The Kirschner litigation arose out of a $1.775 billion syndicated loan transaction that closed in April 2014 in which several banks assigned portions of a term loan to Millennium Laboratories LLC (“Millennium”) in a syndicated loan transaction to hundreds of mutual funds, hedge funds, and other institutional investors. JPMorgan knew U.S. officials were investigating Millennium when it arranged and sold the loan, but relied on Millennium’s statement that such investigation was not material and as a result the information was not disclosed to investors who were about to buy the debt.
Within a matter of months after closing, the lenders saw the value of their loan plunge when Millennium disclosed that that federal authorities were investigating Millennium’s billing practices. Eventually Millennium agreed to pay $256 million to resolve the investigation and went on to file for bankruptcy protection. After Millennium filed for bankruptcy in November 2015, the investors’ claims were contributed to the Millennium Lender Claim Trust (the “Trust”). The trustee for the Trust filed a complaint in August 2017 against the arrangers asserting claims under state securities law and common law and alleging that the offering materials failed to disclose Millennium’s wrongdoings and that the arrangements should be liable for a materially false presentation of Millennium’s financial condition and business practices. In June 2019, the defendants moved to dismiss the complaint, contending in part that the loan was not a security subject to state securities laws. Plaintiff opposed that motion, arguing that the loan was evidenced by a note and as a result “a security” for which the arrangers should have provided securities-type disclosures.
Although, the Securities Act of 1933 defines the term “security” to include “any note” and the loans are evidenced by notes, courts have repeatedly found as they did in Kirschner that “any note” does not include “any” note and that syndicated loans are not securities. The Court in reaching its decision relied heavily on the Second Circuit’s decision in Banco Español de Crédito (which held that “loan participations” were not securities, but loans) and the Supreme Court’s “family resemblance test” in Reves v. Ernst & Young, 494 U.S. 56 (1990), which held that while any note is presumed to be a security, such presumption may be rebutted if resemblance to an instrument commonly denominated by a note which is not a security, including loans by commercial banks for current operations, can be demonstrated by a four-factor test.