In a case pending in federal court in New York, Kirschner v. JPMorgan Chase Bank, N.A., No. 17-cv-06334-PGG (S.D.N.Y.), a bankruptcy trustee may upend what has long been accepted wisdom on Wall Street: securities laws apply to stocks, bonds, equity options, and the like – but not to syndicated loans.

Kirschner is brought by the bankruptcy trustee on behalf of a group of “approximately 400 mutual funds, pension funds, universities, [CLO]s and other institutional investors,” and alleges that the banks that led Millennium Labs’ 2014 loan syndication violated state securities laws of California, Massachusetts, and Colorado, among other claims.

Syndicated loans, often referred to as “leveraged loans,” are term loans extended to companies by a group of lenders. Like corporate bonds, syndicated loans are debt instruments that entitle the holder to interest and principal.  However, unlike traditional securities, interests in a syndicated loan are not sold like a bond, but assigned to the new holder.  As a result, only current investors have standing to bring claims against the borrower.  Another difference is that syndicated loans are not offered through a risk-warning-laden prospectus, but rather a confidential information memorandum, or “CIM.”  The CIM is not a public document, and is generally only made available to lenders upon approval of the borrower.[1]

Enter privately-held Millennium Laboratories LLC, a San Diego-based company that performed urinalysis drug testing for Medicare, Medicaid programs, and commercial insurance companies.  In 2014, Millennium Labs teamed up with a group of banks to organize a $1.765 billion term loan to refinance older debt and pay out a substantial cash dividend to insiders.

Less than a year later, however, lenders found Millennium Labs besieged under a barrage of legal threats from federal regulators and civil litigants that would ultimately lead to the company’s bankruptcy – risks that the trustee in Kirschner asserts were well known to Millennium Labs and its bankers but fraudulently concealed from investors in the 2014 CIM.

As the true depth of these risks was revealed in late 2015 and early 2016, the market value of Millennium Labs’ loan fell sharply:

The secondary market price of Millennium Labs’ syndicated loan during 2016 highlights one of the hazards of this type of investment – as the extent and gravity of the company’s litigation risks were becoming known, Millennium reportedly refused to provide prospective lenders access to the CIM, leading to nearly three months in mid-2016 of no secondary market activity with lenders locked into their stale-priced positions:

As defendants point out in their motion to dismiss, federal courts have for some time agreed that bank loans such as these do not qualify as “securities” for purposes of federal securities laws, citing Banco Espanol de Credito v. Pacific National Bank, 973 F.2d 51 (2d Cir. 1992). Although the Second Circuit did affirm this lower-court determination in Banco Espanol de Credito, the panel cautioned: “We recognize that even if an underlying instrument is not a security, the manner in which participations in that instrument are used, pooled, or marketed might establish that such participations are securities.” Id. at 56.

Further, that ruling was delivered contrary to an amicus brief submitted by the Securities and Exchange Commission, eliciting a vociferous dissent by then-Chief Judge Oakes, who noted:“I fear that the majority opinion misreads the facts, makes bad banking law and bad securities law, and stands on its head the law of this circuit and of the Supreme Court….” Id.

Whether the analysis in Banco Espanol de Credito proves equally availing for purposes of the various state laws that the Trustee in Kirschner relies on remains to be seen.

Defendants’ motions to dismiss the claims in Kirschner have been fully briefed and both sides have requested oral argument.


[1] A publicly filed exhibit in Kirschner offers a rare look at a CIM.  See Decl. in Sup. of Mot. to Dismiss, Ex. B, Parts 1 & 2, Kirschner, No. 17-cv-06334-PGG, Dkt. Nos. 79-2 & 79-3 (S.D.N.Y. June 28, 2019).