A recent decision by the U.S. District Court for the Southern District of New York in Kirschner v. JPMorgan Chase Bank, N.A. et al. reaffirmed that syndicated loans are not “securities” and confirmed the enforceability of standard agent disclaimers of fiduciary duty.
The Kirschner court dismissed a complaint brought by a bankruptcy trustee against JPMorgan and other financial institutions alleging, among other things, securities fraud and breach of fiduciary duty by JPMorgan as administrative agent. The plaintiff’s suit was based, in part, on a claim that the syndicated loans in question were “securities.” The plaintiff claimed that JPMorgan as administrative agent and other financial institutions acting as arrangers of the loans had defrauded the lenders and violated securities laws by failing to perform certain due diligence on the borrower’s financial results and a then-pending investigation of the borrower by the U.S. Department of Justice and by making certain misstatements in the offering documents. In addition, the plaintiff claimed that the administrative agent breached a fiduciary duty allegedly owed to the lenders by failing to disclose breaches by the borrower of representations and warranties contained in the loan documents of which the administrative agent allegedly had knowledge.
In deciding that the loans in question were not “securities,” the court applied the Supreme Court’s long-standing multi-part test from Revesv. Ernst & Young and concluded that “the limited number of highly sophisticated purchasers of the [loans] would not reasonably consider the [loans] ‘securities’ subject to the attendant regulations and protections of federal and state securities law.” A contrary decision could have had broad implications for syndicated loan and CLO markets, including potentially requiring offerings of loans to comply with Rule 144A or some other exemption from registration under the Securities Act and obliging borrowers to comply with applicable disclosure and reporting requirements.
In addition, administrative agents, collateral agents, and other agents should take comfort in the district court’s dismissal of the plaintiff’s claim for a breach of fiduciary duty by the administrative agent. The court expressly rejected the plaintiff’s argument that the agency relationship, by definition, creates fiduciary duties on the part of the administrative agent. The court refused to “impose a broader agency relationship than that to which the parties agreed in their contract,” noting that the credit agreement expressly provided that the “[a]dministrative [a]gent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any [l]ender.” This is consistent with language commonly contained in most credit agreements, collateral agency agreements, and similar agency agreements.
While this decision is welcome news for the syndicated loan and CLO markets, it may or may not be the final word on the “loans-as-securities” question.