79 F.4th 290
2d Cir.2023Background
- Millennium Laboratories (California) received a $1.775 billion syndicated term loan on April 16, 2014 to refinance prior debt and make large shareholder distributions; JP Morgan, Citi, BMO, SunTrust, and others were arrangers/initial lenders.
- At closing JP Morgan Chase funded 100% of the Term Loan and then assigned interests (the “Notes”) to ~61 Parent Lenders and ~400 Child Lenders; some purchasers were foreign entities.
- Lead arrangers marketed the deal to sophisticated institutional "lenders" via a Confidential Information Memorandum; subscription and assignment restrictions limited transfers (no natural persons, consent requirements, $1M minimum exceptions).
- The Credit Agreement created a seven‑year loan with quarterly interest, a perfected first‑priority security interest in Millennium’s assets, and authorized a restricted secondary market; some secondary trading occurred.
- Marc Kirschner, trustee for the Millennium Lender Claim Trust, sued in New York state court asserting state securities and related claims; defendants removed under the Edge Act; the District Court denied remand and later dismissed the state‑law securities claims for failure to plead that the Notes are "securities" under Reves.
- The Second Circuit affirmed: Edge Act jurisdiction exists because JP Morgan Chase directly assigned loan interests to foreign lenders; the Notes are not securities under the Reves "family resemblance" test, so the state‑law securities claims were properly dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Edge Act jurisdiction (12 U.S.C. § 632) | Kirschner: remand — JP Morgan Chase did not engage in international/foreign banking tied to the Transaction, so federal Edge Act jurisdiction is lacking | Defendants: JP Morgan Chase is an Edge Act bank and directly assigned portions of the Term Loan to foreign lenders, which constitutes international/foreign banking | Affirmed jurisdiction — direct assignment of loan interests to foreign entities by an Edge Act bank qualifies as "international or foreign banking." |
| Whether the Notes are "securities" under Reves v. Ernst & Young (family resemblance test) | Kirschner: Notes are securities — investment motivation, broad distribution and secondary trading, and public/investor expectations support classification as securities | Defendants: Notes are commercial bank loans — limited private distribution to sophisticated lenders, assignment restrictions, collateralization, and regulatory guidance reduce risk; thus not securities | Affirmed dismissal — under Reves the factors (distribution, public expectations, regulatory risk reduction) weigh against classifying the Notes as securities; they resemble bank commercial loans. |
Key Cases Cited
- Reves v. Ernst & Young, 494 U.S. 56 (1990) (adopts the "family resemblance" test for whether a "note" is a security)
- Banco Espanol de Credito v. Sec. Pac. Nat'l Bank, 973 F.2d 51 (2d Cir. 1992) (loan participations sold privately to sophisticated purchasers resembled bank commercial loans and were not securities)
- Am. Int'l Grp., Inc. v. Bank of Am. Corp., 712 F.3d 775 (2d Cir. 2013) (discusses scope and purpose of the Edge Act and federal jurisdiction)
- Wilson v. Dantas, 746 F.3d 530 (2d Cir. 2014) (Edge Act bank engaged in international/foreign financial operations where it directly participated in foreign transactions)
- Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808 (2d Cir. 1994) (applies Reves factors in determining whether instruments are securities)