Loans as Securities? Second Circuit Set to Decide

In Kirschner v. JPM, briefs are being submitted in an appellate action which seeks to reverse a 2020 Federal District Court determination that a term loan issued in connection with a credit facility was appropriately characterized as a loan, as opposed to a security.

In its decision, the District Court granted a motion of the financial institutions involved in the case to dismiss the securities law claims at issue because the loan involved in the case was not a security.

A finding that the loans were securities would have had an enormous potential regulatory impact on the loan market in general. When extending credit to borrowers, lenders are not required to conduct their loan activities in compliance with federal and state securities laws. If they were, the expense and risks associated with this line of business would increase exponentially.

With the case now before the Second Circuit, parties not directly involved in the case have the opportunity to submit “amicus” (or friend of the court) briefs to assist the panel of judges in understanding the likely implications of its ruling as to the matters before it.

At the end of May 2022, the Loan Syndications and Trading Association (“LSTA”), an organization that represents the loan community, submitted such a brief (hyperlink) in the Kirschner appellate case.

In a newsletter communication announcing the submission, the LSTA issued the following statement about the amicus brief:

The LSTA filed the amicus brief because (i) we agree with the SDNY that Term Loan Bs [the loan tranche at issue in the case] are not securities and (ii) treating them as such would have profoundly negative implications for borrowers, lenders and the syndicated loan market and would materially disrupt the formation of capital by US companies.

For a specific financial product, do you have questions about whether it is or is not a security? If so, please contact a White Plains Securities lawyer to schedule an introductory consultation.