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We have a final answer to the question of whether a term loan is
a security. Recently, the Second Circuit Court of Appeals affirmed
the District Court’s decision in the Kirschner Case that a term
loan is not a security. We have ben closely following this case,
which has been working its way through New York federal courts for
years, and you can find our updates here.
This case has been described as “a potential gamer
changer” and even “an existential threat” to the
syndicated loan market given the potential consequences it would
have to the syndicated loan market if state and federal securities
laws were to be applicable to that market. The case has received a
lot of attention over the last few months as the participants in
the $1.4 trillion loan market have sat up and taken notice on the
developments as the Second Circuit heard oral argument and has made
certain requests for additional briefing.
Significantly, following a hearing, the Second Circuit entered
an order asking the U.S. Securities and Exchange Commission
(“SEC”) to submit “any views it wishes to
share” on whether the loans in the Kirschner case are
securities. Much was made of what the SEC might say and what that
statement would mean for the Court’s decision. In the end,
following multiple motions for extensions of time from the SEC, the
SEC ultimately declined to submit a legal brief on the subject.
The Loan Syndications Trading Association (“LSTA”) has
also been quite vocal in this case. As it said in a statement when
the opinion was issued, “Maintaining the characterization of
Term Loan Bs as non-securities has been a central focus of the LSTA
for years. We are gratified that the SEC declined to submit a brief
and that the Court adopted the long-standing view that loans.”
The LSTA also submitted a very thorough and thoughtful amicus brief
with the Second Circuit Court of Appeals during the briefing period
of the appeal which set forth its view that term loans are not
securities and explaining the consequences that a determination
otherwise would have for the entire syndicated loan market –
borrowers, agents, lenders and others alike.
The Kirschner case in question involved a broadly syndicated
$1.775 billion term loan. The credit agreement also facilitated the
creation of a secondary market for the notes. Following certain
legal struggles, Millennium filed for bankruptcy seeking relief
under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware. The litigation we
have been following began in the course of the Chapter 11
proceedings. As part of the proceedings, the plaintiff in the case
was appointed trustee of the Millennium Lender Claim Trust
(“Trust”). The ultimate beneficiaries of the Trust are
lenders who purchased notes and have claims in the bankruptcy
proceedings.
Litigation ensued in New York federal court, culminating in a
decision by the District Court in May of 2020 granting
defendants’ motion to dismiss, which thereby dismissed the
plaintiff’s state-law securities claims because it concluded
that plaintiff failed to plead facts plausibly suggesting that the
Notes are “securities” under the standard set forth in
the Supreme Court decision Reves v. Ernst & Young, 494
U.S. 56 (1990). The plaintiffs timely appealed bringing the case
before the Second Circuit Court of Appeals, which for our
non-lawyer readers is a Court that is second only to the Supreme
Court.
The decision issued turned principally on whether the Court
found that the plaintiff in the case “plausibly suggested that
the notes are “securities” under Reves” and
the Court held that he did not. The relevant test that the Supreme
Court set forth in Reves is a 4-factor test that 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 context, for which they would not. The
Court applied the 4-factor test and analyzed each factor against
the facts in the case. Ultimately, the Court determined that the
District Court had ruled properly and affirmed its decision in the
published opinion.
(This article originally appeared in Cadwalader’s Fund Finance Friday, a Fund Finance market
intelligence weekly newsletter.)
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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