Kirschner Court Adopts Fact Specific Analysis to Conclude That Loans Are Not Securities

5 minute read | September.11.2023

The United States Court of Appeals for the Second Circuit recently affirmed the 2020 Kirschner v. JP Morgan Chase Bank, N.A. ruling that a secured $1.775 billion syndicated term loan to Millennium Laboratories LLC (Millennium) was not a security.

The decision is great news for the loan market, but a slightly different set of facts could easily lead to a different decision.

The Decision

In deciding the case, the Second Circuit relied on factors outlined in the 1990 U.S. Supreme Court case Reves v. Ernst & Young. In that case, the justices instructed courts to begin with a presumption that every instrument is a security; that presumption can be rebutted if the instrument does not “resemble” a security because:

  • Motivation: The intention behind the instrument is to facilitate the seller’s cash flow difficulties or to advance some other commercial or consumer purpose and not to raise money for the general use of the business or to finance substantial investments.
  • Plan of Distribution: The plan of distribution for the instrument is sufficiently restricted to sophisticated investors and not to the general public.
  • Investor Expectation: The investor reasonably expects the instrument not to be a security.
  • Alternate Regulatory Scheme in Place: There is a regulatory scheme that reduces the risk the sale of the instrument will harm the public, and such scheme makes the application of the Securities Act unnecessary.

Different Facts Could Mean a Different Decision

Loan Proceeds Used to Finance Investment

The borrower in Kirschner used loan proceeds to refinance its existing debt. Like most participants in the secondary market, the loan buyers purchased the loans to earn a financial return. The Second Circuit concluded that for the purposes of the first Reves factor, the parties’ motivations were mixed, as the borrower entered into the transaction for commercial purposes and the loan buyers sought investment. However, because borrowers regularly use syndicated loans to finance mergers, acquisitions and other large investments, it is easy to imagine a scenario where a court could determine that the motivations of both the borrower and the lenders were for investment purposes. Such a finding would place the first Reves factor squarely in the security column.

Loose Transfer Restrictions

In its analysis of the second Reves factor, the Second Circuit reasoned that borrower and agent consent requirements, minimum transfer amounts and prohibitions on transfers to natural persons weighed against the presumption that the Millennium loan was a security. Such transfer restrictions are standard in credit agreements for broadly syndicated loans. That said, credit agreements do, at least occasionally, lack some of these restrictions. This issue is perhaps more likely to surface in deals where the credit agreement is based on a particularly old form or in middle market deals, where loan documentation tends to vary more than in the broadly syndicated market.

Lack of Standard Sophistication Representations

Credit agreements almost always contain a standard form of assignment and assumption that requires the assignee to represent that it is sophisticated and experienced with respect to buying and selling syndicated loans and that it has performed its own credit analysis. The court in Kirschner noted that such provisions in the Millennium loan helped notify lenders they were purchasing a loan as opposed to a security.

If the assignment or assumption does not include such a provision, a court applying the third Reves factor may be more likely to hold that the loan is a security. As with loose transfer restrictions, this fact pattern will likely arise on the margins.

Consistent Use of the Terms “Issuers,” “Notes,” and “Investors”

In applying the third Reves factor, the Second Circuit noted that although the loan documents occasionally referred to the lenders as “investors,” such isolated references could not have created a reasonable expectation that the loans were securities, especially considering that the loan documents more consistently referred to the lenders as “lenders.” Standard loan documents use the terms “borrower,” “loan,” and “lender.” If the terms “issuer,” “notes,” and “investors” are used instead, a court may come to a different conclusion when applying the third Reves factor.

Unsecured Loans

In analyzing the fourth Reves factor, the Second Circuit noted that one factor that reduces the risks associated with an instrument is whether it is secured by collateral. The Millennium loan was secured. That fact, taken with the policy guidelines from federal regulators, was enough for the Second Circuit to conclude that under the fourth Reves factor, other risk-reducing factors weighed against characterizing the loans as securities. Some syndicated loans are unsecured by design. Others become under-secured or wholly unsecured based on the decline in value of the collateral or after a restructuring. Because unsecured loans are riskier than secured loans, courts may be more likely to conclude that unsecured loans are securities under Reves and Kirschner.


Kirschner v. JP Morgan Chase Bank, N.A.’s decision that the Millennium loans were not securities is great news for the loan market but parties must carefully consider the factors considered in the case when drafting credit agreements and loan transfer documents or the next case may be decided differently.