by Josh A. Feltman, Emil A. Kleinhaus, Michael H. Cassel, and Mitchell S. Levy
From left to right: Josh A. Feltman, Emil A. Kleinhaus, Michael H. Cassel, and Mitchell S. Levy. Photos courtesy of Wachtell, Lipton, Rosen & Katz.
The Second Circuit issued a highly-anticipated opinion recently in Kirschner v. JP Morgan Chase Bank N.A. in which it held that a syndicated bank loan was not a security under state securities law.
Kirschner concerned a $1.775 billion term loan to Millennium Health LLC (“Millennium”), which was made by a small group of banks (the “Initial Lenders”) and then syndicated to a larger group of lenders in April 2014.
Subsequently, Millennium filed for bankruptcy, and in August 2017, Kirschner, on behalf of the bankruptcy estate and its creditors, brought a variety of claims related to the issuance of the term loan, including a claim that the Initial Lenders failed to comply with state securities law when syndicating the loan. In May 2020, the Southern District of New York granted a motion to dismiss the claim on the basis that the term loan was not a security and thus state securities law did not apply. Kirschner appealed.
After soliciting the SEC’s views on the issue, which the SEC ultimately declined to offer, the Second Circuit affirmed. Applying the test set out by the Supreme Court in Reves v. Ernst & Young — the same test that applies in determining what constitutes a security under federal securities law — the Second Circuit held that the loan is not a security, including because it was made available only to sophisticated institutional lenders (rather than to the general public) that did not expect it to be subject to securities laws, and because it bore “a strong resemblance” to loans issued by banks for commercial purposes, which are not securities under Second Circuit precedent.
The Second Circuit’s ruling confirms the general market understanding that term loan issuances, even as part of a wide syndication to institutional lenders, are not subject to securities laws. Assuming the opinion is not disturbed on further appeal, this holding should bring additional clarity and comfort to both borrowers and investors in the debt markets.
Josh A. Feltman and Emil A. Kleinhaus are Partners and Michael H. Cassel and Mitchell S. Levy are Associates at Wachtell, Lipton, Rosen & Katz. This post was originally published on the firm’s blog.
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