, notified Morgan Stanley by letter that the August and September transfers were unauthorized and requested that Morgan Stanley replace the funds. On September 24, Edward Larkin, the executive director of Morgan Stanley's legal department, wrote Ward a letter declining to replace the money. Then, at City National's request, Morgan Stanley liquidated the remaining collateral in the pledged accounts and transferred the proceeds to City National. The amount plaintiff received was $98,204.21 less than the amount owed by Case on the loan.

On March 10, 2005, City National filed a complaint against Morgan Stanley for breach of contract, alleging that Morgan Stanley allowed Case "to make a series of withdrawals from the Pledged Accounts without the required authorization." City National seeks to recover its $98,204.21 loss, plus interest, costs, and attorney's fees. On November 17, 2005, City National filed a motion for summary ...


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