On March 9th, the Second Circuit Court of Appeals heard oral arguments in Kirschner v. JPMorgan Chase Bank on a significant issue of first impression: whether the syndicated notes of a leveraged loan constitute securities. The case arose from a $1.8 billion term loan JPMorgan Chase N.A. provided to Millennium Laboratories in 2014, which the bank’s broker-dealer affiliates thereafter syndicated to about 400 hedge funds and other institutional investors. Millennium went bankrupt 18 months later, after it settled with the U.S. government concerning Millennium’s undisclosed, illicit business practices. McKool’s client, bankruptcy trustee Marc Kirschner, sued JPMorgan and the other banks involved –BMO, Citigroup, and SunTrust – alleging securities law violations on behalf of the holders of the syndicated notes, but the U.S. District Court for the Southern District of New York dismissed those claims on the ground that the syndicated notes are not securities. McKool was then retained to handle the appeal. The Second Circuit panel heard argument for approximately one hour, primarily on the security issue. Then, one week after oral argument, the Second Circuit requested the U.S. Securities & Exchange Commission (SEC) to comment on whether syndicated loan notes should be deemed securities. The SEC’s brief is due June 27th, after which the parties may respond on July 27th. McKool Smith Principals Christopher Johnson, Kyle Lonergan, and Josh Newcomer represent Plaintiff-Appellant Kirschner in the case.
There has been widespread media coverage of the case.
- “Federal Court Asks SEC: Are Syndicated Loans Actually Securities?” FundFind (3-22-2023)
“A three-judge federal appeals court panel last week asked the Securities and Exchange Commission to wade in on the central question of a major lawsuit – whether syndicated term loans traded today in a $2.5 trillion marketplace should be regulated as securities….
Fund managers are closely following the case, which if ruled in favor of the plaintiffs, could upend the market for private term loan B instruments – a major ingredient in collateralized loan obligation, or CLO, funds that are also employed by other alts credit strategies – by subjecting them to SEC and state regulator oversight.”
- “UPDATE 1: Second Circuit Asks SEC to Weigh in on Whether Leveraged Loans Constitute Securities in Millennium Health Appeal” Reorg (3-16-2023)
“The U.S. Court of Appeals for the Second Circuit is asking the U.S. Securities and Exchange Commission for guidance on the question of whether syndicated term loans are securities under the U.S. Supreme Court’s Reves decision, the primary issue in the Millennium Health liquidating trustee’s appeal from a 2020 district court decision holding that they are not.”
- “Court Asks SEC to Weigh In on Whether Loans Should Be Securities” Bloomberg (3-16-2023)
“A federal appeals court in New York is asking the Securities and Exchange Commission to share its views on whether syndicated loans are securities, the court said in an order Thursday.
Any reclassification of syndicated loans as securities under the SEC would have enormous consequences, forcing issuers and banks to adhere to more regulations and forcing a rethink of the way issuers tap capital markets. The syndicated loan market is around $1.4 trillion in size.
Syndicated leveraged loans are not considered securities under SEC laws, but the market’s evolution into one resembling high-yield bonds has brought that into question.”
- “Court Considers Role of Bank Regulators in Syndicated Loan Case” American Banker (3-10-2023)
“The judges asked why the Securities and Exchange Commission hasn't weighed in on the case, and where banking agencies — notably the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve — stand on applying higher regulatory standards to syndicated loans. If the banking regulators saw a problem in the market, the judges asked, why have they not addressed it via rulemaking? "I don't know if they could, but what I do know is that they haven't," said Christopher Johnson at McKool Smith, the lawyer for the plaintiff. "And currently there's no regulatory regime." Johnson, arguing that these syndicated loans should be considered securities, said that's an issue better handled in the discovery phase of a trial. The Second Circuit could send the case back to a lower court, which would initiate that discovery phase.”
- “Appeals Court Seems Reluctant to Upend CLOs: Structured Weekly” Bloomberg Terminal (3-10-2023)
“The case involves a loan that soured soon after it was sold in 2014 by banks including JPMorgan Chase & Co. A trustee for investors said the Wall Street firms withheld information about a government investigation that would have tipped off money managers about trouble at the company. Loans are essentially securities, and banks should have disclosed as much as they would have for a bond sale, the trustee said.”
- “Appeals Court Could Enhance Leveraged Loan Market” Axios (3-8-2023)
“Driving the news: Beginning Thursday, the Second Circuit will hear arguments over whether syndicated bank loans should be treated as securities.
If the three-judge panel rules that they should, thus overturning a lower court decision, it could dramatically change how private equity and corporations finance their acquisitions.
Specifically, it could decrease the use of syndicated bank loans and increase the use of private credit.”
- “Appeals Court Takes Up Case That Could Endanger Buyout Financing” WSJ Pro Private Equity (3-6-2023)
“The lawsuit was brought by bankruptcy trustee Marc Kirschner against a group of lenders that organized a roughly $1.8 billion loan to drug-testing business Millennium Health LLC in 2014. That loan was then chopped up and sold to about 400 investors, including mutual funds and institutions. These investors lost out when Millennium filed for bankruptcy in 2015 after agreeing to settle a government investigation into illegal billing practices. Mr. Kirschner contends that this loan should be treated as a security. Currently, syndicated loans aren’t covered by securities law, which reduces legal obligations on banks that issue them.”