S&C Wins Key Ruling for JPMorgan on Syndicated Loans

October 8, 2021

S&C obtained a ruling for client JPMorgan Chase that a syndicated term loan should not be treated as a “security” under state securities (Blue Sky) laws. In granting JPMorgan's motion to dismiss on May 22, 2020, District Judge Paul Gardephe of the Southern District of New York found that the limited number of highly sophisticated lenders in this transaction would not consider the term loan a security.

The Loan Syndications and Trading Association and the Bank Policy Institute filed an amicus brief in support of JPMorgan, stressing that “treating syndicated term loans as securities would devastate a trillion-dollar-plus market that is vital to the economy.”

In April 2014, JPMorgan led a group of banks that arranged a $1.775 billion term loan for Millennium Laboratories, a drug-testing company, which was syndicated to roughly 70 institutional investor groups comprised of mutual funds, hedge funds, and other institutional investors. In November 2015, after settling with the Department of Justice over its billing practices, Millennium filed for bankruptcy court protection. A trustee appointed by the bankruptcy court sued JPMorgan and the other banks that arranged the loan. The trustee claimed that when marketing the loan, the banks misrepresented or omitted material facts about the legality of Millennium's sales, marketing, and billing practices, as well as the risks posed by the government investigation.

The S&C team, which took the lead on briefing the motion to dismiss for all defendants, argued that the loan was not a security under the Supreme Court's precedent in Reves and the Second Circuit's decision in Banco Espanol.  Judge Gardephe accepted this argument, finding that “it would have been reasonable for these sophisticated institutional buyers to believe that they were lending money, with all of the risks that may entail, and without the disclosure and other protections associated with the issuance of securities.” Judge Gardephe also dismissed the trustee's claims for negligent misrepresentation, breach of fiduciary duty, breach of contract and breach of the covenant of good faith.

On September 30, 2021, Judge Gardephe denied the trustee's motion for leave to file an amended complaint asserting three new claims (common law fraud, aiding and abetting fraud, conspiracy to commit fraud), and reasserting his claim for negligent misrepresentation. Judge Gardephe found that the trustee had not adequately alleged that JPMorgan “controlled, authorized, or caused” Millennium's allegedly false statements or that it had directly made false statements. On the trustee's secondary fraud claims, Judge Gardephe found that the plaintiff failed to plead the defendants' “direct and active participation” in the fraud, for the purposes of aiding and abetting liability. Nor did the trustee adequately plead conspiracy. Finally, with respect to negligent misrepresentation, Judge Gardephe found that contractual disclaimers precluded a duty of care.

Christopher Viapiano and Ann-Elizabeth Ostrager led the S&C team representing JPMorgan.