Second Circuit Issues Decision in Kirschner V. JPMorgan: Loans Are Not Securities

September 12, 2023

Madeline Vaughan 

On August 24, 2023, the US Court of Appeals for the Second Circuit issued a highly anticipated decision in Kirschner v. JPMorgan, affirming the District Court’s decision that a term loan is not a security. Prior to the ruling, this case received significant attention for its potential to disrupt the syndicated loan market if state and federal securities laws were held to apply.

The facts of Kirschner are as follows: In 2014, investors purchased $1.775 billion in syndicated term loan debt obligations of Millennium Laboratories LLC from defendant lenders. The next year, Millennium filed for bankruptcy and as part of the bankruptcy plan, the investors’ claims were assigned to a trust. In 2017, the bankruptcy trustee, Marc Kirschner, alleged that the debt obligations constituted securities, and thus were subject to the more stringent disclosure rules under securities laws. The defendants moved to dismiss the securities law claims on the grounds that a syndicated bank loan is not a security, and a loan syndication is not a securities distribution.

In May 2020, the New York District Court granted the defendants’ motion to dismiss concluding that the plaintiff failed to plead facts suggesting the syndicated bank loans were securities under the standards set forth in Reves. v. Ernst & Young.

The Second Circuit also applied the test set forth in Reves on appeal. The 4-factor test is meant to distinguish between notes that are issued for investment purposes, for which securities laws would apply, and those that are for a commercial or consumer purpose, for which securities laws would not apply. In Kirschner, the court identified the four factors of the Reves test as:

  1. The motivations that would prompt a reasonable seller and buyer to enter into the transaction;
  2. The plan of distribution of the instrument;
  3. The reasonable expectations of the investing public; and
  4. Whether some factor, such as the existence of another regulatory scheme, significantly reduces the risk of the instrument, thereby rendering application of the Securities Act unnecessary.

Ultimately, after applying the Reves test, the court in Kirschner determined that the District Court had ruled properly and affirmed its decision that the loans in question were not securities. The court’s reasoning in applying each factor creates opportunities to mitigate risk for future loans. The decision provides needed confirmation of the treatment of syndicated loans but should not significantly impact current industry practices. Based on the decision, lenders should consider whether the loan issuance and documentation includes clear restrictions on the assignment of notes, requires purchaser certifications, limits the type of purchasers, provides for commercial or consumer-based motivations, and a perfects a proper security interest.

For more information or to contact our attorneys visit: Banking & Finance Practice Group.  Attorneys within this group include Robert Smith, Bryan Duke, Taylor Stockemer and Madeline Vaughan.