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Clark Smith Villazor represents Knighthead and Certares in $750 million civil fraud action against Morgan Stanley and Brightline

September 18, 2023

Leading private equity firms Knighthead Capital Management and Certares, along with their joint-venture CK Opportunities Fund, filed a lawsuit in New York Supreme Court alleging that global financial institution Morgan Stanley and high-speed railroad company Brightline committed fraud and breach of contract in connection with the plaintiffs’ investment in Brightline.

The plaintiffs allege that Brightline borrowed hundreds of millions of dollars from Morgan Stanley, which served as administrative agent for the loan’s credit agreement, which provides for the payment of a “make-whole amount” triggered by a prepayment of the loan.  CK Opportunities Fund purchased approximately $191 million of the loan from Morgan Stanley, which pitched the make-whole amount as an attractive feature of the loan.  The complaint alleges that, in December 2022, the defendants engaged in an unlawful scheme in which a subsidiary of Brightline issued preferred LLC units to an affiliated entity in violation of the credit agreement.  The purported upshot of this unauthorized transaction was that payment of the make-whole amount would no longer be triggered by a prepayment of the loan.  In furtherance of this scheme, plaintiffs allege that Morgan Stanley concealed the preferred-unit issuance by fraudulently swapping a signature page of CK Opportunities Fund into an amendment to the credit agreement containing language about the prohibited transaction that plaintiffs had neither seen nor agreed to.  The complaint alleges that Morgan Stanley compounded this fraud by concealing the fact of the prohibited transaction when it agreed to sell another $90 million of the loan to CK Opportunities Fund.

As a result of this fraud and breach of contract, plaintiffs allege that they are due the entirety of the make-whole amount and the remaining principal on the loan, totaling at least $750 million.  Clark Smith Villazor will aggressively pursue this case against the defendants to vindicate plaintiffs’ rights and return what they would be owed in the absence of defendants’ unlawful scheme.

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