1025-00007 · Quorum Insurance Holdings · Legal Opinions

draft-opinion-true-sale-qpf-to-qrh.docx DOCUMENT M&A / Corporate

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CALDERWOOD & HARKNESS LLP Attorneys at Law

601 Lexington Avenue New York, New York 10022 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com

DRAFT — FOR DISCUSSION PURPOSES ONLY — NOT FOR RELIANCE

October 8, 2022

Matter No.: 1025-00007

Quorum Receivables Funding 2022-1 LLC c/o Quorum Insurance Holdings Corp. 400 Atlantic Street, Suite 2200 Stamford, Connecticut 06901

Calvoneth Trust Company, N.A., as Indenture Trustee 600 Travis Street, Suite 5800 Houston, Texas 77002

Ridgeline Capital Markets LLC, as Initial Purchaser 383 Madison Avenue, 14th Floor New York, New York 10179

Re: True Sale Opinion — Transfer of Insurance Premium Finance Receivables from Quorum Premium Finance LLC to Quorum Receivables Holding LLC pursuant to the Receivables Sale Agreement dated as of [●], 2022

Ladies and Gentlemen:

I. INTRODUCTION AND TRANSACTION DESCRIPTION

Calderwood & Harkness LLP ("we," "us," or "our") has acted as special counsel to Quorum Insurance Holdings Corp. ("QIH"), a Delaware corporation listed on the New York Stock Exchange (ticker: QIHC), Quorum Premium Finance LLC ("QPF"), a Delaware limited liability company and wholly owned subsidiary of QIH, Quorum Receivables Holding LLC ("QRH"), a Delaware limited liability company and intermediate bankruptcy-remote special purpose entity, and Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer"), a Delaware limited liability company and bankruptcy-remote special purpose entity, in connection with the proposed securitization of insurance premium finance receivables described herein (the "Transaction").

Specifically, we have been engaged in connection with the proposed issuance by QRF 2022-1 of $500,000,000 aggregate principal amount of asset-backed notes (the "Notes"), consisting of the following classes:

(a) $375,000,000 Class A Floating Rate Asset-Backed Notes, Series 2022-1 (the "Class A Notes"), which have received preliminary ratings of AAA(cr) from Brindoval Ratings Inc. and Aaa(p) from Pinnacle Rating Services LLC;

(b) $75,000,000 Class B Floating Rate Asset-Backed Notes, Series 2022-1 (the "Class B Notes"), which have received preliminary ratings of A(cr) from Brindoval Ratings Inc. and A1(p) from Pinnacle Rating Services LLC; and

(c) $35,000,000 Class C Floating Rate Asset-Backed Notes, Series 2022-1 (the "Class C Notes"), which have received preliminary ratings of BBB(cr) from Brindoval Ratings Inc. and Baa2(p) from Pinnacle Rating Services LLC.

The Notes will be backed by a revolving pool of insurance premium finance receivables originated by QPF in the ordinary course of its business. The Transaction is structured as a two-step transfer: first, QPF (as Seller) transfers Receivables to QRH (as Purchaser) pursuant to the Receivables Sale Agreement described below; and second, QRH (as Transferor) transfers the Receivables to QRF 2022-1 (as Transferee) pursuant to a separate Receivables Transfer Agreement. QRF 2022-1, as Issuer, then grants a security interest in the Receivables and related assets to Calvoneth Trust Company, N.A. ("Calvoneth Trust"), as Indenture Trustee, to secure payment of the Notes.

This opinion addresses solely whether the initial transfer of Receivables from QPF (as Seller) to QRH (as Purchaser) under the Receivables Sale Agreement dated as of [●], 2022 (the "Sale Agreement") constitutes a "true sale" of such Receivables for purposes of the laws of the State of New York, rather than a loan from QRH to QPF secured by such Receivables. This opinion does not address the second-step transfer from QRH to QRF 2022-1, which is the subject of a separate opinion letter being delivered in connection with the Transaction.

This opinion is delivered in draft form only and has not been finalized. This draft is dated October 8, 2022, and has been prepared under the supervision of Sylvia Hartwell, Partner (Tax and Structured Finance), and the structured finance team at Calderwood & Harkness LLP. A final executed opinion will be delivered at the closing of the Transaction, subject to satisfaction of all closing conditions and to such changes as we may deem necessary or appropriate in light of developments occurring between the date hereof and the closing date.

II. DOCUMENTS REVIEWED

In connection with the rendering of this opinion, we have reviewed originals or copies (certified or otherwise identified to our satisfaction) of the following documents and materials:

1. Receivables Sale Agreement (execution draft v3, dated as of October 12, 2022) by and between QPF, as Seller, and QRH, as Purchaser (the "Sale Agreement");

2. Receivables Transfer Agreement (execution draft v3, dated as of October 12, 2022) by and between QRH, as Transferor, and QRF 2022-1, as Transferee (the "Transfer Agreement");

3. Indenture (execution draft v4, dated as of October 12, 2022) by and between QRF 2022-1, as Issuer, and Calvoneth Trust Company, N.A., as Trustee (the "Indenture");

4. Amended and Restated Limited Liability Company Agreement of Quorum Receivables Holding LLC (dated August 3, 2022), reflecting QPF as sole member and Eleanor M. Vasquez (Fortbridge Corporate Services LLC) as independent manager (the "QRH LLC Agreement");

5. Limited Liability Company Agreement of Quorum Premium Finance LLC (the "QPF LLC Agreement");

6. Certificate of Formation of Quorum Receivables Holding LLC (filed August 3, 2022, with the Secretary of State of the State of Delaware, DE SOS File No. 7894228);

7. Grant of Security Interest (Pledge Agreement) (execution draft v2, dated as of October 12, 2022) by QRF 2022-1 in favor of Calvoneth Trust Company, N.A., as Trustee (the "Pledge Agreement");

8. Draft UCC-1 Financing Statement naming QPF as Debtor and QRH as Secured Party, to be filed with the Secretary of State of the State of Delaware as a precautionary back-up filing (the "Precautionary UCC-1");

9. Servicing Agreement (execution draft v3, dated as of October 12, 2022) among QRF 2022-1, QPF (as Servicer), and Calvoneth Trust Company, N.A. (as Trustee) (the "Servicing Agreement");

10. Note Purchase Agreement (execution draft v3, dated as of October 12, 2022) among QRF 2022-1, QIH, and Ridgeline Capital Markets LLC, as initial purchaser (the "Note Purchase Agreement");

11. Preliminary Offering Memorandum (v3, dated October 12, 2022) for the Notes (the "Offering Memorandum");

12. Manager's Certificate of QPF (dated July 27, 2022), certifying authorizing resolutions executed by Sandra Ling-Hwang, as Manager of QPF, approving the Transaction;

13. Secretary's Certificate of QIH (dated July 27, 2022), certifying resolutions of the Board of Directors of QIH authorizing the Transaction and related matters; and

14. Such other documents, certificates, records, instruments, and matters of law as we have deemed necessary or appropriate for purposes of this opinion.

The documents described in items 1 through 11 above are hereinafter collectively referred to as the "Transaction Documents." We have also reviewed such corporate and organizational documents, good standing certificates, officers' certificates, and other materials as we have deemed relevant and necessary. In all cases, we have relied upon the accuracy and completeness of the documents and information provided to us without independent investigation or verification, except as otherwise expressly stated herein.

III. DEFINITIONS

Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Sale Agreement. For convenience of reference, the following terms are used in this opinion with the meanings set forth below:

"Collections" means all cash collections and other cash proceeds of the Receivables, including all scheduled payments of principal and interest, all prepayments, all late fees and other charges, all insurance proceeds, all unearned premium refund amounts, and all other amounts received by the Servicer or any other person on behalf of the owner of such Receivables, in each case with respect to or on account of the Receivables.

"Cut-Off Date" means June 30, 2022.

"Eligible Receivables Criteria" means the criteria set forth in Schedule I to the Sale Agreement (a summary of which is attached hereto as Annex C), which includes the requirements that each Receivable: (i) was originated by QPF in the ordinary course of its insurance premium finance business; (ii) is denominated and payable in United States dollars; (iii) is secured by the obligor's right to receive unearned premium refunds from the applicable insurance carrier upon cancellation of the financed insurance policy; (iv) has an original term not to exceed twelve (12) months; (v) has an obligor that is a United States commercial policyholder (and not a natural person acting primarily for personal, family, or household purposes); (vi) is not in default, and no payment thereon is more than sixty (60) days past due; and (vii) was originated in compliance with all applicable federal and state usury, licensing, and consumer protection laws.

"Initial Pool Balance" means approximately $612,000,000, representing the aggregate outstanding principal balance of the approximately 82,400 Receivables included in the initial pool as of the Cut-Off Date.

"Purchase Price" has the meaning assigned to such term in Section 2.2 of the Sale Agreement.

"Receivables" means the insurance premium finance receivables originated by QPF in the ordinary course of its business that are sold and transferred by QPF to QRH pursuant to the Sale Agreement, together with all Related Security, Collections, and proceeds thereof.

"Sale Agreement" means the Receivables Sale Agreement (execution draft v3, dated as of October 12, 2022) by and between QPF, as Seller, and QRH, as Purchaser.

IV. ASSUMPTIONS

In rendering the opinion expressed herein, we have assumed, without independent investigation or verification, the following:

1. The Sale Agreement and each other Transaction Document has been duly authorized, executed, and delivered by each party thereto and constitutes the legal, valid, and binding obligation of each such party, enforceable against each such party in accordance with its respective terms, subject to applicable bankruptcy, insolvency, and similar laws affecting the enforcement of creditors' rights generally and to general principles of equity.

2. Each of QPF and QRH is duly organized, validly existing, and in good standing under the laws of the State of Delaware, and each has full power and authority to execute, deliver, and perform its obligations under the Transaction Documents to which it is a party.

3. QPF has good and marketable title to the Receivables, free and clear of any and all liens, claims, security interests, or other encumbrances of any kind, other than those created under the Transaction Documents, and QPF has the right and authority to sell, transfer, assign, and convey such Receivables to QRH pursuant to the Sale Agreement.

4. The UCC-1 financing statement naming QPF as debtor and QRH as secured party, in the form attached hereto as Annex B, will be duly filed with the Secretary of State of the State of Delaware as a precautionary back-up filing, and will be effective upon filing to perfect the back-up security interest described therein.

5. All representations and warranties of QPF and QRH set forth in the Sale Agreement, and all representations and warranties of each other party set forth in the other Transaction Documents, are true and correct in all material respects as of the date hereof and will be true and correct in all material respects as of the closing date of the Transaction.

6. Each of QPF and QRH will perform its respective obligations under the Sale Agreement and the other Transaction Documents in accordance with the terms thereof, and the Transaction will be consummated in accordance with the terms and conditions set forth in the Transaction Documents, without waiver or modification of any material term or condition.

7. The transactions described in the Sale Agreement will be consummated in all material respects in accordance with the terms set forth therein and in the other Transaction Documents, and no party will engage in any conduct that is inconsistent with the terms of the Transaction Documents or that is intended to defeat or undermine the characterization of the transfer of Receivables as a true sale.

8. QRH is, and will at all relevant times be, a bankruptcy-remote special purpose entity that will observe the separateness covenants set forth in the QRH LLC Agreement, including, without limitation: (a) maintenance of its own separate books, records, financial statements, and bank accounts; (b) maintenance of its assets separate from, and not commingled with, the assets of QPF, QIH, or any other affiliate; (c) conducting its business solely in its own name; (d) payment of its own liabilities and expenses from its own funds; (e) maintenance of arm's-length relationships with QPF and its affiliates; (f) holding itself out to the public as a legal entity separate and apart from QPF, QIH, and their respective affiliates; and (g) maintaining adequate capitalization in light of its contemplated business operations.

9. Eleanor M. Vasquez has been duly appointed and continues to serve as independent manager of QRH pursuant to the Independent Manager Agreement with Fortbridge Corporate Services LLC dated as of August 3, 2022, and the QRH LLC Agreement, and that Ms. Vasquez is not, and will not be, an employee, officer, director, or affiliate of QPF, QIH, QRF 2022-1, or any affiliate thereof (other than QRH in her capacity as independent manager).

We have made no independent investigation or inquiry to verify the accuracy or completeness of the foregoing assumptions, and we express no opinion with respect thereto. If any of the foregoing assumptions is incorrect in any material respect, the opinion expressed herein may be affected and should not be relied upon.

V. QUALIFICATIONS AND LIMITATIONS

The opinion expressed herein is subject to the following qualifications and limitations:

A. Governing Law. This opinion is limited to the federal law of the United States and the laws of the State of New York as currently in effect on the date hereof. We express no opinion as to the laws of any other jurisdiction, including, without limitation, the State of Delaware, except to the extent that Delaware law governs the internal affairs of QPF and QRH as Delaware limited liability companies (with respect to which we have assumed, and have not independently verified, due organization, valid existence, and good standing). We note that the Sale Agreement is governed by the laws of the State of New York, and our analysis herein is conducted solely under New York law.

B. Tax, Bankruptcy, and Accounting Characterization. This opinion does not address the characterization of the transfer of Receivables for purposes of: (i) federal or state income tax law (a separate tax opinion is being provided by our tax department in connection with the Transaction); (ii) Title 11 of the United States Code (the "Bankruptcy Code") or any other federal or state bankruptcy, insolvency, or receivership statute (although our analysis of the true sale question under New York law is informed by general principles relating to the treatment of transferred assets in bankruptcy proceedings, and we address in Section 7.2 below the consequence of true sale characterization with respect to the bankruptcy estate of QPF); or (iii) generally accepted accounting principles ("GAAP") or any other accounting standard or framework. We note that accounting treatment, while referenced in our analysis, is not dispositive of the legal characterization of the transfer.

C. Insolvency and Equitable Limitations. The opinion expressed herein is subject to: (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer, preference, and other similar laws affecting the enforcement of creditors' rights generally, now or hereafter in effect; and (ii) general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith, and fair dealing), whether considered in a proceeding at law or in equity. We express no opinion as to the availability of any particular equitable remedy.

D. Substantive Consolidation. We have not been engaged to, and do not, opine on the risk that a court of competent jurisdiction could order the substantive consolidation of QRH with QPF or any other entity. A separate non-consolidation opinion addressing the likelihood that a court would not order substantive consolidation of QRH with QPF or QIH is being delivered separately in connection with the Transaction by Calloway & Brandt LLP, as counsel to Ridgeline Capital Markets LLC. Our opinion assumes, and is conditioned upon, QRH maintaining its status as a separate legal entity and not being substantively consolidated with QPF or any other entity.

E. Date and No Obligation to Update. This opinion is rendered solely as of the date hereof, and we undertake no obligation, and hereby disclaim any responsibility, to update, revise, or supplement this opinion to reflect any changes in applicable law or facts occurring after the date hereof, whether or not brought to our attention. The opinion expressed herein is based upon the law as currently in effect, and any change in such law (including, without limitation, any new judicial decision, legislative enactment, or regulatory action) may affect the opinion expressed herein.

F. Benefit and Reliance. This opinion is furnished solely for the benefit of the addressees hereof and may not be relied upon by any other person or entity, or for any other purpose, without our prior written consent. Except as specifically provided in Section VIII hereof, no other person or entity is entitled to rely on this opinion.

G. Draft Status. This opinion letter is delivered in DRAFT form only and is NOT being delivered for reliance by any person or entity. This draft has not been finalized, and the analysis and conclusions expressed herein are subject to revision, supplementation, or withdrawal prior to the delivery of the final executed opinion at the closing of the Transaction. The final opinion will be delivered at closing, subject to satisfaction of all closing conditions, and will supersede this draft in its entirety. No addressee or other person should take any action in reliance on this draft opinion.

VI. LEGAL ANALYSIS — TRUE SALE FRAMEWORK

6.1 Governing Legal Standard

The central question addressed by this opinion is whether the transfer of Receivables from QPF to QRH under the Sale Agreement constitutes a "true sale" — that is, an absolute transfer of ownership in the Receivables — or whether, notwithstanding the parties' characterization of the transfer as a sale, the transfer should instead be recharacterized as a loan from QRH to QPF secured by a grant of a security interest in the Receivables.

Under the laws of the State of New York, the determination of whether a transfer of financial assets constitutes a true sale or a secured financing is a question of substance over form. While the parties' characterization of a transfer as a "sale" is entitled to significant weight, it is not dispositive; a court applying New York law will look beyond the labels used by the parties to examine the economic substance of the transaction and the totality of the circumstances.

Article 9 of the Uniform Commercial Code, as adopted in New York (the "New York UCC"), recognizes that certain transactions that are denominated as "sales" may, depending on their economic substance, constitute secured transactions subject to Article 9. Conversely, a transaction denominated as a "loan" may in substance be a sale. Section 9-109(a)(3) of the New York UCC provides that Article 9 applies to "a sale of accounts, chattel paper, payment intangibles, or promissory notes," thereby acknowledging that such transfers are subject to Article 9 filing requirements regardless of whether they constitute sales or secured transactions. However, the question of whether a particular transfer constitutes a "true sale" or a "secured financing" — and the legal consequences that flow from that characterization, particularly in the context of bankruptcy proceedings — remains a matter of applicable state law (here, New York law) as interpreted by the courts.

Applicable judicial precedent analyzing the distinction between sales and secured transactions has established a multi-factor test for evaluating whether a transfer of receivables constitutes a true sale. Under this body of case law, courts have consistently held that the characterization of a transfer as a sale or a secured financing depends upon an examination of the totality of the circumstances, with no single factor being dispositive. The core inquiry is whether the transferor has transferred ownership of the receivables in a manner such that the transferor retains no significant economic interest in, or dominion and control over, the transferred assets, and whether the transferee has assumed the material economic risks and benefits of ownership of the receivables.

The principal factors that courts and leading commentators have identified as relevant to the true sale analysis include, among others: (a) the intent of the parties as expressed in the transaction documents; (b) whether the transfer conveys full legal and beneficial title and ownership to the transferee; (c) the nature and adequacy of the consideration paid by the transferee; (d) the extent to which the transferor retains recourse obligations or bears the risk of credit loss on the transferred assets after the transfer; (e) whether the transferor retains a servicing role with respect to the transferred assets; (f) the nature and scope of any repurchase obligations retained by the transferor; (g) whether the transferor retains the right to surplus Collections or bears the obligation to cover shortfalls; (h) the accounting treatment of the transfer; (i) the existence of precautionary UCC filings; and (j) the bankruptcy-remote character of the transferee entity.

We have analyzed each of these factors in detail below as applied to the transfer of Receivables from QPF to QRH under the Sale Agreement.

6.2 Key Factors Analyzed

6.2.1 Intent of the Parties. The intent of the parties is a significant, though not dispositive, factor in the true sale analysis. Courts applying New York law have given substantial weight to the parties' expressed intent, particularly where that intent is clearly and unambiguously reflected in the governing transaction documents and is consistent with the economic substance of the transaction.

Here, the Sale Agreement expressly provides that the transfer of Receivables from QPF to QRH is intended to constitute a sale and an absolute assignment of the Receivables, and not a secured financing or a pledge of the Receivables as collateral for a loan. Specifically, Section 2.1(a) of the Sale Agreement states that "[i]t is the express intention of the parties hereto that the transfer of the Receivables by the Seller to the Purchaser hereunder shall constitute a true, absolute and irrevocable sale and assignment of such Receivables, and not a pledge or grant of a security interest therein." The Sale Agreement further includes recitals stating the parties' mutual intent that the transfer be treated as an absolute sale for all purposes.

In addition, both QPF and QRH have represented and warranted in the Sale Agreement that they will treat the transfer of Receivables as a sale — and not as a secured financing — for all purposes, including for financial reporting, regulatory, and tax purposes. Section 4.1(m) of the Sale Agreement contains QPF's representation that it will account for the transfer of Receivables as a sale on its books and records, and Section 4.2(h) contains QRH's corresponding representation that it will record the Receivables as its own assets on its separate books and records.

The Offering Memorandum for the Notes likewise describes the transfer of Receivables from QPF to QRH as a "sale" and explains the two-step transfer structure in a manner consistent with the parties' expressed intent. The disclosure in the Offering Memorandum, while directed at potential investors in the Notes, further corroborates the intent of QPF and QRH to effect a true sale.

We note that the expressed intent of the parties, standing alone, would be insufficient to support a true sale characterization if the economic substance of the transaction were inconsistent with such intent. However, as discussed in detail below, the economic terms and structural features of the Sale Agreement are consistent with the parties' expressed intent that the transfer constitute a sale.

6.2.2 Transfer of Title and Ownership. A fundamental element of any true sale is the transfer of full legal and beneficial title to the transferred assets from the transferor to the transferee. Under the Sale Agreement, QPF conveys, transfers, assigns, sets over, and otherwise delivers to QRH, without recourse (except as expressly set forth in the Sale Agreement), all of QPF's right, title, and interest in and to the Receivables, including, without limitation:

(i) all rights to receive payments of principal and interest on the Receivables;

(ii) all Related Security, including all unearned premium refund rights arising upon cancellation of the insurance policies financed by the Receivables;

(iii) all Collections on or in respect of the Receivables, whether received before or after the applicable transfer date;

(iv) all proceeds (as defined in the New York UCC) of any of the foregoing; and

(v) all rights, remedies, powers, privileges, and claims of QPF with respect to the Receivables, including all rights under any insurance premium finance agreements and related documentation.

The transfer of Receivables under the Sale Agreement is irrevocable, except to the limited extent described in Section 6.2.6 below with respect to QPF's obligation to repurchase Receivables upon a breach of representations and warranties. Upon transfer, QRH acquires full legal and beneficial ownership of the Receivables, and QPF retains no ownership interest in the transferred Receivables. This complete transfer of title and ownership is a strong indicator of true sale treatment.

We note that QPF does not retain any option or right to reacquire the Receivables (other than the limited repurchase obligation for breaches of representations and warranties), and the Sale Agreement does not contain any "clean-up call" or similar provision that would permit QPF to repurchase the Receivables at its discretion. The absence of any such right of reacquisition further supports the conclusion that the transfer is a sale rather than a secured financing.

6.2.3 Consideration / Purchase Price. The payment of fair consideration by the transferee to the transferor is an important element of the true sale analysis. A transfer for nominal or grossly inadequate consideration may suggest that the parties did not intend a genuine sale, or that the transferor retained a significant economic stake in the transferred assets.

Under the Sale Agreement, QRH pays a Purchase Price to QPF for each Receivable transferred. The Purchase Price is calculated based upon the outstanding principal balance of the Receivables being transferred, subject to adjustments as set forth in Section 2.2 of the Sale Agreement. The Purchase Price is determined at the time of each transfer and reflects the fair value of the Receivables being sold, taking into account the credit quality of the Receivables, their weighted average remaining term, the applicable interest rates, and the presence of unearned premium refund rights as collateral.

We have reviewed the Purchase Price formula set forth in the Sale Agreement and, based on our review and on information provided to us by QPF, we believe that the Purchase Price constitutes reasonably equivalent value for the Receivables. The Purchase Price reflects a market-based valuation that takes into account the expected cash flows of the Receivables, adjusted for expected losses, prepayments, and servicing costs. The Purchase Price is paid in cash or, to the extent permitted by the Sale Agreement, in a combination of cash and a deferred purchase price obligation (the "Deferred Purchase Price"), which represents QRH's obligation to pay additional consideration to QPF out of Collections on the Receivables. The Deferred Purchase Price is subordinated to all other payment obligations of QRH and is payable only to the extent that Collections on the Receivables are sufficient, after payment of all senior obligations, to fund such payment.

Critically, the Purchase Price is not structured as a loan advance with a repayment obligation. QPF is not obligated to return or repay the Purchase Price to QRH under any circumstances (other than through the limited repurchase mechanism described in Section 6.2.6 below). The absence of a repayment obligation distinguishes the transfer from a lending arrangement, in which the "borrower" would be required to repay the "loan" regardless of the performance of the underlying collateral.

6.2.4 Recourse and Risk of Loss. The degree to which the transferor retains the risk of credit loss on the transferred receivables after the transfer is widely regarded as the most critical factor in the true sale analysis. Where the transferor effectively guarantees the collectibility of the transferred receivables or bears the risk of obligor default, the transfer is more likely to be recharacterized as a secured financing. Conversely, where the risk of loss on the transferred receivables passes to the transferee, the transfer is more likely to be characterized as a true sale.

Under the Sale Agreement, QPF does not guarantee the collectibility or performance of the Receivables transferred to QRH. Section 2.5 of the Sale Agreement expressly provides that the transfer of Receivables is made "without recourse" to QPF, except to the limited extent of QPF's obligation to repurchase Receivables upon a breach of representations and warranties (as discussed in Section 6.2.6 below). QPF does not bear the credit risk of obligor default after the transfer of any Receivable to QRH. If an obligor fails to make scheduled payments on a Receivable, the resulting loss is borne by QRH (and, through the second-step transfer to QRF 2022-1, ultimately by QRF 2022-1, the Indenture Trustee, and the holders of the Notes, in accordance with the priority of payments set forth in the Indenture).

This allocation of risk is economically significant. The Receivables, while of high credit quality, are not risk-free. Based on information provided to us by QPF, the historical net loss rate for QPF's insurance premium finance receivables portfolio was approximately 0.42% on a three-year average basis for the period from 2019 through 2021. While this loss rate is low — reflecting the short-term, secured nature of insurance premium finance receivables and the availability of unearned premium refund rights as a source of recovery — losses do occur, and the risk of such losses has been transferred from QPF to QRH. Similarly, the delinquency rate (defined as the percentage of Receivables with any payment more than 60 days past due) was approximately 0.87% as of the Cut-Off Date. QRH assumes exposure to such delinquent Receivables and bears the risk that such delinquencies may result in losses.

The transfer of credit risk from QPF to QRH is a strong indicator that the transfer constitutes a true sale rather than a secured financing. In a typical secured lending arrangement, the lender bears the risk that the borrower may default on its repayment obligation, but the borrower remains obligated to repay the loan regardless of the performance of the collateral. Here, by contrast, QPF has no obligation to repay the Purchase Price to QRH, and QRH bears the risk of loss on the Receivables — a hallmark of a sale transaction.

6.2.5 Retained Servicing Role. QPF continues to act as Servicer of the Receivables pursuant to the Servicing Agreement following the transfer of the Receivables to QRH. In its capacity as Servicer, QPF is responsible for, among other things, billing and collecting payments from obligors, processing premium finance cancellations, pursuing unearned premium refund rights upon default, maintaining records relating to the Receivables, and remitting Collections to designated accounts.

The retention of a servicing role by the transferor is common — indeed, nearly universal — in securitization transactions involving trade receivables, consumer receivables, and insurance premium finance receivables. Courts and commentators have consistently recognized that the retention of servicing responsibilities by the originator/transferor does not, by itself, negate the characterization of the transfer as a true sale. The Servicer acts in a fiduciary or quasi-fiduciary capacity for the benefit of the owner of the Receivables (QRH) and, indirectly, for the benefit of QRF 2022-1 and the holders of the Notes. The Servicer does not act for its own account or for its own benefit, except to the extent of its entitlement to the servicing fee.

Several features of the Servicing Agreement reinforce the conclusion that QPF's retained servicing role is consistent with true sale treatment:

First, QPF receives a servicing fee of 1.00% per annum on the outstanding pool balance, which represents arm's-length compensation for the servicing functions performed. The servicing fee is established at a level consistent with fees charged by third-party servicers of comparable receivables portfolios.

Second, the Servicing Agreement provides for QPF's removal as Servicer upon the occurrence of a "Servicer Default" (as defined in the Servicing Agreement), including failure to remit Collections, material breach of servicing obligations, or the occurrence of certain bankruptcy events with respect to QPF. Upon such removal, Northvane Bank, N.A. is designated as back-up servicer and is prepared to assume servicing functions. The existence of a back-up servicer and the ability to terminate QPF's servicing role further demonstrate that the servicing function is separable from the ownership of the Receivables.

Third, QPF does not retain discretion to commingle Collections with its own funds. Pursuant to Section 5.3 of the Servicing Agreement, all Collections received by QPF in its capacity as Servicer are required to be deposited within two (2) business days of receipt into a segregated Collection Account maintained at Calvoneth Trust Company, N.A. in its capacity as securities intermediary. QPF has no right to use, invest, or otherwise deploy Collections for its own purposes. This segregation of Collections is a significant structural feature that distinguishes the servicing arrangement from a debtor-creditor relationship in which the debtor retains dominion and control over the collateral.

Accordingly, we conclude that QPF's retention of the servicing function does not undermine the true sale characterization of the transfer of Receivables under the Sale Agreement.

6.2.6 Repurchase Obligations. Under Section 3.2 of the Sale Agreement, QPF is obligated to repurchase from QRH any Receivable with respect to which a representation or warranty made by QPF in the Sale Agreement as to the characteristics of such Receivable is discovered to have been untrue in any material respect as of the date of transfer. For example, if a Receivable that was represented to satisfy the Eligible Receivables Criteria is subsequently determined not to have met such criteria at the time of transfer, QPF is required to repurchase such Receivable at the applicable repurchase price (equal to the outstanding principal balance of such Receivable, plus accrued and unpaid interest thereon).

This repurchase obligation is limited in scope. It applies only in the event of a breach of representations and warranties — that is, where QPF has transferred a Receivable that did not conform to the applicable criteria at the time of transfer. The repurchase obligation does not constitute a guaranty of the collectibility or performance of the Receivables generally. QPF is not obligated to repurchase a Receivable merely because the obligor has failed to make a scheduled payment or because the Receivable has become delinquent or has resulted in a credit loss. The repurchase obligation is, in essence, an indemnification mechanism that ensures QPF bears the consequences of its own failure to comply with the eligibility criteria, rather than a risk-sharing or loss-absorption mechanism.

This type of limited repurchase obligation for breach of representations and warranties is a standard and well-established feature of securitization transactions. Courts and commentators have recognized that the inclusion of such a repurchase mechanism does not negate the true sale characterization of the transfer. The repurchase obligation is analogous to the warranty of title and quality that a seller provides in any arm's-length sale transaction: if the goods (or receivables) do not conform to the seller's representations, the seller is required to take them back. This is fundamentally different from a guaranty or recourse obligation that would expose the seller to the full credit risk of the sold assets.

Moreover, QPF does not have an option to repurchase Receivables at will, upon maturity, or for any reason other than a breach of representations and warranties. The absence of such a discretionary repurchase right further distinguishes the transfer from a secured financing arrangement, in which the "borrower" would typically retain the right (and obligation) to "redeem" the collateral upon repayment of the loan.

6.2.7 Right to Surplus / Obligation to Cover Shortfall. In a true sale, the economic upside and downside of ownership of the transferred assets passes to the buyer. Conversely, in a secured financing, the borrower retains the right to any surplus value in the collateral after satisfaction of the loan obligation and bears the obligation to cover any shortfall.

Under the Sale Agreement and the other Transaction Documents, QPF does not have a contractual right to receive excess Collections or surplus value with respect to the Receivables after their transfer to QRH. After the transfer, all Collections on the Receivables are property of QRH (and, following the second-step transfer, of QRF 2022-1). Any residual value remaining after payment in full of all amounts due under the Notes and satisfaction of all other obligations under the Indenture inures to the benefit of QRH, QRF 2022-1, and the retained interest holder (QIH, in its capacity as sponsor of the Transaction and holder of the Residual Interest).

It is true that QIH, as the parent company of QPF and the sponsor of the Transaction, indirectly benefits from any residual value through its retained interest in QRF 2022-1. However, this indirect benefit flows through QIH's separate equity interest in the Transaction structure, not through QPF's retained ownership of the Receivables. QPF itself has no contractual right to receive excess Collections or surplus value once the Receivables have been sold to QRH.

Similarly, QPF does not bear the obligation to cover any shortfall in Collections. If the Collections on the Receivables are insufficient to pay amounts due on the Notes, the resulting shortfall is borne by the holders of the Notes (in inverse order of priority) and the retained interest holder. QPF's only financial obligations are its servicing obligations under the Servicing Agreement and its repurchase obligations under the Sale Agreement for breaches of representations and warranties.

This allocation of surplus and shortfall risk is fully consistent with a true sale characterization.

6.2.8 Accounting Treatment. While not dispositive of the legal characterization of the transfer, the accounting treatment adopted by the parties is a relevant factor in the true sale analysis. The accounting treatment reflects the parties' economic understanding of the transaction and may corroborate (or contradict) the legal characterization.

QPF intends to account for the transfer of Receivables to QRH as a sale on its books and records, in accordance with applicable accounting standards. Following the transfer, the Receivables will be derecognized from QPF's balance sheet, and QPF will recognize a gain or loss on the sale. QRH, for its part, will record the Receivables as assets on its own separate books and records.

The consistency between the accounting treatment and the legal characterization of the transfer as a sale provides additional support for the true sale analysis. We note, however, that accounting treatment is determined under accounting standards that may apply different criteria and analytical frameworks than those applied under New York law, and we express no opinion as to the propriety of the accounting treatment under GAAP or any other accounting standard.

6.2.9 Precautionary UCC Filing (Back-Up Security Interest). Section 2.4 of the Sale Agreement provides that, in the event a court of competent jurisdiction were to recharacterize the transfer of Receivables under the Sale Agreement as a secured financing rather than a true sale, the Sale Agreement shall be deemed to create a first-priority security interest in the Receivables and all related assets in favor of QRH, securing all obligations of QPF to QRH under the Sale Agreement and the other Transaction Documents.

In connection with this back-up security interest provision, a UCC-1 financing statement will be filed with the Secretary of State of the State of Delaware naming QPF as debtor and QRH as secured party. This filing is made on a precautionary basis only, and is not an acknowledgment by either QPF or QRH that the transfer of Receivables under the Sale Agreement constitutes a secured financing.

The inclusion of a precautionary back-up security interest provision and the filing of a precautionary UCC-1 financing statement is standard market practice in securitization transactions. Courts and commentators have consistently held that such precautionary measures do not undermine or negate the true sale characterization of the transfer. To the contrary, the filing of a precautionary UCC-1 provides an additional layer of protection for the transferee and downstream parties by ensuring that, in the unlikely event of recharacterization, the transferee's interest in the receivables would be perfected as a first-priority security interest under Article 9 of the UCC. The inclusion of such belt-and-suspenders provisions reflects prudent structuring and is a hallmark of well-structured securitization transactions.

6.2.10 Bankruptcy Remoteness of Transferee. The bankruptcy-remote character of the transferee entity is a relevant, though not independently dispositive, factor in the true sale analysis. A bankruptcy-remote structure is designed to ensure that the transferred assets are insulated from the bankruptcy estate of the transferor and, conversely, that the transferee entity is insulated from the claims of the transferor's creditors.

QRH is organized as a Delaware limited liability company with a single purpose: to acquire, hold, and transfer insurance premium finance receivables in connection with the Transaction. The QRH LLC Agreement contains extensive separateness covenants and organizational restrictions designed to ensure QRH's continued existence as a separate legal entity, distinct from QPF, QIH, and their respective affiliates.

Key features of QRH's bankruptcy-remote structure include:

(i) Independent Manager. Eleanor M. Vasquez of Fortbridge Corporate Services LLC serves as independent manager of QRH. Under the QRH LLC Agreement, QRH may not file a voluntary petition for bankruptcy, reorganization, or similar relief under the Bankruptcy Code or any state insolvency statute without the prior written consent of the independent manager. Ms. Vasquez is not, and has not been during the preceding five years, an employee, officer, director, or equity holder of QPF, QIH, or any of their respective affiliates (other than QRH in her capacity as independent manager), and she has no financial interest in QPF or its affiliates that could compromise her independence.

(ii) Non-Petition Covenants. The QRH LLC Agreement includes non-petition covenants that prohibit QPF (as sole member of QRH) from filing, or causing to be filed, a voluntary bankruptcy petition on behalf of QRH without the prior unanimous written consent of all members and the independent manager.

(iii) Separateness Covenants. The QRH LLC Agreement requires QRH to maintain separate books, records, and financial statements; maintain its own separate bank accounts; pay its own liabilities and expenses from its own funds; conduct its business solely in its own name; hold itself out as a separate legal entity; maintain arm's-length relationships with QPF and its affiliates; and refrain from commingling its assets with the assets of any other person or entity.

(iv) Limitations on Activities. The QRH LLC Agreement restricts QRH's business activities to those directly related to the acquisition, holding, and transfer of Receivables in connection with the Transaction, and prohibits QRH from engaging in any other business or incurring any indebtedness, other than as expressly contemplated by the Transaction Documents.

The bankruptcy-remote structure of QRH is designed to ensure that, in the event of a bankruptcy filing by or against QPF, the Receivables held by QRH would not be subject to the automatic stay or otherwise treated as property of QPF's bankruptcy estate. This structural feature is consistent with — and, indeed, reinforces — the true sale characterization of the transfer of Receivables from QPF to QRH.

6.3 Analysis of Revolving Nature of the Pool

The Transaction contemplates a twenty-four (24) month revolving period (the "Revolving Period") during which QPF will sell additional Receivables to QRH, and QRH will transfer such additional Receivables to QRF 2022-1, in order to replenish the Receivables pool as existing Receivables amortize through scheduled payments, prepayments, or other liquidation events. During the Revolving Period, QRF 2022-1 will use available Collections (after payment of interest on the Notes, servicing fees, and other senior expenses) to purchase additional Receivables from QRH (which, in turn, purchases them from QPF), thereby maintaining the aggregate outstanding balance of the Receivables pool at or above the minimum pool balance of $450,000,000.

The revolving nature of the pool does not alter the true sale analysis with respect to any individual transfer of Receivables. Each sale of a Receivable from QPF to QRH under the Sale Agreement is an independent transaction that is separately analyzed under the true sale framework. The fact that the overall Transaction structure contemplates a revolving pool does not transform the individual transfers into a single, ongoing financing arrangement. Each transfer satisfies the criteria for true sale treatment on its own terms: QPF conveys title to the Receivable to QRH, QRH pays the applicable Purchase Price, QPF retains no recourse or risk of loss (other than the limited repurchase obligation for breach of representations and warranties), and the risk of loss on the transferred Receivable passes to QRH.

Revolving structures are common in securitization transactions involving short-term receivables, including trade receivables, credit card receivables, and insurance premium finance receivables. The use of a revolving structure reflects the short-duration nature of the underlying assets and the economic necessity of maintaining a sufficient pool balance to support the outstanding Notes. Courts and commentators have recognized that the use of a revolving pool structure is compatible with true sale treatment, provided that the individual transfers within the revolving pool satisfy the applicable true sale criteria.

6.4 Characteristics of the Receivables Supporting True Sale

Certain characteristics of the Receivables further support the conclusion that the transfer from QPF to QRH constitutes a true sale of identifiable financial assets with ascertainable economic value:

Short Duration. The Receivables are short-term insurance premium finance receivables with a weighted average original term of approximately 9.2 months and a weighted average remaining term of approximately 5.7 months as of the Cut-Off Date. No Receivable has an original term in excess of twelve (12) months. The short-term nature of the Receivables facilitates the identification and valuation of the transferred assets, as the expected cash flows are concentrated within a relatively brief time horizon and are subject to less uncertainty than would be the case with longer-duration receivables.

Secured by Unearned Premium Refund Rights. Each Receivable is secured by the obligor's right to receive unearned premium refunds from the applicable insurance carrier in the event of cancellation of the financed insurance policy. This collateral characteristic provides a meaningful source of recovery in the event of obligor default and supports the transfer of a complete economic interest in the Receivables. The availability of unearned premium refund rights as collateral means that, upon default, the Servicer can initiate cancellation of the underlying insurance policy and recover all or a substantial portion of the outstanding balance from the unearned premium refund.

Granular Pool. The Receivables pool consists of approximately 82,400 individual loans, with an average loan balance of approximately $7,427. The granularity of the pool significantly reduces the impact of idiosyncratic risk associated with any individual obligor or Receivable. The large number of Receivables in the pool ensures that the performance of the pool is driven primarily by portfolio-level statistical characteristics rather than by the behavior of any individual obligor.

Market Interest Rates. The Receivables bear interest at a weighted average annual percentage rate ("APR") of approximately 7.85%, which reflects market-rate pricing for insurance premium finance receivables.

Low Obligor Concentration. The Receivables pool is highly diversified at the obligor level. The largest single obligor concentration represents only 0.38% of the aggregate pool balance ($2,325,600), and the top ten obligors together represent only 2.14% of the aggregate pool balance ($13,096,800). No single obligor or group of related obligors represents a disproportionate share of the pool, which reduces the risk that the performance of the pool would be materially affected by the default of any single obligor.

Geographic Diversification. The Receivables are diversified across multiple states. The top three states by pool balance are Texas (14.2%), California (11.8%), and Florida (9.6%), representing an aggregate concentration of 35.6% of the pool. No single state exceeds the 20% concentration limit established by the Eligible Receivables Criteria. This geographic diversification reduces the risk that regional economic conditions or regulatory changes in any single state would materially affect the performance of the pool.

These characteristics collectively support the conclusion that the Receivables are identifiable, segregable financial assets that can be, and have been, sold and transferred from QPF to QRH in a manner consistent with a true sale.

VII. OPINION

Based upon and subject to the foregoing review of the Transaction Documents, the assumptions set forth in Section IV, the qualifications and limitations set forth in Section V, and the legal analysis set forth in Section VI, and subject to the further qualifications and limitations set forth herein, it is our opinion that:

7.1 Primary Opinion

The transfer of Receivables from QPF to QRH pursuant to the Sale Agreement would, under the laws of the State of New York, be characterized as a true sale of such Receivables by QPF to QRH, and not as a loan from QRH to QPF secured by such Receivables.

In reaching this conclusion, we have considered the totality of the circumstances surrounding the transfer, including the parties' expressed intent, the completeness of the transfer of title and ownership, the adequacy of the Purchase Price, the absence of recourse to QPF for credit losses on the Receivables, the limited nature of QPF's repurchase obligations, the transfer of the risk of loss and the right to surplus to QRH, the retained servicing role of QPF, the accounting treatment of the transfer, the precautionary UCC filing, and the bankruptcy-remote structure of QRH. We have concluded that each of the factors analyzed in Section VI above supports, or is at a minimum consistent with, the characterization of the transfer as a true sale. No factor, in our analysis, weighs materially against such characterization.

7.2 Consequence of True Sale

As a result of the true sale characterization set forth in Section 7.1 above, the Receivables transferred by QPF to QRH pursuant to the Sale Agreement would not constitute property of the estate of QPF within the meaning of Section 541 of the Bankruptcy Code in the event of a bankruptcy, insolvency, or receivership proceeding with respect to QPF under applicable federal or state law. Accordingly, a bankruptcy trustee, debtor-in-possession, or receiver of QPF would not have authority to assert dominion or control over the Receivables, and the Receivables would not be subject to the automatic stay provisions of Section 362 of the Bankruptcy Code in any bankruptcy case commenced by or against QPF.

We note that this conclusion is subject to the separate non-consolidation opinion being delivered by Calloway & Brandt LLP, as counsel to Ridgeline Capital Markets LLC, addressing the risk that a court could order the substantive consolidation of QRH with QPF. If a court were to order substantive consolidation, the assets of QRH (including the Receivables) could be pooled with the assets of QPF for the purpose of satisfying the claims of creditors, which could result in the Receivables becoming available to satisfy claims of QPF's creditors. We express no opinion herein on the likelihood or appropriateness of any such substantive consolidation order, and our opinion in Section 7.1 above assumes that QRH is not substantively consolidated with QPF or any other entity.

7.3 Back-Up Security Interest

In the event that, contrary to the opinion expressed in Section 7.1 above, a court of competent jurisdiction were to recharacterize the transfer of Receivables under the Sale Agreement as a secured financing rather than a true sale, the Sale Agreement effectively creates a security interest in the Receivables and all related assets in favor of QRH, which security interest, upon the due filing of the UCC-1 financing statement described in Section II, item 8 above with the Secretary of State of the State of Delaware, would be perfected as a first-priority security interest under Article 9 of the Uniform Commercial Code as in effect in the State of Delaware.

This back-up opinion is provided solely as an additional protective measure and is not intended to, and should not be construed to, qualify, diminish, or undermine the primary opinion expressed in Section 7.1 above.

VIII. RELIANCE AND DISTRIBUTION

This opinion is rendered solely for the benefit of the addressees hereof in connection with the transactions contemplated by the Transaction Documents. This opinion may not be relied upon by any other person or entity, or for any other purpose, without our prior written consent, and no person or entity other than the addressees hereof is entitled to rely on the opinion expressed herein.

Notwithstanding the foregoing, we understand and agree that this opinion (or the final, executed version thereof delivered at closing) may be disclosed to:

(a) Brindoval Ratings Inc. (engagement no. CR-SF-2022-08812) and Pinnacle Rating Services LLC (engagement no. PRS-2022-ABS-3347) in connection with their respective rating assessments of the Notes; and

(b) Calloway & Brandt LLP, as counsel to Ridgeline Capital Markets LLC, in connection with its review of the Transaction Documents and the rendering of its own opinions in connection with the Transaction.

Any such disclosure is made solely for informational purposes, and neither Brindoval Ratings Inc., Pinnacle Rating Services LLC, nor Calloway & Brandt LLP (or their respective clients, other than the addressees hereof) is entitled to rely on this opinion without our prior written consent.

This is a DRAFT opinion letter that has not been finalized and is NOT being delivered for reliance by any person or entity. This draft is provided for discussion purposes only and is subject to revision, supplementation, or withdrawal at any time prior to the delivery of the final executed opinion at the closing of the Transaction. The final opinion will be delivered at the closing of the Transaction, subject to satisfaction of all conditions precedent to closing and the absence of any material change in applicable law or relevant facts between the date hereof and the closing date, and will supersede this draft in its entirety. No addressee or other person should take any action in reliance on this draft opinion.

DRAFT — SUBJECT TO FINALIZATION AT CLOSING

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Name: Sylvia Hartwell

Title: Partner

By: ________

Name: Douglas Carmichael

Title: Partner (Responsible Partner)

Prepared by: Sylvia Hartwell Reviewed by: Douglas Carmichael, Yuki Nakamura

ANNEX A

LIST OF TRANSACTION DOCUMENTS REVIEWED

The following Transaction Documents were reviewed in connection with the rendering of this opinion, as described in Section II hereof:

1. Receivables Sale Agreement (execution draft v3, dated as of October 12, 2022) by and between Quorum Premium Finance LLC, as Seller, and Quorum Receivables Holding LLC, as Purchaser.

2. Receivables Transfer Agreement (execution draft v3, dated as of October 12, 2022) by and between Quorum Receivables Holding LLC, as Transferor, and Quorum Receivables Funding 2022-1 LLC, as Transferee.

3. Indenture (execution draft v4, dated as of October 12, 2022) by and between Quorum Receivables Funding 2022-1 LLC, as Issuer, and Calvoneth Trust Company, N.A., as Trustee.

4. Amended and Restated Limited Liability Company Agreement of Quorum Receivables Holding LLC (dated August 3, 2022).

5. Limited Liability Company Agreement of Quorum Premium Finance LLC.

6. Certificate of Formation of Quorum Receivables Holding LLC (filed August 3, 2022, with the Secretary of State of the State of Delaware, DE SOS File No. 7894228).

7. Grant of Security Interest (Pledge Agreement) (execution draft v2, dated as of October 12, 2022) by Quorum Receivables Funding 2022-1 LLC in favor of Calvoneth Trust Company, N.A., as Trustee.

8. Draft UCC-1 Financing Statement — Quorum Premium Finance LLC (Debtor) / Quorum Receivables Holding LLC (Secured Party), to be filed with the Secretary of State of the State of Delaware.

9. Servicing Agreement (execution draft v3, dated as of October 12, 2022) among Quorum Receivables Funding 2022-1 LLC, Quorum Premium Finance LLC (as Servicer), and Calvoneth Trust Company, N.A. (as Trustee).

10. Note Purchase Agreement (execution draft v3, dated as of October 12, 2022) among Quorum Receivables Funding 2022-1 LLC, Quorum Insurance Holdings Corp., and Ridgeline Capital Markets LLC.

11. Preliminary Offering Memorandum (v3, dated October 12, 2022) for the Class A Notes, Class B Notes, and Class C Notes.

12. Manager's Ce

CALDERWOOD & HARKNESS LLP Attorneys at Law
601 Lexington Avenue New York, New York 10022 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 www.calderwoodharkness.com
DRAFT — FOR DISCUSSION PURPOSES ONLY — NOT FOR RELIANCE
October 8, 2022
Matter No.: 1025-00007
Quorum Receivables Funding 2022-1 LLC c/o Quorum Insurance Holdings Corp. 400 Atlantic Street, Suite 2200 Stamford, Connecticut 06901
Calvoneth Trust Company, N.A., as Indenture Trustee 600 Travis Street, Suite 5800 Houston, Texas 77002
Ridgeline Capital Markets LLC, as Initial Purchaser 383 Madison Avenue, 14th Floor New York, New York 10179
Re: True Sale Opinion — Transfer of Insurance Premium Finance Receivables from Quorum Premium Finance LLC to Quorum Receivables Holding LLC pursuant to the Receivables Sale Agreement dated as of [●], 2022
Ladies and Gentlemen:
I. INTRODUCTION AND TRANSACTION DESCRIPTION
Calderwood & Harkness LLP ("we," "us," or "our") has acted as special counsel to Quorum Insurance Holdings Corp. ("QIH"), a Delaware corporation listed on the New York Stock Exchange (ticker: QIHC), Quorum Premium Finance LLC ("QPF"), a Delaware limited liability company and wholly owned subsidiary of QIH, Quorum Receivables Holding LLC ("QRH"), a Delaware limited liability company and intermediate bankruptcy-remote special purpose entity, and Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer"), a Delaware limited liability company and bankruptcy-remote special purpose entity, in connection with the proposed securitization of insurance premium finance receivables described herein (the "Transaction").
Specifically, we have been engaged in connection with the proposed issuance by QRF 2022-1 of $500,000,000 aggregate principal amount of asset-backed notes (the "Notes"), consisting of the following classes:
(a) $375,000,000 Class A Floating Rate Asset-Backed Notes, Series 2022-1 (the "Class A Notes"), which have received preliminary ratings of AAA(cr) from Brindoval Ratings Inc. and Aaa(p) from Pinnacle Rating Services LLC;
(b) $75,000,000 Class B Floating Rate Asset-Backed Notes, Series 2022-1 (the "Class B Notes"), which have received preliminary ratings of A(cr) from Brindoval Ratings Inc. and A1(p) from Pinnacle Rating Services LLC; and
(c) $35,000,000 Class C Floating Rate Asset-Backed Notes, Series 2022-1 (the "Class C Notes"), which have received preliminary ratings of BBB(cr) from Brindoval Ratings Inc. and Baa2(p) from Pinnacle Rating Services LLC.
The Notes will be backed by a revolving pool of insurance premium finance receivables originated by QPF in the ordinary course of its business. The Transaction is structured as a two-step transfer: first, QPF (as Seller) transfers Receivables to QRH (as Purchaser) pursuant to the Receivables Sale Agreement described below; and second, QRH (as Transferor) transfers the Receivables to QRF 2022-1 (as Transferee) pursuant to a separate Receivables Transfer Agreement. QRF 2022-1, as Issuer, then grants a security interest in the Receivables and related assets to Calvoneth Trust Company, N.A. ("Calvoneth Trust"), as Indenture Trustee, to secure payment of the Notes.
This opinion addresses solely whether the initial transfer of Receivables from QPF (as Seller) to QRH (as Purchaser) under the Receivables Sale Agreement dated as of [●], 2022 (the "Sale Agreement") constitutes a "true sale" of such Receivables for purposes of the laws of the State of New York, rather than a loan from QRH to QPF secured by such Receivables. This opinion does not address the second-step transfer from QRH to QRF 2022-1, which is the subject of a separate opinion letter being delivered in connection with the Transaction.
This opinion is delivered in draft form only and has not been finalized. This draft is dated October 8, 2022, and has been prepared under the supervision of Sylvia Hartwell, Partner (Tax and Structured Finance), and the structured finance team at Calderwood & Harkness LLP. A final executed opinion will be delivered at the closing of the Transaction, subject to satisfaction of all closing conditions and to such changes as we may deem necessary or appropriate in light of developments occurring between the date hereof and the closing date.
II. DOCUMENTS REVIEWED
In connection with the rendering of this opinion, we have reviewed originals or copies (certified or otherwise identified to our satisfaction) of the following documents and materials:
1. Receivables Sale Agreement (execution draft v3, dated as of October 12, 2022) by and between QPF, as Seller, and QRH, as Purchaser (the "Sale Agreement");
2. Receivables Transfer Agreement (execution draft v3, dated as of October 12, 2022) by and between QRH, as Transferor, and QRF 2022-1, as Transferee (the "Transfer Agreement");
3. Indenture (execution draft v4, dated as of October 12, 2022) by and between QRF 2022-1, as Issuer, and Calvoneth Trust Company, N.A., as Trustee (the "Indenture");
4. Amended and Restated Limited Liability Company Agreement of Quorum Receivables Holding LLC (dated August 3, 2022), reflecting QPF as sole member and Eleanor M. Vasquez (Fortbridge Corporate Services LLC) as independent manager (the "QRH LLC Agreement");
5. Limited Liability Company Agreement of Quorum Premium Finance LLC (the "QPF LLC Agreement");
6. Certificate of Formation of Quorum Receivables Holding LLC (filed August 3, 2022, with the Secretary of State of the State of Delaware, DE SOS File No. 7894228);
7. Grant of Security Interest (Pledge Agreement) (execution draft v2, dated as of October 12, 2022) by QRF 2022-1 in favor of Calvoneth Trust Company, N.A., as Trustee (the "Pledge Agreement");
8. Draft UCC-1 Financing Statement naming QPF as Debtor and QRH as Secured Party, to be filed with the Secretary of State of the State of Delaware as a precautionary back-up filing (the "Precautionary UCC-1");
9. Servicing Agreement (execution draft v3, dated as of October 12, 2022) among QRF 2022-1, QPF (as Servicer), and Calvoneth Trust Company, N.A. (as Trustee) (the "Servicing Agreement");
10. Note Purchase Agreement (execution draft v3, dated as of October 12, 2022) among QRF 2022-1, QIH, and Ridgeline Capital Markets LLC, as initial purchaser (the "Note Purchase Agreement");
11. Preliminary Offering Memorandum (v3, dated October 12, 2022) for the Notes (the "Offering Memorandum");
12. Manager's Certificate of QPF (dated July 27, 2022), certifying authorizing resolutions executed by Sandra Ling-Hwang, as Manager of QPF, approving the Transaction;
13. Secretary's Certificate of QIH (dated July 27, 2022), certifying resolutions of the Board of Directors of QIH authorizing the Transaction and related matters; and
14. Such other documents, certificates, records, instruments, and matters of law as we have deemed necessary or appropriate for purposes of this opinion.
The documents described in items 1 through 11 above are hereinafter collectively referred to as the "Transaction Documents." We have also reviewed such corporate and organizational documents, good standing certificates, officers' certificates, and other materials as we have deemed relevant and necessary. In all cases, we have relied upon the accuracy and completeness of the documents and information provided to us without independent investigation or verification, except as otherwise expressly stated herein.
III. DEFINITIONS
Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Sale Agreement. For convenience of reference, the following terms are used in this opinion with the meanings set forth below:
"Collections" means all cash collections and other cash proceeds of the Receivables, including all scheduled payments of principal and interest, all prepayments, all late fees and other charges, all insurance proceeds, all unearned premium refund amounts, and all other amounts received by the Servicer or any other person on behalf of the owner of such Receivables, in each case with respect to or on account of the Receivables.
"Cut-Off Date" means June 30, 2022.
"Eligible Receivables Criteria" means the criteria set forth in Schedule I to the Sale Agreement (a summary of which is attached hereto as Annex C), which includes the requirements that each Receivable: (i) was originated by QPF in the ordinary course of its insurance premium finance business; (ii) is denominated and payable in United States dollars; (iii) is secured by the obligor's right to receive unearned premium refunds from the applicable insurance carrier upon cancellation of the financed insurance policy; (iv) has an original term not to exceed twelve (12) months; (v) has an obligor that is a United States commercial policyholder (and not a natural person acting primarily for personal, family, or household purposes); (vi) is not in default, and no payment thereon is more than sixty (60) days past due; and (vii) was originated in compliance with all applicable federal and state usury, licensing, and consumer protection laws.
"Initial Pool Balance" means approximately $612,000,000, representing the aggregate outstanding principal balance of the approximately 82,400 Receivables included in the initial pool as of the Cut-Off Date.
"Purchase Price" has the meaning assigned to such term in Section 2.2 of the Sale Agreement.
"Receivables" means the insurance premium finance receivables originated by QPF in the ordinary course of its business that are sold and transferred by QPF to QRH pursuant to the Sale Agreement, together with all Related Security, Collections, and proceeds thereof.
"Sale Agreement" means the Receivables Sale Agreement (execution draft v3, dated as of October 12, 2022) by and between QPF, as Seller, and QRH, as Purchaser.
IV. ASSUMPTIONS
In rendering the opinion expressed herein, we have assumed, without independent investigation or verification, the following:
1. The Sale Agreement and each other Transaction Document has been duly authorized, executed, and delivered by each party thereto and constitutes the legal, valid, and binding obligation of each such party, enforceable against each such party in accordance with its respective terms, subject to applicable bankruptcy, insolvency, and similar laws affecting the enforcement of creditors' rights generally and to general principles of equity.
2. Each of QPF and QRH is duly organized, validly existing, and in good standing under the laws of the State of Delaware, and each has full power and authority to execute, deliver, and perform its obligations under the Transaction Documents to which it is a party.
3. QPF has good and marketable title to the Receivables, free and clear of any and all liens, claims, security interests, or other encumbrances of any kind, other than those created under the Transaction Documents, and QPF has the right and authority to sell, transfer, assign, and convey such Receivables to QRH pursuant to the Sale Agreement.
4. The UCC-1 financing statement naming QPF as debtor and QRH as secured party, in the form attached hereto as Annex B, will be duly filed with the Secretary of State of the State of Delaware as a precautionary back-up filing, and will be effective upon filing to perfect the back-up security interest described therein.
5. All representations and warranties of QPF and QRH set forth in the Sale Agreement, and all representations and warranties of each other party set forth in the other Transaction Documents, are true and correct in all material respects as of the date hereof and will be true and correct in all material respects as of the closing date of the Transaction.
6. Each of QPF and QRH will perform its respective obligations under the Sale Agreement and the other Transaction Documents in accordance with the terms thereof, and the Transaction will be consummated in accordance with the terms and conditions set forth in the Transaction Documents, without waiver or modification of any material term or condition.
7. The transactions described in the Sale Agreement will be consummated in all material respects in accordance with the terms set forth therein and in the other Transaction Documents, and no party will engage in any conduct that is inconsistent with the terms of the Transaction Documents or that is intended to defeat or undermine the characterization of the transfer of Receivables as a true sale.
8. QRH is, and will at all relevant times be, a bankruptcy-remote special purpose entity that will observe the separateness covenants set forth in the QRH LLC Agreement, including, without limitation: (a) maintenance of its own separate books, records, financial statements, and bank accounts; (b) maintenance of its assets separate from, and not commingled with, the assets of QPF, QIH, or any other affiliate; (c) conducting its business solely in its own name; (d) payment of its own liabilities and expenses from its own funds; (e) maintenance of arm's-length relationships with QPF and its affiliates; (f) holding itself out to the public as a legal entity separate and apart from QPF, QIH, and their respective affiliates; and (g) maintaining adequate capitalization in light of its contemplated business operations.
9. Eleanor M. Vasquez has been duly appointed and continues to serve as independent manager of QRH pursuant to the Independent Manager Agreement with Fortbridge Corporate Services LLC dated as of August 3, 2022, and the QRH LLC Agreement, and that Ms. Vasquez is not, and will not be, an employee, officer, director, or affiliate of QPF, QIH, QRF 2022-1, or any affiliate thereof (other than QRH in her capacity as independent manager).
We have made no independent investigation or inquiry to verify the accuracy or completeness of the foregoing assumptions, and we express no opinion with respect thereto. If any of the foregoing assumptions is incorrect in any material respect, the opinion expressed herein may be affected and should not be relied upon.
V. QUALIFICATIONS AND LIMITATIONS
The opinion expressed herein is subject to the following qualifications and limitations:
A. Governing Law. This opinion is limited to the federal law of the United States and the laws of the State of New York as currently in effect on the date hereof. We express no opinion as to the laws of any other jurisdiction, including, without limitation, the State of Delaware, except to the extent that Delaware law governs the internal affairs of QPF and QRH as Delaware limited liability companies (with respect to which we have assumed, and have not independently verified, due organization, valid existence, and good standing). We note that the Sale Agreement is governed by the laws of the State of New York, and our analysis herein is conducted solely under New York law.
B. Tax, Bankruptcy, and Accounting Characterization. This opinion does not address the characterization of the transfer of Receivables for purposes of: (i) federal or state income tax law (a separate tax opinion is being provided by our tax department in connection with the Transaction); (ii) Title 11 of the United States Code (the "Bankruptcy Code") or any other federal or state bankruptcy, insolvency, or receivership statute (although our analysis of the true sale question under New York law is informed by general principles relating to the treatment of transferred assets in bankruptcy proceedings, and we address in Section 7.2 below the consequence of true sale characterization with respect to the bankruptcy estate of QPF); or (iii) generally accepted accounting principles ("GAAP") or any other accounting standard or framework. We note that accounting treatment, while referenced in our analysis, is not dispositive of the legal characterization of the transfer.
C. Insolvency and Equitable Limitations. The opinion expressed herein is subject to: (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer, preference, and other similar laws affecting the enforcement of creditors' rights generally, now or hereafter in effect; and (ii) general principles of equity (including, without limitation, concepts of materiality, reasonableness, good faith, and fair dealing), whether considered in a proceeding at law or in equity. We express no opinion as to the availability of any particular equitable remedy.
D. Substantive Consolidation. We have not been engaged to, and do not, opine on the risk that a court of competent jurisdiction could order the substantive consolidation of QRH with QPF or any other entity. A separate non-consolidation opinion addressing the likelihood that a court would not order substantive consolidation of QRH with QPF or QIH is being delivered separately in connection with the Transaction by Calloway & Brandt LLP, as counsel to Ridgeline Capital Markets LLC. Our opinion assumes, and is conditioned upon, QRH maintaining its status as a separate legal entity and not being substantively consolidated with QPF or any other entity.
E. Date and No Obligation to Update. This opinion is rendered solely as of the date hereof, and we undertake no obligation, and hereby disclaim any responsibility, to update, revise, or supplement this opinion to reflect any changes in applicable law or facts occurring after the date hereof, whether or not brought to our attention. The opinion expressed herein is based upon the law as currently in effect, and any change in such law (including, without limitation, any new judicial decision, legislative enactment, or regulatory action) may affect the opinion expressed herein.
F. Benefit and Reliance. This opinion is furnished solely for the benefit of the addressees hereof and may not be relied upon by any other person or entity, or for any other purpose, without our prior written consent. Except as specifically provided in Section VIII hereof, no other person or entity is entitled to rely on this opinion.
G. Draft Status. This opinion letter is delivered in DRAFT form only and is NOT being delivered for reliance by any person or entity. This draft has not been finalized, and the analysis and conclusions expressed herein are subject to revision, supplementation, or withdrawal prior to the delivery of the final executed opinion at the closing of the Transaction. The final opinion will be delivered at closing, subject to satisfaction of all closing conditions, and will supersede this draft in its entirety. No addressee or other person should take any action in reliance on this draft opinion.
VI. LEGAL ANALYSIS — TRUE SALE FRAMEWORK
6.1 Governing Legal Standard
The central question addressed by this opinion is whether the transfer of Receivables from QPF to QRH under the Sale Agreement constitutes a "true sale" — that is, an absolute transfer of ownership in the Receivables — or whether, notwithstanding the parties' characterization of the transfer as a sale, the transfer should instead be recharacterized as a loan from QRH to QPF secured by a grant of a security interest in the Receivables.
Under the laws of the State of New York, the determination of whether a transfer of financial assets constitutes a true sale or a secured financing is a question of substance over form. While the parties' characterization of a transfer as a "sale" is entitled to significant weight, it is not dispositive; a court applying New York law will look beyond the labels used by the parties to examine the economic substance of the transaction and the totality of the circumstances.
Article 9 of the Uniform Commercial Code, as adopted in New York (the "New York UCC"), recognizes that certain transactions that are denominated as "sales" may, depending on their economic substance, constitute secured transactions subject to Article 9. Conversely, a transaction denominated as a "loan" may in substance be a sale. Section 9-109(a)(3) of the New York UCC provides that Article 9 applies to "a sale of accounts, chattel paper, payment intangibles, or promissory notes," thereby acknowledging that such transfers are subject to Article 9 filing requirements regardless of whether they constitute sales or secured transactions. However, the question of whether a particular transfer constitutes a "true sale" or a "secured financing" — and the legal consequences that flow from that characterization, particularly in the context of bankruptcy proceedings — remains a matter of applicable state law (here, New York law) as interpreted by the courts.
Applicable judicial precedent analyzing the distinction between sales and secured transactions has established a multi-factor test for evaluating whether a transfer of receivables constitutes a true sale. Under this body of case law, courts have consistently held that the characterization of a transfer as a sale or a secured financing depends upon an examination of the totality of the circumstances, with no single factor being dispositive. The core inquiry is whether the transferor has transferred ownership of the receivables in a manner such that the transferor retains no significant economic interest in, or dominion and control over, the transferred assets, and whether the transferee has assumed the material economic risks and benefits of ownership of the receivables.
The principal factors that courts and leading commentators have identified as relevant to the true sale analysis include, among others: (a) the intent of the parties as expressed in the transaction documents; (b) whether the transfer conveys full legal and beneficial title and ownership to the transferee; (c) the nature and adequacy of the consideration paid by the transferee; (d) the extent to which the transferor retains recourse obligations or bears the risk of credit loss on the transferred assets after the transfer; (e) whether the transferor retains a servicing role with respect to the transferred assets; (f) the nature and scope of any repurchase obligations retained by the transferor; (g) whether the transferor retains the right to surplus Collections or bears the obligation to cover shortfalls; (h) the accounting treatment of the transfer; (i) the existence of precautionary UCC filings; and (j) the bankruptcy-remote character of the transferee entity.
We have analyzed each of these factors in detail below as applied to the transfer of Receivables from QPF to QRH under the Sale Agreement.
6.2 Key Factors Analyzed
6.2.1 Intent of the Parties. The intent of the parties is a significant, though not dispositive, factor in the true sale analysis. Courts applying New York law have given substantial weight to the parties' expressed intent, particularly where that intent is clearly and unambiguously reflected in the governing transaction documents and is consistent with the economic substance of the transaction.
Here, the Sale Agreement expressly provides that the transfer of Receivables from QPF to QRH is intended to constitute a sale and an absolute assignment of the Receivables, and not a secured financing or a pledge of the Receivables as collateral for a loan. Specifically, Section 2.1(a) of the Sale Agreement states that "[i]t is the express intention of the parties hereto that the transfer of the Receivables by the Seller to the Purchaser hereunder shall constitute a true, absolute and irrevocable sale and assignment of such Receivables, and not a pledge or grant of a security interest therein." The Sale Agreement further includes recitals stating the parties' mutual intent that the transfer be treated as an absolute sale for all purposes.
In addition, both QPF and QRH have represented and warranted in the Sale Agreement that they will treat the transfer of Receivables as a sale — and not as a secured financing — for all purposes, including for financial reporting, regulatory, and tax purposes. Section 4.1(m) of the Sale Agreement contains QPF's representation that it will account for the transfer of Receivables as a sale on its books and records, and Section 4.2(h) contains QRH's corresponding representation that it will record the Receivables as its own assets on its separate books and records.
The Offering Memorandum for the Notes likewise describes the transfer of Receivables from QPF to QRH as a "sale" and explains the two-step transfer structure in a manner consistent with the parties' expressed intent. The disclosure in the Offering Memorandum, while directed at potential investors in the Notes, further corroborates the intent of QPF and QRH to effect a true sale.
We note that the expressed intent of the parties, standing alone, would be insufficient to support a true sale characterization if the economic substance of the transaction were inconsistent with such intent. However, as discussed in detail below, the economic terms and structural features of the Sale Agreement are consistent with the parties' expressed intent that the transfer constitute a sale.
6.2.2 Transfer of Title and Ownership. A fundamental element of any true sale is the transfer of full legal and beneficial title to the transferred assets from the transferor to the transferee. Under the Sale Agreement, QPF conveys, transfers, assigns, sets over, and otherwise delivers to QRH, without recourse (except as expressly set forth in the Sale Agreement), all of QPF's right, title, and interest in and to the Receivables, including, without limitation:
(i) all rights to receive payments of principal and interest on the Receivables;
(ii) all Related Security, including all unearned premium refund rights arising upon cancellation of the insurance policies financed by the Receivables;
(iii) all Collections on or in respect of the Receivables, whether received before or after the applicable transfer date;
(iv) all proceeds (as defined in the New York UCC) of any of the foregoing; and
(v) all rights, remedies, powers, privileges, and claims of QPF with respect to the Receivables, including all rights under any insurance premium finance agreements and related documentation.
The transfer of Receivables under the Sale Agreement is irrevocable, except to the limited extent described in Section 6.2.6 below with respect to QPF's obligation to repurchase Receivables upon a breach of representations and warranties. Upon transfer, QRH acquires full legal and beneficial ownership of the Receivables, and QPF retains no ownership interest in the transferred Receivables. This complete transfer of title and ownership is a strong indicator of true sale treatment.
We note that QPF does not retain any option or right to reacquire the Receivables (other than the limited repurchase obligation for breaches of representations and warranties), and the Sale Agreement does not contain any "clean-up call" or similar provision that would permit QPF to repurchase the Receivables at its discretion. The absence of any such right of reacquisition further supports the conclusion that the transfer is a sale rather than a secured financing.
6.2.3 Consideration / Purchase Price. The payment of fair consideration by the transferee to the transferor is an important element of the true sale analysis. A transfer for nominal or grossly inadequate consideration may suggest that the parties did not intend a genuine sale, or that the transferor retained a significant economic stake in the transferred assets.
Under the Sale Agreement, QRH pays a Purchase Price to QPF for each Receivable transferred. The Purchase Price is calculated based upon the outstanding principal balance of the Receivables being transferred, subject to adjustments as set forth in Section 2.2 of the Sale Agreement. The Purchase Price is determined at the time of each transfer and reflects the fair value of the Receivables being sold, taking into account the credit quality of the Receivables, their weighted average remaining term, the applicable interest rates, and the presence of unearned premium refund rights as collateral.
We have reviewed the Purchase Price formula set forth in the Sale Agreement and, based on our review and on information provided to us by QPF, we believe that the Purchase Price constitutes reasonably equivalent value for the Receivables. The Purchase Price reflects a market-based valuation that takes into account the expected cash flows of the Receivables, adjusted for expected losses, prepayments, and servicing costs. The Purchase Price is paid in cash or, to the extent permitted by the Sale Agreement, in a combination of cash and a deferred purchase price obligation (the "Deferred Purchase Price"), which represents QRH's obligation to pay additional consideration to QPF out of Collections on the Receivables. The Deferred Purchase Price is subordinated to all other payment obligations of QRH and is payable only to the extent that Collections on the Receivables are sufficient, after payment of all senior obligations, to fund such payment.
Critically, the Purchase Price is not structured as a loan advance with a repayment obligation. QPF is not obligated to return or repay the Purchase Price to QRH under any circumstances (other than through the limited repurchase mechanism described in Section 6.2.6 below). The absence of a repayment obligation distinguishes the transfer from a lending arrangement, in which the "borrower" would be required to repay the "loan" regardless of the performance of the underlying collateral.
6.2.4 Recourse and Risk of Loss. The degree to which the transferor retains the risk of credit loss on the transferred receivables after the transfer is widely regarded as the most critical factor in the true sale analysis. Where the transferor effectively guarantees the collectibility of the transferred receivables or bears the risk of obligor default, the transfer is more likely to be recharacterized as a secured financing. Conversely, where the risk of loss on the transferred receivables passes to the transferee, the transfer is more likely to be characterized as a true sale.
Under the Sale Agreement, QPF does not guarantee the collectibility or performance of the Receivables transferred to QRH. Section 2.5 of the Sale Agreement expressly provides that the transfer of Receivables is made "without recourse" to QPF, except to the limited extent of QPF's obligation to repurchase Receivables upon a breach of representations and warranties (as discussed in Section 6.2.6 below). QPF does not bear the credit risk of obligor default after the transfer of any Receivable to QRH. If an obligor fails to make scheduled payments on a Receivable, the resulting loss is borne by QRH (and, through the second-step transfer to QRF 2022-1, ultimately by QRF 2022-1, the Indenture Trustee, and the holders of the Notes, in accordance with the priority of payments set forth in the Indenture).
This allocation of risk is economically significant. The Receivables, while of high credit quality, are not risk-free. Based on information provided to us by QPF, the historical net loss rate for QPF's insurance premium finance receivables portfolio was approximately 0.42% on a three-year average basis for the period from 2019 through 2021. While this loss rate is low — reflecting the short-term, secured nature of insurance premium finance receivables and the availability of unearned premium refund rights as a source of recovery — losses do occur, and the risk of such losses has been transferred from QPF to QRH. Similarly, the delinquency rate (defined as the percentage of Receivables with any payment more than 60 days past due) was approximately 0.87% as of the Cut-Off Date. QRH assumes exposure to such delinquent Receivables and bears the risk that such delinquencies may result in losses.
The transfer of credit risk from QPF to QRH is a strong indicator that the transfer constitutes a true sale rather than a secured financing. In a typical secured lending arrangement, the lender bears the risk that the borrower may default on its repayment obligation, but the borrower remains obligated to repay the loan regardless of the performance of the collateral. Here, by contrast, QPF has no obligation to repay the Purchase Price to QRH, and QRH bears the risk of loss on the Receivables — a hallmark of a sale transaction.
6.2.5 Retained Servicing Role. QPF continues to act as Servicer of the Receivables pursuant to the Servicing Agreement following the transfer of the Receivables to QRH. In its capacity as Servicer, QPF is responsible for, among other things, billing and collecting payments from obligors, processing premium finance cancellations, pursuing unearned premium refund rights upon default, maintaining records relating to the Receivables, and remitting Collections to designated accounts.
The retention of a servicing role by the transferor is common — indeed, nearly universal — in securitization transactions involving trade receivables, consumer receivables, and insurance premium finance receivables. Courts and commentators have consistently recognized that the retention of servicing responsibilities by the originator/transferor does not, by itself, negate the characterization of the transfer as a true sale. The Servicer acts in a fiduciary or quasi-fiduciary capacity for the benefit of the owner of the Receivables (QRH) and, indirectly, for the benefit of QRF 2022-1 and the holders of the Notes. The Servicer does not act for its own account or for its own benefit, except to the extent of its entitlement to the servicing fee.
Several features of the Servicing Agreement reinforce the conclusion that QPF's retained servicing role is consistent with true sale treatment:
First, QPF receives a servicing fee of 1.00% per annum on the outstanding pool balance, which represents arm's-length compensation for the servicing functions performed. The servicing fee is established at a level consistent with fees charged by third-party servicers of comparable receivables portfolios.
Second, the Servicing Agreement provides for QPF's removal as Servicer upon the occurrence of a "Servicer Default" (as defined in the Servicing Agreement), including failure to remit Collections, material breach of servicing obligations, or the occurrence of certain bankruptcy events with respect to QPF. Upon such removal, Northvane Bank, N.A. is designated as back-up servicer and is prepared to assume servicing functions. The existence of a back-up servicer and the ability to terminate QPF's servicing role further demonstrate that the servicing function is separable from the ownership of the Receivables.
Third, QPF does not retain discretion to commingle Collections with its own funds. Pursuant to Section 5.3 of the Servicing Agreement, all Collections received by QPF in its capacity as Servicer are required to be deposited within two (2) business days of receipt into a segregated Collection Account maintained at Calvoneth Trust Company, N.A. in its capacity as securities intermediary. QPF has no right to use, invest, or otherwise deploy Collections for its own purposes. This segregation of Collections is a significant structural feature that distinguishes the servicing arrangement from a debtor-creditor relationship in which the debtor retains dominion and control over the collateral.
Accordingly, we conclude that QPF's retention of the servicing function does not undermine the true sale characterization of the transfer of Receivables under the Sale Agreement.
6.2.6 Repurchase Obligations. Under Section 3.2 of the Sale Agreement, QPF is obligated to repurchase from QRH any Receivable with respect to which a representation or warranty made by QPF in the Sale Agreement as to the characteristics of such Receivable is discovered to have been untrue in any material respect as of the date of transfer. For example, if a Receivable that was represented to satisfy the Eligible Receivables Criteria is subsequently determined not to have met such criteria at the time of transfer, QPF is required to repurchase such Receivable at the applicable repurchase price (equal to the outstanding principal balance of such Receivable, plus accrued and unpaid interest thereon).
This repurchase obligation is limited in scope. It applies only in the event of a breach of representations and warranties — that is, where QPF has transferred a Receivable that did not conform to the applicable criteria at the time of transfer. The repurchase obligation does not constitute a guaranty of the collectibility or performance of the Receivables generally. QPF is not obligated to repurchase a Receivable merely because the obligor has failed to make a scheduled payment or because the Receivable has become delinquent or has resulted in a credit loss. The repurchase obligation is, in essence, an indemnification mechanism that ensures QPF bears the consequences of its own failure to comply with the eligibility criteria, rather than a risk-sharing or loss-absorption mechanism.
This type of limited repurchase obligation for breach of representations and warranties is a standard and well-established feature of securitization transactions. Courts and commentators have recognized that the inclusion of such a repurchase mechanism does not negate the true sale characterization of the transfer. The repurchase obligation is analogous to the warranty of title and quality that a seller provides in any arm's-length sale transaction: if the goods (or receivables) do not conform to the seller's representations, the seller is required to take them back. This is fundamentally different from a guaranty or recourse obligation that would expose the seller to the full credit risk of the sold assets.
Moreover, QPF does not have an option to repurchase Receivables at will, upon maturity, or for any reason other than a breach of representations and warranties. The absence of such a discretionary repurchase right further distinguishes the transfer from a secured financing arrangement, in which the "borrower" would typically retain the right (and obligation) to "redeem" the collateral upon repayment of the loan.
6.2.7 Right to Surplus / Obligation to Cover Shortfall. In a true sale, the economic upside and downside of ownership of the transferred assets passes to the buyer. Conversely, in a secured financing, the borrower retains the right to any surplus value in the collateral after satisfaction of the loan obligation and bears the obligation to cover any shortfall.
Under the Sale Agreement and the other Transaction Documents, QPF does not have a contractual right to receive excess Collections or surplus value with respect to the Receivables after their transfer to QRH. After the transfer, all Collections on the Receivables are property of QRH (and, following the second-step transfer, of QRF 2022-1). Any residual value remaining after payment in full of all amounts due under the Notes and satisfaction of all other obligations under the Indenture inures to the benefit of QRH, QRF 2022-1, and the retained interest holder (QIH, in its capacity as sponsor of the Transaction and holder of the Residual Interest).
It is true that QIH, as the parent company of QPF and the sponsor of the Transaction, indirectly benefits from any residual value through its retained interest in QRF 2022-1. However, this indirect benefit flows through QIH's separate equity interest in the Transaction structure, not through QPF's retained ownership of the Receivables. QPF itself has no contractual right to receive excess Collections or surplus value once the Receivables have been sold to QRH.
Similarly, QPF does not bear the obligation to cover any shortfall in Collections. If the Collections on the Receivables are insufficient to pay amounts due on the Notes, the resulting shortfall is borne by the holders of the Notes (in inverse order of priority) and the retained interest holder. QPF's only financial obligations are its servicing obligations under the Servicing Agreement and its repurchase obligations under the Sale Agreement for breaches of representations and warranties.
This allocation of surplus and shortfall risk is fully consistent with a true sale characterization.
6.2.8 Accounting Treatment. While not dispositive of the legal characterization of the transfer, the accounting treatment adopted by the parties is a relevant factor in the true sale analysis. The accounting treatment reflects the parties' economic understanding of the transaction and may corroborate (or contradict) the legal characterization.
QPF intends to account for the transfer of Receivables to QRH as a sale on its books and records, in accordance with applicable accounting standards. Following the transfer, the Receivables will be derecognized from QPF's balance sheet, and QPF will recognize a gain or loss on the sale. QRH, for its part, will record the Receivables as assets on its own separate books and records.
The consistency between the accounting treatment and the legal characterization of the transfer as a sale provides additional support for the true sale analysis. We note, however, that accounting treatment is determined under accounting standards that may apply different criteria and analytical frameworks than those applied under New York law, and we express no opinion as to the propriety of the accounting treatment under GAAP or any other accounting standard.
6.2.9 Precautionary UCC Filing (Back-Up Security Interest). Section 2.4 of the Sale Agreement provides that, in the event a court of competent jurisdiction were to recharacterize the transfer of Receivables under the Sale Agreement as a secured financing rather than a true sale, the Sale Agreement shall be deemed to create a first-priority security interest in the Receivables and all related assets in favor of QRH, securing all obligations of QPF to QRH under the Sale Agreement and the other Transaction Documents.
In connection with this back-up security interest provision, a UCC-1 financing statement will be filed with the Secretary of State of the State of Delaware naming QPF as debtor and QRH as secured party. This filing is made on a precautionary basis only, and is not an acknowledgment by either QPF or QRH that the transfer of Receivables under the Sale Agreement constitutes a secured financing.
The inclusion of a precautionary back-up security interest provision and the filing of a precautionary UCC-1 financing statement is standard market practice in securitization transactions. Courts and commentators have consistently held that such precautionary measures do not undermine or negate the true sale characterization of the transfer. To the contrary, the filing of a precautionary UCC-1 provides an additional layer of protection for the transferee and downstream parties by ensuring that, in the unlikely event of recharacterization, the transferee's interest in the receivables would be perfected as a first-priority security interest under Article 9 of the UCC. The inclusion of such belt-and-suspenders provisions reflects prudent structuring and is a hallmark of well-structured securitization transactions.
6.2.10 Bankruptcy Remoteness of Transferee. The bankruptcy-remote character of the transferee entity is a relevant, though not independently dispositive, factor in the true sale analysis. A bankruptcy-remote structure is designed to ensure that the transferred assets are insulated from the bankruptcy estate of the transferor and, conversely, that the transferee entity is insulated from the claims of the transferor's creditors.
QRH is organized as a Delaware limited liability company with a single purpose: to acquire, hold, and transfer insurance premium finance receivables in connection with the Transaction. The QRH LLC Agreement contains extensive separateness covenants and organizational restrictions designed to ensure QRH's continued existence as a separate legal entity, distinct from QPF, QIH, and their respective affiliates.
Key features of QRH's bankruptcy-remote structure include:
(i) Independent Manager. Eleanor M. Vasquez of Fortbridge Corporate Services LLC serves as independent manager of QRH. Under the QRH LLC Agreement, QRH may not file a voluntary petition for bankruptcy, reorganization, or similar relief under the Bankruptcy Code or any state insolvency statute without the prior written consent of the independent manager. Ms. Vasquez is not, and has not been during the preceding five years, an employee, officer, director, or equity holder of QPF, QIH, or any of their respective affiliates (other than QRH in her capacity as independent manager), and she has no financial interest in QPF or its affiliates that could compromise her independence.
(ii) Non-Petition Covenants. The QRH LLC Agreement includes non-petition covenants that prohibit QPF (as sole member of QRH) from filing, or causing to be filed, a voluntary bankruptcy petition on behalf of QRH without the prior unanimous written consent of all members and the independent manager.
(iii) Separateness Covenants. The QRH LLC Agreement requires QRH to maintain separate books, records, and financial statements; maintain its own separate bank accounts; pay its own liabilities and expenses from its own funds; conduct its business solely in its own name; hold itself out as a separate legal entity; maintain arm's-length relationships with QPF and its affiliates; and refrain from commingling its assets with the assets of any other person or entity.
(iv) Limitations on Activities. The QRH LLC Agreement restricts QRH's business activities to those directly related to the acquisition, holding, and transfer of Receivables in connection with the Transaction, and prohibits QRH from engaging in any other business or incurring any indebtedness, other than as expressly contemplated by the Transaction Documents.
The bankruptcy-remote structure of QRH is designed to ensure that, in the event of a bankruptcy filing by or against QPF, the Receivables held by QRH would not be subject to the automatic stay or otherwise treated as property of QPF's bankruptcy estate. This structural feature is consistent with — and, indeed, reinforces — the true sale characterization of the transfer of Receivables from QPF to QRH.
6.3 Analysis of Revolving Nature of the Pool
The Transaction contemplates a twenty-four (24) month revolving period (the "Revolving Period") during which QPF will sell additional Receivables to QRH, and QRH will transfer such additional Receivables to QRF 2022-1, in order to replenish the Receivables pool as existing Receivables amortize through scheduled payments, prepayments, or other liquidation events. During the Revolving Period, QRF 2022-1 will use available Collections (after payment of interest on the Notes, servicing fees, and other senior expenses) to purchase additional Receivables from QRH (which, in turn, purchases them from QPF), thereby maintaining the aggregate outstanding balance of the Receivables pool at or above the minimum pool balance of $450,000,000.
The revolving nature of the pool does not alter the true sale analysis with respect to any individual transfer of Receivables. Each sale of a Receivable from QPF to QRH under the Sale Agreement is an independent transaction that is separately analyzed under the true sale framework. The fact that the overall Transaction structure contemplates a revolving pool does not transform the individual transfers into a single, ongoing financing arrangement. Each transfer satisfies the criteria for true sale treatment on its own terms: QPF conveys title to the Receivable to QRH, QRH pays the applicable Purchase Price, QPF retains no recourse or risk of loss (other than the limited repurchase obligation for breach of representations and warranties), and the risk of loss on the transferred Receivable passes to QRH.
Revolving structures are common in securitization transactions involving short-term receivables, including trade receivables, credit card receivables, and insurance premium finance receivables. The use of a revolving structure reflects the short-duration nature of the underlying assets and the economic necessity of maintaining a sufficient pool balance to support the outstanding Notes. Courts and commentators have recognized that the use of a revolving pool structure is compatible with true sale treatment, provided that the individual transfers within the revolving pool satisfy the applicable true sale criteria.
6.4 Characteristics of the Receivables Supporting True Sale
Certain characteristics of the Receivables further support the conclusion that the transfer from QPF to QRH constitutes a true sale of identifiable financial assets with ascertainable economic value:
Short Duration. The Receivables are short-term insurance premium finance receivables with a weighted average original term of approximately 9.2 months and a weighted average remaining term of approximately 5.7 months as of the Cut-Off Date. No Receivable has an original term in excess of twelve (12) months. The short-term nature of the Receivables facilitates the identification and valuation of the transferred assets, as the expected cash flows are concentrated within a relatively brief time horizon and are subject to less uncertainty than would be the case with longer-duration receivables.
Secured by Unearned Premium Refund Rights. Each Receivable is secured by the obligor's right to receive unearned premium refunds from the applicable insurance carrier in the event of cancellation of the financed insurance policy. This collateral characteristic provides a meaningful source of recovery in the event of obligor default and supports the transfer of a complete economic interest in the Receivables. The availability of unearned premium refund rights as collateral means that, upon default, the Servicer can initiate cancellation of the underlying insurance policy and recover all or a substantial portion of the outstanding balance from the unearned premium refund.
Granular Pool. The Receivables pool consists of approximately 82,400 individual loans, with an average loan balance of approximately $7,427. The granularity of the pool significantly reduces the impact of idiosyncratic risk associated with any individual obligor or Receivable. The large number of Receivables in the pool ensures that the performance of the pool is driven primarily by portfolio-level statistical characteristics rather than by the behavior of any individual obligor.
Market Interest Rates. The Receivables bear interest at a weighted average annual percentage rate ("APR") of approximately 7.85%, which reflects market-rate pricing for insurance premium finance receivables.
Low Obligor Concentration. The Receivables pool is highly diversified at the obligor level. The largest single obligor concentration represents only 0.38% of the aggregate pool balance ($2,325,600), and the top ten obligors together represent only 2.14% of the aggregate pool balance ($13,096,800). No single obligor or group of related obligors represents a disproportionate share of the pool, which reduces the risk that the performance of the pool would be materially affected by the default of any single obligor.
Geographic Diversification. The Receivables are diversified across multiple states. The top three states by pool balance are Texas (14.2%), California (11.8%), and Florida (9.6%), representing an aggregate concentration of 35.6% of the pool. No single state exceeds the 20% concentration limit established by the Eligible Receivables Criteria. This geographic diversification reduces the risk that regional economic conditions or regulatory changes in any single state would materially affect the performance of the pool.
These characteristics collectively support the conclusion that the Receivables are identifiable, segregable financial assets that can be, and have been, sold and transferred from QPF to QRH in a manner consistent with a true sale.
VII. OPINION
Based upon and subject to the foregoing review of the Transaction Documents, the assumptions set forth in Section IV, the qualifications and limitations set forth in Section V, and the legal analysis set forth in Section VI, and subject to the further qualifications and limitations set forth herein, it is our opinion that:
7.1 Primary Opinion
The transfer of Receivables from QPF to QRH pursuant to the Sale Agreement would, under the laws of the State of New York, be characterized as a true sale of such Receivables by QPF to QRH, and not as a loan from QRH to QPF secured by such Receivables.
In reaching this conclusion, we have considered the totality of the circumstances surrounding the transfer, including the parties' expressed intent, the completeness of the transfer of title and ownership, the adequacy of the Purchase Price, the absence of recourse to QPF for credit losses on the Receivables, the limited nature of QPF's repurchase obligations, the transfer of the risk of loss and the right to surplus to QRH, the retained servicing role of QPF, the accounting treatment of the transfer, the precautionary UCC filing, and the bankruptcy-remote structure of QRH. We have concluded that each of the factors analyzed in Section VI above supports, or is at a minimum consistent with, the characterization of the transfer as a true sale. No factor, in our analysis, weighs materially against such characterization.
7.2 Consequence of True Sale
As a result of the true sale characterization set forth in Section 7.1 above, the Receivables transferred by QPF to QRH pursuant to the Sale Agreement would not constitute property of the estate of QPF within the meaning of Section 541 of the Bankruptcy Code in the event of a bankruptcy, insolvency, or receivership proceeding with respect to QPF under applicable federal or state law. Accordingly, a bankruptcy trustee, debtor-in-possession, or receiver of QPF would not have authority to assert dominion or control over the Receivables, and the Receivables would not be subject to the automatic stay provisions of Section 362 of the Bankruptcy Code in any bankruptcy case commenced by or against QPF.
We note that this conclusion is subject to the separate non-consolidation opinion being delivered by Calloway & Brandt LLP, as counsel to Ridgeline Capital Markets LLC, addressing the risk that a court could order the substantive consolidation of QRH with QPF. If a court were to order substantive consolidation, the assets of QRH (including the Receivables) could be pooled with the assets of QPF for the purpose of satisfying the claims of creditors, which could result in the Receivables becoming available to satisfy claims of QPF's creditors. We express no opinion herein on the likelihood or appropriateness of any such substantive consolidation order, and our opinion in Section 7.1 above assumes that QRH is not substantively consolidated with QPF or any other entity.
7.3 Back-Up Security Interest
In the event that, contrary to the opinion expressed in Section 7.1 above, a court of competent jurisdiction were to recharacterize the transfer of Receivables under the Sale Agreement as a secured financing rather than a true sale, the Sale Agreement effectively creates a security interest in the Receivables and all related assets in favor of QRH, which security interest, upon the due filing of the UCC-1 financing statement described in Section II, item 8 above with the Secretary of State of the State of Delaware, would be perfected as a first-priority security interest under Article 9 of the Uniform Commercial Code as in effect in the State of Delaware.
This back-up opinion is provided solely as an additional protective measure and is not intended to, and should not be construed to, qualify, diminish, or undermine the primary opinion expressed in Section 7.1 above.
VIII. RELIANCE AND DISTRIBUTION
This opinion is rendered solely for the benefit of the addressees hereof in connection with the transactions contemplated by the Transaction Documents. This opinion may not be relied upon by any other person or entity, or for any other purpose, without our prior written consent, and no person or entity other than the addressees hereof is entitled to rely on the opinion expressed herein.
Notwithstanding the foregoing, we understand and agree that this opinion (or the final, executed version thereof delivered at closing) may be disclosed to:
(a) Brindoval Ratings Inc. (engagement no. CR-SF-2022-08812) and Pinnacle Rating Services LLC (engagement no. PRS-2022-ABS-3347) in connection with their respective rating assessments of the Notes; and
(b) Calloway & Brandt LLP, as counsel to Ridgeline Capital Markets LLC, in connection with its review of the Transaction Documents and the rendering of its own opinions in connection with the Transaction.
Any such disclosure is made solely for informational purposes, and neither Brindoval Ratings Inc., Pinnacle Rating Services LLC, nor Calloway & Brandt LLP (or their respective clients, other than the addressees hereof) is entitled to rely on this opinion without our prior written consent.
This is a DRAFT opinion letter that has not been finalized and is NOT being delivered for reliance by any person or entity. This draft is provided for discussion purposes only and is subject to revision, supplementation, or withdrawal at any time prior to the delivery of the final executed opinion at the closing of the Transaction. The final opinion will be delivered at the closing of the Transaction, subject to satisfaction of all conditions precedent to closing and the absence of any material change in applicable law or relevant facts between the date hereof and the closing date, and will supersede this draft in its entirety. No addressee or other person should take any action in reliance on this draft opinion.
DRAFT — SUBJECT TO FINALIZATION AT CLOSING
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Name: Sylvia Hartwell
Title: Partner
By: ________
Name: Douglas Carmichael
Title: Partner (Responsible Partner)
Prepared by: Sylvia Hartwell Reviewed by: Douglas Carmichael, Yuki Nakamura
ANNEX A
LIST OF TRANSACTION DOCUMENTS REVIEWED
The following Transaction Documents were reviewed in connection with the rendering of this opinion, as described in Section II hereof:
1. Receivables Sale Agreement (execution draft v3, dated as of October 12, 2022) by and between Quorum Premium Finance LLC, as Seller, and Quorum Receivables Holding LLC, as Purchaser.
2. Receivables Transfer Agreement (execution draft v3, dated as of October 12, 2022) by and between Quorum Receivables Holding LLC, as Transferor, and Quorum Receivables Funding 2022-1 LLC, as Transferee.
3. Indenture (execution draft v4, dated as of October 12, 2022) by and between Quorum Receivables Funding 2022-1 LLC, as Issuer, and Calvoneth Trust Company, N.A., as Trustee.
4. Amended and Restated Limited Liability Company Agreement of Quorum Receivables Holding LLC (dated August 3, 2022).
5. Limited Liability Company Agreement of Quorum Premium Finance LLC.
6. Certificate of Formation of Quorum Receivables Holding LLC (filed August 3, 2022, with the Secretary of State of the State of Delaware, DE SOS File No. 7894228).
7. Grant of Security Interest (Pledge Agreement) (execution draft v2, dated as of October 12, 2022) by Quorum Receivables Funding 2022-1 LLC in favor of Calvoneth Trust Company, N.A., as Trustee.
8. Draft UCC-1 Financing Statement — Quorum Premium Finance LLC (Debtor) / Quorum Receivables Holding LLC (Secured Party), to be filed with the Secretary of State of the State of Delaware.
9. Servicing Agreement (execution draft v3, dated as of October 12, 2022) among Quorum Receivables Funding 2022-1 LLC, Quorum Premium Finance LLC (as Servicer), and Calvoneth Trust Company, N.A. (as Trustee).
10. Note Purchase Agreement (execution draft v3, dated as of October 12, 2022) among Quorum Receivables Funding 2022-1 LLC, Quorum Insurance Holdings Corp., and Ridgeline Capital Markets LLC.
11. Preliminary Offering Memorandum (v3, dated October 12, 2022) for the Class A Notes, Class B Notes, and Class C Notes.
12. Manager's Ce