Second Circuit: Notes Issued from Syndicated Loan Transaction Are Not Securities Under 'Reves' Test

In March 2014, JP Morgan Chase Bank and certain other institutional lenders (the initial lenders) agreed to provide Millennium Health LLC, Inc., a urine drug testing company, with a $1.775 billion term loan and a $50 million revolving loan. Millennium intended to use the term loan proceeds to retire an outstanding credit facility, make a large shareholder distribution, "redeem outstanding warrants, debentures and stock options," and pay fees related to the transaction. The Initial Lenders and Millennium agreed that the term loan could be syndicated to lenders identified by the "lead arrangers" — JP Morgan Securities and Citigroup Global Markets. The lead arrangers prepared a confidential information memo about Millennium and the syndicated transaction offer. On April 15, 2014, lenders were informed of the amount of their allocations based on their legally binding offers and the lenders became bound to purchase their allocations. The transaction closed on April 16, 2014 in a series of three contemporaneous steps: JP Morgan Chase funded the term loan; JP Morgan Chase assigned, with Millennium's consent, rights and obligations with respect to the Term Loan to the lenders; and the individual lenders purchased their term loan allocations. Ultimately, there were more than 400 institutions that held a part of the syndicated loan.

In the year following the transaction, Millennium faced a series of litigation judgements and settlements, incurring hundreds of millions of dollars in liabilities. On Nov. 10, 2015, Millennium filed Chapter 11. As part of Millennium's plan, the Millennium Lender Claim Trust was created for the benefit of the lenders who purchased syndicated notes, and the plaintiff, Marc Kirschner, was appointed trustee. On Aug. 1, 2017, the trustee filed suit against the Initial Lender defendants for, among other things, violations of state securities laws. The suit was ultimately removed to federal court, where the defendants filed a motion to dismiss the complaint. The U.S. District Court for the Southern District of New York dismissed the securities claims, finding that the "plaintiff failed to plead facts plausibly suggesting that the notes are 'securities' under Reves." The plaintiff appealed the district court decision to the Second Circuit, which considered the question of whether the plaintiff's state-law securities claims were erroneously dismissed because the plaintiff did not plausibly allege that the notes issued as part of the transaction were "securities."