Securities
Kirschner v. JP Morgan Chase Bank
Date: Feb. 20, 2024
Issue: Whether a syndicated bank loan qualifies as a security and thus is subject to securities laws.
Case Summary: The U.S. Supreme Court denied a petition to examine whether a syndicated bank loan qualifies as a security and is thus subject to securities laws.
Millennium Health LLC, a urine drug testing company, received a $1.78 billion syndicated loan from multiple banks for financial assistance. Millennium received the loan, then dispersed it to roughly 70 institutional investors. Millennium functioned as arrangers for syndicated credit facilities. Shortly after receiving the loan, Millennium lost a lawsuit regarding alleged kickbacks. Millennium also settled with the U.S. Department of Justice regarding possible violations of the False Claims Act. Millennium later filed for bankruptcy.
Marc S. Kirschner, a bankruptcy trustee, sued on behalf of hedge funds, mutual funds and other institutional entities that purchased notes in the syndicated loan. Kirschner argued the banks should have warned the note holders of the enforcement risks which would soon bankrupt Millennium. Kirschner also argued syndicated loans were securities and alleged the banks violated state securities laws of certain states, also known as “blue sky” laws. According to Kirschner, misstatements and omissions relating to the government investigation and civil lawsuit in the marketing materials for the loans violated securities laws. The banks moved to dismiss, arguing the loan was not a security. In 2020, the district court ruled that syndicated term loans were not securities under blue sky laws. On appeal, a Second Circuit panel affirmed, ruling that syndicated term loans are not securities under state blue sky or U.S. federal securities laws. The Second Circuit concluded that the district court properly dismissed claims brought against the banks for alleged material misstatements and omissions for the loans, because Kirschner failed to plead facts plausibly suggesting that syndicated loans are securities. The Second Circuit applied the U.S. Supreme Court’s four-factor Reves test to reach its decision.
In December, Kirschner filed a petition urging the U.S. Supreme Court to examine whether syndicated loans are securities. Kirschner argued whether syndicated loans are beyond the reach of securities laws is critical. Kirschner explained syndicated loans have all the essential attributes of securities. Kirschner also explained that syndicated loans are “worlds away from traditional bank loans” and share the characteristics of securities. At the same time, Kirschner emphasized the Second Circuit’s decision results in different treatment for two instruments that resemble and compete with one another.
Kirschner also claimed that syndicated loans threaten serious risks to investors. According to Kirschner, the market is enormous and growing rapidly and the Second Circuit’s decision leaves investors without adequate remedies. While traditional commercial banks can protect themselves through due diligence, investors who buy syndicated loan notes have no comparable opportunity. Kirchner asserted investors have neither the means nor time to conduct meaningful diligence. Kirschner theorized that arranging banks would have no incentive to conduct their own due diligence. Therefore, credit decisions could be driven by what banks are able to sell rather than the fundamental credit quality of the loan or the strength of the business.
Kirschner also claimed the Securities and Exchange Commission has repeatedly expressed concerns about unregulated loan investments. In Reves v. Ernst and Young, the SEC filed an amicus brief supporting a broad interpretation of the term “notes.” The SEC warned that “excluding notes from the securities laws would threaten to undermine the Commission’s law enforcement efforts.” The SEC urged the U.S. Supreme Court to presume that all notes are securities absent a “strong family resemblance” to a traditionally excluded category.
Finally, Kirschner argued that this case is an excellent vehicle for review. According to Kirschner, the Second Circuit decided the issues that address Reves at length. Therefore, this illustrates the consequences of excluding syndicated loans from securities notes. However, the U.S. Supreme Court disagreed with Kirschner’s arguments and declined to examine the issue.
Bottom Line: The U.S. Supreme Court’s denial reaffirms the Second Circuit’s decision and the longstanding view that syndicated loans are not securities under securities laws.
Documents: Petition
