Second Circuit Holds That Syndicated Term Loans Are Not Securities

• Published date: 30 August 2023
• Subject Matter: Corporate/Commercial Law, Contracts and Commercial Law, Securities
• Law Firm: Akin Gump Strauss Hauer & Feld LLP
• Author: Mr Parvin Daphne Moyne, Peter I. Altman, Michael Asaro, Katherine Rachel Goldstein, Kendall Lewis Manlove, Daniel I. Fisher, Ranesh Ramanathan, Jesse Michael Brush and Brian T. Daly

Key Points

• On August 24, 2023, a three-judge panel of the 2nd Circuit unanimously held that the syndicated term loans at issue were not "securities" under the test articulated by the Supreme Court in Reves v. Ernst &amp Young.
• The syndicated loan market and the financing markets, in general, will welcome the 2nd Circuit's decision, which comports with customary practices that have been in place for decades. The decision also provides further specific guidance to market participants on the application of the Reves factors to these types of instruments.

Background

In 2017, the trustee of the Millennium Lender Claim Trust brought an action in New York state court against a syndicate of lenders alleging that a $1.8 billion syndicated loan transaction violated, inter alia, state securities laws. The defendants removed the case to federal court and then moved to dismiss on the basis that the Millennium syndicated loan notes (the "Notes") are not securities under the "family resemblance test" articulated in Reves v. Ernst & Young, 494 U.S. 56 (1990).

In Reves, the Supreme Court recognized that a presumption exists that notes are securities. 494 U.S. at 65. Reves then directs courts to uncover whether the note was issued in an "investment context" (and is thus a security) or in a "consumer or commercial context" (and is thus not a security). The Supreme Court directed courts to determine whether the particular notes bear a "family resemblance" to securities or non-securities. The four factors of the "family resemblance test" are: (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." Id. at 66-67.

On May 22, 2020, Judge Paul G. Gardephe of the U.S. District Court for the Southern District of New York granted the defendants' motion to dismiss, holding that the Notes were analogous to bank loans'not securities. On October 28, 2021, the plaintiff appealed to the U.S. Court of Appeals for the 2nd Circuit¹, and the case was argued on March 9, 2023. Shortly after oral argument, on March 16, 2023, the 2nd Circuit solicited the Securities and Exchange Commission's opinion regarding whether a syndicated term loan note is a...