SDNY Holds Syndicated Loan Is not a "Security"
The U.S. District Court for the Southern District of New York ("SDNY") held that certain syndicated loans sold to institutional investors are not "securities" and rejected claims of violations of federal and state securities laws.
The Court applied the four-factor "family resemblance" test set out in Reves v. Ernst & Young, 494 U.S. 56 (1990) in determining that loan participations sold to the plaintiffs are not "securities." The Court found that:
- the motivations of the seller and buyer did not weigh strongly for or against categorizing the loans as securities;
- the plan of distribution supported the notion that the instruments should be considered loans, because the plan was "relatively narrow";
- the reasonable expectations of the investing public supported the notion that the instruments should be treated as loans, because the lenders were sufficiently notified that the instruments of participation in the transaction were loans, not "investments in a business enterprise"; and
- the existence of another regulatory scheme whereby the Court, citing Banc Espanol de Credito v. Security Pacific Nat'l Bank, 973 F.2d 51 (2d Cir. 1992), noted that the federal banking regulators have set forth specific guidelines on the sale of loan participations.
While the Court rejected the plaintiff's claims, it did grant the plaintiff leave to amend its complaint.
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