The lawsuit is related to an investment made by Certares and Knighthead Capital Management through their jointly managed CK Opportunities Fund, formed during the pandemic to invest in distressed travel and tourism assets.

In 2022, the fund acquired more than half of a $360 million Morgan Stanley loan to Brightline Holdings, a Fortress Investment Group-backed high-speed rail operator.

At issue is a "make-whole" provision in the loan’s credit agreement, designed to protect lenders in the event of early loan repayment by compensating for the loss of expected yield.

In this case, Certares and Knighthead claim they specifically entered into the deal because of the make-whole provision. The two firms say that Morgan Stanley, which had been working to move the loan off of its balance sheet, pitched the investment on the basis of the provision and the expectation that Brightline would soon raise additional debt that would trigger a mandatory prepayment of the existing loan and a corresponding payment of the make-whole amount.

A mandatory prepayment of this type could, however, only be triggered by a Brightline subsidiary. A technicality, allege the plaintiffs, that Morgan Stanley and Brightline tried to use as a way to sidestep any future make-whole payments.

On the same day that CK Opportunities Fund purchased the loan, the plaintiffs say that Brightline subsidiary BL West Holdings issued preferred LLC units to a group of affiliated entities in an attempt to terminate its obligations as a Subsidiary under the original Credit Agreement — thereby allowing it to raise additional debt at some point in the future without triggering the mandatory prepayment and make-whole payment.

The rationale for the release was that, as a result of the issuance, BL West Holdings would no longer be a wholly owned subsidiary of Brightline Holdings.

The firms say Morgan Stanley concealed this preferred issuance from them in part by making changes to the credit agreement without their knowledge.

"Morgan Stanley fraudulently swapped out a signature page of plaintiff CK Opportunities Fund and placed it onto an amendment to the Credit Agreement containing language about the prohibited transaction that plaintiffs had neither seen nor agreed to."

The firms say they discovered the discrepancy months later after purchasing an additional $90 million exposure to the loan from Morgan Stanley.

In response, Certares and Knighthead believe they’re due the $750 million make-whole payment precisely because of Brightline’s attempt to avoid it. The preferred unit issuance, they say, violated the credit agreement’s prohibition on the sale of any "Capital Stock" as well as its limitations on affiliate transactions.

"By engaging in this voluntary transaction in breach of the Credit Agreement, Brightline Holdings, under New York law, opened itself up to liability that would require prepayment of the loan and corresponding payments of the Make-Whole Amounts."

Morgan Stanley, in its motion to dismiss filed on Monday, disputes this series of events and maintains that Certares and Knighthead are attempting to coerce an unwarranted windfall.

Calling the fraud claims "implausible," Morgan Stanley argues that the alleged scheme would have been detrimental to its own economic interests. Because it’s also a lender to Brightline, the firm says that it would have benefitted from the make-whole provision and would, therefore, have no incentive to aid in its avoidance.

Even so, say Certares and Knighthead, Morgan Stanley was still acting in its rational self-interest.

Their reasoning: “… so that Morgan Stanley could position itself for future lucrative investment banking business with Brightline Holdings and its private equity owners at Fortress, including through handling municipal debt transactions for Brightline Holdings.”

Morgan Stanley characterized the assertion as nothing more than "conjecture" in its response this week.

Brightline Holdings, also named as a defendant in the suit, has separately filed for dismissal of the claims. Fortress Investment Group, while not a party to the case, has denied involvement in the loan deal and has resisted the plaintiffs' attempts to depose co-founder Wesley Edens.