Second Circuit Considering Whether Syndicated Term Loan Notes Sold To Buyers Are "Securities" ' Case Update: Kirschner v. Jpmorgan Chase Bank, N.A. (2d Cir. Appeal)

• Published date: 08 June 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Securities
• Law Firm: Shearman & Sterling LLP
• Author: Shearman & Sterling LLP

As we previously covered, on May 22, 2020, Judge Paul G. Gardephe of the United States District Court for the Southern District of New York dismissed a complaint asserting claims under state blue-sky laws as well as common-law claims against financial institutions that acted as arrangers on a syndicated term loan, holding that the term loan at issue was not a "security." 2020 WL 2614765 (S.D.N.Y. May 22, 2020). In October 2021, plaintiff filed an appeal to the Second Circuit challenging the issue of whether the syndicated loan in question was a security and therefore subject to securities laws and regulations. No. 0:21-cv-02726 (2d Cir., Oct. 28, 2021).

Plaintiff brought the action as trustee of a trust for which the beneficiaries were lenders and alleged purchasers in a $1.775 billion syndicated term loan transaction which defendants allegedly arranged for a California-based medical testing company (the "Company"). After the Company defaulted on the term loan and filed for bankruptcy protection, plaintiff filed suit against the arrangers, asserting claims under various state securities laws ("Blue Sky" laws), as well as numerous common-law claims. Plaintiff alleged generally that defendants misrepresented or omitted material facts in the alleged "offering materials" provided and other communications allegedly made regarding the legality of the Company's sales, marketing, and billing practices, as well as the known risks posed by a pending government investigation into the illegality of such practices.

In connection with plaintiff's state securities law claims, the district court first addressed whether the term loan was a security. The district court applied the Reves test (named after the Supreme Court case Reves v. Ernst & Young, 494 U.S. 56 (1990)), which was the standard plaintiff argued should apply. As noted by the Supreme Court in Reves, Congress "enacted a definition of 'security' sufficiently broad to encompass virtually any instrument that might be sold as an investment." Id. at 61. In particular, the definition of "security" refers to "notes," and the Supreme Court has accordingly stated that every note is initially presumed to be a security. Id. at 65. This presumption may be rebutted, however, if the note strongly resembles one of the families of instruments previously determined by the courts to be non-securities'including, for example, notes delivered in consumer financing, notes secured by a mortgage on a home, or notes evidencing loans...