Kirschner v. JPMorgan Chase: A Significant Development for the Syndicated Loan Market

The Second Circuit Court of Appeals’ recent decision in Kirschner v. JPMorgan Chase is a significant development for the syndicated loan market. In a unanimous opinion, the court affirmed the district court’s decision to dismiss a securities fraud lawsuit against JPMorgan Chase and other banks in connection with a $1.775 billion syndicated loan to Millennium Laboratories LLC. The plaintiff, a minority shareholder in Millennium, alleged that the banks had made misrepresentations and omissions in connection with the loan, which caused Millennium to default on the loan and resulted in losses to the plaintiff and other minority shareholders.

The banks argued that the loan was not a security and that the plaintiff’s claims were therefore not subject to state securities laws. The Second Circuit agreed, holding that the loan did not meet the “family resemblance” test set forth by the Supreme Court in Reves v. Ernst & Young.

The family resemblance test is a four-factor test used to determine whether an investment instrument is a security. The four factors are:

• The motivation and plan of the buyer and seller.
• The economic realities of the transaction.
• The character of the investment and the relationship between the parties.
• The nature of the instrument.

The Second Circuit found that the loan did not meet any of the four factors. The court held that the plaintiff’s motivation for buying the loan was to invest in Millennium, not to speculate on the price of the loan. The court also found that the economic realities of the transaction were more akin to a traditional loan than to a security.

The Second Circuit’s decision in Kirschner has a number of potential implications for borrowers, lenders, and investors.

For borrowers, the decision makes it more likely that they will be able to obtain financing through syndicated loans without being subject to securities litigation. This could lead to lower borrowing costs and make it easier for businesses to grow and expand.  For lenders, the decision provides clarity and certainty about the legal status of syndicated loans. This could encourage lenders to make more syndicated loans, which could increase the liquidity of the syndicated loan market.

However, it is important to note that the Kirschner decision is not without limits or risks. The decision is based on the specific facts of the case, and it is possible that a different court could reach a different conclusion in a case with different facts. Additionally, the decision does not apply to all types of loans, such as securitized loans.

Overall, the Second Circuit’s decision in Kirschner is a positive development for the syndicated loan market. The decision has the potential to make it easier and less expensive for borrowers to obtain financing, provide clarity and certainty for lenders, and create a new investment opportunity for investors. However, it is important to be aware of the limits and risks of the decision before engaging in any syndicated loan transactions.