Opinions in Structured Finance and Securitized Lending Transactions: Bankruptcy Remoteness, Legal Separateness

Description

The fundamental concept for structured finance is the isolation of assets in a "bankruptcy remote" special purpose entity (SPE) and the separateness of the SPE from its affiliates, which reduces the risk of bankruptcy and helps shield an SPE's assets against an affiliate's creditors. These transactions frequently use LLCs and statutory trusts formed in Delaware.

Two structuring techniques that help achieve legal separation and bankruptcy remoteness in SPEs are the inclusion of bankruptcy remoteness and separateness provisions, and strict limitations on the business purpose of an SPE in its organizational documents. Lenders, rating agencies, trustees, issuers, and servicers generally require specialized opinions of counsel in structured finance transactions. Those opinions address the legal separateness of the SPE from affiliated entities, the legal isolation of the SPE's assets from the creditors of affiliated entities, and the likelihood that such provisions will be respected by a bankruptcy court and enforced by state courts in the SPE's jurisdiction of formation.

A non-consolidation opinion addresses whether the SPE has been appropriately structured and meets established case law and other criteria for the enforcement of bankruptcy remoteness and separateness provisions. This opinion gives the recipient assurance that the risk of bankruptcy and substantive consolidation have been minimized to the greatest extent possible. A true sale opinion addresses whether the assets of the SPE have been appropriately isolated from the transferor of such assets.  This opinion gives the recipient assurance that the risks of a transferor bankruptcy and of recharacterization of the transfer of the SPE’s assets have been minimized to the greatest extent possible. Authority to file opinions and Delaware limited liability company opinions are companion state law opinions that evaluate certain of the bankruptcy remoteness protections.

Listen as our authoritative panel discusses drafting opinions of counsel in structured finance transactions with particular emphasis on rendering non-consolidation opinions and best practices for the opinion giver to minimize risks.