The highly anticipated decision threatened to impose a new regulatory framework on syndicated lending, and disrupt the $1.4 trillion syndicated loan market in the United States.

The US Court of Appeals for the Second Circuit today affirmed a 2020 ruling by the US District Court for the Southern District of New York that broadly syndicated term loans are not "securities". The decision comes after the Securities and Exchange Commission recently declined a request from the Second Circuit Court to share its position on the issue.

The case, originally brought by Marc S. Kirschner (as trustee of a bankruptcy-related trust established for the benefit of certain holders of syndicated loans made to Millennium Health) against financial institutions who arranged the loans, has been closely watched by loan market participants. A ruling that subjected syndicated loans to US securities law had the potential to upend the legal and regulatory framework in which such loans currently exist.

In reaction, the Loan Syndications & Trading Association (LSTA) released a brief statement heralding the ruling as "an extremely positive development" and "a great – and critical – result for the leveraged loan market". The LSTA, together with the Bank Policy Institute, the US Chamber of Commerce, and the Security Industry and Financial Markets Association (SIFMA), had filed an amicus brief with the Second Circuit Court, advocating for the position that syndicated loans are not securities.

Our overview of the earlier District Court ruling is available here. As further detailed in that article, Judge Paul Gardephe of the District Court had dismissed the plaintiff's claim that the loans at issue were "securities", and therefore subject to securities laws, by applying the four-factor "family resemblance" test established by the Supreme Court in the 1990 decision of Reves v. Ernst & Young. In Reves, the Supreme Court stated that courts should begin with the presumption that every "note" (including a note evidencing a loan) is a security, but that this presumption may be rebutted if the note bears a strong "family resemblance" to one of the categories of non-securities instruments enumerated by the court (including "notes evidencing loans made by commercial banks for current operations").

The Second Circuit Court applied the Reves test in a manner generally consistent with the application put forth by Judge Gardephe, concluding that the District Court had properly dismissed the securities law claims. Both decisions also relied on the 1992 Second Circuit ruling in Banco Espanol de Credito v. Security Pacific National Bank, in which the Reves test was applied to find that loan participations are not securities.

White & Case will continue to monitor for any further developments in the case, including whether the plaintiffs seek certiorari review by the United States Supreme Court. We note that the Supreme Court denied a petition for certiorari in the Banco Espanol case.