Rendering Structured Finance Opinions of Counsel: Substantive Consolidation, Authority to File Bankruptcy and More

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Rendering Structured Finance Opinions of Counsel: Substantive Consolidation, Authority to File Bankruptcy and More Navigating Assumptions, Qualifications, Limitations and Use of Letters; Reducing Risks for Opinion Givers THURSDAY, AUGUST 6, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Scott J. Gordon, Partner, Kirkland & Ellis, New York Michelle P. Quinn, Partner, Berger Harris LLP, Wilmington, Del. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 RENDERING STRUCTURED FINANCE OPINIONS OF COUNSEL: SUBSTANTIVE CONSOLIDATION, AUTHORITY TO FILE BANKRUPTCY AND MORE NAVIGATING ASSUMPTIONS, QUALIFICATIONS, LIMITATIONS AND USE OF LETTERS; REDUCING RISKS FOR OPINION GIVERS MICHELLE P. QUINN, ESQUIRE

6 INTRODUCTION Why Delaware? LLCs Opinions Provided Non-dissolution opinion or the Delaware State Law opinion Authority to file opinion UCC Opinion Entity Authority Opinion Non-consolidation opinion True Sale opinion Series LLCs 6

7 WHY DELAWARE? The Delaware Limited Liability Company Act Increase of use of LLCs in the mid- 1990s As of March 29, 2013 from the Delaware Division of Corporations 7

8 EASY ADMINISTRATIVE PROCEDURES Online Services Expedited and same day service Filing of UCC documents Payment of franchise taxes Access to relevant provisions of the Delaware Code Help with finding a registered agent Name reservations Status check for Delaware entities 8

9 EXPERTISE OF JUDICIARY IN BUSINESS MATTERS Delaware's Court of Chancery Limited jurisdiction High volume of corporate and LLC matters Corporations Section of the Delaware State Bar Association Generates legislation after careful study of case law and business trends Easy access to elected and appointed officials due to the small size of the state 9

10 CONTRACT FLEXIBILITY Section (b) of the DE LLC Act: It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. "Except as provided in a limited liability company agreement or similar language is found in most provisions of the DE LLC Act. Delaware LLC Act is friendly to the SPV structure. 10

11 THE DELAWARE STATE LAW OPINION THE NON-DISSOLUTION OPINION

12 DOCUMENTS REQUIRED A certified copy of the Certificate of Formation from the Delaware Secretary of State. A fully executed limited liability company agreement A Certificate of Good Standing from the Delaware Secretary of State 12

13 CONTENTS OF THE OPINION LETTER The Company has been duly formed and is validly existing in good standing as a limited liability company under the laws of the State of Delaware. In Delaware, this requires an LLC Agreement and a Certificate of Formation. Should not be based solely on a good standing certificate. The LLC Agreement constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member, in accordance with its terms. Given with standard enforceability carve-outs, including bankruptcy Sometimes drafted to cover only the Special Member provisions 13

14 CONTENTS OF THE OPINION LETTER (CONT.) If properly presented to a Delaware court, a Delaware court applying Delaware law, would conclude that (i) [so long as any Obligation is outstanding,] in order for a Person to file a voluntary bankruptcy petition on behalf of the Company, the prior unanimous written consent of the Member and all Independent Managers, as provided for in Section of the LLC Agreement, is required, and (ii) such provision, contained in Section of the LLC Agreement, that requires, [so long as any Obligation is outstanding,] the prior unanimous written consent of the Member and all Independent Managers in order for a Person to file a voluntary bankruptcy petition on behalf of the Company, constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member, in accordance with its terms. Given with only an equitable principles carve-out. No bankruptcy carve-out. Should track language of LLC Agreement. LLC Agreement should not prohibit a bankruptcy filing or require lender consent for a bankruptcy filing 14

15 INDEPENDENT MANAGER Disinterested third party granted authority to vote on bankruptcy of the LLC Often serves as the special member Lender limits on identity and replacement Designate as a manager within the meaning of the LLC Act. 15

16 CONTENTS OF THE OPINION LETTER (CONT.) While under the Delaware Limited Liability Company Act, 6 Del. C , et seq.) (the "LLC Act"), on application to a court of competent jurisdiction, a judgment creditor of the Member may be able to charge the Member's share of any profits and losses of the Company and the Member's right to receive distributions of the Company's assets (the "Member's Interest"), to the extent so charged, the judgment creditor has only the right to receive any distribution or distributions to which the Member would otherwise have been entitled in respect of the Member's Interest. Under the LLC Act, no creditor of the Member shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the Company. Thus, under the LLC Act, a judgment creditor of the Member may not satisfy its claims against the Member by asserting a claim against the assets of the Company. Under the LLC Act (i) the Company is a separate legal entity, and (ii) the existence of the Company as a separate legal entity shall continue until the cancellation of the LLC Certificate. 16

17 CONTENTS OF OPINION LETTER (CONT.) Under the LLC Act and the LLC Agreement, the Bankruptcy or dissolution of the Member will not, by itself, cause the Company to be dissolved or its affairs to be wound up. LLC Agreement should override LLC Act regarding bankruptcy of a member Mandatory Events Dissolution 1. As specified in the limited liability company agreement 2. At such time as there are no remaining members 3. When ordered by the Court of Chancery 17

18 THE SPECIAL MEMBER A special member/springing member becomes a member of the LLC upon occurrence of any event that would causes the last remaining equity member to cease to be a member by operation of law or contract Provisions: May not resign or transfer its rights unless a successor Special Member has been admitted Has no interest in the profits, losses and capital of the Company Has no right to receive any distributions of Company assets Is not required to make any capital contributions to the Company, 6 Del. C (d) May not bind the Company except as required by any mandatory provision of the LLC Act Has no right to vote on, approve or otherwise consent to any action by, or matter relating to, the Company, including, without limitation, the merger, consolidation or conversion of the Company 18

19 THE PERSONAL REPRESENTATIVE Unless otherwise provided in a limited liability company agreement, within 90 days or such other period as is provided for in the limited liability company agreement after the occurrence of the event that terminated the continued membership of the last remaining member, the personal representative of the last remaining member agrees in writing to continue the limited liability company and to the admission of the personal representative of such member or its nominee or designee to the limited liability company as a member, effective as of the occurrence of the event that terminated the continued membership of the last remaining member; provided, that a limited liability company agreement may provide that the personal representative of the last remaining member shall be obligated to agree in writing to continue the limited liability company and to the admission of the personal representative of such member or its nominee or designee to the limited liability company as a member, effective as of the occurrence of the event that terminated the continued membership of the last remaining member. Section (a)(4) of the DE LLC Act Provision works with the Special Member provision to continue the LLC in the event of a dissolution. 19

20 THE AUTHORITY TO FILE BANKRUPTCY OPINION Reasoned opinion that addresses whether a federal bankruptcy court would look to federal or state law to determine the parties with authority to file a bankruptcy petition on behalf of the LLC. Required because federal bankruptcy law does not specifically address LLCs. 20

21 THE UCC OPINION The Financing Statement is in an appropriate form for filing with the Division. Insofar as Article 9 of the Uniform Commercial Code as in effect in the State of Delaware on the date hereof (the "Delaware UCC") is applicable (without regard to conflict of laws principles), upon the filing of the Financing Statement with the Division, the Lender will have a perfected security interest in the Company's rights in that portion of the Property described in the Financing Statement in which a security interest may be perfected by the filing of a UCC financing statement with the Division and the proceeds (as defined in Section 9-102(a)(64) of the Delaware UCC) thereof. 21

22 OPINIONS REGARDING DUE AUTHORITY AND AUTHORIZATION Under the LLC Act and the LLC Agreement, the Company has all necessary limited liability company power and authority to execute and deliver the Loan Documents to which it is a party, and to perform its obligations thereunder. Under the LLC Act and the LLC Agreement, the execution and delivery by the Company of the Loan Documents to which it is a party, and the performance by the Company of its obligations thereunder, have been duly authorized by all necessary limited liability company action on the part of the Company. 22

23 OPINIONS REGARDING DUE AUTHORITY AND AUTHORIZATION (CONT.) No authorization, consent, approval or order of any Delaware court or any Delaware governmental or administrative body is required to be obtained by the Company solely as a result of the execution and delivery by the Company of the Loan Documents to which it is a party, or the performance by the Company of its obligations thereunder. The execution, delivery and performance by the Company of the Loan Documents to which it is a party do not violate (i) any Delaware law, rule or regulation, or (ii) the LLC Agreement or the LLC Certificate. For both opinions, assume no assets or activities in Delaware 23

24 SERIES LLCS Provide for isolated assets in separate series within one LLC Require only one filing with the DE Secretary of State and one annual tax Series are not separate legal entities under DE law Cannot provide standard structured finance opinions on a series Not recognized in every state or under federal bankruptcy law Concern over whether a series can hold title to real estate in other jurisdictions 24

25 Rendering Structured Finance Opinions of Counsel: Substantive Consolidation, Authority to File Bankruptcy and More Navigating Assumptions, Qualifications, Limitations and Use of Letters; Reducing Risks for Opinion Givers Scott J. Gordon, Esq. 25

26 Bankruptcy Estate Estate includes all legal and equitable rights of debtor Imposes automatic stay, which prohibits: judicial proceedings against debtor enforcement of pre-petition judgments actions to possess or control debtor s property enforcement of liens against debtor s property actions to collect pre-petition debts set-offs of pre-petition debts 26

27 Right to File Bankruptcy Pre-petition waivers of the right to file a bankruptcy petition, whether by contract or in charter documents, have repeatedly been held to be void on the basis that they are against public policy. Most recently, in In Re BAY CLUB PARTNERS 472, LLC, Debtor (No , 2014 WL (Bankr. D. Or. May 6, 2014)), the court characterized as cleverly insidious a restriction on filing that was placed in the debtor s operating agreement at a lender s request rather than being placed in the loan agreement. The court held the provision to be void. 27

28 Right to File Bankruptcy (Cont d) SPE charter documents contain requirements that there be at least one independent person represented among those whose vote is required to approve the voluntary filing of a bankruptcy petition and that the authorizing vote be unanimous (the Independent Director Requirement ). 28

29 Right to File Bankruptcy (Cont d) While the Independent Director Requirement has been respected and not found to be an unreasonable restraint on the right to file a bankruptcy petition, courts have viewed the application of the Independent Director Requirement in a manner consistent with preservation of the right to file. 29

30 Right to File Bankruptcy (Cont d) In the circumstances underlying the 1997 case of In Re Kingston Square Associates, 214 B.R. 713, the owner/manager of property owning SPEs solicited creditors to make involuntary bankruptcy filings in respect of the SPEs, thereby seeking to thwart the bankruptcy-remote provisions of the SPEs charters, which contained a requirement for the unanimous vote of directors, including an ID, for a voluntary filing. Lenders that had relied on the bankruptcy-remote provisions argued for dismissal on grounds of bad faith through collusion to file. The court found that the debtors had orchestrated the involuntary filings but that the filings did not further a wrongful purpose, which is a necessary element of collusion; also noting that the failure of the ID, who had been selected by one of the lenders, to participate in the governance of the SPEs eliminated the potential for proper consideration of a unanimous voluntary filing. 30

31 Right to File Bankruptcy (Cont d) In 2009, General Growth Properties, Inc. replaced existing independent directors (ID) with seasoned restructuring professionals that satisfied the ID requirements and the newly appointed IDs voted with the inside directors to place the SPEs, which were solvent and in varying states of financial health, into bankruptcy, supporting their votes as consistent with their fiduciary duty to creditors and shareholders as established by the LLC Agreements by reference to Delaware General Corporation Law (DGCL), which provides that the directors of a solvent corporation are required to consider the interests of shareholders in exercising their fiduciary duties. In re Gen. Growth Props., Inc., 409 B.R. 43 (Bankr. S.D.N.Y. 2009). 31

32 Right to File Bankruptcy (Cont d) Delaware Limited Liability Company Act (c): To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing. Fiduciary duties should be explicitly addressed in the LLC Agreement. 32

33 Effects of Bankruptcy Debtor may use collateral, despite security interest, if creditor has adequate protection Debtor may substitute for collateral if new property is indubitable equivalent Debtor may give collateral to other parties if creditor is over-secured Debtor may reject obligations under executory contracts and leases 33

34 Bankruptcy Remote Structures 3 Key Attributes of Isolation Effect true sale of assets by originator keep assets out of BK estate of originator Minimize risk of substantive consolidation avoid consolidation of purchaser s assets and liabilities with those of originator Structure purchaser as bankruptcy-remote minimize likelihood of purchaser independently filing for BK due to unforeseen problems First Two attributes supported by legal opinions 34

35 True Sale Opinion Supports key structured finance principle of isolation of assets in SPE Is one of two creditor s rights opinions (along with the Non-Consolidation Opinion) key to supporting the legal isolation of the SPE s assets from creditors of the SPE s affiliates Although speaks to outcome in Bankruptcy, is based on state law principles Is relied upon by accountants for accounting sale treatment 35

36 What Constitutes True Sale Keys to True Sale are Risk transfer / recourse Intent Securitization Statutes Delaware, ("ABSFA (2002)), Texas, Ohio Attempt (largely ineffective) to create true sale safe harbor Most transfers under securitizations continue to be governed by New York law 36

37 True Sale Applicable Law Property interests are created and defined by state law, including in bankruptcy, unless federal interest requires otherwise Butner v. United States, 440 U.S. 48, 55 (1979) 37

38 True Sale Indicia of Sale Purchase price = fmv Buyer keeps all collections Buyer services receivables Obligors notified of sale Seller makes representations regarding nature of receivables Buyer takes interest rate risk Buyer takes obligor credit risk 38

39 True Sale Indicia of Secured Loan Overcollateralization of loan Lender receives P + I only Debtor services receivables Obligors not notified of sale Seller makes reps re nature of receivables Debtor retains interest rate risk Debtor retains obligor credit risk 39

40 True Sale Recourse [T]here may be a true sale of accounts or chattel paper although recourse exists. UCC section 9-502, comment 4 Castle required Major s to retain all conceivable risks of uncollectibility of these accounts... Guaranties of quality alone, or even guarantees of collectibility alone, might be consistent with a true sale, but Castle attempted to shift all risks to Major s, and incur none of the risks or obligations of ownership. Castle s Furniture Mart, 602 F.2d At

41 True Sale Recourse How Much is OK? Loss-based e.g., Equal to historical losses Percentage-based X% of pool size Dodd-Frank Act risk retention requirements Ratings-based e.g., Seller retains only investment grade risk 41

42 Two-Step Transfer 42

43 True Sale Opinion You have requested our opinion whether, in a properly presented proceeding under Title 11 of the United States Code, the bankruptcy court with jurisdiction over the case would: compel the turnover of the [relevant property] or proceeds thereof to the bankruptcy trustee under Section 542 of the Bankruptcy Code based on a determination that the [relevant property] is property of the originator s/transferor s bankruptcy estate under Section 541 of the Bankruptcy Code; or prohibit the SPE from enforcing its rights under the [relevant property] pursuant to the automatic stay provisions of Section 362(a) of the Bankruptcy Code. 43

44 True Sale Cases Intent One line of cases relies substantially upon the intent of the parties. Provided that the characterization of the transaction by the parties is supported by the facts, where commercially sophisticated parties have characterized a transaction as a sale and have acted consistently with that characterization, courts have been unwilling to recharacterize the transaction even though it may also bear certain attributes of a secured loan. Kassuba v. Realty Income Trust (In re Kassuba), 562 F.2d 511, 514 (7th Cir. 1977) ("If the parties actually intended to effect an absolute transfer of ownership, a court of equity will not ignore that intent and make another contract for them"). 44

45 True Sale Cases True Nature of Transfer The other line of cases looks beyond the stated intent of the parties and seek to ascertain the "true nature" of a transaction, regarding the parties' intent as only one factor in analyzing a transaction, and weighing those characteristics of a transaction indicative of a true sale against those indicative of a secured loan to determine whether the transaction most resembles one or the other. In Major's Furniture Mart, Inc. v. Castle Credit Corp., Inc., 602 F.2d 538, 544 (3rd Cir. 1979) the court asked "whether the nature of the recourse, and the true nature of the transaction, are such that the legal rights and economic consequences of the agreement bear a greater similarity to a financing transaction or to a sale." 45

46 True Sale Cases Conduct Matters In a series of decisions between 2007 and 2013, the Bankruptcy Court for the Northern District of Illinois, the District Court for the Northern District of Illinois and the Seventh Circuit Court of Appeals considered matters relating to the purported sale of a hospital s accounts receivable to an affiliate of the hospital that was structured to be an SPE. While ultimately, on remand, the Bankruptcy Court found that a true-sale existed, the Seventh Circuit noted that the SPE lacked the usual attributes of a bankruptcy-remote vehicle and that the [Bankruptcy] Code allows the [bankruptcy] trustee to look out for the interests of these other creditors, who may not appreciate that they should have charged extra to offset the effects of a bankruptcy-remote vehicle that was hidden in the weeds. 46

47 Substantive Consolidation Derivation/Foundation The power of a bankruptcy court to consolidate the assets and liabilities of separate, but related, entities Judicially created doctrine; not codified; based on equitable jurisdiction Derives from the U.S. Supreme Court s decision in Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215 (1941) Remedial action Extraordinary remedy Determination made on case-by-case basis Distinct from procedural consolidation 47

48 Substantive Consolidation Dead or Deadly Grupo Mexicano and the Death of Substantive Consolidation was as article that appeared in the American Bankruptcy Institute Law Review in 2000 (8Am. Bankr. Inst. L. Rev. 427 (2000)). The Grupo Mexicano decision suggested that federal courts look to 18th Century English legal practice to determine whether the equitable remedy of substantive consolidation may be granted Six years later, the American Bankruptcy Institute Law Review published an article titled Substantive Consolidation A Post-Modern Trend in which the author, Timothy E. Graulich, argued that [n]otwithstanding the appellate courts' repeated admonitions that substantive consolidation should be used only "sparingly," other decisions mostly bankruptcy court cases citing to unreported bankruptcy court decisions have announced a "liberal" or "modern" trend that would make substantive consolidation the rule, rather than the sparingly used exception described by the appellate decisions. 48

49 Substantive Consolidation Dead or Deadly (Cont d) In their article titled The Sum and Substance of Substantive Consolidation published in the Annual Survey of Bankruptcy Law in 2005, Kirkland bankruptcy practitioners James H.M. Sprayregen, Jonathan P. Friedland, and Jeffrey W. Gettleman began, Substantive consolidation jurisprudence, perhaps more than many other areas of bankruptcy law, is highly unpredictable. 49

50 Substantive Consolidation Framework Courts consider: The corporate structure and conduct of the entities proposed to be consolidated and their relationship with their creditors and other third parties The impact upon creditors and whether they would be unfairly prejudiced or treated more fairly by substantive consolidation 50

51 Substantive Consolidation Framework (Cont d) Consideration of many factors; none dispositive: In In re Vecco Construction Industries, Inc., 4 B.R. 407, 409 (Bankr. E.D. Va. 1980) the court considered the following seven factors: (1) degree of difficulty in segregating assets and liabilities; (2) presence of consolidated financial statements; (3) increased profitability due to consolidation at a single physical location; (4) commingling of assets and business functions; (5) unity of interests and ownership; (6) existence of intercorporate guaranties or loans; and (7) transfer of assets without observance of corporate formalities 51

52 Substantive Consolidation Framework (Cont d) Other courts have added additional factors: (1) the parent owning the majority of the subsidiary s stock; (2) the entities having common officers or directors; (3) the subsidiary being grossly undercapitalized; (4) the subsidiary transacting business solely with the parent; and (5) both entities disregarding the legal requirements of the subsidiary as a separate organization Subsequently, courts have created tests from the foregoing factors 52

53 Substantive Consolidation Auto Train In Drabkin v. Midland-Ross Corp. (In re Auto Train Corp.), 810 F.2d 270 (D.C.Cir. 1987), the court laid out a winding path of analysis that started with applying factors, as set forth in Vecco, to determine whether substantial identity existed, which, if it did exist, would require the proponent of substantive consolidation to establish a prima facie case, which if established would shift the burden to opponents of substantive consolidation to demonstrate harm, which, if established would shift the burden back to the proponent to demonstrate that the benefits of substantive consolidation heavily outweigh the harm. 53

54 Substantive Consolidation Augie/Restivo In Union Savings Bank v. Augie/Restivo Baking Co. (In re Augie Restivo Baking Co., Inc.), 860 F.2d 515, 518 (2d Cir. 1988), the court stated that the factual predicates used by courts (such as the Vecco variables) to determine whether to order substantive consolidation of entities are merely variants of two critical factors: (i) whether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit (citations omitted) or (ii) whether the affairs of the debtors are so entangled that consolidation will benefit all creditors. 54

55 Substantive Consolidation Augie/Restivo (cont d) Augie/Restivo Emphasizes whether creditors have been harmed based on their expectations and reliance in extending credit Augie/Restivo concluded that the course of dealing and the expectations of the parties did not justify consolidation Coupled with the court s general reluctance to grant substantive consolidation except where estates are hopelessly entangled, Augie/Restivo represents a conservative approach to substantive consolidation 55

56 Substantive Consolidation Eastgroup In Eastgroup Properties v. Southern Motel Assoc., Ltd. 935 F.2d 245, 250 (11th Cir. 1991), the court stated that the essential analysis is whether the economic prejudice of continued debtor separateness outweighs the economic prejudice of consolidation The Eastgroup court upheld the lower courts substantive consolidation orders Both the lower courts and the 11th Circuit Court considered the relative recoveries of the proponent and objecting creditors Eastgroup styled itself as the liberal approach to substantive consolidation 56

57 Substantive Consolidation Owens Corning In In re Owens Corning, 419 F.3d 195 (3d Cir. 2005), 419 F.3d 195, cert. denied sub nom. McMonagle v. Credit Suisse First Boston, 126 S. Ct (2006), the court stated, What must be proven (absent consent) concerning the entities whom substantive consolidation is sought is that (i) prepetition they disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (ii) postpetition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors. 57

58 Substantive Consolidation Owens Corning (Cont d) The Owens Corning court: criticized the mere recitation of factors as omitting analysis and failing to separate the important from the unimportant discounted the mere presence of a parent guarantee of a subsidiary SPE s obligations as evidence of lack of separateness 58

59 Substantive Consolidation Opinion You have requested our opinion whether, in a properly presented proceeding under Title 11 of the United States Code in which [the transferor of receivables that is an affiliate of the SPE and an eligible debtor under the bankruptcy code (the Code Debtors )] is the debtor, the bankruptcy court with jurisdiction over the case would, under applicable federal bankruptcy law, apply the doctrine of substantive consolidation to consolidate the assets and liabilities of the SPE with the assets and liabilities of the Code Debtors. 59

60 Creditors Rights Opinions Reasoned Opinions True Sale and Non-Consolidation Opinions are reasoned opinions Reasoning: Sets forth: legal precedent, including facts, holdings and principles derived therefrom facts of transaction and parties covered by the opinion Conveys lack of certainty based on absence of precedent with identical facts codified legal principles The conclusion, and the reasoning upon which the conclusion is based, link the facts at hand to precedent cases that have established tests, albeit in the context of different facts 60

61 Creditors Rights Opinions Diligence As with all legal opinions, reasoned opinions require diligence Review certified copies of formation documents of the SPE Assure presence of requirements for SPE to, among other things: establish and maintain its separate identity and present itself to creditors accordingly pay its own bills from its own funds not incur indebtedness other than as contemplated in the transaction documents or become liable for the debt of others not act as agent for its members or affiliates or permit them to act as agent for it 61

62 Creditors Rights Opinions Diligence (Cont d) not commingle its assets with those of any other person Appoint and at all times maintain at least one Independent Director (or manager) whose consent is required to file Bankruptcy and take other Material Actions that could jeopardize the entity s status as an SPE Review all relevant contracts Assure that transactions contemplated maintain arms-length relationship between the SPE and its affiliates contain covenants of reliance by the SPEs counterparties and creditors on the separateness of the SPE 62

63 Creditors Rights Opinions Diligence (Cont d) Identify any guarantees of the SPEs obligations by any affiliate Receive Officer s Certificates certifying as to the intended operation of the SPE in a manner consistent with the separateness and solvency of the SPE, and, to the extent the SPE is not a newly-formed entity, addressing the conduct of the SPE from the time of its formation through the date of the opinion 63

64 Creditors Rights Opinions Other Considerations Purpose of opinion Doesn t assure outcome Hopefully assures thorough consideration of relevant factors in forming SPE structuring/documenting transactions to which SPE is a party Opinion shopping Appropriate pairings for Non-Consolidation opinions Appropriate assumptions for counsel reliance 64

65 FDIC Safe Harbor Federal Deposit Insurance Act ( FDIA ) governs insolvencies of banks and other insured depository institutions ( IDIs ) stay for up to 90 days following FDIC s appointment and up to 6 mos to decide claims against estate FDIC can repudiate obligations under burdensome executory contracts and challenge true sales and separateness of IDI subsidiaries 2000 Safe-Harbor based on legal isolation or GAAP sale FAS 166/167 made GAAP sale very difficult 65

66 FDIC Safe Harbor (Cont d) 2010 Safe-Harbor Conditions include: Conformity with payment and capital structure requirements Disclosure obligations to all potential investors Documentary provisions regarding rights and obligations of the parties Risk retention (to conform to Dodd-Frank) 66

67 FDIC Safe Harbor (Cont d) If GAAP sale and all key conditions satisfied: FDIC will not seek to recover or re-characterize the transferred financial assets as property of the IDI If not a GAAP sale and all key conditions satisfied: Trustee can take possession of the financial assets 10 business days after monetary default with notice to FDIC If FDIC repudiates IDI s obligations, FDIC must, within 10 business days, pay principal and interest owing on assetback securities at date of repudiation or let trustee take possession of the financial assets 67

68 FDIC Safe Harbor Opinion You have requested our opinion whether, if the FDIC were to be appointed as a conservator or receiver for [the IDI] pursuant to Section 11(c) of the FDIA, a court of applicable jurisdiction, exercising reasonable judgment after fully considering all relevant factors, would hold that paragraphs (d)(4) and (e) of the FDIC regulation entitled Treatment of financial assets transferred in connection with a securitization or participation, 12 CFR (as amended through the date of this opinion letter) (the Rule ) would apply to the [transactions covered by this opinion]. 68

69 FDIC Safe Harbor Opinion Certain key assumptions contained in the opinion letter: Receivables convert into cash within a finite period of time Investors are relying on collections on the financial assets and not on external credit support, other than as permitted by the Rule transfers do not qualify for GAAP sale treatment 69

70 FDIC Safe Harbor Opinion Certain key conclusions supported by reasoning set forth in the opinion letter: The transactions constitute a securitization as defined in the Rule: The issuance by an issuing entity of obligations for which the investors are relying on the cash flow or market value characteristics and the credit quality of the transferred financial assets (together with any external credit support permitted by [the Rule] to repay the obligations. Receivables constitute financial assets under the Rule The notes being issued constitute obligations as defined in the Rule 70