1. Structured Finance Opinions
Brian M. Gottesman Michelle P. Quinn

2. Types of opinions required
Qualified opinions:
Delaware state law opinion (aka the “non-dissolution” opinion or the “springing member opinion”)
UCC opinion
Reasoned opinions
“Authority to file” opinion
Non-consolidation opinion

3. Purpose of opinions Diligence/Comfort Rating Agency Requirements
Dictates form and type of opinions required

4. Form of structured finance opinions
Forms have been pre-negotiated with rating agencies
Contain scaled back carve-outs and limitations

5. THE DELAWARE State law Opinion
the “non-dissolution” opinion or THE “SPRINGING MEMBER” OPINION

6. 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

7. 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

8. 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

9. 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.

10. 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

11. 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
Under Delaware law, can be anyone other than the equity member itself.
However, lenders impose additional restrictions. This is often negotiable.

12. The Independent Manager
Pre-petition waivers of the right to file a bankruptcy petition, even “cleverly insidious” waivers, have been held to be void as against public policy. E.g., In re Bay Club Partners-472, LLC, 2014 WL (Bankr. D. Or. May 6, 2014).
Independent Manager provisions are designed to give the lender some comfort that an abusive bankruptcy petition will not be filed without waiving the right to file entirely.

13. The Independent Manager
Disinterested third party.
Sole function is to approve the filing of a bankruptcy petition.
Must consider interests of company and its members, in addition to those of the creditors.
Lender imposes limitations on who can serve as independent manager.

14. Recent cases
In Re Lexington Hospitality Group, LLC, 2017 WL (Bankr. E.D. Ky. Sep. 15, 2017)
Court questions in dicta whether Independent Manager was truly independent where LLC Agreement required Independent Manager to consider creditor’s best interest but not best interest of the company at issue. However, case decided on other grounds.

15. Contents of opinion letter – Power and Authority
The Company has power and authority under the LLC Act and the LLC Agreement to execute, deliver and perform its respective obligations under the respective Loan Documents to which it is a party.
Under the LLC Act and the Limited Liability Company Agreement of the Company, the execution and delivery by the Company of each of the Loan Documents to which it is a party, and the performance by the Company of its respective obligations thereunder, have been duly authorized by all necessary limited liability company action on the part of the Company.

16. Contents of opinion letter – Power and Authority (Cont.)
No consent, approval or other authorization of or registration, declaration or filing with, any court or governmental agency or commission of the State of Delaware is required in connection with the execution or delivery by the Company of the respective Loan Documents to which it is a party, or the performance by the Company of its respective obligations thereunder.
The execution and delivery by the Company of the respective Loan Documents to which it is a party, will not (i) result in a breach or violation of any law or governmental rule or regulation of Delaware applicable to the parties thereto and now in effect, or (ii) conflict with or violate the Certificate of Formation or LLC Agreement.

17. Contents of opinion letter – Power and Authority (Cont.)
The authority opinions require a review of the limited liability company agreement and certificate of formation.
The LLC agreement delineates the power and authority of the LLC to enter into a given transaction.
LLC Agreement is granted almost plenary deference by both the statutes and the courts.
Management is generally in the hands of members; however, members may at their discretion establish managers and other governing entities to control day-to-day functions. Such managers are vested with whatever powers are granted in the limited liability company agreement.
The limited liability company agreement may also designate officers or agents to carry out the functions of the LLC. 6 Del. C. § (d).

18. 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.

19. The “Authority to File” Bankruptcy Opinion
Required:
Structure includes one or more independent managers/directors
Typically deals over $12M-$20M.
The opinion is required because the applicable federal bankruptcy law does not specifically address LLCs. Not required for other types of entities.

20. The “Authority to File” Bankruptcy Opinion
We believe that a federal bankruptcy court would hold that Delaware law, and not federal law, governs the determination of what persons or entities have authority to file a voluntary bankruptcy petition on behalf of each of the Delaware Entities.

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 (a)(64) of the Delaware UCC) thereof.

22. 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
Tax uncertainties in other states and with IRS
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

23. Non-consolidation opinion
Opinion addresses the potential consolidation of the borrower with its paired affiliates.
Judicially created doctrine based on equitable jurisdiction
Determination made on case-by-case basis
Distinct from procedural consolidation
Required in deals over $15M-$20M

24. Non-consolidation opinion – Opinion language
Based on and subject to the foregoing, the qualifications and analysis set forth below, and to the further qualification that there is no definitive judicial authority confirming the correctness of the analysis, it is our opinion that, in connection with any bankruptcy proceeding instituted by or against any one or more of the SPE Entity Affiliates under the Bankruptcy Code, a federal court exercising bankruptcy jurisdiction, in a properly briefed, argued and presented case and exercising reasonable judgment and discretion after full consideration of all relevant factors, would not order the substantive consolidation of the assets and liabilities of the Borrower with those of any such SPE Entity Affiliate or SPE Entity Affiliates based on any legal theories currently subscribed to by federal courts exercising bankruptcy jurisdiction.

25. Non-consolidation opinion – Pairing requirements
Any entity owning directly or indirectly more than a 49% interest in the borrower.
Informal rule of thumb is that pairings can stop once they reach an entity that has substantial other assets other than its interest in the borrower.
Guarantors
Affiliated property managers

26. Non-consolidation opinion – DOCUMENTS REVIEWED
All organizational documents of borrower
All loan documents (including prior loan documents if assumption)
Organizational chart of the borrower

27. Non-consolidation opinion – Important factors
Structure of the transaction
Conduct of the parties

28. Non-consolidation opinion – Common issues with recycled entities
Prior commingling
Incomplete transfer of property
Release of prior loan – timing issue
Governmental entities
Missing organizational documents

29. Non-consolidation opinion – Guaranties
“Bad Acts” guaranty
Payment guaranty
Completion guaranty
Environmental guaranty