MARC S. KIRSCHNER, solely in his capacity as Trustee of The Millennium Lender Claim Trust v. JP MORGAN CHASE BANK, N.A., JP MORGAN SECURITIES LLC, CITIBANK, N.A., BANK OF MONTREAL, BMO CAPITAL MARKETS CORP., SUNTRUST ROBINSON HUMPHREY, INC., SUNTRUST BANK, CITIGROUP GLOBAL MARKETS, INC.
No. 21-2726
United States Court of Appeals for the Second Circuit
AUGUST 24, 2023
AUGUST TERM 2022
ARGUED: MARCH 9, 2023
CHRISTOPHER P. JOHNSON (Kyle A. Lonergan, Joshua J. Newcomer, and Grant L.
JEFFREY B. WALL (Christopher M. Viapiano, Zoe A. Jacoby, Ann-Elizabeth Ostrager, and Mark A. Popovsky, on the brief), Sullivan & Cromwell LLP, Washington, D.C. & New York, NY, for Defendants-Appellees JP Morgan Chase Bank, N.A. and J.P. Morgan Securities LLC.
Benjamin S. Kaminetzky, Lara Samet Buchwald, and Tina Hwa Joe, on the brief, Davis Polk & Wardwell LLP, New York, NY, for Defendants-Appellees Citibank N.A. and Citigroup Global Markets Inc.
J. Emmett Murphy and John C. Toro, on the brief, King & Spalding LLP, New York, NY, for Defendants-Appellees SunTrust Robinson Humphrey, Inc. and SunTrust Bank.
Steve M. Dollar and Sean M. Topping, on the brief, Norton Rose Fulbright US LLP, New York, NY, for Defendants-Appellees BMO Capital Markets Corp. and Bank of Montreal.
Before: CABRANES, BIANCO, and PÉREZ, Circuit Judges.
Plaintiff-Appellant Marc S. Kirschner brought a series of claims in New York state court arising out of a syndicated loan transaction facilitated by the defendants-appellees, a group of financial institutions. Plaintiff‘s appeal presents two issues. The first issue presented is whether the United States District Court for the Southern District of New York (Paul G. Gardephe, Judge) had subject matter jurisdiction over this action pursuant to the Edge Act,
We hold that the District Court had jurisdiction under the Edge Act because defendant-appellee JP Morgan Chase Bank, N.A. engaged in international or foreign banking as part of the transaction giving rise to this suit. We also hold that the District Court did not erroneously dismiss plaintiff‘s state-law securities claims because plaintiff failed to plausibly suggest that the notes are securities under Reves.
We accordingly AFFIRM the District Court‘s September 24, 2018 order determining that it had jurisdiction pursuant to the Edge Act and AFFIRM its May 22, 2020 order dismissing plaintiff‘s state-law securities claims.
JOSÉ A. CABRANES, Circuit Judge:
Plaintiff-Appellant Marc S. Kirschner brought a series of claims in New York state court arising out of a syndicated loan transaction (the “Transaction“)1 facilitated by the defendants-appellees, a group of financial institutions. Plaintiff‘s appeal presents two issues. The first issue presented is whether the United States District Court for the Southern District of New York (Paul G. Gardephe, Judge) had jurisdiction over this action pursuant to the Edge Act,
We hold that the District Court had jurisdiction under the Edge Act because defendant-appellee JP Morgan Chase Bank, N.A. engaged in international or foreign banking as part of the Transaction. We also hold that the District Court did not erroneously dismiss plaintiff‘s state-law securities claims because plaintiff failed to plausibly suggest that the Notes are securities under Reves.
We accordingly AFFIRM the District Court‘s September 24, 2018 order determining that it had jurisdiction pursuant to the Edge Act and AFFIRM its May 22, 2020 order dismissing plaintiff‘s state-law securities claims.2
I. BACKGROUND
We describe the facts as set forth in the complaint and the documents incorporated therein.3 We recount only those necessary to explain our decision.
Millennium Health LLC, Inc. f/k/a Millennium Laboratories (“Millennium“) was a California-based urine drug testing company. In March 2012, defendants-appellees JP Morgan Chase Bank, N.A. (“JP Morgan Chase“), JP Morgan Securities, LLC (“JP Morgan Securities,” and together with JP Morgan Chase, “JP Morgan“), SunTrust Robinson Humphrey, Inc., SunTrust Bank, and Bank of Montreal,4 executed a credit agreement (the “2012 Credit Agreement“) providing Millennium a $310 million term loan and a $20 million revolving loan. Two days before the 2012 Credit Agreement closed, the United States Department of Justice (“DOJ“) issued a subpoena to Millennium in connection with an investigation into whether Millennium had violated federal health care laws. At the time, Millennium was also embroiled in litigation with a competitor, Ameritox Ltd. Ameritox alleged that Millennium had violated federal anti-kickback statutes and that such violations “constituted ‘unfair competition.‘”5
As the DOJ investigation and Ameritox litigation continued, JP Morgan began to consider ways to refinance the 2012 Credit Agreement. Plaintiff alleges that “by the end of February 2014,” the “only” way to refinance was “a huge institutional financing that would” eliminate the roughly $300 million that Millennium still owed under the 2012 Credit Agreement.6
B. The March 16, 2014 Commitment Letter
The “huge institutional financing” principally consisted of a $1.775 billion term loan to Millennium (the “Term Loan“). By letter dated March 16, 2014, JP Morgan, Citi,7 BMO Capital Markets, Bank of Montreal, SunTrust Robinson Humphrey, and SunTrust Bank (the “Initial Lenders“) agreed to provide Millennium the Term Loan8 and a $50 million revolving loan.9 Millennium, in turn, planned to use the Term Loan to (1) pay the outstanding amount due under the 2012 Credit Agreement ($304 million), (2) pay a shareholder distribution ($1.27 billion), (3) “redeem outstanding warrants, debentures and stock options” ($196 million) and (4) pay fees and expenses related to the Transaction ($45 million).10
The Initial Lenders and Millennium further agreed that the Initial Lenders could “syndicate the [Term Loan] to a group of
C. The Confidential Information Memorandum
To facilitate the syndication effort, JP Morgan and Citi prepared a “Confidential Information Memorandum” about Millennium. The Confidential Information Memorandum most consistently refers to its intended audience as potential “lenders,”13 although its cover page uses the term “Public Side Investors.”14 The other relevant documents also most consistently employ the term “lender” and not “investor.”15 Accordingly, we too refer to those who purchased Notes as “lenders.”16
The Confidential Information Memorandum contains numerous disclaimers. For example, it warns potential lenders that the material did “not purport to be all-inclusive” and was “prepared to assist potential lenders in making their own evaluation of [Millennium] and the [Term Loan].”17 It also advises that each potential lender “should perform its own independent investigation and analysis of the [Term Loan] or the transactions contemplated thereby and the creditworthiness of [Millennium].”18 And by receiving the Confidential Information Memorandum, each potential lender “represent[ed] that it [was] sophisticated and experienced in extending credit to entities similar to [Millennium].”19
If a potential lender wanted to become an actual lender, then it had “to make a final legally binding offer to purchase” the Notes no later than 5 p.m. Eastern Standard Time on April 14, 2014.20
On April 15, 2014, JP Morgan Securities notified potential lenders with outstanding legally binding offers of the amount of their allocation. At that point, those potential lenders became actual lenders because they were “irrevocabl[y]” bound to purchase their allocation of the Term Loan.21 Those lenders—referred to here as “Parent Lenders“—could then sub-allocate their allocation to investors in their respective funds—referred to here as “Child Lenders.” For example, Brigade Capital Management, LP (“Brigade“), a Parent Lender, was allocated $45 million of the Term Loan and then sub-allocated that $45 million allocation among twenty-three Child Lenders.22
In total, sixty-one Parent Lenders received an allocation of the Term Loan. Of those sixty-one Parent Lenders, fifty-nine were domestic entities and two were foreign entities. Approximately half of the roughly four hundred Child Lenders were foreign entities.
E. The Transaction
The Transaction “proceeded in three inter-related and contemporaneous steps” and closed on April 16, 2014.23
First, by letter agreement dated April 16, 2014, JP Morgan Securities or its “Lending Affiliate,” JP Morgan Chase, agreed to “fund 100%” of the Term Loan.24
Second, by letter agreement dated April 16, 2014, Millennium consented to JP Morgan Chase assigning its rights and obligations with respect to the Term Loan to the lenders.
Third, “each individual [lender] . . . became irrevocably committed to [JP Morgan Chase] . . . to purchase” its allocated amount of the Term Loan.25
F. The Credit Agreement
In connection with the closing on April 16, 2014, each lender executed an “Assignment and Assumption Agreement” with JP Morgan Chase.26 The lenders thereby assumed “all of [JP Morgan Chase‘s] rights and obligations in its capacity as a Lender”27 under a “Credit Agreement” dated April 16, 2014. The Credit Agreement established the conditions of the Term Loan. By entering the Credit Agreement, each lender represented that it had
independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness
of [Millennium]28 and made its own decision to make its Loans29 hereunder and enter into this [Credit] Agreement.30
The Credit Agreement established that Millennium would pay back the Term Loan over seven years. Millennium was generally obligated to make quarterly payments consisting of a portion of the $1.775 billion principal plus interest. Additionally, to protect lenders were Millennium to default on its payment obligations, the Credit Agreement “create[d] in favor of the Administrative Agent [JP Morgan Chase], for the benefit of the Lenders, a legal, valid and enforceable security interest” in Millennium‘s collateral.31
The Credit Agreement also facilitated the creation of a secondary market for the Notes, subject to certain assignment restrictions. The restrictions include:
- A prohibition on assignment to “a natural person”32;
- A requirement that Millennium and JP Morgan Chase, acting in its capacity as Administrative Agent, provide written consent to any assignment (subject to certain exceptions)33; and
- A requirement that any assignment be for more than $1,000,000, unless, among other things, the assignment was to a “Lender, an affiliate of a Lender, or an Approved Fund or an assignment of the entire remaining amount of the assigning Lender‘s” allocation.34
The Notes began trading on a secondary market “as early as April 15th.”35
As the Transaction proceeded, the DOJ investigation and Ameritox litigation also continued. After the Transaction‘s April 16, 2014 closing, both took a material turn.
On June 16, 2014, a jury in the United States District Court for the Middle District of Florida determined that Millennium had violated federal anti-kickback statutes and awarded Ameritox $2.755 million in compensatory damages and $12 million in punitive damages.36 The United States Court of Appeals for the Eleventh Circuit later vacated the verdict.37
In December 2014, the DOJ informed Millennium that it would intervene in qui tam litigation involving Millennium‘s billing practices. It did so on March 19, 2015. On May 22, 2015, Millennium announced that it had reached a preliminary $256 million global settlement with the government related to the qui tam litigation. On October 16, 2015, Millennium completed the $256 million settlement. Soon thereafter, on November 10, 2015, Millennium filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.
H. This Litigation
As part of the Chapter 11 bankruptcy proceedings, plaintiff was appointed trustee of the Millennium Lender Claim Trust (the “Trust“). The ultimate beneficiaries of the Trust are lenders who purchased Notes and have claims in the bankruptcy proceedings.
On August 1, 2017, plaintiff filed suit in the Supreme Court of the State of New York, New York County. He brought claims for violations of state securities laws, negligent misrepresentation, breach of fiduciary duty, breach of contract, and breach of the implied contractual duty of good faith and fair dealing.
On August 21, 2017, defendants filed a notice of removal to the United States District Court for the Southern District of New York pursuant to the Edge Act,
On June 28, 2019, defendants moved to dismiss plaintiff‘s complaint. On May 22, 2020, the District Court granted defendants’ motion to dismiss. It dismissed the state-law securities claims because it concluded that plaintiff failed to plead facts plausibly suggesting that the Notes are “securities” under Reves v. Ernst & Young, 494 U.S. 56 (1990).
On July 31, 2020, plaintiff moved for leave to file a proposed amended complaint. On December 1, 2020, Magistrate Judge Sarah L. Cave issued a “Report and Recommendation” that recommended denying plaintiff‘s motion to amend the complaint as futile.
On September 30, 2021, the District Court adopted the Report and Recommendation and denied plaintiff‘s motion to amend the complaint as futile. Plaintiff timely appealed on October 28, 2021.
We consider at the threshold whether the District Court had subject matter jurisdiction over this action pursuant to the Edge Act,
A. Edge Act Jurisdiction
Plaintiff challenges the District Court‘s determination that it had jurisdiction over this matter pursuant to the Edge Act,
Congress enacted the Edge Act in 1919 “to provide for the establishment of international banking and financial corporations operating under Federal supervision with powers sufficiently broad to enable them to compete effectively with similar foreign-owned institutions in the United States and abroad.”39 Consistent with that purpose, the Edge Act “authorized the creation of banking corporations chartered by the Federal Reserve Bank, so-called ‘Edge Act banks’ or ‘Edge Act corporations,’ which could engage in offshore banking operations freed from regulatory barriers imposed by state banking commissioners.”40
Congress amended the statute in 1933 to “provid[e] for federal court jurisdiction of certain suits to which . . . Edge Act banks [or corporations] were parties.”41 For a federal court to have jurisdiction under the Edge Act, (1) the suit must be “of a civil nature at common law or in equity,” (2) at least one party to the suit must be an Edge Act bank or corporation, and (3) the suit must “aris[e] out of transactions involving” (a) “international or foreign banking,” (b) “banking in a dependency or insular possession of the United States,” or (c) “out of other international or foreign financial operations.”42 We have clarified that to satisfy the third element, the party Edge Act bank or corporation must itself engage in the relevant “international or foreign banking,” “banking in a dependency or
The parties agree that the first two elements are satisfied: They agree that the suit is civil in nature and that a party to this suit—JP Morgan Chase—is an Edge Act bank.44 The parties disagree on whether the third element is satisfied. Specifically, they dispute whether JP Morgan Chase itself engaged in the relevant international or foreign banking.
We conclude that the third element is satisfied because JP Morgan Chase itself engaged in international or foreign banking as part of the Transaction. To effectuate the Transaction, JP Morgan Chase assigned its interest in the Term Loan to lenders.45 That assignment constituted banking.46 And JP Morgan Chase‘s assignment of its interest in the Term Loan “involv[ed] international or foreign banking”47 because JP Morgan Chase directly assigned a portion of its interest in the Term Loan to foreign lenders.48
Plaintiff does not contest that JP Morgan Chase assigned portions of the Term Loan to foreign lenders. Rather, he argues that the mere “fortuitous involvement” of the foreign lenders “in an otherwise domestic transaction is alone insufficient to trigger the [international or foreign banking] element.”49 The “involvement” of the foreign lenders, he explains, was “fortuitous” because JP Morgan Chase “was [not] involved in soliciting” the foreign lenders “into the [T]ransaction.”50 Plaintiff thus concludes that Edge Act jurisdiction is wanting.
We are unpersuaded by his argument. True, JP Morgan Chase did not solicit the foreign lenders into the Transaction. But that solicitation is not the relevant “international
In sum, an Edge Act bank‘s direct assignment of a loan to a foreign entity qualifies as “international or foreign banking.”54 Accordingly, because each of the elements required to establish Edge Act jurisdiction is satisfied, the District Court correctly concluded that it had jurisdiction over this matter.
B. Whether The Notes Are “Securities”
We now turn to the second issue presented: whether the District Court erroneously dismissed plaintiff‘s state-law securities claims because he did not plausibly allege that the Notes are “securities” under Reves v. Ernst & Young, 494 U.S. 56 (1990).
We review a district court‘s decision to dismiss a claim under
The parties agree that to determine whether the Notes are “securities,” we should apply the test enunciated by the Supreme Court in Reves.58 There, the Supreme Court explained that although the
Under Reves, courts must apply a “family resemblance” test to determine whether a “note” is a “security.” The test “begin[s] with a presumption that every note is a security.”64 It then directs courts to examine four factors, each of which helps to uncover whether the note was issued in an investment context (and is thus a security) or in a consumer or commercial context (and is thus not a security).65 The four factors are:
- “[T]he motivations that would prompt a reasonable seller and buyer to enter into” the transaction66;
- “[T]he plan of distribution of the instrument”67;
- “[T]he reasonable expectations of the investing public”68; and
- “[W]hether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary.”69
In balancing the four factors, courts compare the note at issue to an existing “judicially crafted” list of instruments
1. The Motivations of the Parties
The first Reves factor requires us to “examine the transaction to assess the motivations that would prompt a reasonable seller and buyer to enter into it.”73 We must determine “whether the motivations [of the seller and buyer] are investment (suggesting a security) or commercial or consumer (suggesting a non-security).”74 A buyer‘s motivation is investment if it expects to profit from its investment, including through earning either variable or fixed-rate interest.75 A seller‘s motivation is investment if its “purpose is to raise money for the general use of a business enterprise or to finance substantial investments.”76 A seller‘s motivation is commercial if, for example, “the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller‘s cash-flow difficulties, or to advance some
On the one hand, the pleaded facts plausibly suggest that the lenders’ motivation was investment because the lenders expected to profit from their purchase of the Notes. Under the Credit Agreement, the lenders were entitled to receive quarterly interest payments over the course of seven years. They therefore expected to receive a “valuable return”78 on their purchase of the Notes.
On the other hand, the pleaded facts do not plausibly suggest that Millennium‘s motivation was investment. Millennium was not using the Term Loan to raise funds for its urine testing business or to finance other investments. Instead, it planned to use the Term Loan to pay the outstanding amount due under the 2012 Credit Agreement, make a shareholder distribution, “redeem outstanding warrants, debentures and stock options,” and pay fees and expenses related to the Transaction.79 These uses suggest that Millennium‘s motivation was commercial.
Accordingly, the pleaded facts indicate that the parties’ motivations were mixed.80 At this early stage of litigation, our application of the first Reves factor tilts in favor of concluding that the complaint plausibly alleges that the Notes are securities.
2. The Plan of Distribution
The second Reves factor requires us to “examine the plan of distribution of the instrument to determine whether it is an instrument in which there is common trading for speculation or investment.”81 This factor weighs in favor of determining that a note is a security if it is “offered and sold to a broad segment of the public.”82 This factor weighs against determining that a note is a security if there are limitations in place that “work[] to prevent the [notes] from being sold to the general public.”83
The pleaded facts do not plausibly suggest that the Notes were “offered and sold to a broad segment of the public.”84 The Lead Arrangers offered the Notes only to sophisticated institutional entities, providing them with a Confidential Information Memorandum. JP Morgan then proceeded to allocate the Notes to only the sophisticated institutional entities that submitted “legally binding offer[s].”85 This allocation process was not a “broad-based, unrestricted sale[] to the general investing public.”86
Plaintiff points to the presence of a secondary market as evidence that the Notes were “offered and sold to a broad segment of the public.”87 But the restrictions on any
The assignment restrictions here are akin91 to those in Banco Espanol de Credito v. Security Pacific National Bank that we held weighed against concluding that the relevant loan participations were securities.92 In Banco Espanol, “[t]he plan of distribution specifically prohibited resales of the loan participations without the express written permission of [the issuer][,] . . . . [which] worked to prevent the loan participations from being sold to the general public, thus limiting eligible buyers to those with the capacity to acquire information about the debtor.”93 The collective impact of the assignment restrictions here likewise works to prevent the Notes from being sold to the general public.94
Accordingly, this factor weighs against concluding that the complaint plausibly alleges that the Notes are securities.
3. The Public‘s Reasonable Perceptions
The third Reves factor requires us to “examine the reasonable expectations of the investing public.”95 We “consider [notes] to be ‘securities’ on the
The pleaded facts do not plausibly suggest that the lenders reasonably perceived the Notes as securities. Instead, we are persuaded that the sophisticated entities that purchased the Notes “were given ample notice that the [Notes] were . . . loans and not investments in a business enterprise.”98 Before purchasing the Notes, the lenders certified that they were “sophisticated and experienced in extending credit to entities similar to [Millennium].”99 They also certified that they had “independently and without reliance upon any Agent or any Lender, and based on such documents and information as [they] ha[ve] deemed appropriate, made [their] own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of [Millennium] and made [their] own decision to make [their] Loans hereunder.”100 This certification is substantively identical to the certification made by the purchasers in Banco Espanol, which was central to our determination that the buyers there could not have reasonably perceived the loan participations as securities.101
Plaintiff argues that the fact that the loan documents at times refer to the buyers as “investors” plausibly suggests that the buyers reasonably expected that the Notes were securities.102 We disagree. First, there are only isolated references to “investors” in the loan documents. These isolated references could not have plausibly created the reasonable expectation that the buyers were investing in securities.103 Second, the loan documents more consistently refer to the buyers as “lenders.” This label aligns with the reasonable expectations of the experienced entities that the Notes were not securities.
4. Whether some other risk-reducing factor renders application of securities laws unnecessary
The fourth Reves factor requires us to “examine whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary.”105 Among the factors that reduce the risks associated with an instrument are whether the instrument is secured by collateral or is insured106 and whether “specific policy guidelines”107 issued by federal regulators address the type of instrument at issue.
The pleaded facts do not plausibly suggest that application of securities laws108 are necessary here for two reasons.109 First, the Notes were “secured by a perfected first priority security interest in all of [Millennium‘s] tangible and intangible assets,” i.e., Millennium‘s collateral.110 That perfected first priority security interest reduces the risk associated with the Notes. Second, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (jointly, the “Bank Regulators“) issued “specific policy guidelines”111 addressing syndicated term loans.112
Plaintiff contends that the Bank Regulators’ guidance does not constitute “another regulatory scheme [that] significantly
Accordingly, this factor weighs against concluding that the complaint plausibly alleges that the Notes are securities.
***
To summarize our application of the Reves factors to the pleaded facts:
- The first factor—the motivations of the parties—weighs in favor of concluding that the complaint plausibly suggests that the Notes are securities because, although Millennium‘s motivation appears to be “commercial,” the lenders’ motivations were “investment.”
- The second factor—the plan of distribution—weighs against concluding that the complaint plausibly suggests that the Notes are securities because they were unavailable to the general public by virtue of restrictions on assignments of the Notes.
- The third factor—the reasonable expectations of the public—weighs against concluding that the complaint plausibly suggests that the Notes are securities because the lenders were sophisticated and experienced institutional entities with ample notice that the Notes were not securities.
- The fourth factor—the existence of other risk-reducing factors—weighs
against concluding that the complaint plausibly suggests that the Notes are securities because they were secured by collateral and federal regulators have issued specific policy guidance addressing syndicated loans.
Upon our review of the pleaded facts, we conclude that the Notes, like the loan participations in Banco Espanol, “bear[] a strong resemblance”118 to one of the enumerated categories of notes that are not securities: “[L]oans issued by banks for commercial purposes.”119 We accordingly hold that plaintiff has failed to plead facts plausibly suggesting that the Notes are securities under Reves v. Ernst & Young, 494 U.S. 56 (1990). The District Court therefore properly dismissed plaintiff‘s state-law securities claims.
III. CONCLUSION
In sum, we hold as follows:
- The District Court had jurisdiction over this action pursuant to the Edge Act because defendant-appellee JP Morgan Chase Bank, N.A. engaged in international or foreign banking as part of the Transaction; and
- The District Court properly dismissed plaintiff‘s state-law securities claims because he failed to plead facts plausibly suggesting that the Notes are securities under the “family resemblance” test established by the Supreme Court in Reves v. Ernst & Young, 494 U.S. 56 (1990).
We accordingly AFFIRM the District Court‘s September 24, 2018 order determining that it had jurisdiction over this matter pursuant to the Edge Act and AFFIRM its May 22, 2020 order dismissing plaintiff‘s state-law securities claims.
Notes
any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a “security“; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker‘s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.
Defendants assert that “[a]lthough the fixed rate of return on the loan does not by itself preclude the existence of a security, it is highly relevant that the lenders’ return was not tied to Millennium‘s market performance.” Defs. Br. at 40 (citation omitted). To the contrary, that a lender‘s return is not tied to market performance is not highly relevant to whether a “note” is a “security” under Reves. The Supreme Court in Reves explicitly rejected a definition of “profit” that would “suggest that notes paying a rate of interest not keyed to the earning of the enterprise are not ‘notes’ within the meaning of the Securities Acts.” Reves, 494 U.S. at 68 n.4. Instead, the Supreme Court “emphasize[d]” that, in “the context of notes,” profit means “a valuable return on an investment.” Id. A fixed rate of return is undoubtedly “a valuable return on an investment.” Id.