1025-00007 · Quorum Insurance Holdings · Tax

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MEMORANDUM

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

TO: Douglas Carmichael, Partner, Calderwood & Harkness LLP Nolan Whitford, General Counsel, Quorum Insurance Holdings Corp. Sandra Ling-Hwang, Treasurer, Quorum Insurance Holdings Corp.

FROM: Sylvia Hartwell, Partner (Tax), Calderwood & Harkness LLP

DATE: September 1, 2022

RE: State Franchise and Income Tax Nexus Analysis — Quorum Receivables Funding 2022-1 LLC and Quorum Receivables Holding LLC

MATTER NO.: 1025-00007

I. Executive Summary

This memorandum sets forth our analysis of whether Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer") and Quorum Receivables Holding LLC ("QRH" or the "Depositor") will be subject to state-level franchise tax, income tax, or other entity-level taxes in states other than Delaware as a result of the contemplated securitization transaction. We have been asked to provide this analysis in connection with the structuring and issuance of the Notes (as defined below) and in anticipation of the tax disclosure that will be included in the Offering Memorandum.

Based on our review of the organizational documents, the Final Term Sheet (v3) dated September 2, 2022, and the near-final transaction documents, it is our conclusion that both QRF 2022-1 and QRH should avoid state-level franchise or income tax nexus in all jurisdictions other than the State of Delaware. This conclusion rests upon the following principal factors:

• Each entity is a Delaware limited liability company with no employees, no offices, and no physical presence outside of Delaware.

• Each entity is structured as a bankruptcy-remote special purpose vehicle with strictly limited purposes, independent managers, and separateness covenants that prevent commingling of operations or assets with the originator, sponsor, or any other affiliate.

• All administrative, servicing, trustee, and back-up servicing functions are performed by third parties pursuant to arm's-length agreements, and those third parties act in their own capacities rather than as agents of the SPVs for nexus purposes.

• The receivables held by QRF 2022-1 are intangible financial assets — insurance premium finance receivables — that do not constitute tangible personal property located in any particular state.

Both QRF 2022-1 and QRH are Delaware LLCs and, as such, will be subject to Delaware's annual franchise tax, which is currently assessed at a flat rate of $300 per entity per year. Neither entity is expected to owe Delaware income tax, as neither conducts business within the State of Delaware beyond maintaining a registered agent and registered office.

This analysis assumes the transaction structure as described in the Final Term Sheet (v3) dated September 2, 2022, and the near-final transaction documents provided to us for review. Any material modification to the transaction structure, the organizational documents, or the operational profile of either SPV could alter the conclusions set forth herein. We note that this memorandum does not address the federal income tax treatment of the transaction, which is addressed separately in the Tax Structuring Memorandum dated August 12, 2022 (Matter No. 1025-00007-FED). Nor does this memorandum address FATCA withholding or compliance, which is the subject of the FATCA Compliance Memorandum dated August 18, 2022.

II. Background — Transaction Structure and Entity Overview

A. Quorum Receivables Funding 2022-1 LLC (QRF 2022-1 — Issuer)

QRF 2022-1 is a Delaware limited liability company formed on August 3, 2022, under the Delaware Limited Liability Company Act, 6 Del. C. § 18-101 et seq. The entity is registered with the Delaware Secretary of State under File No. 7894231 and has been assigned Employer Identification Number 88-1247653 by the Internal Revenue Service.

The sole member of QRF 2022-1 is Quorum Receivables Holding LLC. The entity is governed by a limited liability company agreement that provides for management by an independent manager, Timothy R. Callan, who is provided by Fortbridge Corporate Services LLC, located at 1209 Orange Street, Wilmington, Delaware 19801. Mr. Callan's role as independent manager is essential to the bankruptcy-remote structure of the entity, as his approval is required for any voluntary bankruptcy filing, and he owes fiduciary duties to the entity (and not to the sole member or any affiliate) with respect to such approval.

The registered agent for QRF 2022-1 is Ashgrove Services Inc., located at 28 Liberty Street, New York, New York 10005. The designation of a New York registered agent is a matter of administrative convenience related to service of process and does not reflect any operational activities of QRF 2022-1 in the State of New York.

QRF 2022-1's purpose is strictly limited under its organizational documents. The entity's sole activities consist of: (i) acquiring and holding insurance premium finance receivables originated by Quorum Premium Finance LLC ("QPF"); (ii) issuing asset-backed notes secured by such receivables; (iii) entering into and performing its obligations under the transaction documents; and (iv) engaging in activities incidental to the foregoing. QRF 2022-1 has no employees, maintains no offices (other than its Delaware registered office), and conducts no operations other than those strictly necessary to fulfill its limited purpose as issuer in the securitization transaction.

In connection with the contemplated transaction, QRF 2022-1 will issue up to $500,000,000 in aggregate principal amount of notes (the "Notes"), structured as follows:

The receivables pool backing the Notes has an initial balance of approximately $612,000,000, comprising approximately 82,400 individual insurance premium finance loans originated by QPF across all 50 states. The receivables represent short-term, amortizing loans made to insureds to finance the payment of insurance premiums, secured by the borrower's right to any unearned premium refund from the applicable insurance carrier.

All administrative and servicing functions related to the receivables pool and the Notes are performed by third parties pursuant to arm's-length contractual arrangements. QPF serves as servicer of the receivables under the Servicing Agreement, for which it receives a servicing fee of 1.00% per annum on the outstanding pool balance. Calvoneth Trust Company, N.A. serves as indenture trustee under the Indenture, with its Corporate Trust Office located at 600 Travis Street, Suite 5800, Houston, Texas 77002. Northvane Bank, N.A. serves as back-up servicer and liquidity provider. Quorum Insurance Holdings Corp. ("QIH") serves as administrator of the SPV under the Administration Agreement.

B. Quorum Receivables Holding LLC (QRH — Depositor / Intermediate SPV)

QRH is a Delaware limited liability company formed on August 3, 2022, under the Delaware Limited Liability Company Act. The entity is registered with the Delaware Secretary of State under File No. 7894228 and has been assigned Employer Identification Number 88-1247619.

The sole member of QRH is Quorum Premium Finance LLC. The entity is governed by a limited liability company agreement that provides for management by an independent manager, Eleanor M. Vasquez, who is also provided by Fortbridge Corporate Services LLC. Ms. Vasquez serves in the same capacity and under the same independence requirements as Mr. Callan serves for QRF 2022-1, ensuring that QRH's governance structure supports its bankruptcy-remote status and legal separateness from QPF, QIH, and other affiliates.

The registered agent for QRH is Ashgrove Services Inc., located at 28 Liberty Street, New York, New York 10005.

QRH's purpose is limited to acting as the intermediate transferee and depositor of receivables between QPF (as seller and originator) and QRF 2022-1 (as issuer). Specifically, QRH receives receivables from QPF under the Receivables Sale Agreement and subsequently transfers those receivables to QRF 2022-1 under the Receivables Transfer Agreement. QRH is a bankruptcy-remote entity with no employees, no offices (other than its Delaware registered office), and no independent operations. Its role in the transaction is solely that of a conduit or depositor, facilitating the two-step true sale transfer of receivables from the originator to the issuer.

C. Originator and Sponsor

Quorum Premium Finance LLC ("QPF") is a Delaware limited liability company and a wholly owned subsidiary of Quorum Insurance Holdings Corp. QPF's principal office is located at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. QPF is licensed to originate insurance premium finance loans in all 50 states and the District of Columbia, and it currently manages approximately $2.1 billion in total receivables across its portfolio. QPF serves dual roles in the transaction: it is the originator and seller of the receivables, and it serves as the servicer of the receivables pool under the Servicing Agreement.

Quorum Insurance Holdings Corp. ("QIH") is a Delaware corporation, publicly traded on the New York Stock Exchange under the ticker symbol QIHC. QIH is headquartered at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. For fiscal year 2021, QIH reported consolidated revenue of approximately $3.8 billion. QIH's Chief Executive Officer is Marcus Devereaux, and its Chief Financial Officer is Priya Raghavan. QIH serves as the transaction sponsor and as administrator of the SPVs under the Administration Agreement.

It is important to note at the outset that QPF's extensive nationwide presence — including its licensing in all 50 states, its employment of personnel across multiple jurisdictions, and its origination of loans to obligors in every state — does not, in and of itself, impute state tax nexus to QRF 2022-1 or QRH. The SPVs are legally separate entities from QPF and from QIH. Provided that the true sale characterization of the receivables transfers is respected and the SPVs maintain their separate legal existence in accordance with the separateness covenants in their organizational documents and the transaction agreements, the operational footprint of QPF and QIH should not be attributed to the SPVs for state tax nexus purposes. The analysis supporting this conclusion is set forth in detail in Section III.C and Sections V and VI below.

III. Framework — State Tax Nexus Principles

A. Physical Presence Standard vs. Economic Nexus

Historically, the constitutional threshold for a state to impose a tax on an out-of-state entity was grounded in the physical presence doctrine. Under the Due Process Clause of the Fourteenth Amendment and the Commerce Clause of Article I, Section 8, a state could not impose a tax on an entity unless that entity had a sufficient connection — or "nexus" — with the taxing jurisdiction. For decades, the touchstone of this analysis was physical presence: whether the entity maintained a physical office, employed personnel, or owned or leased tangible personal property within the state. The Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), reinforced the physical presence standard in the context of sales and use tax, holding that the Commerce Clause required a seller to have a physical presence in a state before the state could require the seller to collect and remit use tax.

The landscape shifted significantly in 2018 when the Supreme Court decided South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), overruling Quill and holding that a state may impose sales and use tax collection obligations on an out-of-state seller based on the seller's economic activity in the state (i.e., exceeding a threshold of sales or transactions) even in the absence of physical presence. The Wayfair decision has had a profound impact on the sales and use tax landscape, prompting virtually every state to adopt economic nexus thresholds for sales tax purposes.

However, the application of Wayfair's economic nexus rationale to income and franchise taxes remains unsettled and varies considerably from state to state. While some states have enacted or adopted economic nexus standards for income and franchise tax purposes — and several states had such standards even before Wayfair (most notably, California and New York) — many states continue to apply a physical presence or substantial nexus standard for income tax purposes that requires more than merely deriving revenue from in-state customers. The distinction between sales/use tax nexus and income/franchise tax nexus is important for purposes of this memorandum, as our analysis focuses exclusively on the latter.

We also note the relevance of Public Law 86-272, 15 U.S.C. §§ 381–384, which prohibits a state from imposing a net income tax on an out-of-state corporation whose only in-state activity is the solicitation of orders for tangible personal property, provided that the orders are sent outside the state for approval and are filled from a point outside the state. While P.L. 86-272 does not directly apply to QRF 2022-1 or QRH — because the assets at issue are financial assets (receivables), not tangible personal property, and the SPVs do not engage in solicitation of orders — the statute is useful as a framing principle for the broader limitation on state power to impose income-based taxes on entities whose in-state activities are minimal or nonexistent.

B. Nexus for Passive Investment Entities / SPVs

Many states have developed specific exemptions, safe harbors, or interpretive positions that limit the imposition of income or franchise taxes on entities whose sole activity within a state is the passive holding and management of intangible assets, such as receivables, securities, partnership interests, or intellectual property. This treatment is particularly relevant to bankruptcy-remote SPVs of the type involved in securitization transactions, which by design are created with extremely limited purposes and no operational infrastructure.

In evaluating whether a passive investment entity or SPV has sufficient nexus with a state to be subject to that state's income or franchise tax, courts and state taxing authorities generally consider the following factors:

(i) Presence of employees or agents within the state. An entity that has no employees and does not maintain agents acting on its behalf within the state is less likely to be found to have nexus. The mere existence of obligors or counterparties within the state is generally insufficient to establish the entity's own presence.

(ii) Ownership or lease of real or tangible personal property. Entities that own or lease real property or tangible personal property located within a state are typically considered to have nexus with that state. SPVs that hold only intangible financial assets do not have tangible property in any state.

(iii) Active conduct of business vs. passive holding of intangibles. States generally distinguish between entities that actively conduct business within their borders — such as originating loans, soliciting customers, or providing services — and entities that passively hold intangible assets. Passive holding of receivables, where all origination, servicing, and administrative functions are performed by separate entities, is generally insufficient to constitute "doing business" in a state.

(iv) Location where decisions are made regarding the entity's assets. If an entity's governing body meets or makes investment decisions within a state, that activity may create nexus. For QRF 2022-1 and QRH, all governance occurs through independent managers provided by Fortbridge Corporate Services LLC in Wilmington, Delaware, and all material decisions are made pursuant to the terms of pre-established transaction documents.

(v) Whether the entity has any state-registered activities. Registration as a foreign LLC or other entity in a state may create nexus or may be treated as an admission of doing business in that state. Neither QRF 2022-1 nor QRH is registered to do business as a foreign LLC in any state other than Delaware.

Bankruptcy-remote SPVs that have no employees, no offices, and no independent operations — and whose sole activities consist of holding receivables and issuing securities pursuant to pre-established transaction documents — are generally considered to have insufficient nexus for state income or franchise tax purposes in states other than their state of formation. This principle has been recognized both in state administrative guidance and in the securitization industry's established market practice, and it has been relied upon by rating agencies in evaluating the credit and structural integrity of securitization transactions.

C. Attribution and Agency Theories

Even where an SPV itself has no direct physical or economic presence in a state, there is a risk that the activities of a servicer, administrator, or other party acting on behalf of the SPV could be attributed to the SPV under agency or attribution theories, thereby creating nexus in states where the servicer or other party operates.

This risk is particularly relevant in the present transaction because QPF — the servicer of the receivables — is licensed and conducts business in all 50 states. QPF employs personnel in multiple states, maintains offices in several jurisdictions, and interacts directly with obligors and insurance carriers in connection with the origination and servicing of insurance premium finance loans. If QPF's in-state activities were attributed to QRF 2022-1 or QRH, the SPVs could potentially be found to have nexus in every state in which QPF operates.

Under general agency principles, however, the activities of a servicer are attributable to an SPV only if the servicer acts as the SPV's agent — that is, only if the servicer acts on behalf of and subject to the control and direction of the SPV. Where the servicer acts as an independent contractor under the terms of a servicing agreement, performing services in its own capacity and exercising its own judgment and discretion (subject to contractual standards), most states will not attribute the servicer's in-state activities to the entity on whose behalf the servicer acts.

In the present transaction, the Servicing Agreement (dated for execution, v3, 2022-10-12) establishes that QPF acts as an independent contractor in its capacity as servicer. The Servicing Agreement provides that QPF will service the receivables in accordance with its customary practices, that QPF retains discretion over day-to-day servicing decisions, and that QRF 2022-1 does not direct or control QPF's in-state activities. The servicing relationship is conducted on an arm's-length basis, and QPF receives a market-rate servicing fee (1.00% per annum on the outstanding pool balance) for its services. These contractual terms are critical to the conclusion that QPF's in-state activities should not be attributed to the SPVs.

It is essential that the arm's-length nature of the servicing relationship be maintained throughout the life of the transaction. Any operational changes that blur the line between QPF's activities as servicer and the SPVs' activities as owners of the receivables — such as the SPVs directing QPF's collection activities in a particular state, or the SPVs' managers supervising QPF employees in the field — could undermine the independent contractor characterization and create a risk of nexus attribution.

Similarly, QIH's activities as administrator under the Administration Agreement are conducted on an arm's-length basis and should not create nexus for the SPVs in states where QIH operates, provided that QIH acts in its own capacity as administrator and the SPVs do not exercise direction or control over QIH's in-state activities.

IV. Delaware Tax Exposure

A. Delaware Annual Franchise Tax

Both QRF 2022-1 and QRH are organized as Delaware limited liability companies and are therefore subject to Delaware's annual franchise tax on domestic LLCs. Under 6 Del. C. § 18-1107, every domestic limited liability company is required to pay an annual tax of $300 to the State of Delaware, due on or before June 1 of each year. This is a flat-rate tax that does not vary based on the revenue, income, or assets of the entity. For each of QRF 2022-1 and QRH, the annual Delaware LLC franchise tax obligation will be $300 per entity per year, for a combined annual cost of $600.

Delaware does not impose a state income tax on LLCs that do not conduct business within the State of Delaware. Because neither QRF 2022-1 nor QRH conducts any business within Delaware other than maintaining a registered agent (Ashgrove Services Inc. — though the registered agent's office is in New York, the registered office address may be in Delaware) and a registered office at the address of its independent manager (Fortbridge Corporate Services LLC, 1209 Orange Street, Wilmington, Delaware 19801), neither entity should be subject to Delaware income tax. The mere maintenance of a registered agent and registered office in Delaware, and the holding of organizational meetings or executing written consents through independent managers in Delaware, do not constitute the conduct of business in Delaware for income tax purposes.

Conclusion: Both QRF 2022-1 and QRH will be subject only to the $300 annual Delaware LLC franchise tax. Neither entity is expected to incur any Delaware income tax liability.

B. Delaware Unclaimed Property

We note that Delaware's unclaimed property laws — which are among the most comprehensive and actively enforced in the nation — may apply to unclaimed distributions, payments, or other amounts held by or on behalf of the SPVs. Under Delaware's Unclaimed Property Law, 12 Del. C. § 1130 et seq., property that is owed to a person and remains unclaimed for a specified dormancy period must be reported and remitted to the State of Delaware. Because the SPVs are Delaware LLCs, Delaware may assert jurisdiction over unclaimed property held by or on behalf of the SPVs under the priority rules established by the Supreme Court in Texas v. New Jersey, 379 U.S. 674 (1965), and Delaware v. New York, 507 U.S. 490 (1993).

We recommend that standard unclaimed property compliance procedures be implemented for both SPVs as part of the ongoing administration of the transaction. The Administration Agreement should include provisions requiring QIH, as administrator, to monitor and comply with applicable unclaimed property requirements on behalf of the SPVs.

V. State-by-State Nexus Analysis — Key Jurisdictions

The receivables pool acquired by QRF 2022-1 comprises approximately 82,400 individual insurance premium finance loans originated by QPF to obligors located across all 50 states. The geographic distribution of the pool is diversified, but three states account for a disproportionate share of the pool balance:

Because QPF originates loans across all 50 states, the obligors on the receivables are located nationwide. The analysis below focuses on the states presenting the highest risk of nexus assertion or the largest pool concentrations, as well as New York (where several transaction parties are located) and Connecticut (where QIH is headquartered). General conclusions for the remaining 47 states are addressed in Section V.F.

A. New York

New York imposes a franchise tax on corporations under Article 9-A of the New York Tax Law and, in New York City, an unincorporated business tax ("UBT") on the income of unincorporated businesses (including LLCs) that carry on business within New York City. The franchise tax applies to domestic and foreign corporations doing business, employing capital, owning or leasing property, or maintaining an office in New York. The UBT applies to individuals and unincorporated entities that carry on a trade, business, profession, or occupation wholly or partly within New York City.

Physical Presence: Neither QRF 2022-1 nor QRH has an office, employees, or tangible personal property in the State of New York. Neither entity is registered to do business in New York as a foreign LLC. Neither entity conducts any operational activities in New York.

Registered Agent: The registered agent for both entities, Ashgrove Services Inc., is located at 28 Liberty Street, New York, New York 10005. However, the designation of a registered agent for purposes of receiving service of process does not, standing alone, create nexus for franchise or income tax purposes under New York law. The New York Department of Taxation and Finance has consistently taken the position that the mere use of a New York registered agent does not constitute "doing business" or "maintaining an office" in New York.

Issuer's Counsel: Calderwood & Harkness LLP, located at 601 Lexington Avenue, New York, New York 10022, serves as counsel to the Issuer and has performed legal work in connection with the transaction from its New York office. Under well-established principles, the activities of an attorney on behalf of a client do not create nexus for the client in the attorney's jurisdiction. An attorney is an independent professional engaged by the client, not an agent whose in-state presence is attributable to the client for tax nexus purposes.

Indenture Trustee: Calvoneth Trust Company, N.A. maintains its Corporate Trust Office at 600 Travis Street, Suite 5800, Houston, Texas 77002. The indenture trustee does not have a New York presence that would be relevant to the nexus analysis for the SPVs.

Structuring Agent / Bookrunner: Ridgeline Capital Markets, located at 383 Madison Avenue, New York, New York, acts as structuring agent and bookrunner for the offering. The activities of a placement agent or underwriter in connection with the offering and sale of securities are activities of the placement agent in its own capacity and do not create nexus for the issuer in the placement agent's state. This is consistent with long-standing market practice and the treatment of underwriting activities under New York tax law.

Back-Up Servicer / Liquidity Provider: Northvane Bank, N.A., located at 200 Vesey Street, New York, New York, serves as back-up servicer and liquidity provider under the transaction documents. Northvane Bank acts in its own capacity as a contracting party under the Back-Up Servicing Agreement and the Liquidity Facility Agreement. The existence of a contractual relationship between an SPV and a New York-based financial institution does not create nexus for the SPV in New York, provided the SPV does not exercise direction or control over the financial institution's in-state activities.

Conclusion: Neither QRF 2022-1 nor QRH should have New York income or franchise tax nexus. Neither entity should be subject to New York City's unincorporated business tax. The various New York-based transaction participants (registered agent, issuer's counsel, structuring agent, back-up servicer) act in their own capacities and do not create nexus for the SPVs.

B. Connecticut

Connecticut imposes a business entity tax ("BET") on entities, including LLCs, that are "doing business" in Connecticut. The BET is a biennial tax of $250 per entity. In addition, Connecticut imposes a corporation business tax on corporations and, under certain circumstances, on pass-through entities that have nexus with the state.

Risk of Affiliate-Based Nexus: The primary nexus risk in Connecticut arises from the fact that QIH and QPF are headquartered in Stamford, Connecticut, at 400 Atlantic Street, Suite 2200. QIH employs a significant number of personnel in Connecticut, maintains its principal executive offices there, and conducts substantial operations in the state. QPF, as a wholly owned subsidiary of QIH, also maintains its principal office at the same address. There is a theoretical risk that the Connecticut Department of Revenue Services could argue that the SPVs — as affiliates of QIH and QPF — are "doing business" in Connecticut by virtue of their parent's or affiliate's activities, particularly if the state were to apply a broad interpretation of "doing business" that encompasses entities whose ultimate parent or sponsor is headquartered in the state.

Mitigating Factors: Several factors strongly militate against a finding of Connecticut nexus for the SPVs:

(i) QRF 2022-1's sole member is QRH, which is a Delaware LLC — not a Connecticut entity. The chain of ownership between QRF 2022-1 and any Connecticut entity runs through QRH and then to QPF (a Delaware LLC), and only then to QIH (a Delaware corporation headquartered in Connecticut). The SPVs are not directly owned or controlled by a Connecticut entity.

(ii) QRH's sole member is QPF, a Delaware LLC with its principal office in Connecticut but organized under Delaware law. QPF's Connecticut presence is attributable to its own operations, not to QRH.

(iii) Both SPVs are subject to separateness covenants in their LLC agreements and in the transaction documents that prohibit commingling of operations, assets, or identities with QPF, QIH, or any other affiliate. These covenants are designed to preserve the legal separateness and bankruptcy-remote status of the SPVs.

(iv) Neither QRF 2022-1 nor QRH has any employees, offices, or tangible property in Connecticut. Neither entity is registered to do business in Connecticut.

(v) All governance and decision-making for the SPVs occurs through independent managers provided by Fortbridge Corporate Services LLC in Wilmington, Delaware. The independent managers (Timothy R. Callan for QRF 2022-1 and Eleanor M. Vasquez for QRH) are not located in Connecticut and do not conduct SPV business in Connecticut.

Importance of Strict Separateness: The risk of Connecticut nexus, while we believe it to be low, would be materially elevated if the SPVs failed to maintain their separate existence from QIH and QPF. If, for example, QIH personnel in Stamford were to direct the day-to-day operations of the SPVs, or if the SPVs were to share office space, telephone numbers, or stationery with QIH or QPF, Connecticut could assert nexus based on alter ego or agency theories. It is therefore critical that all parties involved in the transaction strictly adhere to the separateness covenants and that QIH personnel understand that the SPVs are legally distinct entities that must be treated as such.

Conclusion: The risk of Connecticut nexus for QRF 2022-1 and QRH is low, provided that the separateness covenants are observed and the SPVs maintain their independent existence. We do not believe that either entity is "doing business" in Connecticut within the meaning of the Connecticut BET statute or the corporation business tax.

C. Texas

Texas imposes a franchise tax — commonly referred to as the "margin tax" — on entities that are organized in Texas or that are "doing business" in Texas. The Texas franchise tax is an entity-level tax calculated based on the entity's total revenue, with various deductions and apportionment methodologies available. The tax applies to corporations, LLCs, partnerships, and other legal entities.

Pool Concentration: Texas represents the largest state concentration in the receivables pool, at 14.2% of the pool balance (approximately $86,904,000). This means that a significant portion of the obligors on the receivables are located in Texas and that a substantial portion of the cash flows generated by the pool originate from Texas-based borrowers.

No Physical Presence: QRF 2022-1 and QRH have no office, employees, or tangible personal property in Texas. Neither entity is organized in Texas, and neither is registered to do business in Texas as a foreign LLC.

Indenture Trustee's Texas Presence: Calvoneth Trust Company, N.A. maintains its Corporate Trust Office at 600 Travis Street, Suite 5800, Houston, Texas 77002. However, Calvoneth Trust acts in its own capacity as trustee under the Indenture. It is a separate legal entity with its own Texas presence, and its activities in Texas are not conducted on behalf of or as agent for the SPVs. The trustee's Texas presence does not create nexus for QRF 2022-1 or QRH.

Texas Comptroller's Historical Position: The Texas Comptroller of Public Accounts has historically evaluated nexus for franchise tax purposes by examining whether an entity has a physical presence in Texas or is "doing business" in Texas within the meaning of the Texas Tax Code. The passive ownership of receivables where the obligors happen to be located in Texas has not been treated by the Comptroller as "doing business" in Texas, provided the entity does not maintain offices, employ personnel, or otherwise actively conduct business in the state.

QPF's Texas Activities: QPF is licensed to originate insurance premium finance loans in Texas and maintains operational capabilities in the state. QPF's licensing, origination, and servicing activities in Texas are activities of QPF in its own capacity as originator and servicer. Under the independent contractor analysis discussed in Section III.C, QPF's Texas activities should not be attributed to the SPVs, provided the arm's-length servicing relationship is maintained.

Conclusion: Neither QRF 2022-1 nor QRH should have Texas franchise tax nexus. The passive ownership of receivables owed by Texas obligors, without more, does not constitute "doing business" in Texas.

D. California

California imposes a franchise tax on entities "doing business" in California. The minimum franchise tax for an LLC doing business in California is $800 per year. In addition, California imposes an LLC fee based on the LLC's total income from California sources, with graduated rates applicable to LLCs with California-source income exceeding $250,000. California's franchise tax regime is notable for its breadth and for the aggressiveness with which the California Franchise Tax Board ("FTB") has historically asserted jurisdiction over out-of-state entities.

Pool Concentration: California represents the second-largest state concentration in the receivables pool, at 11.8% of the pool balance (approximately $72,216,000).

Broad "Doing Business" Definition: California Revenue and Taxation Code Section 23101(a) defines "doing business" broadly to include any entity that, among other things, is "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit" in California. In addition, California has adopted a bright-line economic nexus test under Revenue and Taxation Code Section 23101(b), which treats an entity as "doing business" in California if it has California sales exceeding the lesser of $500,000 or 25% of total sales, California real and tangible personal property exceeding the lesser of $50,000 or 25% of total real and tangible personal property, or California compensation exceeding the lesser of $50,000 or 25% of total compensation paid. This economic nexus standard was adopted prior to Wayfair and has been in effect since 2011.

Risk Assessment: The principal risk in California arises from the possibility that the FTB could assert that the SPVs derive California-source income from receivables owed by California obligors. Under this theory, the interest income and principal payments received from California-based borrowers could be characterized as California-source income, triggering the economic nexus threshold and subjecting the SPVs to the California franchise tax and LLC fee.

Mitigating Factors: Several factors support the conclusion that the SPVs should not have California nexus:

(i) The receivables were originated by QPF, not by the SPVs. The receivables are transferred from QPF to QRH and then from QRH to QRF 2022-1 via true sale transactions. After the transfer, the receivables are owned by the SPVs, but the SPVs did not originate, solicit, or create the receivables. The SPVs' ownership of the receivables is passive.

(ii) Neither SPV has employees, offices, or tangible personal property in California. Neither entity is registered to do business in California as a foreign LLC.

(iii) The SPVs do not actively solicit or originate loans in California. All origination and solicitation activities are conducted by QPF in its own capacity as originator.

(iv) California courts have generally held that the passive ownership of intangible assets — such as receivables, securities, or partnership interests — does not constitute "doing business" in California for franchise tax purposes, provided the entity has no other California contacts. See, e.g., Swart Enterprises, Inc. v. Franchise Tax Board, 7 Cal. App. 4th 1798 (1992) (holding that mere receipt of income from California sources, without active business conduct in the state, does not constitute "doing business").

Elevated Risk: Notwithstanding the mitigating factors, California remains the highest-risk jurisdiction among the states analyzed. The FTB has been aggressive in asserting jurisdiction over out-of-state entities, and the broad economic nexus thresholds could potentially be applied to the SPVs' California-source income (interest and principal payments from California obligors). In addition, the FTB has in certain instances taken the position that an entity that derives substantial income from California sources is "doing business" in California even if the entity has no physical presence in the state, particularly if the entity is part of an affiliated group that includes entities with substantial California operations.

Recommendation: We recommend that the transaction parties monitor California legislative and administrative developments, particularly any guidance from the FTB addressing the application of the "doing business" standard to securitization SPVs or passive investment entities. If the deal is relaunched, we further recommend considering the engagement of California-based tax counsel to provide a state-specific opinion on the California nexus question, particularly if Brindoval Ratings or Pinnacle Rating Services requests additional comfort on state tax exposure as part of the rating process.

Conclusion: The risk of California nexus is moderate. We believe it is likely defensible that neither QRF 2022-1 nor QRH has California franchise tax nexus, based on the entities' passive activities and absence of California contacts. However, California's aggressive enforcement posture and broad statutory definitions warrant heightened attention and ongoing monitoring.

E. Florida

Florida imposes a corporate income tax under Chapter 220 of the Florida Statutes. The Florida corporate income tax applies to corporations and entities that are treated as corporations for federal tax purposes. However, Florida does not impose an income tax on LLCs that are not classified as corporations for federal income tax purposes. Florida's corporate income tax rate is currently 5.5% on income apportioned to Florida.

Pool Concentration: Florida represents the third-largest state concentration in the receivables pool, at 9.6% of the pool balance (approximately $58,752,000).

Federal Tax Classification: Under the transaction documents, both QRF 2022-1 and QRH are classified as disregarded entities (or, in the alternative, as partnerships) for federal income tax purposes. Neither entity has elected to be treated as a corporation for federal tax purposes. Because Florida's corporate income tax applies only to entities that are classified as corporations for federal tax purposes, and because QRF 2022-1 and QRH are classified as disregarded entities or partnerships, neither entity should be subject to Florida's corporate income tax.

No Franchise Tax: Florida formerly imposed a franchise tax on corporations and other entities, but the Florida franchise tax was repealed effective January 1, 2022, pursuant to CS/CS/HB 7061 (2021). Accordingly, there is no Florida franchise tax applicable to the SPVs.

Conclusion: Neither QRF 2022-1 nor QRH has Florida state income or franchise tax exposure. Because both entities are treated as disregarded entities or partnerships for federal tax purposes, they fall outside the scope of Florida's corporate income tax. The repeal of the Florida franchise tax eliminates any residual franchise tax risk.

F. Other States — General Analysis

The remaining 47 states (and the District of Columbia) comprise approximately 64.4% of the receivables pool in aggregate. No single state other than Texas, California, and Florida exceeds the single-state concentration limit of 20% established in the Receivables Transfer Agreement, and no individual state outside the top three accounts for a concentration that would warrant a state-specific analysis at this time.

States with No Income Tax: Several states — including Nevada, Wyoming, South Dakota, Alaska (no individual income tax; corporate income tax exists), and New Hampshire (limited income tax) — do not impose a general income tax. In these states, there is generally no income or franchise tax exposure for passive SPVs. However, we note that Washington State does not impose an income tax but does impose a Business & Occupation ("B&O") tax, which is an excise tax on gross receipts. The B&O tax applies to entities "engaging in business" in Washington. Because the SPVs are not engaging in business activities in Washington — they have no employees, offices, or operational activities in the state, and the passive ownership of receivables owed by Washington obligors should not constitute "engaging in business" — we conclude that the SPVs should not be subject to Washington's B&O tax.

States with Broad Economic Nexus Provisions: Certain states have adopted economic nexus provisions for income or franchise tax purposes that could theoretically reach out-of-state entities with economic connections to the state. Notable examples include:

• Ohio Commercial Activity Tax ("CAT"): The Ohio CAT is a gross receipts tax imposed on entities with more than $150,000 in taxable gross receipts from Ohio-sourced commercial activity. The SPVs may receive interest payments from Ohio obligors, but such payments derive from the passive ownership of receivables originated by QPF, and the SPVs have no physical presence or active business conduct in Ohio. We believe the SPVs' passive receipt of interest income from Ohio-sourced receivables should not constitute "commercial activity" sufficient to trigger the CAT, although Ohio's broad sourcing rules warrant monitoring.

• Illinois: Illinois imposes a corporate income tax and a personal property replacement income tax on corporations and on certain pass-through entities. Illinois applies a "doing business" standard for nexus that includes maintaining an office, having employees, or conducting activities beyond mere solicitation. The SPVs have no presence or activities in Illinois, and the passive ownership of receivables should not create Illinois nexus.

Foreign Registration: Neither QRF 2022-1 nor QRH is registered to do business (i.e., foreign qualified) as an LLC in any state other than Delaware. This absence of foreign registration is consistent with the entities' limited activities and supports the conclusion that neither entity is "doing business" in any state other than Delaware. We note that foreign registration in a state may, in certain jurisdictions, be treated as an admission that the entity is doing business in the state, which could create nexus. The decision not to register in any state is appropriate given the SPVs' passive activities and bankruptcy-remote structure.

Conclusion: For the remaining 47 states and the District of Columbia, neither QRF 2022-1 nor QRH should have state income or franchise tax nexus. The entities' lack of physical presence, absence of employees, passive ownership of intangible assets, and non-registration as foreign LLCs support this conclusion across all jurisdictions.

VI. Unitary/Combined Reporting Considerations

Several states, including California, New York, Illinois, and others, require or permit combined or unitary reporting for affiliated entities that are engaged in a "unitary business." Under the unitary business principle, entities that are part of an economically integrated group may be required to file a combined or consolidated return, with the combined income of the group apportioned among the states in which the group operates. If QRF 2022-1 or QRH were treated as part of QIH's unitary group for purposes of any state's combined reporting requirements, the SPV could be pulled into a combined return, and the state could apportion a share of the group's combined income to the SPV.

Risk Assessment: The risk that a state would include QRF 2022-1 or QRH in a combined or unitary filing with QIH is mitigated by several factors:

(i) Bankruptcy-Remote Structure and Separateness Covenants. Both SPVs are bankruptcy-remote entities with separateness covenants that require them to maintain separate legal identities, separate books and records, separate bank accounts, and independent governance structures. The separateness covenants are fundamental to the transaction's structural integrity and are designed to prevent the SPVs from being treated as alter egos or divisions of QPF or QIH.

(ii) Absence of Unitary Business Indicators. The hallmarks of a unitary business — centralized management, economies of scale, functional integration, and shared operations — are absent with respect to the SPVs. QRF 2022-1's sole activity is holding receivables and issuing notes; QRH's sole activity is acting as an intermediate transferee and depositor of receivables. Neither entity shares employees, offices, equipment, or operational systems with QPF or QIH. The SPVs do not market products, solicit customers, or engage in any revenue-generating activity other than passively receiving collections on the receivables.

(iii) Independent Governance. The independent manager governance structure — with Timothy R. Callan serving as independent manager of QRF 2022-1 and Eleanor M. Vasquez serving as independent manager of QRH, both provided by Fortbridge Corporate Services LLC — reinforces the separateness of the SPVs from the operating companies. The independent managers are not officers or employees of QPF or QIH, and they owe fiduciary duties to the SPVs rather than to the sponsor or originator.

(iv) True Sale Transfer Structure. The receivables are transferred from QPF to QRH and then from QRH to QRF 2022-1 pursuant to true sale agreements. The true sale characterization further supports the legal and operational separateness of the SPVs from the originator. If the transfers are respected as true sales (as analyzed in the Tax Structuring Memorandum dated August 12, 2022), the receivables are owned by the SPVs and not by QPF, and the SPVs' income from the receivables is not income of QPF or QIH.

Conclusion: We believe there is a strong argument that QRF 2022-1 and QRH should not be included in any state unitary or combined filing of the QIH group. The SPVs' bankruptcy-remote structure, independent governance, absence of shared operations, and true sale transfer structure distinguish them from the operating companies and support the position that they are not engaged in a unitary business with QIH or QPF. However, because the application of unitary business principles varies by state and is inherently fact-intensive, we recommend ongoing vigilance in maintaining the SPVs' separateness and monitoring any state-level challenges to the treatment of securitization SPVs as independent entities for combined reporting purposes.

VII. Impact of Receivables Pool Characteristics on Nexus

The characteristics of the receivables pool are relevant to the state tax nexus analysis in several respects. The nature, term, geographic distribution, and security of the receivables all bear on the question of whether the SPVs' ownership of the receivables creates a sufficient connection to any particular state to support a nexus finding.

Pool Statistics:

Intangible Nature of the Receivables: The receivables are contractual rights to receive payments from obligors. They are intangible financial assets and do not constitute tangible personal property located in any particular state. This is a significant distinction for nexus purposes, because the ownership of tangible personal property in a state — such as inventory, equipment, or real estate — is a well-established basis for nexus, whereas the ownership of intangible assets generally does not create nexus in the state where the obligor or payor is located. The receivables are secured by the obligors' rights to unearned premium refunds from insurance carriers, which are themselves intangible contractual rights. At no point do the SPVs hold tangible property in any state.

Geographic Diversification: The pool is widely dispersed across all 50 states. No single state accounts for more than 14.2% of the pool balance (Texas), and no single state exceeds the 20% concentration limit established in the transaction documents. This geographic diversification reduces the risk that any single state could argue that the SPVs have a dominant or disproportionate presence within its borders. The concentration limits — including the single obligor limit of 0.75%, the single state limit of 20%, and the single carrier limit of 15% — are structural protections that will be maintained throughout the revolving period and that further support the characterization of the SPVs' activities as passive and diversified.

Granularity and Short Duration: The pool consists of approximately 82,400 individual loans with an average balance of approximately $7,427, a weighted average original term of 9.2 months, and a weighted average remaining term of 5.7 months. The high degree of granularity (no single obligor accounts for more than 0.38% of the pool, or approximately $2,325,600, and the top 10 obligors account for only 2.14% of the pool, or approximately $13,096,800) means that the SPVs' income is not dependent on any individual borrower or any small group of borrowers in any particular state. The short duration of the receivables further supports the passive nature of the SPVs' activities — the receivables self-liquidate over a matter of months, and the SPVs do not engage in long-term lending relationships with obligors.

Revolving Structure: The transaction includes a 24-month revolving period during which new receivables will be added to the pool as existing receivables amortize or pay off. The revolving nature of the pool means that the geographic composition of the pool will change over time. However, the concentration limits will continue to apply during the revolving period, ensuring that the pool remains geographically diversified and that no single state's share of the pool exceeds the 20% threshold.

Conclusion: The characteristics of the receivables pool — including their intangible nature, short duration, high granularity, and wide geographic diversification — are consistent with the passive investment profile of the SPVs and support the conclusion that neither QRF 2022-1 nor QRH has state tax nexus in any jurisdiction by virtue of owning receivables owed by obligors in that jurisdiction.

VIII. Structural Recommendations to Minimize Nexus Risk

Based on the analysis set forth above, we offer the following structural and operational recommendations designed to minimize the risk that any state could assert franchise or income tax nexus over QRF 2022-1 or QRH.

A. Maintain SPV Separateness

Both QRF 2022-1 and QRH must strictly observe all separateness covenants contained in their respective LLC agreements and in the transaction documents. These covenants are the foundation of the bankruptcy-remote structure and are equally critical to the state tax nexus analysis. Specifically, each SPV must:

• Maintain separate books and records that are distinct from those of QPF, QIH, and all other affiliates;

• Not commingle its assets with those of any other entity, including maintaining separate bank accounts and segregated collections;

• Hold itself out to the public and to all counterparties as a separate and distinct entity from QPF, QIH, and all other affiliates;

• Maintain adequate capitalization in light of its contemplated activities and obligations;

• Conduct business only through its own authorized managers, officers, or agents (i.e., the independent managers and the parties acting under the transaction documents), and not through the personnel of QPF or QIH;

• Maintain its own stationery, invoices, and other business correspondence, distinct from those of QPF and QIH; and

• Not guarantee or otherwise become liable for the debts or obligations of any other entity.

The independent managers provided by Fortbridge Corporate Services LLC — Timothy R. Callan for QRF 2022-1 and Eleanor M. Vasquez for QRH — must be actively involved in any consent or approval requiring the independent manager's vote. This is particularly important with respect to any voluntary bankruptcy filing, but it extends to all matters requiring the independent manager's approval under the LLC agreement. The independent managers must exercise their own independent judgment and must not act under the direction or control of QPF, QIH, or any other affiliate.

B. Limit Activities

Neither QRF 2022-1 nor QRH should maintain an office, employ personnel, or lease or own tangible personal property in any state other than Delaware. The SPVs' activities must remain limited to those expressly permitted under their organizational documents and the transaction agreements.

All servicing, administration, and trustee functions should continue to be performed by third parties under arm's-length agreements:

• QPF as servicer under the Servicing Agreement;

• QIH as administrator under the Administration Agreement;

• Calvoneth Trust Company, N.A. as indenture trustee under the Indenture; and

• Northvane Bank, N.A. as back-up servicer under the Back-Up Servicing Agreement.

Neither SPV should register as a foreign LLC in any state other than Delaware unless legally required to do so. Based on our current analysis, neither entity's activities rise to a level that would require foreign qualification in any state. If circumstances change — for example, if a state were to adopt a new statutory requirement mandating registration of entities that own receivables originated within the state — this conclusion should be reassessed.

C. Governance in Delaware

All formal governance actions — including manager consents, resolutions, amendments to organizational documents, and any other actions requiring the approval of the SPVs' managers or members — should be executed in Delaware or, where in-person execution is not practicable, through written consent procedures that avoid creating nexus in any state. Written consents executed by the independent managers in Delaware are preferable to in-person meetings held in other jurisdictions.

If any in-person board or manager meetings are held, they should not be held in Connecticut, New York, or California. These three states have the broadest nexus standards among the jurisdictions analyzed, and the conduct of governance activities in any of these states could be cited as evidence of "doing business" in the state. Meetings, to the extent necessary, should be held in Delaware or in a jurisdiction with no income or franchise tax (such as Nevada or Wyoming).

D. Documentation Discipline

The transaction documents — including the Receivables Sale Agreement, the Receivables Transfer Agreement, the Servicing Agreement, the Administration Agreement, the Indenture, the Back-Up Servicing Agreement, and the Liquidity Facility Agreement — should clearly identify the SPVs as separate legal entities with their own rights and obligations, distinct from QPF, QIH, and all other affiliates. The documents should not contain provisions that could be interpreted as creating an agency relationship between the SPVs and the servicer, administrator, or any other party that would impute the other party's state presence to the SPVs.

In particular, the Servicing Agreement should expressly provide that QPF acts as an independent contractor in its capacity as servicer and that the SPVs do not direct or control QPF's in-state activities. The agreement should specify that QPF exercises its own judgment and discretion in servicing the receivables, subject to contractual performance standards, and that QPF's in-state presence is attributable solely to QPF and not to the SPVs.

We have reviewed the near-final versions of the transaction documents and believe they are generally consistent with these recommendations. We will provide specific markup comments if any provisions warrant revision prior to execution.

IX. Conclusion

Based on the foregoing analysis, it is our conclusion that both Quorum Receivables Funding 2022-1 LLC and Quorum Receivables Holding LLC should avoid state-level franchise or income tax nexus in all states other than Delaware. In Delaware, each entity will be subject only to the $300 annual LLC franchise tax, for a combined annual cost of $600. Neither entity is expected to incur any Delaware income tax liability.

Among the states analyzed in detail, California presents the highest risk due to its broad statutory definition of "doing business," its economic nexus thresholds, and the historically aggressive enforcement posture of the California Franchise Tax Board. However, we believe that the SPVs' passive activities and absence of California contacts — no employees, no offices, no tangible property, no origination or solicitation activities in California — should support a defensible position that no California franchise tax nexus exists. The remaining states analyzed — New York, Connecticut, Texas, and Florida — present lower risk profiles, and we are confident that neither SPV has nexus in any of these jurisdictions.

This conclusion is dependent upon strict compliance with the separateness covenants set forth in the SPVs' organizational documents and the transaction agreements, maintenance of the bankruptcy-remote structure, and the continued absence of any in-state employees, offices, tangible property, or operational activities on the part of the SPVs. Any material change in the SPVs' activities or operational profile could alter the nexus analysis and should be evaluated before implementation.

If the transaction is relaunched following any delay, we recommend the following:

(i) Re-confirm the analysis as of the new projected closing date, taking into account any changes in state law, administrative guidance, or judicial decisions that may have occurred in the interim;

(ii) Monitor changes in state nexus law, particularly in California, New York, and any states that may adopt broader economic nexus tests for income or franchise tax purposes in the wake of Wayfair or otherwise;

(iii) Consider engagement of local counsel in California if Brindoval Ratings or Pinnacle Rating Services requests additional comfort on state tax exposure as part of the rating process or if the California Franchise Tax Board issues guidance that could affect the analysis; and

(iv) Coordinate with the transaction parties to ensure ongoing compliance with the structural recommendations set forth in Section VIII of this memorandum.

This memorandum does not constitute a guarantee of any particular tax outcome. Tax laws are subject to change, and the application of state nexus standards to specific facts is inherently uncertain. This memorandum should be read in conjunction with the following related work product:

• Tax Structuring Memorandum, dated August 12, 2022 (Matter No. 1025-00007-FED);

• FATCA Compliance Memorandum, dated August 18, 2022 (Matter No. 1025-00007-FATCA); and

• Tax Disclosure Review of the Offering Memorandum Tax Section, dated September 20, 2022 (Matter No. 1025-00007-DISC).

We are available to discuss any aspect of this analysis at your convenience.

•

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

MEMORANDUM
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
TO: Douglas Carmichael, Partner, Calderwood & Harkness LLP Nolan Whitford, General Counsel, Quorum Insurance Holdings Corp. Sandra Ling-Hwang, Treasurer, Quorum Insurance Holdings Corp.
FROM: Sylvia Hartwell, Partner (Tax), Calderwood & Harkness LLP
DATE: September 1, 2022
RE: State Franchise and Income Tax Nexus Analysis — Quorum Receivables Funding 2022-1 LLC and Quorum Receivables Holding LLC
MATTER NO.: 1025-00007
I. Executive Summary
This memorandum sets forth our analysis of whether Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer") and Quorum Receivables Holding LLC ("QRH" or the "Depositor") will be subject to state-level franchise tax, income tax, or other entity-level taxes in states other than Delaware as a result of the contemplated securitization transaction. We have been asked to provide this analysis in connection with the structuring and issuance of the Notes (as defined below) and in anticipation of the tax disclosure that will be included in the Offering Memorandum.
Based on our review of the organizational documents, the Final Term Sheet (v3) dated September 2, 2022, and the near-final transaction documents, it is our conclusion that both QRF 2022-1 and QRH should avoid state-level franchise or income tax nexus in all jurisdictions other than the State of Delaware. This conclusion rests upon the following principal factors:
• Each entity is a Delaware limited liability company with no employees, no offices, and no physical presence outside of Delaware.
• Each entity is structured as a bankruptcy-remote special purpose vehicle with strictly limited purposes, independent managers, and separateness covenants that prevent commingling of operations or assets with the originator, sponsor, or any other affiliate.
• All administrative, servicing, trustee, and back-up servicing functions are performed by third parties pursuant to arm's-length agreements, and those third parties act in their own capacities rather than as agents of the SPVs for nexus purposes.
• The receivables held by QRF 2022-1 are intangible financial assets — insurance premium finance receivables — that do not constitute tangible personal property located in any particular state.
Both QRF 2022-1 and QRH are Delaware LLCs and, as such, will be subject to Delaware's annual franchise tax, which is currently assessed at a flat rate of $300 per entity per year. Neither entity is expected to owe Delaware income tax, as neither conducts business within the State of Delaware beyond maintaining a registered agent and registered office.
This analysis assumes the transaction structure as described in the Final Term Sheet (v3) dated September 2, 2022, and the near-final transaction documents provided to us for review. Any material modification to the transaction structure, the organizational documents, or the operational profile of either SPV could alter the conclusions set forth herein. We note that this memorandum does not address the federal income tax treatment of the transaction, which is addressed separately in the Tax Structuring Memorandum dated August 12, 2022 (Matter No. 1025-00007-FED). Nor does this memorandum address FATCA withholding or compliance, which is the subject of the FATCA Compliance Memorandum dated August 18, 2022.
II. Background — Transaction Structure and Entity Overview
A. Quorum Receivables Funding 2022-1 LLC (QRF 2022-1 — Issuer)
QRF 2022-1 is a Delaware limited liability company formed on August 3, 2022, under the Delaware Limited Liability Company Act, 6 Del. C. § 18-101 et seq. The entity is registered with the Delaware Secretary of State under File No. 7894231 and has been assigned Employer Identification Number 88-1247653 by the Internal Revenue Service.
The sole member of QRF 2022-1 is Quorum Receivables Holding LLC. The entity is governed by a limited liability company agreement that provides for management by an independent manager, Timothy R. Callan, who is provided by Fortbridge Corporate Services LLC, located at 1209 Orange Street, Wilmington, Delaware 19801. Mr. Callan's role as independent manager is essential to the bankruptcy-remote structure of the entity, as his approval is required for any voluntary bankruptcy filing, and he owes fiduciary duties to the entity (and not to the sole member or any affiliate) with respect to such approval.
The registered agent for QRF 2022-1 is Ashgrove Services Inc., located at 28 Liberty Street, New York, New York 10005. The designation of a New York registered agent is a matter of administrative convenience related to service of process and does not reflect any operational activities of QRF 2022-1 in the State of New York.
QRF 2022-1's purpose is strictly limited under its organizational documents. The entity's sole activities consist of: (i) acquiring and holding insurance premium finance receivables originated by Quorum Premium Finance LLC ("QPF"); (ii) issuing asset-backed notes secured by such receivables; (iii) entering into and performing its obligations under the transaction documents; and (iv) engaging in activities incidental to the foregoing. QRF 2022-1 has no employees, maintains no offices (other than its Delaware registered office), and conducts no operations other than those strictly necessary to fulfill its limited purpose as issuer in the securitization transaction.
In connection with the contemplated transaction, QRF 2022-1 will issue up to $500,000,000 in aggregate principal amount of notes (the "Notes"), structured as follows:
The receivables pool backing the Notes has an initial balance of approximately $612,000,000, comprising approximately 82,400 individual insurance premium finance loans originated by QPF across all 50 states. The receivables represent short-term, amortizing loans made to insureds to finance the payment of insurance premiums, secured by the borrower's right to any unearned premium refund from the applicable insurance carrier.
All administrative and servicing functions related to the receivables pool and the Notes are performed by third parties pursuant to arm's-length contractual arrangements. QPF serves as servicer of the receivables under the Servicing Agreement, for which it receives a servicing fee of 1.00% per annum on the outstanding pool balance. Calvoneth Trust Company, N.A. serves as indenture trustee under the Indenture, with its Corporate Trust Office located at 600 Travis Street, Suite 5800, Houston, Texas 77002. Northvane Bank, N.A. serves as back-up servicer and liquidity provider. Quorum Insurance Holdings Corp. ("QIH") serves as administrator of the SPV under the Administration Agreement.
B. Quorum Receivables Holding LLC (QRH — Depositor / Intermediate SPV)
QRH is a Delaware limited liability company formed on August 3, 2022, under the Delaware Limited Liability Company Act. The entity is registered with the Delaware Secretary of State under File No. 7894228 and has been assigned Employer Identification Number 88-1247619.
The sole member of QRH is Quorum Premium Finance LLC. The entity is governed by a limited liability company agreement that provides for management by an independent manager, Eleanor M. Vasquez, who is also provided by Fortbridge Corporate Services LLC. Ms. Vasquez serves in the same capacity and under the same independence requirements as Mr. Callan serves for QRF 2022-1, ensuring that QRH's governance structure supports its bankruptcy-remote status and legal separateness from QPF, QIH, and other affiliates.
The registered agent for QRH is Ashgrove Services Inc., located at 28 Liberty Street, New York, New York 10005.
QRH's purpose is limited to acting as the intermediate transferee and depositor of receivables between QPF (as seller and originator) and QRF 2022-1 (as issuer). Specifically, QRH receives receivables from QPF under the Receivables Sale Agreement and subsequently transfers those receivables to QRF 2022-1 under the Receivables Transfer Agreement. QRH is a bankruptcy-remote entity with no employees, no offices (other than its Delaware registered office), and no independent operations. Its role in the transaction is solely that of a conduit or depositor, facilitating the two-step true sale transfer of receivables from the originator to the issuer.
C. Originator and Sponsor
Quorum Premium Finance LLC ("QPF") is a Delaware limited liability company and a wholly owned subsidiary of Quorum Insurance Holdings Corp. QPF's principal office is located at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. QPF is licensed to originate insurance premium finance loans in all 50 states and the District of Columbia, and it currently manages approximately $2.1 billion in total receivables across its portfolio. QPF serves dual roles in the transaction: it is the originator and seller of the receivables, and it serves as the servicer of the receivables pool under the Servicing Agreement.
Quorum Insurance Holdings Corp. ("QIH") is a Delaware corporation, publicly traded on the New York Stock Exchange under the ticker symbol QIHC. QIH is headquartered at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. For fiscal year 2021, QIH reported consolidated revenue of approximately $3.8 billion. QIH's Chief Executive Officer is Marcus Devereaux, and its Chief Financial Officer is Priya Raghavan. QIH serves as the transaction sponsor and as administrator of the SPVs under the Administration Agreement.
It is important to note at the outset that QPF's extensive nationwide presence — including its licensing in all 50 states, its employment of personnel across multiple jurisdictions, and its origination of loans to obligors in every state — does not, in and of itself, impute state tax nexus to QRF 2022-1 or QRH. The SPVs are legally separate entities from QPF and from QIH. Provided that the true sale characterization of the receivables transfers is respected and the SPVs maintain their separate legal existence in accordance with the separateness covenants in their organizational documents and the transaction agreements, the operational footprint of QPF and QIH should not be attributed to the SPVs for state tax nexus purposes. The analysis supporting this conclusion is set forth in detail in Section III.C and Sections V and VI below.
III. Framework — State Tax Nexus Principles
A. Physical Presence Standard vs. Economic Nexus
Historically, the constitutional threshold for a state to impose a tax on an out-of-state entity was grounded in the physical presence doctrine. Under the Due Process Clause of the Fourteenth Amendment and the Commerce Clause of Article I, Section 8, a state could not impose a tax on an entity unless that entity had a sufficient connection — or "nexus" — with the taxing jurisdiction. For decades, the touchstone of this analysis was physical presence: whether the entity maintained a physical office, employed personnel, or owned or leased tangible personal property within the state. The Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), reinforced the physical presence standard in the context of sales and use tax, holding that the Commerce Clause required a seller to have a physical presence in a state before the state could require the seller to collect and remit use tax.
The landscape shifted significantly in 2018 when the Supreme Court decided South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), overruling Quill and holding that a state may impose sales and use tax collection obligations on an out-of-state seller based on the seller's economic activity in the state (i.e., exceeding a threshold of sales or transactions) even in the absence of physical presence. The Wayfair decision has had a profound impact on the sales and use tax landscape, prompting virtually every state to adopt economic nexus thresholds for sales tax purposes.
However, the application of Wayfair's economic nexus rationale to income and franchise taxes remains unsettled and varies considerably from state to state. While some states have enacted or adopted economic nexus standards for income and franchise tax purposes — and several states had such standards even before Wayfair (most notably, California and New York) — many states continue to apply a physical presence or substantial nexus standard for income tax purposes that requires more than merely deriving revenue from in-state customers. The distinction between sales/use tax nexus and income/franchise tax nexus is important for purposes of this memorandum, as our analysis focuses exclusively on the latter.
We also note the relevance of Public Law 86-272, 15 U.S.C. §§ 381–384, which prohibits a state from imposing a net income tax on an out-of-state corporation whose only in-state activity is the solicitation of orders for tangible personal property, provided that the orders are sent outside the state for approval and are filled from a point outside the state. While P.L. 86-272 does not directly apply to QRF 2022-1 or QRH — because the assets at issue are financial assets (receivables), not tangible personal property, and the SPVs do not engage in solicitation of orders — the statute is useful as a framing principle for the broader limitation on state power to impose income-based taxes on entities whose in-state activities are minimal or nonexistent.
B. Nexus for Passive Investment Entities / SPVs
Many states have developed specific exemptions, safe harbors, or interpretive positions that limit the imposition of income or franchise taxes on entities whose sole activity within a state is the passive holding and management of intangible assets, such as receivables, securities, partnership interests, or intellectual property. This treatment is particularly relevant to bankruptcy-remote SPVs of the type involved in securitization transactions, which by design are created with extremely limited purposes and no operational infrastructure.
In evaluating whether a passive investment entity or SPV has sufficient nexus with a state to be subject to that state's income or franchise tax, courts and state taxing authorities generally consider the following factors:
(i) Presence of employees or agents within the state. An entity that has no employees and does not maintain agents acting on its behalf within the state is less likely to be found to have nexus. The mere existence of obligors or counterparties within the state is generally insufficient to establish the entity's own presence.
(ii) Ownership or lease of real or tangible personal property. Entities that own or lease real property or tangible personal property located within a state are typically considered to have nexus with that state. SPVs that hold only intangible financial assets do not have tangible property in any state.
(iii) Active conduct of business vs. passive holding of intangibles. States generally distinguish between entities that actively conduct business within their borders — such as originating loans, soliciting customers, or providing services — and entities that passively hold intangible assets. Passive holding of receivables, where all origination, servicing, and administrative functions are performed by separate entities, is generally insufficient to constitute "doing business" in a state.
(iv) Location where decisions are made regarding the entity's assets. If an entity's governing body meets or makes investment decisions within a state, that activity may create nexus. For QRF 2022-1 and QRH, all governance occurs through independent managers provided by Fortbridge Corporate Services LLC in Wilmington, Delaware, and all material decisions are made pursuant to the terms of pre-established transaction documents.
(v) Whether the entity has any state-registered activities. Registration as a foreign LLC or other entity in a state may create nexus or may be treated as an admission of doing business in that state. Neither QRF 2022-1 nor QRH is registered to do business as a foreign LLC in any state other than Delaware.
Bankruptcy-remote SPVs that have no employees, no offices, and no independent operations — and whose sole activities consist of holding receivables and issuing securities pursuant to pre-established transaction documents — are generally considered to have insufficient nexus for state income or franchise tax purposes in states other than their state of formation. This principle has been recognized both in state administrative guidance and in the securitization industry's established market practice, and it has been relied upon by rating agencies in evaluating the credit and structural integrity of securitization transactions.
C. Attribution and Agency Theories
Even where an SPV itself has no direct physical or economic presence in a state, there is a risk that the activities of a servicer, administrator, or other party acting on behalf of the SPV could be attributed to the SPV under agency or attribution theories, thereby creating nexus in states where the servicer or other party operates.
This risk is particularly relevant in the present transaction because QPF — the servicer of the receivables — is licensed and conducts business in all 50 states. QPF employs personnel in multiple states, maintains offices in several jurisdictions, and interacts directly with obligors and insurance carriers in connection with the origination and servicing of insurance premium finance loans. If QPF's in-state activities were attributed to QRF 2022-1 or QRH, the SPVs could potentially be found to have nexus in every state in which QPF operates.
Under general agency principles, however, the activities of a servicer are attributable to an SPV only if the servicer acts as the SPV's agent — that is, only if the servicer acts on behalf of and subject to the control and direction of the SPV. Where the servicer acts as an independent contractor under the terms of a servicing agreement, performing services in its own capacity and exercising its own judgment and discretion (subject to contractual standards), most states will not attribute the servicer's in-state activities to the entity on whose behalf the servicer acts.
In the present transaction, the Servicing Agreement (dated for execution, v3, 2022-10-12) establishes that QPF acts as an independent contractor in its capacity as servicer. The Servicing Agreement provides that QPF will service the receivables in accordance with its customary practices, that QPF retains discretion over day-to-day servicing decisions, and that QRF 2022-1 does not direct or control QPF's in-state activities. The servicing relationship is conducted on an arm's-length basis, and QPF receives a market-rate servicing fee (1.00% per annum on the outstanding pool balance) for its services. These contractual terms are critical to the conclusion that QPF's in-state activities should not be attributed to the SPVs.
It is essential that the arm's-length nature of the servicing relationship be maintained throughout the life of the transaction. Any operational changes that blur the line between QPF's activities as servicer and the SPVs' activities as owners of the receivables — such as the SPVs directing QPF's collection activities in a particular state, or the SPVs' managers supervising QPF employees in the field — could undermine the independent contractor characterization and create a risk of nexus attribution.
Similarly, QIH's activities as administrator under the Administration Agreement are conducted on an arm's-length basis and should not create nexus for the SPVs in states where QIH operates, provided that QIH acts in its own capacity as administrator and the SPVs do not exercise direction or control over QIH's in-state activities.
IV. Delaware Tax Exposure
A. Delaware Annual Franchise Tax
Both QRF 2022-1 and QRH are organized as Delaware limited liability companies and are therefore subject to Delaware's annual franchise tax on domestic LLCs. Under 6 Del. C. § 18-1107, every domestic limited liability company is required to pay an annual tax of $300 to the State of Delaware, due on or before June 1 of each year. This is a flat-rate tax that does not vary based on the revenue, income, or assets of the entity. For each of QRF 2022-1 and QRH, the annual Delaware LLC franchise tax obligation will be $300 per entity per year, for a combined annual cost of $600.
Delaware does not impose a state income tax on LLCs that do not conduct business within the State of Delaware. Because neither QRF 2022-1 nor QRH conducts any business within Delaware other than maintaining a registered agent (Ashgrove Services Inc. — though the registered agent's office is in New York, the registered office address may be in Delaware) and a registered office at the address of its independent manager (Fortbridge Corporate Services LLC, 1209 Orange Street, Wilmington, Delaware 19801), neither entity should be subject to Delaware income tax. The mere maintenance of a registered agent and registered office in Delaware, and the holding of organizational meetings or executing written consents through independent managers in Delaware, do not constitute the conduct of business in Delaware for income tax purposes.
Conclusion: Both QRF 2022-1 and QRH will be subject only to the $300 annual Delaware LLC franchise tax. Neither entity is expected to incur any Delaware income tax liability.
B. Delaware Unclaimed Property
We note that Delaware's unclaimed property laws — which are among the most comprehensive and actively enforced in the nation — may apply to unclaimed distributions, payments, or other amounts held by or on behalf of the SPVs. Under Delaware's Unclaimed Property Law, 12 Del. C. § 1130 et seq., property that is owed to a person and remains unclaimed for a specified dormancy period must be reported and remitted to the State of Delaware. Because the SPVs are Delaware LLCs, Delaware may assert jurisdiction over unclaimed property held by or on behalf of the SPVs under the priority rules established by the Supreme Court in Texas v. New Jersey, 379 U.S. 674 (1965), and Delaware v. New York, 507 U.S. 490 (1993).
We recommend that standard unclaimed property compliance procedures be implemented for both SPVs as part of the ongoing administration of the transaction. The Administration Agreement should include provisions requiring QIH, as administrator, to monitor and comply with applicable unclaimed property requirements on behalf of the SPVs.
V. State-by-State Nexus Analysis — Key Jurisdictions
The receivables pool acquired by QRF 2022-1 comprises approximately 82,400 individual insurance premium finance loans originated by QPF to obligors located across all 50 states. The geographic distribution of the pool is diversified, but three states account for a disproportionate share of the pool balance:
Because QPF originates loans across all 50 states, the obligors on the receivables are located nationwide. The analysis below focuses on the states presenting the highest risk of nexus assertion or the largest pool concentrations, as well as New York (where several transaction parties are located) and Connecticut (where QIH is headquartered). General conclusions for the remaining 47 states are addressed in Section V.F.
A. New York
New York imposes a franchise tax on corporations under Article 9-A of the New York Tax Law and, in New York City, an unincorporated business tax ("UBT") on the income of unincorporated businesses (including LLCs) that carry on business within New York City. The franchise tax applies to domestic and foreign corporations doing business, employing capital, owning or leasing property, or maintaining an office in New York. The UBT applies to individuals and unincorporated entities that carry on a trade, business, profession, or occupation wholly or partly within New York City.
Physical Presence: Neither QRF 2022-1 nor QRH has an office, employees, or tangible personal property in the State of New York. Neither entity is registered to do business in New York as a foreign LLC. Neither entity conducts any operational activities in New York.
Registered Agent: The registered agent for both entities, Ashgrove Services Inc., is located at 28 Liberty Street, New York, New York 10005. However, the designation of a registered agent for purposes of receiving service of process does not, standing alone, create nexus for franchise or income tax purposes under New York law. The New York Department of Taxation and Finance has consistently taken the position that the mere use of a New York registered agent does not constitute "doing business" or "maintaining an office" in New York.
Issuer's Counsel: Calderwood & Harkness LLP, located at 601 Lexington Avenue, New York, New York 10022, serves as counsel to the Issuer and has performed legal work in connection with the transaction from its New York office. Under well-established principles, the activities of an attorney on behalf of a client do not create nexus for the client in the attorney's jurisdiction. An attorney is an independent professional engaged by the client, not an agent whose in-state presence is attributable to the client for tax nexus purposes.
Indenture Trustee: Calvoneth Trust Company, N.A. maintains its Corporate Trust Office at 600 Travis Street, Suite 5800, Houston, Texas 77002. The indenture trustee does not have a New York presence that would be relevant to the nexus analysis for the SPVs.
Structuring Agent / Bookrunner: Ridgeline Capital Markets, located at 383 Madison Avenue, New York, New York, acts as structuring agent and bookrunner for the offering. The activities of a placement agent or underwriter in connection with the offering and sale of securities are activities of the placement agent in its own capacity and do not create nexus for the issuer in the placement agent's state. This is consistent with long-standing market practice and the treatment of underwriting activities under New York tax law.
Back-Up Servicer / Liquidity Provider: Northvane Bank, N.A., located at 200 Vesey Street, New York, New York, serves as back-up servicer and liquidity provider under the transaction documents. Northvane Bank acts in its own capacity as a contracting party under the Back-Up Servicing Agreement and the Liquidity Facility Agreement. The existence of a contractual relationship between an SPV and a New York-based financial institution does not create nexus for the SPV in New York, provided the SPV does not exercise direction or control over the financial institution's in-state activities.
Conclusion: Neither QRF 2022-1 nor QRH should have New York income or franchise tax nexus. Neither entity should be subject to New York City's unincorporated business tax. The various New York-based transaction participants (registered agent, issuer's counsel, structuring agent, back-up servicer) act in their own capacities and do not create nexus for the SPVs.
B. Connecticut
Connecticut imposes a business entity tax ("BET") on entities, including LLCs, that are "doing business" in Connecticut. The BET is a biennial tax of $250 per entity. In addition, Connecticut imposes a corporation business tax on corporations and, under certain circumstances, on pass-through entities that have nexus with the state.
Risk of Affiliate-Based Nexus: The primary nexus risk in Connecticut arises from the fact that QIH and QPF are headquartered in Stamford, Connecticut, at 400 Atlantic Street, Suite 2200. QIH employs a significant number of personnel in Connecticut, maintains its principal executive offices there, and conducts substantial operations in the state. QPF, as a wholly owned subsidiary of QIH, also maintains its principal office at the same address. There is a theoretical risk that the Connecticut Department of Revenue Services could argue that the SPVs — as affiliates of QIH and QPF — are "doing business" in Connecticut by virtue of their parent's or affiliate's activities, particularly if the state were to apply a broad interpretation of "doing business" that encompasses entities whose ultimate parent or sponsor is headquartered in the state.
Mitigating Factors: Several factors strongly militate against a finding of Connecticut nexus for the SPVs:
(i) QRF 2022-1's sole member is QRH, which is a Delaware LLC — not a Connecticut entity. The chain of ownership between QRF 2022-1 and any Connecticut entity runs through QRH and then to QPF (a Delaware LLC), and only then to QIH (a Delaware corporation headquartered in Connecticut). The SPVs are not directly owned or controlled by a Connecticut entity.
(ii) QRH's sole member is QPF, a Delaware LLC with its principal office in Connecticut but organized under Delaware law. QPF's Connecticut presence is attributable to its own operations, not to QRH.
(iii) Both SPVs are subject to separateness covenants in their LLC agreements and in the transaction documents that prohibit commingling of operations, assets, or identities with QPF, QIH, or any other affiliate. These covenants are designed to preserve the legal separateness and bankruptcy-remote status of the SPVs.
(iv) Neither QRF 2022-1 nor QRH has any employees, offices, or tangible property in Connecticut. Neither entity is registered to do business in Connecticut.
(v) All governance and decision-making for the SPVs occurs through independent managers provided by Fortbridge Corporate Services LLC in Wilmington, Delaware. The independent managers (Timothy R. Callan for QRF 2022-1 and Eleanor M. Vasquez for QRH) are not located in Connecticut and do not conduct SPV business in Connecticut.
Importance of Strict Separateness: The risk of Connecticut nexus, while we believe it to be low, would be materially elevated if the SPVs failed to maintain their separate existence from QIH and QPF. If, for example, QIH personnel in Stamford were to direct the day-to-day operations of the SPVs, or if the SPVs were to share office space, telephone numbers, or stationery with QIH or QPF, Connecticut could assert nexus based on alter ego or agency theories. It is therefore critical that all parties involved in the transaction strictly adhere to the separateness covenants and that QIH personnel understand that the SPVs are legally distinct entities that must be treated as such.
Conclusion: The risk of Connecticut nexus for QRF 2022-1 and QRH is low, provided that the separateness covenants are observed and the SPVs maintain their independent existence. We do not believe that either entity is "doing business" in Connecticut within the meaning of the Connecticut BET statute or the corporation business tax.
C. Texas
Texas imposes a franchise tax — commonly referred to as the "margin tax" — on entities that are organized in Texas or that are "doing business" in Texas. The Texas franchise tax is an entity-level tax calculated based on the entity's total revenue, with various deductions and apportionment methodologies available. The tax applies to corporations, LLCs, partnerships, and other legal entities.
Pool Concentration: Texas represents the largest state concentration in the receivables pool, at 14.2% of the pool balance (approximately $86,904,000). This means that a significant portion of the obligors on the receivables are located in Texas and that a substantial portion of the cash flows generated by the pool originate from Texas-based borrowers.
No Physical Presence: QRF 2022-1 and QRH have no office, employees, or tangible personal property in Texas. Neither entity is organized in Texas, and neither is registered to do business in Texas as a foreign LLC.
Indenture Trustee's Texas Presence: Calvoneth Trust Company, N.A. maintains its Corporate Trust Office at 600 Travis Street, Suite 5800, Houston, Texas 77002. However, Calvoneth Trust acts in its own capacity as trustee under the Indenture. It is a separate legal entity with its own Texas presence, and its activities in Texas are not conducted on behalf of or as agent for the SPVs. The trustee's Texas presence does not create nexus for QRF 2022-1 or QRH.
Texas Comptroller's Historical Position: The Texas Comptroller of Public Accounts has historically evaluated nexus for franchise tax purposes by examining whether an entity has a physical presence in Texas or is "doing business" in Texas within the meaning of the Texas Tax Code. The passive ownership of receivables where the obligors happen to be located in Texas has not been treated by the Comptroller as "doing business" in Texas, provided the entity does not maintain offices, employ personnel, or otherwise actively conduct business in the state.
QPF's Texas Activities: QPF is licensed to originate insurance premium finance loans in Texas and maintains operational capabilities in the state. QPF's licensing, origination, and servicing activities in Texas are activities of QPF in its own capacity as originator and servicer. Under the independent contractor analysis discussed in Section III.C, QPF's Texas activities should not be attributed to the SPVs, provided the arm's-length servicing relationship is maintained.
Conclusion: Neither QRF 2022-1 nor QRH should have Texas franchise tax nexus. The passive ownership of receivables owed by Texas obligors, without more, does not constitute "doing business" in Texas.
D. California
California imposes a franchise tax on entities "doing business" in California. The minimum franchise tax for an LLC doing business in California is $800 per year. In addition, California imposes an LLC fee based on the LLC's total income from California sources, with graduated rates applicable to LLCs with California-source income exceeding $250,000. California's franchise tax regime is notable for its breadth and for the aggressiveness with which the California Franchise Tax Board ("FTB") has historically asserted jurisdiction over out-of-state entities.
Pool Concentration: California represents the second-largest state concentration in the receivables pool, at 11.8% of the pool balance (approximately $72,216,000).
Broad "Doing Business" Definition: California Revenue and Taxation Code Section 23101(a) defines "doing business" broadly to include any entity that, among other things, is "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit" in California. In addition, California has adopted a bright-line economic nexus test under Revenue and Taxation Code Section 23101(b), which treats an entity as "doing business" in California if it has California sales exceeding the lesser of $500,000 or 25% of total sales, California real and tangible personal property exceeding the lesser of $50,000 or 25% of total real and tangible personal property, or California compensation exceeding the lesser of $50,000 or 25% of total compensation paid. This economic nexus standard was adopted prior to Wayfair and has been in effect since 2011.
Risk Assessment: The principal risk in California arises from the possibility that the FTB could assert that the SPVs derive California-source income from receivables owed by California obligors. Under this theory, the interest income and principal payments received from California-based borrowers could be characterized as California-source income, triggering the economic nexus threshold and subjecting the SPVs to the California franchise tax and LLC fee.
Mitigating Factors: Several factors support the conclusion that the SPVs should not have California nexus:
(i) The receivables were originated by QPF, not by the SPVs. The receivables are transferred from QPF to QRH and then from QRH to QRF 2022-1 via true sale transactions. After the transfer, the receivables are owned by the SPVs, but the SPVs did not originate, solicit, or create the receivables. The SPVs' ownership of the receivables is passive.
(ii) Neither SPV has employees, offices, or tangible personal property in California. Neither entity is registered to do business in California as a foreign LLC.
(iii) The SPVs do not actively solicit or originate loans in California. All origination and solicitation activities are conducted by QPF in its own capacity as originator.
(iv) California courts have generally held that the passive ownership of intangible assets — such as receivables, securities, or partnership interests — does not constitute "doing business" in California for franchise tax purposes, provided the entity has no other California contacts. See, e.g., Swart Enterprises, Inc. v. Franchise Tax Board, 7 Cal. App. 4th 1798 (1992) (holding that mere receipt of income from California sources, without active business conduct in the state, does not constitute "doing business").
Elevated Risk: Notwithstanding the mitigating factors, California remains the highest-risk jurisdiction among the states analyzed. The FTB has been aggressive in asserting jurisdiction over out-of-state entities, and the broad economic nexus thresholds could potentially be applied to the SPVs' California-source income (interest and principal payments from California obligors). In addition, the FTB has in certain instances taken the position that an entity that derives substantial income from California sources is "doing business" in California even if the entity has no physical presence in the state, particularly if the entity is part of an affiliated group that includes entities with substantial California operations.
Recommendation: We recommend that the transaction parties monitor California legislative and administrative developments, particularly any guidance from the FTB addressing the application of the "doing business" standard to securitization SPVs or passive investment entities. If the deal is relaunched, we further recommend considering the engagement of California-based tax counsel to provide a state-specific opinion on the California nexus question, particularly if Brindoval Ratings or Pinnacle Rating Services requests additional comfort on state tax exposure as part of the rating process.
Conclusion: The risk of California nexus is moderate. We believe it is likely defensible that neither QRF 2022-1 nor QRH has California franchise tax nexus, based on the entities' passive activities and absence of California contacts. However, California's aggressive enforcement posture and broad statutory definitions warrant heightened attention and ongoing monitoring.
E. Florida
Florida imposes a corporate income tax under Chapter 220 of the Florida Statutes. The Florida corporate income tax applies to corporations and entities that are treated as corporations for federal tax purposes. However, Florida does not impose an income tax on LLCs that are not classified as corporations for federal income tax purposes. Florida's corporate income tax rate is currently 5.5% on income apportioned to Florida.
Pool Concentration: Florida represents the third-largest state concentration in the receivables pool, at 9.6% of the pool balance (approximately $58,752,000).
Federal Tax Classification: Under the transaction documents, both QRF 2022-1 and QRH are classified as disregarded entities (or, in the alternative, as partnerships) for federal income tax purposes. Neither entity has elected to be treated as a corporation for federal tax purposes. Because Florida's corporate income tax applies only to entities that are classified as corporations for federal tax purposes, and because QRF 2022-1 and QRH are classified as disregarded entities or partnerships, neither entity should be subject to Florida's corporate income tax.
No Franchise Tax: Florida formerly imposed a franchise tax on corporations and other entities, but the Florida franchise tax was repealed effective January 1, 2022, pursuant to CS/CS/HB 7061 (2021). Accordingly, there is no Florida franchise tax applicable to the SPVs.
Conclusion: Neither QRF 2022-1 nor QRH has Florida state income or franchise tax exposure. Because both entities are treated as disregarded entities or partnerships for federal tax purposes, they fall outside the scope of Florida's corporate income tax. The repeal of the Florida franchise tax eliminates any residual franchise tax risk.
F. Other States — General Analysis
The remaining 47 states (and the District of Columbia) comprise approximately 64.4% of the receivables pool in aggregate. No single state other than Texas, California, and Florida exceeds the single-state concentration limit of 20% established in the Receivables Transfer Agreement, and no individual state outside the top three accounts for a concentration that would warrant a state-specific analysis at this time.
States with No Income Tax: Several states — including Nevada, Wyoming, South Dakota, Alaska (no individual income tax; corporate income tax exists), and New Hampshire (limited income tax) — do not impose a general income tax. In these states, there is generally no income or franchise tax exposure for passive SPVs. However, we note that Washington State does not impose an income tax but does impose a Business & Occupation ("B&O") tax, which is an excise tax on gross receipts. The B&O tax applies to entities "engaging in business" in Washington. Because the SPVs are not engaging in business activities in Washington — they have no employees, offices, or operational activities in the state, and the passive ownership of receivables owed by Washington obligors should not constitute "engaging in business" — we conclude that the SPVs should not be subject to Washington's B&O tax.
States with Broad Economic Nexus Provisions: Certain states have adopted economic nexus provisions for income or franchise tax purposes that could theoretically reach out-of-state entities with economic connections to the state. Notable examples include:
• Ohio Commercial Activity Tax ("CAT"): The Ohio CAT is a gross receipts tax imposed on entities with more than $150,000 in taxable gross receipts from Ohio-sourced commercial activity. The SPVs may receive interest payments from Ohio obligors, but such payments derive from the passive ownership of receivables originated by QPF, and the SPVs have no physical presence or active business conduct in Ohio. We believe the SPVs' passive receipt of interest income from Ohio-sourced receivables should not constitute "commercial activity" sufficient to trigger the CAT, although Ohio's broad sourcing rules warrant monitoring.
• Illinois: Illinois imposes a corporate income tax and a personal property replacement income tax on corporations and on certain pass-through entities. Illinois applies a "doing business" standard for nexus that includes maintaining an office, having employees, or conducting activities beyond mere solicitation. The SPVs have no presence or activities in Illinois, and the passive ownership of receivables should not create Illinois nexus.
Foreign Registration: Neither QRF 2022-1 nor QRH is registered to do business (i.e., foreign qualified) as an LLC in any state other than Delaware. This absence of foreign registration is consistent with the entities' limited activities and supports the conclusion that neither entity is "doing business" in any state other than Delaware. We note that foreign registration in a state may, in certain jurisdictions, be treated as an admission that the entity is doing business in the state, which could create nexus. The decision not to register in any state is appropriate given the SPVs' passive activities and bankruptcy-remote structure.
Conclusion: For the remaining 47 states and the District of Columbia, neither QRF 2022-1 nor QRH should have state income or franchise tax nexus. The entities' lack of physical presence, absence of employees, passive ownership of intangible assets, and non-registration as foreign LLCs support this conclusion across all jurisdictions.
VI. Unitary/Combined Reporting Considerations
Several states, including California, New York, Illinois, and others, require or permit combined or unitary reporting for affiliated entities that are engaged in a "unitary business." Under the unitary business principle, entities that are part of an economically integrated group may be required to file a combined or consolidated return, with the combined income of the group apportioned among the states in which the group operates. If QRF 2022-1 or QRH were treated as part of QIH's unitary group for purposes of any state's combined reporting requirements, the SPV could be pulled into a combined return, and the state could apportion a share of the group's combined income to the SPV.
Risk Assessment: The risk that a state would include QRF 2022-1 or QRH in a combined or unitary filing with QIH is mitigated by several factors:
(i) Bankruptcy-Remote Structure and Separateness Covenants. Both SPVs are bankruptcy-remote entities with separateness covenants that require them to maintain separate legal identities, separate books and records, separate bank accounts, and independent governance structures. The separateness covenants are fundamental to the transaction's structural integrity and are designed to prevent the SPVs from being treated as alter egos or divisions of QPF or QIH.
(ii) Absence of Unitary Business Indicators. The hallmarks of a unitary business — centralized management, economies of scale, functional integration, and shared operations — are absent with respect to the SPVs. QRF 2022-1's sole activity is holding receivables and issuing notes; QRH's sole activity is acting as an intermediate transferee and depositor of receivables. Neither entity shares employees, offices, equipment, or operational systems with QPF or QIH. The SPVs do not market products, solicit customers, or engage in any revenue-generating activity other than passively receiving collections on the receivables.
(iii) Independent Governance. The independent manager governance structure — with Timothy R. Callan serving as independent manager of QRF 2022-1 and Eleanor M. Vasquez serving as independent manager of QRH, both provided by Fortbridge Corporate Services LLC — reinforces the separateness of the SPVs from the operating companies. The independent managers are not officers or employees of QPF or QIH, and they owe fiduciary duties to the SPVs rather than to the sponsor or originator.
(iv) True Sale Transfer Structure. The receivables are transferred from QPF to QRH and then from QRH to QRF 2022-1 pursuant to true sale agreements. The true sale characterization further supports the legal and operational separateness of the SPVs from the originator. If the transfers are respected as true sales (as analyzed in the Tax Structuring Memorandum dated August 12, 2022), the receivables are owned by the SPVs and not by QPF, and the SPVs' income from the receivables is not income of QPF or QIH.
Conclusion: We believe there is a strong argument that QRF 2022-1 and QRH should not be included in any state unitary or combined filing of the QIH group. The SPVs' bankruptcy-remote structure, independent governance, absence of shared operations, and true sale transfer structure distinguish them from the operating companies and support the position that they are not engaged in a unitary business with QIH or QPF. However, because the application of unitary business principles varies by state and is inherently fact-intensive, we recommend ongoing vigilance in maintaining the SPVs' separateness and monitoring any state-level challenges to the treatment of securitization SPVs as independent entities for combined reporting purposes.
VII. Impact of Receivables Pool Characteristics on Nexus
The characteristics of the receivables pool are relevant to the state tax nexus analysis in several respects. The nature, term, geographic distribution, and security of the receivables all bear on the question of whether the SPVs' ownership of the receivables creates a sufficient connection to any particular state to support a nexus finding.
Pool Statistics:
Intangible Nature of the Receivables: The receivables are contractual rights to receive payments from obligors. They are intangible financial assets and do not constitute tangible personal property located in any particular state. This is a significant distinction for nexus purposes, because the ownership of tangible personal property in a state — such as inventory, equipment, or real estate — is a well-established basis for nexus, whereas the ownership of intangible assets generally does not create nexus in the state where the obligor or payor is located. The receivables are secured by the obligors' rights to unearned premium refunds from insurance carriers, which are themselves intangible contractual rights. At no point do the SPVs hold tangible property in any state.
Geographic Diversification: The pool is widely dispersed across all 50 states. No single state accounts for more than 14.2% of the pool balance (Texas), and no single state exceeds the 20% concentration limit established in the transaction documents. This geographic diversification reduces the risk that any single state could argue that the SPVs have a dominant or disproportionate presence within its borders. The concentration limits — including the single obligor limit of 0.75%, the single state limit of 20%, and the single carrier limit of 15% — are structural protections that will be maintained throughout the revolving period and that further support the characterization of the SPVs' activities as passive and diversified.
Granularity and Short Duration: The pool consists of approximately 82,400 individual loans with an average balance of approximately $7,427, a weighted average original term of 9.2 months, and a weighted average remaining term of 5.7 months. The high degree of granularity (no single obligor accounts for more than 0.38% of the pool, or approximately $2,325,600, and the top 10 obligors account for only 2.14% of the pool, or approximately $13,096,800) means that the SPVs' income is not dependent on any individual borrower or any small group of borrowers in any particular state. The short duration of the receivables further supports the passive nature of the SPVs' activities — the receivables self-liquidate over a matter of months, and the SPVs do not engage in long-term lending relationships with obligors.
Revolving Structure: The transaction includes a 24-month revolving period during which new receivables will be added to the pool as existing receivables amortize or pay off. The revolving nature of the pool means that the geographic composition of the pool will change over time. However, the concentration limits will continue to apply during the revolving period, ensuring that the pool remains geographically diversified and that no single state's share of the pool exceeds the 20% threshold.
Conclusion: The characteristics of the receivables pool — including their intangible nature, short duration, high granularity, and wide geographic diversification — are consistent with the passive investment profile of the SPVs and support the conclusion that neither QRF 2022-1 nor QRH has state tax nexus in any jurisdiction by virtue of owning receivables owed by obligors in that jurisdiction.
VIII. Structural Recommendations to Minimize Nexus Risk
Based on the analysis set forth above, we offer the following structural and operational recommendations designed to minimize the risk that any state could assert franchise or income tax nexus over QRF 2022-1 or QRH.
A. Maintain SPV Separateness
Both QRF 2022-1 and QRH must strictly observe all separateness covenants contained in their respective LLC agreements and in the transaction documents. These covenants are the foundation of the bankruptcy-remote structure and are equally critical to the state tax nexus analysis. Specifically, each SPV must:
• Maintain separate books and records that are distinct from those of QPF, QIH, and all other affiliates;
• Not commingle its assets with those of any other entity, including maintaining separate bank accounts and segregated collections;
• Hold itself out to the public and to all counterparties as a separate and distinct entity from QPF, QIH, and all other affiliates;
• Maintain adequate capitalization in light of its contemplated activities and obligations;
• Conduct business only through its own authorized managers, officers, or agents (i.e., the independent managers and the parties acting under the transaction documents), and not through the personnel of QPF or QIH;
• Maintain its own stationery, invoices, and other business correspondence, distinct from those of QPF and QIH; and
• Not guarantee or otherwise become liable for the debts or obligations of any other entity.
The independent managers provided by Fortbridge Corporate Services LLC — Timothy R. Callan for QRF 2022-1 and Eleanor M. Vasquez for QRH — must be actively involved in any consent or approval requiring the independent manager's vote. This is particularly important with respect to any voluntary bankruptcy filing, but it extends to all matters requiring the independent manager's approval under the LLC agreement. The independent managers must exercise their own independent judgment and must not act under the direction or control of QPF, QIH, or any other affiliate.
B. Limit Activities
Neither QRF 2022-1 nor QRH should maintain an office, employ personnel, or lease or own tangible personal property in any state other than Delaware. The SPVs' activities must remain limited to those expressly permitted under their organizational documents and the transaction agreements.
All servicing, administration, and trustee functions should continue to be performed by third parties under arm's-length agreements:
• QPF as servicer under the Servicing Agreement;
• QIH as administrator under the Administration Agreement;
• Calvoneth Trust Company, N.A. as indenture trustee under the Indenture; and
• Northvane Bank, N.A. as back-up servicer under the Back-Up Servicing Agreement.
Neither SPV should register as a foreign LLC in any state other than Delaware unless legally required to do so. Based on our current analysis, neither entity's activities rise to a level that would require foreign qualification in any state. If circumstances change — for example, if a state were to adopt a new statutory requirement mandating registration of entities that own receivables originated within the state — this conclusion should be reassessed.
C. Governance in Delaware
All formal governance actions — including manager consents, resolutions, amendments to organizational documents, and any other actions requiring the approval of the SPVs' managers or members — should be executed in Delaware or, where in-person execution is not practicable, through written consent procedures that avoid creating nexus in any state. Written consents executed by the independent managers in Delaware are preferable to in-person meetings held in other jurisdictions.
If any in-person board or manager meetings are held, they should not be held in Connecticut, New York, or California. These three states have the broadest nexus standards among the jurisdictions analyzed, and the conduct of governance activities in any of these states could be cited as evidence of "doing business" in the state. Meetings, to the extent necessary, should be held in Delaware or in a jurisdiction with no income or franchise tax (such as Nevada or Wyoming).
D. Documentation Discipline
The transaction documents — including the Receivables Sale Agreement, the Receivables Transfer Agreement, the Servicing Agreement, the Administration Agreement, the Indenture, the Back-Up Servicing Agreement, and the Liquidity Facility Agreement — should clearly identify the SPVs as separate legal entities with their own rights and obligations, distinct from QPF, QIH, and all other affiliates. The documents should not contain provisions that could be interpreted as creating an agency relationship between the SPVs and the servicer, administrator, or any other party that would impute the other party's state presence to the SPVs.
In particular, the Servicing Agreement should expressly provide that QPF acts as an independent contractor in its capacity as servicer and that the SPVs do not direct or control QPF's in-state activities. The agreement should specify that QPF exercises its own judgment and discretion in servicing the receivables, subject to contractual performance standards, and that QPF's in-state presence is attributable solely to QPF and not to the SPVs.
We have reviewed the near-final versions of the transaction documents and believe they are generally consistent with these recommendations. We will provide specific markup comments if any provisions warrant revision prior to execution.
IX. Conclusion
Based on the foregoing analysis, it is our conclusion that both Quorum Receivables Funding 2022-1 LLC and Quorum Receivables Holding LLC should avoid state-level franchise or income tax nexus in all states other than Delaware. In Delaware, each entity will be subject only to the $300 annual LLC franchise tax, for a combined annual cost of $600. Neither entity is expected to incur any Delaware income tax liability.
Among the states analyzed in detail, California presents the highest risk due to its broad statutory definition of "doing business," its economic nexus thresholds, and the historically aggressive enforcement posture of the California Franchise Tax Board. However, we believe that the SPVs' passive activities and absence of California contacts — no employees, no offices, no tangible property, no origination or solicitation activities in California — should support a defensible position that no California franchise tax nexus exists. The remaining states analyzed — New York, Connecticut, Texas, and Florida — present lower risk profiles, and we are confident that neither SPV has nexus in any of these jurisdictions.
This conclusion is dependent upon strict compliance with the separateness covenants set forth in the SPVs' organizational documents and the transaction agreements, maintenance of the bankruptcy-remote structure, and the continued absence of any in-state employees, offices, tangible property, or operational activities on the part of the SPVs. Any material change in the SPVs' activities or operational profile could alter the nexus analysis and should be evaluated before implementation.
If the transaction is relaunched following any delay, we recommend the following:
(i) Re-confirm the analysis as of the new projected closing date, taking into account any changes in state law, administrative guidance, or judicial decisions that may have occurred in the interim;
(ii) Monitor changes in state nexus law, particularly in California, New York, and any states that may adopt broader economic nexus tests for income or franchise tax purposes in the wake of Wayfair or otherwise;
(iii) Consider engagement of local counsel in California if Brindoval Ratings or Pinnacle Rating Services requests additional comfort on state tax exposure as part of the rating process or if the California Franchise Tax Board issues guidance that could affect the analysis; and
(iv) Coordinate with the transaction parties to ensure ongoing compliance with the structural recommendations set forth in Section VIII of this memorandum.
This memorandum does not constitute a guarantee of any particular tax outcome. Tax laws are subject to change, and the application of state nexus standards to specific facts is inherently uncertain. This memorandum should be read in conjunction with the following related work product:
• Tax Structuring Memorandum, dated August 12, 2022 (Matter No. 1025-00007-FED);
• FATCA Compliance Memorandum, dated August 18, 2022 (Matter No. 1025-00007-FATCA); and
• Tax Disclosure Review of the Offering Memorandum Tax Section, dated September 20, 2022 (Matter No. 1025-00007-DISC).
We are available to discuss any aspect of this analysis at your convenience.
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Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________

MEMORANDUM

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

MATTER NO.: 1025-00007

CALDERWOOD & HARKNESS LLP

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