Corporate Finance


By: Lucosky Brookman

In structured finance transactions such as securitizations, special purpose entities (SPEs) play a vital role in isolating financial assets from the potential bankruptcy risk of the originator or servicer of those assets. Two key legal opinions that facilitate this isolation are the "true sale" opinion and the "non-consolidation" or "non-con" opinion. This article will explore the purpose and key elements of these opinions, as well as best practices for counsel issuing them.

The Role of SPEs in Structured Finance

SPEs, also known as special purpose vehicles (SPVs), are entities set up for the limited purpose of holding financial assets such as accounts receivable in a securitization. The goal is to insulate those assets from the originator's potential bankruptcy and make them bankruptcy remote.

This is typically accomplished through two key steps:

  1. Transferring the financial assets from the originator to the SPE in a "true sale" such that the originator no longer has any ownership interest that could be clawed back into its bankruptcy estate.
  2. Ensuring the SPE is unlikely to voluntarily file for bankruptcy or be substantively consolidated into the originator's bankruptcy. This is done through separateness covenants, narrow purpose provisions, and independent directors in the SPE's organizational documents.

By isolating the assets in a bankruptcy remote SPE, a lender or purchaser of asset-backed securities can rely primarily on the credit risk of the underlying assets and their obligors, rather than the originator's creditworthiness and bankruptcy risk. This reduces financing costs for the originator.

True Sale Opinions

A true sale opinion provides assurance to the recipients that in counsel's reasoned judgment, if the issue were raised in a bankruptcy of the originator, the court would determine the transfer of financial assets to the SPE constituted a true sale rather than a secured loan.

Distinguishing a true sale from a secured loan is a highly fact-intensive analysis. Key factors courts consider include:

  • The language and intent expressed in the transaction documents
  • The allocation of risk and benefits between seller and buyer
  • Recourse to the seller by the buyer
  • Seller's retention of servicing rights and commingling of proceeds
  • Seller's right to excess collections or repurchase assets
  • Pricing and terms relative to fair market value

To support a true sale conclusion, counsel will want to see:

  • The transaction clearly documented as a sale, not a secured loan
  • An arm's length purchase price
  • Transfer of most risks and benefits of ownership to the buyer
  • Limited recourse to the seller
  • Servicing rights and commingling of proceeds minimized
  • Repurchase rights limited
  • Pricing and terms consistent with a sale

Counsel will typically assume certain core facts necessary for their analysis, as well as relying on officer's certificates and representations in the transaction documents to establish other pertinent facts. The opinion will be reasoned and limited, not an absolute guarantee of outcome.

If a true sale is achieved, the SPE's assets should not be considered part of the originator's bankruptcy estate under Section 541 of the Bankruptcy Code. This allows the SPE and its lenders/investors to liquidate and collect the assets without the automatic stay or other bankruptcy restrictions.

Non-Consolidation Opinions

Even if a true sale is achieved, there remains a risk a bankruptcy court could order a "substantive consolidation" of the SPE's assets and liabilities with the originator based on equitable factors. This would defeat the isolation of the SPE's assets.

A non-consolidation opinion provides assurance that counsel has analyzed the relevant facts and law and reasonably believes a bankruptcy court would not order such substantive consolidation. Like a true sale opinion, a non-con opinion is a reasoned, limited opinion, not an absolute guarantee.

Substantive consolidation is a rare, equitable doctrine that allows a court to pool the assets and liabilities of separate entities and satisfy creditors from the common pool. Key factors courts consider in a substantive consolidation analysis include:

  • Failure to observe corporate formalities and separateness between entities
  • Extensive commingling of assets, business functions and records
  • Inadequate capitalization of subsidiary
  • Difficulty segregating individual entity assets and liabilities
  • Some creditors dealing with entities as a single economic unit and relying on that combined credit
  • Consolidation benefits some creditors but is not generally unfair to objecting creditors
  • Necessity of consolidation to reorganization

To mitigate the risk of substantive consolidation, counsel will look for robust separateness covenants in the SPE's organizational documents requiring it to:

  • Maintain separate books, records and accounts
  • Not commingle assets
  • Conduct business in its own name
  • Pay liabilities only from its own funds
  • Observe all organizational formalities
  • Maintain arm's-length relationships with affiliates
  • Not guarantee or become obligated for debts of affiliates
  • Hold itself out as a separate entity
  • Maintain adequate capital
  • Have independent directors/managers whose vote is required for bankruptcy
  • Counsel will also examine the conduct of the parties to confirm adherence to separateness and look for any factors suggesting some creditors relied on the combined credit of the entities. An officer's certificate and representations in the transaction documents will typically establish these facts.

If the SPE adheres to separateness, it should remain a distinct legal entity from its parent. This creates a compelling argument against substantive consolidation, especially if SPE-only creditors relied on its separateness and would be harmed by consolidation.

Rating agencies and recipients of non-con opinions may also require certain diligence regarding the SPE's historical activities, financial condition and relationships. However, some commentators question the relevance of certain diligence items to the substantive consolidation analysis if current adherence to separateness is shown.

Special Issues and Considerations

While the core opinions are well-established, nuances in transaction structures and law firm practices can create additional issues for counsel to navigate in rendering true sale and non-con opinions.

For example, some true sale opinions must grapple with factors such as a sale price at 100% of face value (rather than a discount), servicing/interest type compensation for the delay in collections, or parent guarantees. There are differing views on the import of such terms.

In the non-con opinion context, a key issue is whether even a limited parent guarantee, springing guarantee or "bad boy" guarantee creates too much association between the entities. One view is that a creditor with any parent guarantee claim has a harder case for arguing it relied solely on the SPE and would be unfairly harmed by consolidation.

Use of pre-existing SPEs can also complicate a non-con analysis with additional historical diligence requirements. Some question the relevance and feasibility of certain forensic type diligence to the core separateness analysis.


While highly nuanced and limited, true sale and non-consolidation opinions serve important functions in structured finance deals. A thoughtful, well-reasoned opinion from experienced counsel provides assurance that the bankruptcy isolation intended by the SPE structure will likely be respected based on counsel's analysis of the pertinent law and facts.

By carefully structuring the transfers and SPE to maximize indicia of a true sale and separateness, the parties improve the odds of a favorable outcome if these issues are ever litigated in a bankruptcy of the originator. The true sale and non-con opinions reflect counsel's considered professional judgment on these key issues.