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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Second Circuit: Notes Issued from Syndicated Loan Transaction Are Not Securities Under 'Reves' Test

By Francis J. Lawall and Marcy J. McLaughlin Smith
October 01, 2023

Syndicated loans are regularly used to raise large amounts of capital to finance business ventures. Depending upon how the syndication is structured, there is risk that the facility could be viewed as a security offering thereby injecting a significantly greater level of regulatory oversight into the transaction. In an important recent decision, the U.S. Court of Appeals for the Second Circuit reviewed a $1.7 billion syndicated loan and provided a helpful analytical framework for determining whether applicable securities laws were called into play. See, Kirschner v. JP Morgan Chase Bank, 2023 U.S. App. LEXIS 22327 (2d Cir. Aug. 24, 2023). In so doing, the court affirmed the U.S. District Court for the Southern District of New York's decision that notes issued from the syndicated loan transaction were not securities under the application of the test set forth in the U.S. Supreme Court's decision in Reves v. Ernst & Young, 494 U.S. 56 (1990).

In March 2014, JP Morgan Chase Bank and certain other institutional lenders (the initial lenders) agreed to provide Millennium Health LLC, Inc., a urine drug testing company, with a $1.775 billion term loan and a $50 million revolving loan. Millennium intended to use the term loan proceeds to retire an outstanding credit facility, make a large shareholder distribution, "redeem outstanding warrants, debentures and stock options," and pay fees related to the transaction. The Initial Lenders and Millennium agreed that the term loan could be syndicated to lenders identified by the "lead arrangers" — JP Morgan Securities and Citigroup Global Markets. The lead arrangers prepared a confidential information memo about Millennium and the syndicated transaction offer. On April 15, 2014, lenders were informed of the amount of their allocations based on their legally binding offers and the lenders became bound to purchase their allocations. The transaction closed on April 16, 2014 in a series of three contemporaneous steps: JP Morgan Chase funded the term loan; JP Morgan Chase assigned, with Millennium's consent, rights and obligations with respect to the Term Loan to the lenders; and the individual lenders purchased their term loan allocations. Ultimately, there were more than 400 institutions that held a part of the syndicated loan.

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