Promissory Notes Deemed To Be ‘Securities’

In a divided decision, New York state's highest court has concluded that promissory notes issued by a company to various holders constituted "securities" within the meaning of Article 8 of the Uniform Commercial Code (UCC8). Because the notes were deemed to be securities, the New York Court of Appeals determined that UCC8 governed the rights of the holders thereunder. Highland Capital Management, L.P. v. Schneider, 866 N.E.2d.1020 (N.Y., Apr. 3, 2007).

While the facts of the case are not unusual, they are instructive. A company issued notes that are similar to forms of subordinated indebtedness often issued in acquisition financings. The notes (which were governed by New York law) had a subordination legend placed on them and noted that they were not registered under the Federal Securities Act. Although not widely traded, most security industry professionals considered these notes to be "high-risk debt"