CHAPTER 15.10. Special Bankruptcy-Remote Opinions

• Jurisdiction: United States

15.10. Special Bankruptcy-Remote Opinions

Delaware limited liability companies and, in particular, special-purpose bankruptcy-remote limited liability companies are used in many financing transactions. While the structure of the limited liability company and the types of legal opinions that are required can vary depending upon the type of transaction, there are certain features common to many of these transactions. In particular, these transactions often employ one or more single-member Delaware limited liability companies. Also, the relevant limited liability company agreements will typically include (i) a narrow purpose; (ii) covenants limiting the activities of both the limited liability company and its sole member, as well as covenants aimed at respecting the separate legal entity status of the limited liability company; (iii) restrictions on the ability to (a) dissolve the limited liability company, (b) sell all or substantially all of its assets, (c) amend its limited liability company agreement, and (d) to engage in similar activities; and (iv) in some transactions, a requirement that the limited liability company always have at least one or two independent managers whose consent is required for the limited liability company to file a voluntary bankruptcy petition or otherwise consent to bankruptcy-related matters. As a general matter, the types of opinions required in these transactions fall into three categories: (i) nonconsolidation and/or true sale opinions; (ii) traditional formation, power, authorization, and enforceability opinions (including U.C.C. perfection opinions); and (iii) opinions that are often referred to as bankruptcy-remote LLC opinions or rating agency opinions. The rating agency criteria in connection with this type of transaction are discussed in some detail at the websites of certain of the statistical rating agencies.

One common form of transaction using special-purpose bankruptcy-remote limited liability companies is a loan transaction involving a single property owned by a single-member Delaware limited liability company (an "SPE LLC Borrower Transaction"). For reasons discussed below, lenders and rating agencies have often expressed a preference for using Delaware limited liability companies in this type of transaction. In its basic form, the SPE LLC Borrower Transaction involves a newly formed, single-member Delaware limited liability company, which has a limited purpose and other bankruptcy-remote features (an "SPE LLC"), and borrows funds in order to obtain or refinance a single property.

Many practitioners are familiar with the traditional real estate loan opinions that are required in an SPE LLC Borrower Transaction (e.g., opinions concerning the due formation of the borrower; the power of the borrower to execute, deliver, and perform the loan documents; and enforceability opinions with respect to the loan documents).¹⁴⁴ Many opinion givers are also familiar with the nonconsolidation opinions that are often required in this type of transaction. However, there is a third category of legal opinion that is often required in this type of transaction, which is a type of legal opinion that is sometimes new to attorneys not regularly involved in these transactions. The legal opinions falling under this third category, referred to as bankruptcy-remote LLC opinions or "rating agency opinions," are often required in an SPE LLC Borrower...