PRIVILEGED AND CONFIDENTIAL
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
October 5, 2022
DRAFT — FOR DISCUSSION PURPOSES ONLY — NOT FOR RELIANCE
Quorum Receivables Funding 2022-1 LLC c/o Quorum Insurance Holdings Corp. 400 Atlantic Street, Suite 2200 Stamford, Connecticut 06901
Calvoneth Trust Company, National Association, 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: Non-Consolidation Opinion — Quorum Receivables Funding 2022-1 LLC
Proposed Issuance of $500,000,000 Aggregate Principal Amount of Asset-Backed Notes (Class A Notes, Class B Notes, and Class C Notes) by Quorum Receivables Funding 2022-1 LLC
Calderwood & Harkness Matter No. 1025-00007
Ladies and Gentlemen:
I. INTRODUCTION AND ENGAGEMENT
Calderwood & Harkness LLP ("we," "us," or "Calderwood & Harkness") has been engaged as issuer's counsel in connection with the proposed issuance (the "Offering") by Quorum Receivables Funding 2022-1 LLC, a Delaware limited liability company ("QRF 2022-1" or the "Issuer"), of asset-backed notes in the following classes and amounts:
(a) $375,000,000 aggregate principal amount of Class A Floating Rate Asset-Backed Notes (the "Class A Notes"), which have received preliminary ratings of AAA(cr) by Brindoval Ratings Inc. ("Brindoval") and Aaa(p) by Pinnacle Rating Services LLC ("Pinnacle");
(b) $75,000,000 aggregate principal amount of Class B Floating Rate Asset-Backed Notes (the "Class B Notes"), which have received preliminary ratings of A(cr) by Brindoval and A1(p) by Pinnacle; and
(c) $35,000,000 aggregate principal amount of Class C Fixed Rate Asset-Backed Notes (the "Class C Notes" and, together with the Class A Notes and Class B Notes, the "Notes"), which have received preliminary ratings of BBB(cr) by Brindoval and Baa2(p) by Pinnacle.
The Notes are to be issued pursuant to the Indenture dated as of the Closing Date (as defined below), 2022 (the "Indenture"), between QRF 2022-1, as Issuer, and Calvoneth Trust Company, National Association ("Calvoneth Trust" or the "Trustee"), as Indenture Trustee. The Notes will be secured by, and payments thereon will be made from, a revolving pool of insurance premium finance receivables (the "Receivables") originated by Quorum Premium Finance LLC, a Delaware limited liability company ("QPF" or the "Originator"), and transferred to the Issuer through Quorum Receivables Holding LLC, a Delaware limited liability company ("QRH" or the "Depositor"), pursuant to a two-tier securitization structure described more fully below.
This opinion is delivered pursuant to the requirements of Section 3.01(b)(xii) of the Indenture, Section 7(j) of the Note Purchase Agreement dated as of the Closing Date, 2022 (the "Note Purchase Agreement"), among QRF 2022-1, Quorum Insurance Holdings Corp. ("QIH" or the "Sponsor"), and Ridgeline Capital Markets LLC ("Ridgeline" or the "Initial Purchaser"), and the applicable rating agency criteria of Brindoval and Pinnacle, each of which requires the delivery of a reasoned legal opinion as to the non-consolidation of the Issuer with the Sponsor and its affiliates.
Specifically, you have requested our opinion as to whether, in a hypothetical case under the United States Bankruptcy Code (Title 11 of the United States Code, as amended, the "Bankruptcy Code") in which QIH, QPF, or QRH is a debtor, a court exercising competent jurisdiction and properly applying existing law would order the substantive consolidation of the assets and liabilities of QRF 2022-1 with those of QIH, QPF, or QRH (collectively, the "Affiliated Entities" and each, an "Affiliated Entity").
For purposes of rendering this opinion, we have examined the documents listed in Section II below, and we have relied upon the assumptions set forth in Section III. Our analysis of the applicable legal framework is set forth in Section IV, and our application of that framework to the facts and circumstances of QRF 2022-1 and the Affiliated Entities is set forth in Sections V and VI. Our opinion, together with the qualifications and limitations to which it is subject, is set forth in Sections VII through IX.
II. DOCUMENTS REVIEWED AND RELIED UPON
In connection with rendering this opinion, we have reviewed originals or copies (certified or otherwise identified to our satisfaction) of the following documents:
1. Certificate of Formation of Quorum Receivables Funding 2022-1 LLC, as filed with the Secretary of State of the State of Delaware on August 3, 2022 (Delaware Secretary of State File No. 7894231).
2. Limited Liability Company Agreement of Quorum Receivables Funding 2022-1 LLC, dated as of August 3, 2022 (the "QRF 2022-1 LLC Agreement"), by Quorum Receivables Holding LLC, as sole member, providing for the appointment of Timothy R. Callan as independent manager of QRF 2022-1, such appointment having been made by Fortbridge Corporate Services LLC ("Fortbridge").
3. Certificate of Formation of Quorum Receivables Holding LLC, as filed with the Secretary of State of the State of Delaware on August 3, 2022 (Delaware Secretary of State File No. 7894228).
4. Limited Liability Company Agreement of Quorum Receivables Holding LLC, dated as of August 3, 2022 (the "QRH LLC Agreement"), by Quorum Premium Finance LLC, as sole member, providing for the appointment of Eleanor M. Vasquez as independent manager of QRH, such appointment having been made by Fortbridge.
5. Independent Manager Agreement, dated as of August 3, 2022, between Quorum Receivables Funding 2022-1 LLC and Fortbridge Corporate Services LLC, naming Timothy R. Callan as independent manager of QRF 2022-1 (the "QRF Independent Manager Agreement").
6. Independent Manager Agreement, dated as of August 3, 2022, between Quorum Receivables Holding LLC and Fortbridge Corporate Services LLC, naming Eleanor M. Vasquez as independent manager of QRH (the "QRH Independent Manager Agreement").
7. Indenture (execution draft v4, dated October 12, 2022) between Quorum Receivables Funding 2022-1 LLC, as Issuer, and Calvoneth Trust Company, National Association, as Indenture Trustee (the "Indenture").
8. Receivables Sale Agreement (execution draft v3, dated October 12, 2022) between Quorum Premium Finance LLC, as Seller, and Quorum Receivables Holding LLC, as Purchaser (the "Receivables Sale Agreement").
9. Receivables Transfer Agreement (execution draft v3, dated October 12, 2022) between Quorum Receivables Holding LLC, as Transferor, and Quorum Receivables Funding 2022-1 LLC, as Transferee (the "Receivables Transfer Agreement").
10. Servicing Agreement (execution draft v3, dated October 12, 2022) among Quorum Receivables Funding 2022-1 LLC, as Issuer, Quorum Premium Finance LLC, as Servicer, and Calvoneth Trust Company, National Association, as Trustee (the "Servicing Agreement").
11. Back-Up Servicing Agreement (execution draft v2, dated October 12, 2022) among Quorum Receivables Funding 2022-1 LLC, Quorum Premium Finance LLC, Northvane Bank, National Association ("Northvane Bank"), as Back-Up Servicer, and Calvoneth Trust Company, National Association, as Trustee (the "Back-Up Servicing Agreement").
12. Administration Agreement (execution draft v2, dated October 12, 2022) between Quorum Receivables Funding 2022-1 LLC and Quorum Insurance Holdings Corp., as Administrator (the "Administration Agreement").
13. Note Purchase Agreement (execution draft v3, dated October 12, 2022) among Quorum Receivables Funding 2022-1 LLC, Quorum Insurance Holdings Corp., and Ridgeline Capital Markets LLC (the "Note Purchase Agreement").
14. Liquidity Facility Agreement (execution draft v2, dated October 12, 2022) between Quorum Receivables Funding 2022-1 LLC and Northvane Bank, National Association (the "Liquidity Facility Agreement").
15. Account Control Agreement (execution draft v2, dated October 12, 2022) between Quorum Receivables Funding 2022-1 LLC and Calvoneth Trust Company, National Association, as Securities Intermediary (the "Account Control Agreement").
16. Grant of Security Interest / Pledge Agreement (execution draft v2, dated October 12, 2022) from Quorum Receivables Funding 2022-1 LLC to Calvoneth Trust Company, National Association (the "Pledge Agreement").
17. Performance Guaranty (execution draft v1, dated October 12, 2022) by Quorum Insurance Holdings Corp. in favor of Calvoneth Trust Company, National Association (the "Performance Guaranty").
18. Draft UCC-1 Financing Statements (Forms UCC1) to be filed with the Secretary of State of the State of Delaware, naming (a) Quorum Premium Finance LLC as debtor and Quorum Receivables Holding LLC as secured party, (b) Quorum Receivables Holding LLC as debtor and Quorum Receivables Funding 2022-1 LLC as secured party, and (c) Quorum Receivables Funding 2022-1 LLC as debtor and Calvoneth Trust Company, National Association as secured party (collectively, the "Financing Statements").
19. Secretary's Certificate of Quorum Insurance Holdings Corp., dated July 27, 2022, certifying resolutions of the Board of Directors of QIH authorizing the transaction and attaching copies of the Certificate of Incorporation and Bylaws of QIH as currently in effect.
20. Manager's Certificate of Quorum Premium Finance LLC, dated July 27, 2022, certifying resolutions of the managers of QPF authorizing the transaction.
21. Preliminary Offering Memorandum (v3, dated October 12, 2022) relating to the offering of the Notes (the "Offering Memorandum").
22. Good standing certificate for Quorum Receivables Funding 2022-1 LLC, issued by the Secretary of State of the State of Delaware, dated September 28, 2022.
23. Good standing certificate for Quorum Receivables Holding LLC, issued by the Secretary of State of the State of Delaware, dated September 28, 2022.
The documents listed in items (1) through (23) above are referred to collectively herein as the "Transaction Documents." We have also reviewed such other documents, certificates, and records as we have deemed necessary or appropriate for purposes of this opinion.
In rendering this opinion, we have also relied upon the factual representations made to us by officers and representatives of QIH, QPF, QRH, and QRF 2022-1, including without limitation representations regarding the manner in which QRF 2022-1 and QRH have been and will be operated. We have not independently verified any such factual matters.
III. ASSUMPTIONS
This opinion is predicated upon each of the following assumptions. If any of the following assumptions is not satisfied in fact, the conclusions expressed in this opinion could be materially affected:
1. Due Execution and Enforceability. All Transaction Documents will be duly authorized, executed, and delivered in the form reviewed by us (or in substantially similar form containing no provisions that are materially less favorable from a separateness or bankruptcy-remoteness standpoint), and will constitute the valid, binding, and enforceable obligations of all parties thereto, in each case in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, and other similar laws affecting creditors' rights generally and to general principles of equity (whether considered in a proceeding in equity or at law).
2. Accuracy of Representations and Warranties. The factual representations and warranties of the parties contained in the Transaction Documents are true and correct in all material respects as of the date of execution thereof and will continue to be true and correct in all material respects as of the Closing Date and at all relevant times thereafter.
3. Compliance with QRF 2022-1 Separateness Covenants. QRF 2022-1 has been, and will continue to be, operated in strict compliance with the separateness covenants and organizational restrictions set forth in the QRF 2022-1 LLC Agreement and the Transaction Documents, including without limitation the covenants described in Section V.2 below.
4. Compliance with QRH Separateness Covenants. QRH has been, and will continue to be, operated in strict compliance with the separateness covenants and organizational restrictions set forth in the QRH LLC Agreement and the Transaction Documents.
5. Maintenance of Independent Managers. The independent managers — Timothy R. Callan for QRF 2022-1 and Eleanor M. Vasquez for QRH — have been and will continue to be maintained in their respective positions for so long as any Notes remain outstanding, and will at all times satisfy the independence requirements set forth in the QRF 2022-1 LLC Agreement and the QRH LLC Agreement, respectively. The consent of the applicable independent manager will be required before the filing of any voluntary bankruptcy petition by QRF 2022-1 or QRH, as applicable, or before any other material action described in the applicable LLC Agreement as requiring independent manager consent.
6. True Sale Treatment. The transfers of Receivables from QPF to QRH pursuant to the Receivables Sale Agreement, and from QRH to QRF 2022-1 pursuant to the Receivables Transfer Agreement, will constitute true sales and not secured loans for all purposes, including under applicable federal bankruptcy law and applicable state law (including the Uniform Commercial Code as in effect in the applicable jurisdictions). We note that we are delivering separate draft True Sale opinions, dated October 8, 2022, addressing the characterization of such transfers, and we rely upon the conclusions expressed therein for purposes of this opinion.
7. Perfection of Security Interests. The UCC-1 Financing Statements described in item (18) of Section II will be duly filed with the Secretary of State of the State of Delaware on or prior to the Closing Date, and all actions necessary to perfect the security interests contemplated by the Transaction Documents will be duly taken and maintained.
8. Separate Accounts, Books, and Records. QRF 2022-1 will maintain its own bank accounts, including the Collection Account, the Payment Account, the Reserve Account, and the Liquidity Reserve Account, each held at Calvoneth Trust Company, National Association, and will maintain separate books and records and separate financial statements distinct from those of QIH, QPF, and QRH.
9. Observance of Entity Formalities. QRF 2022-1 will observe all formalities of a separate limited liability company entity, including holding itself out to the public, lenders, rating agencies, trade creditors, and all other third parties as a legal entity separate and apart from QIH, QPF, and QRH.
10. Adequate Capitalization; No Commingling. QRF 2022-1 will maintain adequate capitalization for its contemplated activities and will not commingle its assets with those of QIH, QPF, QRH, or any other entity.
11. Payment of Own Expenses. QRF 2022-1 will pay its own expenses and liabilities from its own funds, including, without limitation, the Indenture Trustee fee of $35,000 per annum plus $5,000 per Payment Date, and will not guarantee or pay the obligations or debts of any affiliate or other person.
12. Consistency with Separateness Covenants. No party to any Transaction Document will act in a manner inconsistent with the separateness covenants set forth in the QRF 2022-1 LLC Agreement, the QRH LLC Agreement, or the Transaction Documents.
13. Compliance with Applicable Laws. All applicable state and federal laws and regulations, including without limitation applicable licensing, usury, insurance premium financing, and consumer protection laws, will be complied with by QRF 2022-1 and the Affiliated Entities.
We emphasize that the foregoing assumptions are fundamental to the opinion expressed herein. The doctrine of substantive consolidation is fact-intensive and equitable in nature, and the failure of QRF 2022-1 or any of the Affiliated Entities to satisfy any of the foregoing assumptions could, depending on the nature and extent of such failure, provide a basis for a court to reach a different conclusion from that expressed in this opinion.
IV. LEGAL FRAMEWORK — SUBSTANTIVE CONSOLIDATION DOCTRINE
A. General Principles
The doctrine of substantive consolidation is an equitable remedy available to a bankruptcy court under the Bankruptcy Code. Although the Bankruptcy Code does not expressly authorize substantive consolidation by name, courts have recognized the remedy as incident to the general equitable powers conferred by Section 105(a) of the Bankruptcy Code, which provides that a bankruptcy court "may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]," and under Section 1123(a)(5)(C), which permits a plan of reorganization to provide for the "merger or consolidation of the debtor with one or more persons."
Substantive consolidation, when ordered, disregards the separateness of two or more legal entities and treats their respective assets and liabilities as though they were held by, or belonged to, a single entity. The practical consequence of such an order in the context of a securitization transaction is significant: if the assets of the special purpose entity were to be substantively consolidated with those of its parent, sponsor, originator, or other affiliate, the receivables and other assets held by the SPE would become part of the bankruptcy estate of the affiliated debtor, and the secured claim of the noteholders against the SPE's assets would be subordinated to, or would compete with, the claims of the affiliated debtor's general unsecured creditors.
It is well established that substantive consolidation is an extraordinary remedy that courts invoke sparingly, particularly in light of the strong policy under state law favoring respect for the separate legal existence of entities and the rights of creditors who extend credit in reliance on the separateness of a particular obligor. Courts have recognized that the remedy of substantive consolidation, by its nature, necessarily involves the redistribution of assets and liabilities among entities and their respective creditor bodies, and can produce significant inequities if applied without careful consideration.
The burden of establishing the propriety of substantive consolidation falls squarely on the party seeking the remedy. In the securitization context, that party would typically be a trustee in bankruptcy of the affiliated debtor (or the debtor in possession) or a creditors' committee seeking to bring the SPE's assets into the affiliated debtor's estate. As discussed more fully below, the party seeking consolidation must demonstrate either that the entities' affairs are so entangled that their separate identities can no longer be distinguished, or that creditors dealt with the entities as a single economic unit without reliance on their separate identities.
B. The Two-Part Test for Substantive Consolidation
The prevailing judicial framework for analyzing substantive consolidation requests involves a two-part test. Under this framework, a court may order substantive consolidation only where one of the following conditions is satisfied:
Prong 1 — Entanglement (Substantial Identity). The first prong asks whether the entities' affairs are so entangled that their respective assets, liabilities, and corporate identities can no longer be segregated without undue cost and effort. Under this test — often referred to as the "entanglement" test or the "substantial identity" test — the court examines whether the entities have maintained sufficiently distinct corporate existences such that their respective estates can be identified and administered separately. If the entities' affairs have become so intertwined that the cost of untangling them would consume a significant portion of the estate or would be practically infeasible, substantive consolidation may be warranted.
In evaluating the degree of entanglement, courts have considered a range of factors, including but not limited to the following:
(i) the degree of difficulty in segregating and ascertaining the individual assets and liabilities of each entity;
(ii) the presence or absence of consolidated financial statements and whether creditors reviewed or relied upon consolidated financial information;
(iii) the unity of interests and ownership among the entities, including whether the entities share common equity holders, officers, directors, or managers;
(iv) the existence of parent-subsidiary guarantees, intercompany loans, or other financial interdependencies;
(v) the degree to which the entities observe corporate formalities, including the maintenance of separate books and records, separate bank accounts, separate stationery, and separate organizational meetings or consents;
(vi) the extent of commingling of assets, business functions, employees, or records;
(vii) whether the entities share the same physical offices, telephone numbers, or operational infrastructure;
(viii) whether the entities engage in transactions with each other on arm's-length terms; and
(ix) the profitability and financial viability of each entity on a stand-alone basis.
No single factor is dispositive, and the analysis is inherently fact-specific. Courts weigh these factors in the aggregate to determine whether the entities have maintained sufficient separateness to warrant respect for their distinct legal identities.
Prong 2 — Reliance. The second prong focuses on whether creditors dealt with the entities as a single economic unit and did not rely on the separate identity or separate creditworthiness of the individual entity when extending credit. Under this test, a court will consider whether the creditors of the non-debtor entity (in this case, the noteholders) would be unfairly disadvantaged by consolidation because they extended credit based on the separateness of the entity and the ring-fenced nature of the assets securing their claims.
In assessing reliance, courts examine factors such as:
(i) whether credit was extended based on the creditworthiness of the specific entity (and its assets), rather than on the creditworthiness of the parent or sponsor;
(ii) whether offering documents, credit agreements, or other disclosure materials described the entity as a separate legal entity with a distinct asset base;
(iii) whether credit ratings were assigned to the entity's obligations on a de-linked basis, separate from the corporate credit rating of the parent or sponsor;
(iv) whether the credit enhancement structure was designed to protect creditors against losses on the entity's own asset pool, without reliance on parent support; and
(v) whether creditors conducted independent due diligence on the entity's assets and financial condition, as distinguished from the parent's consolidated financial condition.
Where creditors have relied on the separate identity and separate asset base of the non-debtor entity in making their investment decisions, substantive consolidation is generally inappropriate because it would destroy the very basis on which those creditors extended credit.
C. Heightened Standard for Special Purpose Entities
Courts have recognized that special purpose entities ("SPEs") used in structured finance transactions occupy a unique position in the substantive consolidation analysis. Because these entities are typically created for the express purpose of isolating assets from the bankruptcy estate of the sponsor or originator — i.e., for the purpose of achieving "bankruptcy remoteness" — courts have exhibited heightened reluctance to order the substantive consolidation of a properly structured SPE with its parent or sponsor.
Several considerations inform this heightened standard. First, the organizational documents of a bankruptcy-remote SPE typically contain express separateness covenants that require the entity to maintain its separate legal existence, refrain from commingling assets, pay its own expenses, and avoid guaranteeing the obligations of affiliates. Courts have recognized that these covenants serve as objective evidence that the SPE was intended to operate as a distinct legal entity and that creditors relied on such separateness.
Second, the appointment of one or more independent managers (sometimes referred to as "independent directors" or "special members") who must consent before the entity may file a voluntary bankruptcy petition is a widely recognized structural feature that evidences the separate governance of the SPE. The presence of an independent manager who has no financial interest in the outcome of a bankruptcy filing by the parent or sponsor and who owes a fiduciary duty to the SPE (including its creditors) provides meaningful protection against the entity being swept into a parent's bankruptcy estate.
Third, non-petition covenants — provisions in which the entity's members, managers, or creditors agree not to file or join in the filing of a bankruptcy petition against the SPE — further reinforce the entity's bankruptcy-remote status. While the enforceability of non-petition covenants in all circumstances remains an open question under federal bankruptcy law, courts have given weight to these provisions as evidence of the parties' intent that the SPE remain separate from its affiliates.
Fourth, in the two-tier securitization context (where an intermediate depositor entity sits between the originator and the issuing SPE), the additional corporate layer provides further insulation. Even if a court were to order consolidation of the originator with the depositor, the issuing SPE remains separated by an additional corporate boundary, and the assets held by the issuing SPE would not automatically be drawn into the originator's estate absent a separate finding of entanglement or lack of reliance as to the issuing SPE itself.
In light of these considerations, we believe that a court analyzing a substantive consolidation claim involving a properly structured, bankruptcy-remote SPE such as QRF 2022-1 would apply an exacting standard and would require a strong factual showing before ordering consolidation.
V. APPLICATION TO QRF 2022-1
A. QRF 2022-1 as a Properly Structured Bankruptcy-Remote SPE
QRF 2022-1 is a Delaware limited liability company formed on August 3, 2022, for the sole and limited purpose of (i) acquiring and holding insurance premium finance receivables originated by QPF, (ii) issuing notes backed by such receivables, (iii) granting security interests in such receivables and the proceeds thereof to the Trustee for the benefit of the noteholders, and (iv) engaging in such other activities as are incidental to the foregoing. QRF 2022-1 was organized under the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.) and has no purpose other than the securitization transactions described herein.
The sole member of QRF 2022-1 is Quorum Receivables Holding LLC, a Delaware limited liability company that itself qualifies as a bankruptcy-remote intermediate SPE. QRH, in turn, is 100% owned by QPF, a Delaware limited liability company that is the wholly owned subsidiary of QIH, a Delaware corporation that is publicly traded on the New York Stock Exchange under the ticker symbol "QIHC." The resulting corporate chain is as follows:
QIH (Delaware corporation, NYSE: QIHC) ↓ (100% ownership) QPF (Delaware LLC, originator and servicer) ↓ (100% ownership) QRH (Delaware LLC, depositor, bankruptcy-remote) ↓ (sole member) QRF 2022-1 (Delaware LLC, issuer, bankruptcy-remote)
This two-tier SPV structure — in which QRH serves as an intermediate depositor between QPF (the originator) and QRF 2022-1 (the issuer) — is a widely accepted market practice in asset-backed securities transactions. The use of two separate bankruptcy-remote entities provides additional structural insulation from the bankruptcy estate of the originator and sponsor. Even if a court were to order the substantive consolidation of QPF with QRH (a result we believe would be highly unlikely given QRH's own bankruptcy-remote features, as discussed in Section VI.C below), QRF 2022-1 would remain separated from the consolidated estate by its own independent corporate existence and separateness protections.
B. Separateness Covenants and Organizational Restrictions
The QRF 2022-1 LLC Agreement and the Transaction Documents contain a comprehensive set of separateness covenants and organizational restrictions designed to ensure that QRF 2022-1 maintains its separate legal existence and is not treated as a mere alter ego, instrumentality, or department of QIH, QPF, QRH, or any other affiliated entity. We have reviewed these covenants in detail and summarize the principal provisions below.
Separate Existence. QRF 2022-1 covenants in Section 7.01(a) of the QRF 2022-1 LLC Agreement to maintain its existence as a separate legal entity, distinct and apart from QIH, QPF, QRH, and any other affiliate. QRF 2022-1 will hold itself out to the public, rating agencies, lenders, trade creditors, and all other persons as a legal entity separate and apart from any other person, and will correct any known misunderstanding regarding its separate identity.
Separate Books and Records. QRF 2022-1 covenants in Section 7.01(b) to maintain its own complete and accurate books and records, separate from those of QIH, QPF, QRH, and any other affiliate. These books and records will be maintained at the offices of the Administrator (QIH, in its capacity as Administrator under the Administration Agreement) or at such other location as QRF 2022-1 may designate, and will at all times be available for inspection by the Trustee and the rating agencies upon reasonable notice.
Separate Financial Statements. QRF 2022-1 covenants in Section 7.01(c) to prepare and maintain its own financial statements. To the extent that the financial statements of QRF 2022-1 are consolidated with those of QIH or any other affiliate for financial reporting purposes under generally accepted accounting principles, such consolidated financial statements will contain a note or other prominent notation indicating that QRF 2022-1 is a separate legal entity whose assets are not available to satisfy the obligations of QIH, QPF, QRH, or any other affiliate.
Separate Bank Accounts. QRF 2022-1 covenants in Section 7.01(d) to maintain its own separate bank accounts, including the Collection Account, the Payment Account, the Reserve Account, and the Liquidity Reserve Account, each held at Calvoneth Trust Company, National Association, and subject to the Account Control Agreement. QRF 2022-1 will not commingle its funds with those of QIH, QPF, QRH, or any other person. All collections on the Receivables are deposited directly into the Collection Account, and all payments on the Notes and other distributions are made from the Payment Account in accordance with the payment waterfall set forth in Section 5.04 of the Indenture.
Arm's-Length Transactions. QRF 2022-1 covenants in Section 7.01(e) that all transactions between QRF 2022-1 and its affiliates will be conducted on an arm's-length basis or on terms no less favorable to QRF 2022-1 than those that could be obtained from unaffiliated third parties. In this regard, the servicing fee payable to QPF under the Servicing Agreement is 1.00% per annum on the outstanding pool balance, which is consistent with market rates for comparable insurance premium finance receivables servicing arrangements, as reflected in comparable transactions reviewed by Calderwood & Harkness. The administration fee payable to QIH under the Administration Agreement is similarly set at levels consistent with arm's-length terms.
No Guarantees or Pledges. QRF 2022-1 covenants in Section 7.01(f) that it will not guarantee, become obligated for, or pledge its assets in respect of the debts or obligations of QIH, QPF, QRH, or any other person. We note that the Performance Guaranty executed in connection with this transaction runs from QIH (as guarantor) to Calvoneth Trust (as beneficiary) for QPF's servicing obligations under the Servicing Agreement, and does not constitute an obligation of, or create any liability for, QRF 2022-1. Accordingly, the Performance Guaranty does not compromise the separateness of QRF 2022-1.
Adequate Capitalization. QRF 2022-1 covenants in Section 7.01(g) to maintain capitalization adequate for its contemplated business activities. The initial capitalization of QRF 2022-1 includes the over-collateralization required by the Indenture and the funded reserve amounts, which, together with the subordination of the Class B Notes and Class C Notes relative to the Class A Notes, provide a meaningful capital cushion for the entity's operations.
Separate Stationery and Contacts. QRF 2022-1 covenants in Section 7.01(h) to use separate stationery, invoices, and other business documents that bear its own name and identify it as a separate legal entity. Correspondence and communications issued by QRF 2022-1 (or by the Administrator on behalf of QRF 2022-1) will clearly identify QRF 2022-1 as a separate entity and will not suggest that QRF 2022-1 is a division, department, or alter ego of QIH, QPF, or QRH.
Limitation on Activities. QRF 2022-1 covenants in Section 7.01(i) that its activities will be limited to (i) acquiring Receivables from QRH pursuant to the Receivables Transfer Agreement, (ii) issuing the Notes pursuant to the Indenture, (iii) granting security interests in the Receivables and related assets to the Trustee pursuant to the Pledge Agreement, (iv) entering into and performing its obligations under the Transaction Documents, and (v) engaging in such other activities as are incidental to the foregoing. QRF 2022-1 will not engage in any business unrelated to the securitization of insurance premium finance receivables contemplated by the Transaction Documents.
No Employees. QRF 2022-1 covenants in Section 7.01(j) that it will have no employees. All administrative functions necessary for the operation of QRF 2022-1 are performed by QIH in its capacity as Administrator under the Administration Agreement, and all servicing functions with respect to the Receivables are performed by QPF in its capacity as Servicer under the Servicing Agreement. In each case, these services are provided pursuant to arm's-length contractual arrangements, and the service providers act as independent contractors, not as agents or employees of QRF 2022-1.
Registered Agent. QRF 2022-1 maintains its own registered agent for service of process in the State of Delaware, currently Ashgrove Services Inc., located at 28 Liberty Street, New York, New York 10005, and at 1209 Orange Street, Wilmington, Delaware 19801.
Taken together, these separateness covenants establish a robust framework for maintaining the separate legal identity of QRF 2022-1 and preventing the type of commingling, identity confusion, or operational entanglement that could support a substantive consolidation claim.
C. Independent Manager and Non-Petition Provisions
A critical component of QRF 2022-1's bankruptcy-remote structure is the requirement that an independent manager consent before QRF 2022-1 may take certain fundamental actions that could expose the entity to bankruptcy proceedings or alter its bankruptcy-remote character.
Pursuant to Section 7.02 of the QRF 2022-1 LLC Agreement and the QRF Independent Manager Agreement, the affirmative consent of Timothy R. Callan, as independent manager of QRF 2022-1, is required before QRF 2022-1 may take any of the following actions (each, a "Material Action"):
(a) file a voluntary petition for relief under the Bankruptcy Code or any similar state or federal insolvency law;
(b) consent to the filing of an involuntary petition against QRF 2022-1 under the Bankruptcy Code or any similar state or federal insolvency law;
(c) seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian, or similar official for QRF 2022-1 or any substantial part of its assets;
(d) make a general assignment for the benefit of creditors;
(e) seek or consent to the dissolution, liquidation, winding up, or termination of QRF 2022-1;
(f) merge or consolidate QRF 2022-1 with any other person, or transfer all or substantially all of QRF 2022-1's assets to any other person (other than pursuant to the Indenture and the Transaction Documents);
(g) amend, modify, or waive any provision of the QRF 2022-1 LLC Agreement relating to the independent manager, the separateness covenants, or the limitations on the entity's activities; or
(h) take any action that would cause QRF 2022-1 to become insolvent.
Mr. Callan has been appointed by Fortbridge Corporate Services LLC, a nationally recognized provider of independent manager and independent director services located at 1209 Orange Street, Wilmington, Delaware 19801. As required by the QRF 2022-1 LLC Agreement and the QRF Independent Manager Agreement, Mr. Callan (i) has no ownership interest, direct or indirect, in QRF 2022-1, QRH, QPF, or QIH; (ii) is not and has not been within the past five years an employee, officer, director, manager, or controlling person of QRF 2022-1, QRH, QPF, QIH, or any of their respective affiliates (other than serving as an independent manager of unrelated bankruptcy-remote entities at the direction of Fortbridge); (iii) is not a creditor, supplier, or customer of QRF 2022-1, QRH, QPF, QIH, or any of their respective affiliates; and (iv) is not a family member of any of the foregoing persons. Mr. Callan's compensation is paid by Fortbridge pursuant to the QRF Independent Manager Agreement and is not contingent upon any actions taken by QRF 2022-1 or any affiliated entity.
Similarly, the QRH LLC Agreement requires the consent of Eleanor M. Vasquez, as independent manager of QRH (also appointed by Fortbridge), before QRH may take any Material Action, including filing a voluntary bankruptcy petition. Ms. Vasquez satisfies the same independence requirements described above with respect to Mr. Callan.
Additionally, the Indenture contains covenants, set forth in Section 4.18 thereof, reinforcing the restriction on QRF 2022-1 from filing or consenting to bankruptcy without the prior consent of the independent manager and further requiring that the Trustee be given advance notice of any such proposed filing.
The presence of independent managers at both the issuer (QRF 2022-1) and depositor (QRH) levels, each of whom must consent before a voluntary bankruptcy petition may be filed, is a significant structural feature that underscores the distinct governance of each entity and reduces the risk of involuntary inclusion in a parent's bankruptcy filing. Although, as noted in Section VII below, the enforceability of non-petition covenants under all circumstances remains an evolving area of law, these provisions are widely recognized by courts, rating agencies, and market participants as meaningful protections against the voluntary entry of an SPE into bankruptcy.
D. True Sale Structure
A fundamental premise of the non-consolidation analysis is that the Receivables held by QRF 2022-1 are its own property and are not property of the bankruptcy estate of QPF or QRH. The Transaction Documents are structured to accomplish this result by effecting true sales of the Receivables at each stage of the two-tier transfer chain.
Under the Receivables Sale Agreement, QPF sells and assigns its right, title, and interest in the Receivables to QRH. Under the Receivables Transfer Agreement, QRH sells and assigns its right, title, and interest in the Receivables to QRF 2022-1. Each such transfer is structured and documented as an absolute and irrevocable sale and assignment, not as a secured loan or financing arrangement. The purchase price paid by QRH to QPF, and by QRF 2022-1 to QRH, is determined by reference to a formula set forth in the applicable agreement and is intended to represent fair value for the Receivables transferred.
We are delivering separate draft True Sale opinions, dated October 8, 2022, addressing the characterization of each such transfer under applicable law. For purposes of this non-consolidation opinion, we assume (as stated in Assumption 6 in Section III above) that the transfers of Receivables from QPF to QRH and from QRH to QRF 2022-1 constitute true sales for all purposes, including under the Bankruptcy Code and applicable state law.
As additional protection against recharacterization risk, each of the Receivables Sale Agreement and the Receivables Transfer Agreement provides that if, notwithstanding the intent of the parties, a court were to determine that the transfers constituted secured loans rather than true sales, the applicable transferor would be deemed to have granted a first-priority perfected security interest in the Receivables to the applicable transferee. The draft UCC-1 Financing Statements described in item (18) of Section II are designed to perfect such back-up security interests upon filing with the Secretary of State of the State of Delaware.
If the Receivables are property of QRF 2022-1 by virtue of true sale transfers, they would not be part of the bankruptcy estate of QPF or QRH, and the principal factual predicate for substantive consolidation — commingled or undifferentiated assets — would be absent.
E. Analysis of Entanglement Factors (Prong 1)
Applying the entanglement or substantial identity test described in Section IV.B above, we have evaluated the degree to which the affairs of QRF 2022-1 are, or could become, entangled with those of QIH, QPF, or QRH.
Asset Segregation. QRF 2022-1 holds only insurance premium finance receivables acquired through true sale transfers from QRH, the proceeds of such receivables, and cash and investment assets held in the segregated accounts at Calvoneth Trust Company, National Association (i.e., the Collection Account, Payment Account, Reserve Account, and Liquidity Reserve Account). These assets are readily identifiable and can be segregated from the assets of QIH, QPF, and QRH without undue cost or difficulty. There is no commingling of the Receivables or the proceeds thereof with the assets of any other entity. The Account Control Agreement grants the Trustee control over the accounts, and all collections on the Receivables are deposited directly into the Collection Account at Calvoneth Trust, which is not an account of, and is not controlled by, QIH, QPF, or QRH.
Separate Liabilities. The liabilities of QRF 2022-1 consist solely of (i) the Notes — $375,000,000 of Class A Notes, $75,000,000 of Class B Notes, and $35,000,000 of Class C Notes — aggregating $485,000,000 in principal amount (including $15,000,000 of initial over-collateralization), (ii) obligations under the Liquidity Facility Agreement, pursuant to which Northvane Bank, National Association has committed to provide up to $25,000,000 of liquidity support, and (iii) routine operating expenses, including trustee fees, servicing fees, administration fees, back-up servicing fees, and other transaction costs payable from the payment waterfall. These liabilities are entirely distinct from the obligations of QIH (which has outstanding corporate debt with unsecured credit ratings of BBB from Brindoval and Baa2 from Pinnacle), QPF, or QRH. There is no overlap or interdependence between the claims of QRF 2022-1's creditors and the claims of any Affiliated Entity's creditors.
No Intercompany Debt. QRF 2022-1 does not borrow from, or lend to, QIH, QPF, or QRH (other than the structured receivables transfers, which are true sales, not loans). There are no intercompany payables, receivables, loans, advances, or other financial obligations between QRF 2022-1 and any Affiliated Entity that could create a basis for finding entanglement. The servicing fee of 1.00% per annum paid to QPF and the administration fee paid to QIH represent arm's-length compensation for services rendered and are payable from the payment waterfall, not from intercompany lending arrangements.
Separate Officers and Managers. QRF 2022-1 has no officers or directors. It is managed by its sole member, QRH, subject to the oversight and consent rights of independent manager Timothy R. Callan. While QRH is in turn managed by QPF (itself managed by Sandra Ling-Hwang in her capacity as QIH Treasurer), the independent manager structure provides a meaningful layer of governance separation. Mr. Callan's sole function is to protect the separate existence of QRF 2022-1 and to exercise his fiduciary duties to QRF 2022-1 (including its creditors, the noteholders) when deciding whether to consent to any Material Action. There is no overlap of day-to-day management between QRF 2022-1 and QIH, and the administrative services provided by QIH under the Administration Agreement are performed on a contractual basis, not through an identity of management.
No Commingling. As described above, QRF 2022-1 maintains separate bank accounts controlled by the Trustee under the Account Control Agreement. Collections on the Receivables are deposited into the Collection Account and are distributed in accordance with the payment waterfall set forth in the Indenture. At no point are QRF 2022-1's funds deposited into, or commingled with, accounts belonging to QIH, QPF, or QRH. QRF 2022-1 pays its own expenses from its own funds and does not subsidize or contribute to the expenses of any affiliate.
Based on the foregoing analysis, we believe that the affairs of QRF 2022-1 are not entangled with those of QIH, QPF, or QRH and that the assets and liabilities of QRF 2022-1 can be readily identified and segregated from those of the Affiliated Entities. A party seeking substantive consolidation under Prong 1 would face a substantial burden in demonstrating that the separate identities of these entities can no longer be distinguished.
F. Analysis of Reliance Factors (Prong 2)
Applying the reliance test described in Section IV.B above, we have evaluated whether creditors of QRF 2022-1 — specifically, the holders of the Notes — dealt with QRF 2022-1 as a separate entity and relied on its separate identity and separate asset base in making their investment decisions.
Reliance on Receivables Pool. The Notes are being offered and sold in a private placement pursuant to Rule 144A under the Securities Act of 1933, as amended, and Regulation S thereunder, by Ridgeline Capital Markets LLC as Initial Purchaser. Purchasers of the Notes are sophisticated institutional investors who will rely on the creditworthiness of the underlying insurance premium finance receivables pool and the structural protections afforded by the Transaction Documents — including over-collateralization, subordination, the Reserve Account, and the Liquidity Facility — rather than on the general creditworthiness of QIH, QPF, or QRH.
Disclosure of Separateness. The Offering Memorandum clearly and prominently discloses the separate legal existence of QRF 2022-1, the bankruptcy-remote structure of the transaction, the two-tier SPV structure, the presence of independent managers, the separateness covenants, and the limited-purpose nature of QRF 2022-1. The Offering Memorandum also contains risk factor disclosure alerting prospective investors to the risks associated with substantive consolidation and the factors that mitigate such risks. Investors who purchase the Notes will have had access to, and the opportunity to review, this disclosure.
De-Linked Ratings. The preliminary ratings assigned to the Notes by Brindoval (AAA(cr), A(cr), and BBB(cr) for the Class A, B, and C Notes, respectively) and Pinnacle (Aaa(p), A1(p), and Baa2(p), respectively) are based on the credit quality of the Receivables pool and the structural protections, and are expressly de-linked from the unsecured corporate credit ratings of QIH (BBB from Brindoval and Baa2 from Pinnacle). The fact that the Class A Notes carry preliminary ratings of AAA(cr)/Aaa(p), which are multiple notches above QIH's unsecured corporate ratings, is direct evidence that the rating agencies — and, by extension, investors — rely on the separate asset pool and structural features of QRF 2022-1, not on the corporate credit of QIH.
Credit Enhancement on Stand-Alone Basis. The credit enhancement structure is sized to protect noteholders against losses on the Receivables pool on a stand-alone basis, without reliance on QIH's corporate credit. The initial credit enhancement levels — 25.0% for the Class A Notes (consisting of subordination of the Class B Notes and Class C Notes plus over-collateralization and the Reserve Account), 10.0% for the Class B Notes, and 3.0% for the Class C Notes — are determined by reference to the historical loss experience, prepayment rates, and other performance characteristics of QPF's insurance premium finance receivables portfolio.
Based on the foregoing, we believe that creditors of QRF 2022-1 will deal with QRF 2022-1 as a separate entity and will rely on the separate identity and asset base of QRF 2022-1 in making their investment decisions. A party seeking substantive consolidation under Prong 2 would face an extremely difficult burden in demonstrating that noteholders dealt with QRF 2022-1, QIH, QPF, and QRH as a single economic unit.
VI. ANALYSIS OF CONSOLIDATION WITH SPECIFIC ENTITIES
A. Non-Consolidation with Quorum Insurance Holdings Corp. (QIH)
QIH is the ultimate parent and sponsor of the securitization transaction. It is a publicly traded Delaware corporation listed on the New York Stock Exchange under the ticker symbol "QIHC," with its principal executive offices located at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. For its fiscal year ended December 31, 2021, QIH reported consolidated revenue of approximately $3.8 billion and maintains unsecured corporate credit ratings of BBB from Brindoval and Baa2 from Pinnacle.
QRF 2022-1 is four levels removed from QIH in the organizational chain: QIH owns 100% of QPF, QPF owns 100% of QRH, and QRH is the sole member of QRF 2022-1. This multi-layered corporate structure provides significant organizational separation between QIH and QRF 2022-1.
QIH's roles in the transaction are limited and clearly defined. QIH serves as Administrator under the Administration Agreement, pursuant to which it provides certain administrative services to QRF 2022-1 (including coordination with the Servicer, the Trustee, and the rating agencies) in exchange for an arm's-length administration fee. QIH also serves as Sponsor and has executed the Performance Guaranty in favor of Calvoneth Trust for QPF's servicing obligations under the Servicing Agreement. Critically, the Performance Guaranty runs from QIH (as guarantor) to Calvoneth Trust (as beneficiary) for the benefit of the noteholders and does not create any obligation of QRF 2022-1 to QIH or any guaranty by QRF 2022-1 of QIH's obligations. The Performance Guaranty is a one-way credit support mechanism that benefits the noteholders; it does not blur the corporate boundary between QIH and QRF 2022-1.
QIH does not commingle its assets with those of QRF 2022-1, does not maintain joint bank accounts with QRF 2022-1, and does not hold itself out as the same entity as QRF 2022-1. QIH's consolidated financial statements, to the extent they include QRF 2022-1, contain footnote disclosure indicating that QRF 2022-1 is a separate legal entity whose assets are not available to satisfy the obligations of QIH or its other subsidiaries. QIH has no control over the day-to-day operations of QRF 2022-1 other than through its contractual role as Administrator, and Mr. Callan serves as an independent check on the governance of QRF 2022-1.
For these reasons, we believe that a court would not order the substantive consolidation of QRF 2022-1 with QIH. The entities maintain clearly separate existences, separate assets and liabilities, separate governance structures, and separate creditor constituencies. The multi-tier corporate structure, the arm's-length contractual relationships, and the de-linked credit ratings all weigh strongly against a finding of entanglement or lack of creditor reliance.
B. Non-Consolidation with Quorum Premium Finance LLC (QPF)
QPF is the originator and servicer of the insurance premium finance receivables. It is a Delaware limited liability company, wholly owned by QIH, with Employer Identification Number 84-2653198. QPF originates insurance premium finance loans to commercial policyholders across all 50 states, with a total managed portfolio of approximately $2.1 billion as of the date hereof.
QPF's relationship with QRF 2022-1 is defined by two principal contractual arrangements: (i) QPF is the ultimate originator of the Receivables, which are sold by QPF to QRH pursuant to the Receivables Sale Agreement, and (ii) QPF acts as Servicer of the Receivables pursuant to the Servicing Agreement, for which it receives a servicing fee of 1.00% per annum on the outstanding pool balance.
Both of these relationships are contractual and arm's-length in nature. The servicing relationship, in particular, is designed to be operationally separable: in the event of a Servicer Default under the Servicing Agreement (including, without limitation, the filing of a bankruptcy petition by QPF or against QPF, the failure of QPF to make required remittances, or a material breach of QPF's servicing obligations), the servicing responsibilities will transfer to Northvane Bank, National Association, as back-up servicer, pursuant to the Back-Up Servicing Agreement. The existence of a back-up servicing arrangement demonstrates that QRF 2022-1's continued operation does not depend on QPF's continued financial health or corporate existence.
QPF's interest in QRF 2022-1 is indirect, flowing through its ownership of QRH, which is the sole member of QRF 2022-1. The two-tier SPV structure provides an additional corporate layer of separation between QPF and QRF 2022-1. QPF retains no residual ownership interest in the Receivables after their sale to QRH; the sale is structured as a true sale, and QPF's only continuing relationship with the Receivables is its role as Servicer.
QPF does not commingle its assets with those of QRF 2022-1, does not share bank accounts with QRF 2022-1, and does not hold itself out as the same entity as QRF 2022-1. QPF's books and records reflect the sale of Receivables to QRH (and ultimately to QRF 2022-1) as true sales, and QPF's financial statements are prepared on a basis consistent with such treatment.
For these reasons, we believe that a court would not order the substantive consolidation of QRF 2022-1 with QPF. The contractual and arm's-length nature of the servicing relationship, the true sale transfer of Receivables, the two-tier SPV structure, the availability of a back-up servicer, and the absence of commingling or operational entanglement all weigh strongly against substantive consolidation.
C. Non-Consolidation with Quorum Receivables Holding LLC (QRH)
QRH is the intermediate SPV or depositor in the two-tier securitization structure. It is a Delaware limited liability company, formed on August 3, 2022 (Delaware Secretary of State File No. 7894228), 100% owned by QPF, with Employer Identification Number 88-1247619.
QRH is itself a bankruptcy-remote entity, with its own independent manager (Eleanor M. Vasquez, appointed by Fortbridge Corporate Services LLC) and its own separateness covenants set forth in the QRH LLC Agreement. The Material Action consent requirements applicable to QRH mirror those applicable to QRF 2022-1, and Ms. Vasquez satisfies the same independence requirements as Mr. Callan. The QRH LLC Agreement contains the same categories of separateness covenants as the QRF 2022-1 LLC Agreement, including requirements for separate books and records, separate accounts, separate financial statements, arm's-length transactions, and no commingling.
QRH's role in the transaction is narrowly circumscribed: it acquires Receivables from QPF pursuant to the Receivables Sale Agreement and immediately transfers those Receivables to QRF 2022-1 pursuant to the Receivables Transfer Agreement. QRH does not hold Receivables for any extended period and does not engage in any business activities other than those related to its function as depositor. QRH does not commingle its assets with those of QRF 2022-1, does not share bank accounts with QRF 2022-1, and does not hold itself out as the same entity as QRF 2022-1.
Although QRH is the sole member of QRF 2022-1, the relationship between the two entities is governed by the QRF 2022-1 LLC Agreement, which limits QRH's authority as member to actions that do not require independent manager consent. The presence of separate independent managers for each entity — Mr. Callan for QRF 2022-1 and Ms. Vasquez for QRH — underscores the distinct governance of each entity and demonstrates that neither entity is a mere alter ego or instrumentality of the other.
Furthermore, the fact that QRH is itself a bankruptcy-remote entity means that, even in a scenario in which QPF were to file for bankruptcy, QRH would not automatically become part of QPF's bankruptcy estate. The assets of QRH — namely, the rights (if any) it retains in connection with the Receivables transfer structure — would remain insulated from QPF's creditors, providing an additional buffer of protection for QRF 2022-1.
For these reasons, we believe that a court would not order the substantive consolidation of QRF 2022-1 with QRH. The distinct governance structures, the separate independent managers, the narrow and limited role of QRH, and the absence of commingling or operational entanglement all support the conclusion that QRF 2022-1 and QRH are separate legal entities whose assets and liabilities should not be pooled.
VII. QUALIFICATIONS AND LIMITATIONS
The opinion expressed herein is subject to the following qualifications and limitations:
1. Jurisdictional Scope. This opinion is based solely on the laws of the State of New York and the federal laws of the United States of America, including the United States Bankruptcy Code (Title 11 of the United States Code, as amended). We express no opinion as to the laws of any other jurisdiction, including the laws of the State of Delaware, except to the extent that the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.) is addressed in the separate formation and good standing opinions being delivered by Delaware counsel in connection with this transaction.
2. Laws and Facts as of Date Hereof. This opinion is based on facts as they exist as of the date hereof and on laws in effect as of the date hereof. We assume no obligation to update, revise, or supplement this opinion to reflect any changes in law, regulation, or fact that may occur after the date hereof, and we expressly disclaim any such obligation.
3. Dependence on Assumptions. This opinion is subject to and conditioned upon the assumptions set forth in Section III above. If any such assumption is not satisfied in fact — whether at the time of closing or at any time thereafter — the conclusions expressed herein could be materially affected. In particular, the ongoing observance of the separateness covenants and organizational restrictions set forth in the QRF 2022-1 LLC Agreement, the QRH LLC Agreement, and the Transaction Documents is essential to the conclusions expressed herein. A sustained or material failure to observe such covenants in practice could provide a basis for a court to reach a conclusion different from that expressed in this opinion.
4. Equitable Nature of Substantive Consolidation. Substantive consolidation is an equitable remedy that lies within the broad discretion of the bankruptcy court. By its nature, the doctrine involves a case-by-case, fact-intensive inquiry, and