August 8, 2023 - Last week, counsel to Marc Kirschner, the Trustee in the Kirschner case, and the banks each filed one-page letters to the 2nd Circuit Court of Appeals in response to the SEC’s unexpected “punt letter” on filing an amicus in response to the 2nd Circuit’s request. Surprisingly, counsel to Americans for Financial Reform (AFR), a consumer-focused trade association that had submitted (albeit a year after the deadline) an amicus brief in the Kirschner case in support of overturning the 2nd Circuit’s Banco Espanol precedent, also submitted a letter.  Remarkably, the AFR’s letter brings to the court’s attention many of the policy points the LSTA made in its amicus brief as reasons to affirm the district court’s decision.  The banks’ letter is available here, Kirschner’s letter is available here, and the AFR letter is available here. Following we summarize and analyze the three submissions and describe what comes next.

The Kirschner Letter.  Kirschner’s counsel argued that the SEC’s inability to express its view “buttresses the Appellant’s position that a complete factual record must be developed addressing each of the Reves factors” and implores the court to reverse and remand to develop “an appropriate factual record”. Kirschner is predictably trying to convince the 2nd Circuit that there are more facts to develop in discovery and suggests the SEC’s failure to submit an amicus is proof.   The problem with that argument is that the SEC said no such thing.  Instead, the SEC said its staff was “not in a position” to offer its views.  In context, where the SEC clearly signaled its intention to file (requesting and receiving three extensions), it is far more likely that the SEC was unable to obtain a policy consensus given the complexity of the issue, the participation in the process of the banking agencies and the significant concern over the consequences of radically changing the status quo.  Indeed, the AFR’s letter, described below, seems to strongly confirm that conclusion.  It is a stretch for Kirschner to argue that the SEC didn’t file an amicus because the factual record in the case was inadequate.   

The Banks’ Letter.  The banks’ counsel rested on their prior briefing and oral argument and reminded the court – as confirmed by the LSTA’s amicus brief – that “in the thirty years since this Court’s decision in Banco Espanol…Congress, the SEC, the U.S. Treasury Department, the banking regulators, and market participants have all treated syndicated term loans such as the one in this case as loans rather than securities.”  The banks’ counsel suggested that “there is no reason to disrupt settled law and market-wide consensus” and accordingly, requested that the Court affirm the district court’s decision.

The banks’ counsel used its letter to briefly restate their main point:   Congress, the SEC, the bank regulators, Treasury, and the market, have all recognized that loans are different from securities and there is no reason to disrupt established law or market consensus.

The AFR LetterThe AFR’s stated goal was to “draw the Court’s attention to public information and reporting” in the context of the SEC’s failure to submit an amicus brief.  Citing several press reports, the letter notes that the banks, the banking regulators and the LSTA lobbied aggressively and the U.S. Treasury Department “may have pushed back against any stance that would have disrupted the [syndicated loan] industry” (emphasis added).    Another press report suggested that while Gary Gensler, the SEC’s Chair, reportedly was in favor of submitting an amicus brief stating that the loan in the Kirschner case is a security, he “couldn’t muster enough internal support for his view”.  Another report notes that the SEC backed down because of “quiet pressure from the Federal Reserve and U.S. Treasury.  Thus, the AFR letter recognizes that the banking agencies, the Treasury Department and a majority of the SEC Commissioners were opposed to submitting a brief taking the view that syndicated term loans are securities, the very position espoused by the LSTA in its amicus brief.  Notably, the AFR did not support Kirschner’s view that the SEC failed to submit a brief because the factual record was insufficiently developed.

What’s Next:

Given that there is no SEC amicus brief to reply to the LSTA will not be submitting a letter or brief to the Court.  Since the record before the 2nd Circuit is complete, the only thing left for the Court to do is deliberate and issue its decision.  Nevertheless, the timing of when a decision will be issued is difficult to predict and depends on many factors such as the judges’ workloads and who writes the opinion.  Please reach out to Elliot Ganz if you have any questions.

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