<PAGE>
EXHIBIT 99.1
Wells Fargo Bank Minnesota, N.A. Moody's Investors Service, Inc.
Wells Fargo Center 99 Church Street
Sixth & Marquette New York, NY 10007
Minneapolis, MN 55479
First Union Securities, Inc.
Standard & Poor's Ratings Services, One First Union Center
a Division of The McGraw-Hill Charlotte, North Carolina 28288
Companies, Inc.
25 Broadway
New York, New York 10004
Re: Conseco Finance Lease 2000-1, LLC
Lease-Backed Notes
Ladies and Gentlemen:
We have acted as counsel for Conseco Finance Corp., a Delaware corporation
("Conseco Finance "), Conseco Vendor Services Corporation, a Delaware
corporation and a subsidiary of Conseco Finance ("Vendor Services"), Green Tree
Lease Finance II, Inc., a Minnesota corporation and a subsidiary of Vendor
Services (the "SPC"), and Conseco Finance Lease 2000-1, LLC, a Delaware limited
liability company of which the SPC is the sole and managing member (the
"Issuer"), in connection with the issuance of Lease-Backed Notes (the "Notes")
pursuant to an Indenture, dated as of July 1, 2000 (the "Indenture"), among the
Issuer and Wells Fargo Bank Minnesota, N.A. (the "Trustee"), as Trustee.
Pursuant to a Transfer Agreement dated as of July 1, 2000 (the "Transfer
Agreement"), among the SPC, as Purchaser, and Vendor Services, as Seller and
Servicer, Vendor Services has sold certain leases, including all collections
received with respect to the leases and certain other related rights (the
"Leases") and its interests (which may be deemed an ownership interest or a
security interest, depending on the terms of the related Lease) in the equipment
related to such Leases (such interests being hereinafter referred to as the
"Equipment") to the SPC. The Leases will be transferred by the SPC to the Issuer
pursuant to the terms of a Contribution and Servicing Agreement dated as of July
1, 2000 (the "Contribution and Servicing Agreement"), among the Issuer, the SPC,
Vendor Services, in its individual
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capacity and as Servicer, and the Trustee. Pursuant to the Contribution and
Servicing Agreement, the SPC will also grant to the Issuer certain rights to the
proceeds of the Equipment (the "Residual Realizations").
The Issuer has requested that we provide to you our opinion whether the
transfer by Vendor Services to the SPC of the Leases, the Equipment and the
proceeds thereof could be recharacterized as a pledge by Vendor Services to
secure borrowings, rather than an absolute contribution by Vendor Services of
such assets, in the event that Conseco Finance Corp. or Vendor Services became a
debtor in a case under the United States Bankruptcy Code (the "Code"). In
rendering such opinion, we have examined the Transfer Agreement and such
additional related documents, and we have reviewed such questions of law, as we
have considered necessary and appropriate for the purposes of the opinion
expressed herein. All capitalized terms used herein and not defined herein have
the meanings assigned to them in the Indenture.
I. Legal Background.
It is important to note that, in view of the lack of authoritative case law
directly on point, it is not possible to predict with certainty the outcome if a
court were to consider the proper characterization of Vendor Services' transfer
of the Leases and the Equipment to the SPC. In determining whether a particular
transfer is properly characterized as a sale or a loan, courts have examined and
analyzed a variety of factors which they have deemed relevant. While these
courts have set forth the factors considered to be indicative of either a sale
or a loan, they generally have provided little or no analysis of why a
particular factor or combination of factors was held to be determinative.1/ In
addition, the courts have differed in the importance and relative weight to be
accorded to these factual elements, so that their decisions do not provide
strong guidance for the application of consistently applied or well developed
legal doctrines.2/ Accordingly, our analysis is based upon a review of existing
case law, decided
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1/ There is strong authority for the proposition that the party asserting that a
transaction structured as a sale is in - reality a loan must establish that fact
by evidence which is clear and convincing. In re Bevill Bresler & Schulman Asset
Management Corp., 67 B.R. 557, 596-98 (D.N.J. 1986); In re Candy Lane Corp., 38
B.R. 571, 577 (Bankr. S.D.N.Y. 1984) (citing Cross v. A.G.V. Assocs., Inc., 340
F.2d 42, 44 (2d Cir. 1964), cert. denied, 381 U.S. 913 (1965)); A.B. Lewis Co.
v. National Inv. Corp., 421 S.W.2d 723, 729 (Tex. Civ. App. 1967); see also Fox
v. Peck Iron & Metal Co., 25 B.R. 674, 688 (Bankr. S.D. Cal. 1982). But see In
re Hurricane Elkhorn Coal Corp. II, 19 B.R. 609, 618 (Bankr. W.D. Ky. 1982),
modified on other grounds, 32 B.R. 737 (W.D. Ky. 1983) (there is a "presumption
of includability in the estate, leaving it to the property claimant, even the
possessory claimant, to rebut the presumption...").
2/ Moreover, with respect to the subject transaction, a court may exercise its
equitable authority to deem significant in its "characterization" analysis facts
or circumstances which do not exist as of the date hereof.
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under the laws of various jurisdictions,3/ which we believe may be applicable by
analogy but which would not necessarily be deemed controlling by a court
exercising jurisdiction under the Bankruptcy Code of a proceeding instituted
with respect to the SPC or Vendor Services.
Although no single factor is considered to be determinative in the
characterization analysis, the several factors which courts have considered in
their analysis generally concentrate on (a) the intent of the parties to the
transaction and (b) the economic substance of the transaction. Although
categorization of the factual elements assists in the review of case law, within
each such category the analysis is the same: an attempt to determine the true
nature of a particular transaction. Moreover, unless all of the factual elements
in a given transaction are indicative of either a sale or a loan, the
determination of its true nature, as discussed below, almost invariably requires
a balancing of factors to ascertain whether the transaction more closely
resembles a sale or a loan.
In determining whether a challenged transfer is properly characterized as a
loan or a sale, courts frequently refer to the intent of the parties to the
transaction. See, e.g., In re Bevill Bresler & Schulman Asset Management Corp.,
67 B.R. 557, 596-98 (D.N.J. 1986)(having determined that agreements at issue
were "hybrid" transactions possessing both sale and loan characteristics, court
rejected analysis based upon "weighing economic factors" and gave effect to
clearly expressed intent of sophisticated parties to consummate sale rather than
loan); In re Candy Lane Corp., supra note 1, 38 B.R. at 576 (noting that under
the Uniform Commercial Code, "the intent of the parties governs whether a
particular document or transaction creates a security interest"); In re Lemons &
Associates Inc., 67 B.R. 198, 210 (Bankr. D. Nev. 1986); see also In re Armando
Gerstel, Inc., 65 B.R. 602, 604 (Bankr. S.D. Fla. 1986). The courts' analysis of
the parties' intent is consistent with and reflects recognition of the express
provision ofss.9-102(1)(a) of the Uniform Commercial Code, which provides that
Article 9 applies to "any transaction (regardless of its form) which is intended
to create a security interest in personal property . . ." (emphasis added)
(hereinafter cited as the "UCC"). However, neither this provision nor any other
relevant provision in the UCC resolves the characterization issue. As noted by
the Third Circuit in Major's Furniture Mart, Inc. v. Castle Credit Corp. Inc.,
602 F.2d 538, 543 (3rd Cir. 1979) (hereinafter referred to as "Major's
Furniture"):
[T]he [Uniform Commercial] Code does not provide assistance in
distinguishing between the character [sale or loan] of such
transactions. This determination, as to whether a
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3/ The case law strongly suggests that the determination of whether a transfer
of property is properly characterized as a sale or a loan - and consequently
excluded from or included in the debtor-transferor's estate - is ultimately
governed by applicable state law. See Butner v. United States, 440 U.S. 48, 54
(1979) ("Congress has generally left the determination of property rights in the
assets of a bankrupt's estate to state law"); see also Barnhill v. Johnson, 112
S. Ct. 1386, 1389 (1992) ("In the absence of any controlling federal law,
'property' and 'interests in property' are creatures of state law"); In re
Contractors Equip. Supply Co., 861 F.2d 241, 244 (9th Cir. 1988) ("Whether a
debtor in possession has an interest in property is determined by state law").
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particular assignment constitutes a sale or a transfer for security, is
left to the courts for decision.
See also In re Evergreen Valley Resort, Inc., 23 B.R. 659, 661 (Bankr. D. Me.
1982); but see Octagon Gas Systems Inc. v. Rimmer (In re Meridian Reserve,
Inc.), 995 F.2d 948, 956-57, 957 n.9 (10th Cir.), cert. denied, 114 S. Ct. 554
(1993).4/
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4/ The Octagon Gas court held that accounts sold by a debtor prior to filing for
bankruptcy, though subject to the rights and interests of the purchaser,
nevertheless remain property of the debtor's bankruptcy estate under the
combined workings of Article 9 of the Oklahoma Uniform Commercial Code and
Bankruptcy Code ss. 541. The court concluded that because Article 9 treats the
interest transferred in a sale of accounts as a form of "security interest," the
seller of accounts does not part with all transferable rights in the accounts
even following an absolute assignment. 995 F.2d at 956. We do not believe that a
bankruptcy court properly applying the principles of Article 9 and the
Bankruptcy Code in a proceeding in which Conseco Finance or Vendor Services was
the debtor would follow Octagon Gas. The Official Comments to Article 9 explain
that the definitional labels employed by Article 9 were specifically chosen to
avoid reference to existing law. See Official Comment 1 to Section 9-102
(providing rationale for use of uniform definitional terms). Thus, although the
interest held by a buyer of chattel paper is termed a "security interest" for
the purposes of applying Article 9 perfection rules, this label should not
transform the underlying substantive nature of an absolute conveyance of chattel
paper under applicable state law. Moreover, Article 9 itself recognizes that
there may be a true sale of chattel paper. See Official Comment 2 to Section
9-102 ("Neither Section 9-102 nor any other provision of Article 9 is intended
to prevent the sale of chattel paper. The determination of whether a particular
transfer of accounts or chattel paper constitutes a sale or a transfer for
security purposes (such as in connection with a loan) is not governed by Article
9."). In sum, we do not believe that Octagon Gas properly or definitively
determines whether a seller of chattel paper retains any interest or right
where, as is anticipated by the Transfer Agreement, Vendor Services intends to
convey to the SPC all of its right, title and interest in and to the Leases as a
true sale, and where the SPC evidences its ownership interest by filing
appropriate financing statements. The Permanent Editorial Board for the Uniform
Commercial Code (the "PEB") came to a similar conclusion - that the holding in
Octagon Gas was erroneous - in its recently adopted comment to Article 9. See
PEB Commentary on the Uniform Commercial Code, Commentary No. 14 (Section
9-102(1)(b)) (Final Draft dated June 10, 1994). Moreover, Octagon Gas is not
controlling precedent with respect to a Minnesota court or a federal court
sitting in Minnesota and applying Minnesota law. You should recognize, however,
that if Octagon Gas were followed, it could result in a conclusion that the
Leases remained "property of the estate" of Vendor Services under ss. 541 of the
Bankruptcy Code.
Each of the Leases is "chattel paper" within the meaning of the UCC Under the
UCC, either the pledge or the sale of chattel paper may be perfected by means of
filing a UCC-1 financing statement. UCC ss. 9-302. (Possession by the secured
party is also effective to perfect either a pledge or a sale of chattel paper,
UCC ss. 9-305, but Vendor Services will retain custody of each Lease that
constitutes chattel paper.) Such filings therefore are a necessary, but not
necessarily sufficient, condition to concluding that a "true sale" of such
chattel paper or accounts has taken place. As noted in Part II infra, such
filings will be made with respect to the Leases, indicating that such filings
are being made in order to perfect sales of such Leases. Article 9 of the UCC
does not govern the sale of general intangibles. See Part III infra. You should
note that if a third party purchased Leases that constitute chattel paper for
new value and took possession of the chattel paper in the ordinary course of
business, such third party could prevail over a party whose purchase of such
chattel paper was perfected by means of filing in certain circumstances. See UCC
ss.9-308.
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While the parties' subjective intent to consummate a sale may be manifest
in the language employed in the operative documents, it is well established that
courts often will ignore the "labels" used by the parties and conduct an
independent examination of the objective intent or true nature of the
transaction. See In re The Woodson Co., 813 F.2d 266, 272 (9th Cir. 1987)
("Simply calling transactions 'sales' does not make them so. Labels cannot
change the true nature of the underlying transactions"); In re Joseph Kanner Hat
Co., Inc., 482 F.2d 937, 940 (2d Cir. 1973) ("courts will determine the true
nature of a security transaction, and will not be prevented from exercising
their function of judicial review by the form of words the parties may have
chosen") (quoting 1 Gilmore, Security Interests in Personal Property
(1965)ss.2.6, at 47);5/ In re Evergreen Valley Resort Inc., supra, 23 B.R. at
661 ("the label - attached to the transaction by the parties does not control");
People v. Service Inst., Inc., 101 Misc.2d 549, 421 N.Y.S.2d 325, 326 (N.Y. Sup.
Ct. 1979) ("The mere fact that a transaction may have been denominated a sale
rather than a loan is not determinative"); see also Major's Furniture, supra,
602 F.2d at 543;6/ In re Candy Lane Corp., supra note 1, 38 B.R. at 575; In re
O.P.M. Leasing Services, Inc., - 30 B.R. 642, 647-48 (Bankr. S.D.N.Y. 1983).
This objective intent and the true nature of the transaction are to be
determined from all of the facts and circumstances of the transaction. See In re
Golden Plan of California, Inc., 829 F.2d 705, 709 (9th Cir. 1987); In re Candy
Lane Corp., supra note 1, 38 B.R. at 576 ("an examination of the substance of
the documents in the context of the surrounding transaction").7/ - As stated by
the Third Circuit in reviewing prior cases:
[D]espite the express language of the agreements, the respective courts
examined the parties' practices, objectives, business activities and
relationships and determined whether the transaction was a sale or a
secured loan only after analysis of the evidence as to the true nature of
the transaction.
Major's Furniture, supra, 602 F.2d at 545 (emphasis added); see also In re
Evergreen Valley Resort, Inc., supra, 23 B.R. at 661; In re Carolina Utils.
Supply Co., 118 B.R. 412, 415 (Bankr. D.S.C. 1990).
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5/ In Kanner, the debtor assigned a legal claim against a third party pursuant
to an agreement providing that the debtor "absolutely assigned, transferred and
sold any and all right, title and interest it had" in the claim. 482 F.2d at
938. As discussed infra, the Second Circuit held that the assignment created
only a security interest, relying largely upon the fact that payments made on
the claims were to be applied in satisfaction of the debt secured and that any
balance would belong to the assignor.
6/ In Major's Furniture, although the accounts receivable purchase agreement
contained the words "purchase" and "sale," the Third Circuit found, as discussed
infra, that the agreement provided for merely a transfer to secure indebtedness.
7/ In evaluating the "context of the surrounding transaction," a court may be
expected to consider whether the transaction is characterized by the parties as
a sale or a loan not only in the operative documents, but also for accounting
and tax purposes.
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In sum, an examination of the true nature of a transaction requires an analysis
of the economic substance and legal character of the transaction, which
examination will enable the court to resolve the ultimate issue in
characterizing such transaction, i.e., "whether the true nature of the
transaction is such that the 'legal rights and economic consequences of the
agreement bear a greater similarity to a financing transaction or to a sale.'"
In re Evergreen Valley Resort, Inc., supra, 23 B.R. at 661, quoting Major's
Furniture, supra, 602 F.2d at 544.8/
In conducting an analysis of the economic substance and legal character of
a transaction, the case law indicates that the determination of whether to
recharacterize a sale of assets as a loan is largely a function of the extent to
which the risks and benefits associated with ownership have either been retained
or transferred by the transferor. See, e.g., Grossman v. Butcher, 1992 WL
158422, Slip Op. at 3 (Ohio Ct. App. June 30, 1992) (citing treatise for view
that in "true sale," buyer is subject to risk of loss and/or entitled to benefit
beyond fixed sum); In re Executive Growth Invs., Inc., 40 B.R. 417, 422 (Bankr.
C.D. Cal. 1984) ("Traditionally, risk of loss has been regarded as one of the
hallmarks of ownership"); see also Major's Furniture, supra, 602 F.2d at 545-46;
In re The Woodson Co., supra, 813 F.2d at 271-72; In re Lendvest Mortgage, Inc.
119 B.R. 199, 200 (9th Cir. BAP 1990). Probably the most important factor in an
analysis of the allocation of risks and benefits is the nature and level of
recourse possessed by the putative buyer against the seller. Other factors
include the nature and scope of the role retained by the seller in the
administration of the assets and the proceeds thereof; the rate of return paid
to the putative buyer; and the transfer or retention of the right to enjoy the
value or surplus generated by the assets in excess of the consideration paid
therefor.9/ Recourse in a transaction generally involves some form of
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8/ There are, however, a few cases involving sophisticated parties in which the
courts either have given effect to the - intent clearly expressed in the
language and terms of the operative documents without analyzing the economic
substance and legal character of the transaction, or have found the latter
factors outweighed by such clearly expressed intent. See In re National Equip. &
Mold Corp., 64 B.R. 239, 245 (Bankr. N.D. Ohio 1986) ("Such terms so clearly
express the intent of the parties that there is no reasonable or rational
interpretation which can be used to assert that the Debtor intended to retain
any rights in the accounts subsequent to its execution of the contract"); In re
Bevill Bresler & Schulman Asset Management Corp., 67 B.R. 557, 596-98 (D.N.J.
1986) (having determined that agreements at issue were "hybrid" transactions
possessing both sale and loan characteristics, court rejected analysis based
upon "weighing economic factors" and gave effect to clearly expressed intent of
sophisticated parties to consummate sale rather than loan); see also In re
Kassuba, 562 F.2d 511, 515 (7th Cir. 1977) ("However, appellants have admitted
that they were sophisticated in matters of real estate financing at the time of
these transactions . . . . Appellants have removed any doubt about the intent of
the parties"); cf. In re Lemons & Assocs., Inc., supra, 67 B.R. at 209-10
(guarantee of payment "insufficient to outweigh objective indications of an
intended sale"); Indian Lake Estates Inc. v. Special Invs., Inc., 154 So.2d 883,
888 (Fla. Dist. Ct. App.), cert. denied, 161 So.2d 219 (1963) ("It is clear that
the intent of the parties controls in these cases").
9/ The court in In re Evergreen Valley Resort Inc., supra, set out a list of
factors, including recourse, that bear upon the characterization analysis:
A security interest is indicated where the assignee retains a right to a
deficiency on the debt if the assignment does not provide sufficient funds
to satisfy the amount of debt. A security interest is also indicated when
the assignee acknowledges that his rights in the assigned property would be
extinguished if the debt owed were to be paid through
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guarantee of the performance of the underlying assets transferred, which can be
structured as a reserve fund, an obligation to substitute or repurchase
underperforming assets, or a guarantee of an agreed-upon return regardless of
the performance of those assets. Although the mere existence of recourse is
itself not dispositive of the proper characterization of a transaction,10/ many
courts have reasoned that if the nature and level of recourse reveals that all
or virtually all risk of loss was retained by the transferor, the transfer
should properly be characterized as a loan.
Major's Furniture represents the most frequently cited case on this topic,
for its analysis of the nature and level of recourse and its holding that a
transfer structured as a sale should be recharacterized as a loan where the
transferee assumes almost none of the risks associated with ownership. Major's
Furniture involved a purported sale by Major's to Castle of accounts receivable
in which Major's effectively retained all risk associated with the
collectibility of the assigned accounts. The Third Circuit adopted the findings
and conclusions of the lower court and held that, notwithstanding the "sale"
language contained in the agreement, the transfer was merely a loan secured by a
pledge because "none of the risks present in a true sale is present here":
It appears that Castle required Major's to retain all conceivable risks of
uncollectibility of these accounts. It required . . . that Major's warrant
that the accounts were fully enforceable legally and were "fully and timely
collectible." It also imposed an obligation to indemnify Castle out of a
reserve account for losses resulting from a customer's failure to pay, or
for any breach of warranty, and an obligation to repurchase any account
after the customer was in default for more than 60 days . . . Guaranties of
quality alone, or even guarantees of collectibility alone, might be
consistent with a true sale, but Castle attempted to shift all risks to
Major's, and incur none of the risks or obligations of ownership.
Major's Furniture, supra, 602 F.2d at 545; see also Blackford v. Commercial
Credit Corp., 263 F.2d 97, 106 (5th Cir.), cert. denied, 361 U.S. 825 (1959)
(transfer of accounts held a loan where transferor warranted that each account
would be paid timely, agreed to pay any amounts not timely paid and provided
similar protections "essentially guaranteeing [the transferees] that they will
suffer no loss on the
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some other source. Likewise, a security interest is indicated if the
assignee must account to the assignor for any surplus received from the
assignment over the amount of the debt. Evidence that the assignor's debt
is not reduced on account of the assignment is also evidence that the
assignment is intended as security. Finally, the contract language itself
may express the intent that the assignment is for security only.
23 B.R. at 661 (citations omitted).
10/ See Major's Furniture, supra, 602 F.2d at 544 ("[T]he presence of recourse
in a sale agreement without more will not automatically convert a sale into a
security interest"); Official Comment 4 to Section 9-502("there may be a true
sale of accounts or chattel paper although recourse exists"). Indeed, as
discussed infra, several cases have held that a transaction was a sale
notwithstanding significant or even complete recourse.
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transaction"); Fox v. Peck Iron & Metal Co., supra note 1, 25 B.R. at 690 ("Peck
never assumed the normal risks of ownership, such as the risk that the value of
the property might decline . . ."); Abeloff v. Ohio Finance Co., 313 Mich. 568,
21 N.W.2d 856 (Sup. Ct. Mich. 1946); Union Planters Nat'l Bank v. United States,
426 F.2d 115 (6th Cir.), cert. denied, 400 U.S. 827 (1970).
In In re The Woodson Co., supra, the Ninth Circuit found that the
transferees were relieved of all risk of loss and held, as a result, that
purported sales of interests in a mortgage broker's (Woodson's) loan portfolio
should properly be recharacterized as loans.11/ The transferees were relieved of
any risk of loss in that:
Woodson guaranteed monthly payments to each investor regardless of whether
borrowers made their monthly payments . . . . If a loan was foreclosed, the
investors had an option either to receive payment in full (unpaid principal
balance plus accrued interest) from Woodson or to reimburse Woodson for the
costs for foreclosure and to take title to the property at the time of
sale. No investor ever exercised this latter option.
813 F.2d at 268.12/
Similarly, in In re S.O.A.W. Enterprises. Inc., 32 B.R. 279 (Bankr. W.D.
Tex. 1983), the court considered the nature of transactions in which S.O.A.W., a
real estate developer, entered into financing arrangements with a bank, Castle
Rock, whereby Castle Rock "purchased" participations in "Agreements for Deeds."
The court concluded that the purported sales of participations were properly
recharacterized as loans because the transactions were structured so that Castle
Rock bore no risk of loss.
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11/ See also In re Executive Growth Invs., Inc., supra, 40 B.R. at 422 (court
held that transfer of interest in promissory note and collateral was properly
recharacterized as a loan where transferor retained the risk of loss by virtue
of an express contractual provision providing for full recourse).
12/ This recourse mechanism differed from the device discussed in In re Golden
Plan of California Inc., 829 F.2d 705 (9th Cir. 1986), whereby the
seller-servicer of promissory notes and trust deeds would, in the event an
assigned obligation went into default, make "advances" on the defaulting
borrower's behalf. The Ninth Circuit, after reviewing the other servicing
functions performed by the seller-servicer, concluded that making "advances" did
not amount to a guarantee of repayment warranting recharacterization of the
transaction: "[D]espite a practice known as 'advancing,' the Bear investors
received no contractual guarantee of repayment or compensation in case of
foreclosure. Such assumption of risk strongly suggests that the Bear investors
were not in a creditor-debtor relationship with Golden Plan." 829 F.2d at 709.
The Woodson court, in fact, expressly distinguished the transaction in In re
Golden Plan of California Inc. noting that: "In contrast to our case, payments
[in the Golden Plan transaction] were not guaranteed (notes were assigned
without recourse), and upon foreclosure the purchasers were left to their own
remedies against borrowers. In other words, they bore the ordinary risks of
ownership." In re The Woodson Co., supra, 813 F.2d at 272 n.6.
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In addition to an absolute obligation on the part of S.O.A.W. to "repurchase"
Castle Rock's investment for any Agreement in default:
[B]oth S.O.A.W. and its President . . . personally guaranteed the return to
Castle Rock of its investment and guaranteed the interest to be generated
by investment. Thus, Castle Rock "participated" in no risk of non-payment
by the Agreement for Deed vendees because it did not look to them for
repayment.
32 B.R. at 282-83. Moreover, under the operative agreement, Castle Rock, as
participant, actually received a greater rate of repayment and return than
S.O.A.W. received.
The foregoing discussion indicates that several courts have considered
substantial recourse and the retention by the transferor of the risk of loss to
be important factors in the characterization of a particular transaction.
However, several other courts have upheld transactions denominated as sales
notwithstanding such recourse and the failure to transfer risk of loss. Most
notably, the court in In re Lemons & Assocs., Inc., supra, addressed the proper
characterization of transactions between a mortgage company, Lemons, which
engaged in brokering real estate loans and buying and selling promissory notes
secured by deeds of trust, and the investors, who purportedly "purchased" such
notes. The court determined that the objective manifestation of the parties'
intent, as indicated by the testimony of transferees and the terms (such as
"purchase" and "sale") contained in various documents, outweighed other factors
which might otherwise be indicative of a loan.
The Court acknowledges that Lemons' practice of "guaranteeing" regular
returns to investors irrespective of the actual performance on the notes,
and, at return rates exceeding the interest rates paid by the borrowers,
does indicate that the investors bore none of the risks normally
accompanying a purchase. Similarly, the "Early Withdrawal" provisions that
allowed investors to disassociate themselves with notes [that is, transfer
their investment to another note in the event of borrower default] suggests
that the risk associated with an investment purchase was lacking. On
balance, however, the Court finds that these inconsistencies are
insufficient to outweigh the objective indications of an intended sale
manifested by the other documents.
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In re Lemons & Assocs., Inc., supra, 67 B.R. at 210.13/ In addition to analyzing
the objective intent of the parties, the court in Lemons also noted that
characterization of the transactions as loans rather than purchases would have
at least two significant consequences. First, since none of the investors were
in possession of the notes, their security interests would not be perfected and
the investors "would be unsecured creditors of the estate only." Id. at 209.
Second, if no sale had occurred, the investors would be unable to claim an
equitable ownership interest in the notes under the Bankruptcy Code. Id. These
observations suggest that a court may be influenced in its decisionmaking by
other considerations, such as the threat of broad losses to "innocent"
investors. Moreover, as previously noted, the official commentary to Article 9
states that "a sale of accounts . . . or chattel paper may exist even if there
is a right of recourse." See note 4 supra.
II. The Factual Context.
In rendering the opinion expressed herein we have relied, as to (i) factual
matters, (ii) conclusions (other than matters of law) and (iii) the actions that
parties to the transaction will take or refrain from taking in the future, to
the extent we deemed such reliance proper, on certificates of responsible
officers of Vendor Services and the SPC, copies of which certificates are
attached hereto, and we have assumed, without independent verification, that
such certificates are correct. For purposes of the opinion hereinafter expressed
we note in particular the following terms of the transfer of the Leases and the
Equipment and related transactions, which, unless expressly stated otherwise, we
have established based upon a review of the Transfer Agreement, the Indenture
and related agreements:
1. Vendor Services will transfer the Leases and the Equipment to the SPC
pursuant to the Transfer Agreement. Following the transfer of the Leases and the
Equipment to the SPC, Vendor Services will have no right to modify or alter the
terms of such transfer, and no provision exists whereby the consideration paid
for the Leases and the Equipment may be modified following such contribution.
2. The Transfer Agreement states that it is the intention of Vendor
Services that the transfer of the Leases and the Equipment from Vendor Services
to the SPC constitute an absolute
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13/ See also Lake Hiwassee Dev. Co. v. Pioneer Bank, 535 S.W.2d 323, 326-27
(Sup. Ct. Tenn. 1976) (court held that transaction involving transfer of notes
was sale notwithstanding provision of full recourse against seller and creation
of reserve fund, finding that "[t]he establishment of a reserve fund . . . is
not sufficient to convert an otherwise valid sale into a loan"); A.B. Lewis Co.
Inc. v. National Inv. Corp., 421 S.W.2d 723, 728 (Tex. Civ. App. 1967) (court
held that transfer of conditional sales contracts with full recourse was sale
and not loan, viewing full recourse as "a contingent obligation . . . not
inconsistent with a sale of the contract rather than a pledge to secure a
loan"); Indian Lake Estates, Inc. v. Special Invs., Inc., supra note 9,154 So.2d
at 891 (court held that transfer of contracts receivable was sale even though
transfer was accompanied by full recourse and guaranty of payment); General
Motors Acceptance Corp. v. Mid-West Chevrolet Co., 66 F.2d 1, 8 (10th Cir. 1933)
(court found "no substantial evidence . . . that the transactions were not sales
of contracts" despite full recourse against seller).
<PAGE>
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Page 11
assignment to the SPC of all of the right, title and interest of Vendor
Services to and in the Leases and the Equipment.
3. We have assumed that Vendor Services, as Servicer, will comply with the
requirements of the Transfer Agreement, the Contribution and Servicing Agreement
and the Indenture relating to the filing of UCC-1 financing statements and
continuation statements in order to perfect the transfer of the Leases under
applicable state law.
4. Although the SPC, as a wholly-owned subsidiary of Vendor Services, and
Vendor Services, as a subsidiary of Conseco Finance , prepare consolidated
statements for financial reporting purposes, Vendor Services is accounting for
the transfer of the Leases and the Equipment to the SPC pursuant to the Transfer
Agreement as an absolute assignment, rather than a borrowing by the SPC, for
accounting purposes. Similarly, although Conseco Finance , Vendor Services and
the SPC are required to file joint income tax returns, Vendor Services is
treating the transfer of the Leases and the Equipment to the SPC pursuant to the
Transfer Agreement as an irrevocable transfer of the benefits and burdens of
ownership.
5. Neither Conseco Finance nor Vendor Services has any right to repurchase
or otherwise to cause the reconveyance to itself of any of the Leases or
Equipment.
6. Neither Conseco Finance nor Vendor Services has any obligation to
repurchase Leases or Equipment from the SPC or the Issuer, except that Vendor
Services will be obligated under the Contribution and Servicing Agreement to
repurchase (or to substitute a Substitute Lease for) any Lease discovered to be
in breach of a representation or warranty. We believe such representations and
warranties are of a kind customarily used in the sale of lease contracts similar
to the Leases.
7. Neither Conseco Finance nor Vendor Services has any obligation to
provide the Issuer with protection against delinquencies and losses on the
Leases. Except as set forth in the Transfer Agreement, there are no agreements
or understandings affecting the obligations of Conseco Finance or Vendor
Services with respect to delinquencies and losses on the Leases.
8. Neither Conseco Finance nor Vendor Services has entered or will enter
into any agreements or other arrangements whereby any investor in the Notes
would be protected against the risk of fluctuations in the market value of the
Leases.
9. Neither Conseco Finance nor Vendor Services has entered or will enter
into any agreements or other arrangements whereby any investor in the Notes
would be protected against prepayments on the Leases. The SPC will have the
right, but not the obligation, to request that Vendor Services transfer to the
SPC Substitute Leases to replace (a) Liquidated Leases, (b) Prepaid Leases, (c)
Leases subject to repurchase as a result of a breach of a representation or
warranty ("Warranty
<PAGE>
July ___, 2000
Page 12
Leases"), and (d) Leases that have undergone a material modification or
adjustment to their terms ("Adjusted Leases"). If Vendor Services agrees to
transfer such Substitute Leases to the SPC, the SPC will contribute such
Substitute Leases to the Issuer. The aggregate Principal Balance of all
Liquidated Leases, Warranty Leases and Adjusted Leases for which the SPC has
substituted Substitute Leases may not exceed 10% of the Initial Pool Principal
Balance. We believe that the SPC would find it advantageous to exercise this
substitution right (and thereby sell additional leases and extend the weighted
average life of the Notes) under market conditions when such an extension of the
weighted average life of the Notes is not in the interests of the Noteholders.
10. Vendor Services, directly or through sub-servicers, will retain custody
of the documents and records relating to the Leases, and the Leases will not be
stamped to evidence their assignment to the SPC. As a result, if another lender
or purchaser were to obtain possession of any Leases without knowledge of their
prior assignment to the SPC, such lender's or purchaser's security or ownership
interest would be prior to the ownership interest of the SPC in such Leases.
Vendor Services will hold the Lease Files strictly in a fiduciary capacity,
however, and UCC-1 financing statements will be filed in the appropriate
jurisdictions to reflect the contribution of the Leases. Vendor Services will
have no remaining rights in the Leases, and the only rights of Vendor Services
in the Leases and the Equipment will be pursuant to its obligation to service
the Leases and collect Residual Realizations as set forth in the Contribution
and Servicing Agreement.
11. There are no agreements, arrangements or understandings, written or
otherwise, with respect to the transfer of the Leases and the Equipment other
than as set forth in the Transaction Documents.
III. Applying the Law to the Instant Facts.
It is apparent, in applying the legal principles developed from the cases
discussed in Part I above to the facts summarized in paragraphs 1 through 11 of
Part II above, that several attributes of the transaction described therein
argue strongly in favor of characterizing the transfer by Vendor Services of the
Leases and the Equipment to the SPC as a sale. At the same time, certain other
aspects of the transaction suggest a loan secured by the Leases and the
Equipment rather than a sale. On balance, however, we believe that the factors
which militate in favor of a court's characterizing the transfer of the Leases
and the Equipment as a "true sale" substantially outweigh those which militate
against such a characterization.
First, the parties' intent to have the transfer of the Leases and the
Equipment by Vendor Services to the SPC treated as a complete and absolute
contribution is clearly set forth in the Transfer Agreement. The Transfer
Agreement describes the transaction as a sale and assignment, and the
transaction will be treated by Vendor Services as a sale for accounting and tax
purposes.
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July ___, 2000
Page 13
Second, Vendor Services is obligated under the Transfer Agreement to take
the actions which are necessary to perfect the assignment of the Leases and the
Equipment by Vendor Services to the SPC under the laws of the State of
Minnesota. Although the taking of these actions does not settle the "sale"
question, the failure to take them would prevent a "sale" from taking place.
Thus, Vendor Services is required to file the UCC financing statement which is
necessary in order to perfect an assignment of the Leases under the UCC of
Minnesota. See note 4 supra.14/
In addition to the intent of the parties and the satisfaction of state law
requirements, the facts and circumstances surrounding the transfer of the Leases
and the Equipment are either indicative of or not inconsistent with a "true
sale" characterization. For example, whether the transferor or the transferee
services the accounts and notifies the obligor of the assignment may influence
the characterization of a transaction. See In re Alda Commercial Corp., 327 F.
Supp. 1315 (S.D.N.Y. 1971). In the instant case, Vendor Services will continue
to service the Leases in its capacity as the Servicer under the Contribution and
Servicing Agreement, and the Obligors will not be notified of the assignment of
the Leases. Nevertheless, while servicing by the transferee with notice to the
obligor of the sale may indicate a sale, servicing by the transferor and an
absence of notification does not necessarily prevent sale treatment. See In re
P.A. Bergner & Co. Holding Co., Nos. 91-05501 to 91-05516, Slip Op. at 11-12
(Bankr. E.D. Wis. April 16, 1992) (sales of receivables deemed "true arms-length
sales" notwithstanding appointment of seller as servicer of receivables); A.B.
Lewis Co. Inc. v. National Inv. Corp., 421 S.W.2d 723, 728 (Tex. Civ. App. 1967)
(giving reasons, on facts of case, that collection by seller and
non-notification of obligors of assigned sales contracts did not require
characterization of assignment as loan).
Another important factor examined by the courts is the extent to which the
purported buyer or seller of the Leases and the Equipment bears the risks and
enjoys the benefits of their ownership. The "benefits" associated with ownership
consist primarily of the opportunity for the buyer to retain any excess above
the purchase price of the property and to reap any gains that may arise from an
increase in the market value of the property. A purported seller's right to
repurchase the subject property or to substitute property, in order to capture
such increase or to retain any surplus remaining after the buyer has received a
discrete amount in respect of the transaction, may indicate that the benefits of
ownership have been retained by the transferor, suggesting a debtor-creditor
relationship rather than a seller-buyer relationship.
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14/ As stated in note 4, if a court applying Minnesota law followed the Octagon
Gas case, it could conclude that the Leases nevertheless remained "property of
the estate" of Vendor Services under ss. 541 of the Bankruptcy Code. As stated
in note 4, however, Octagon Gas is not controlling precedent with respect to
such a court. Perfection of the "security interest" in chattel paper granted by
Vendor Services to the Issuer in connection with its contribution of the Leases
to the Issuer will be governed by the law of the state where the "debtor's"
chief executive office is located. UCC ss.9-103(3). We therefore are of the
opinion that Minnesota law would govern perfection of the transfer of such
chattel paper by Vendor Services to the SPC in connection with the contribution
made pursuant to the Transfer Agreement. You should note, however, that
perfection of a competing possessory security interest in the Leases could be
governed by the laws of other jurisdictions. See UCC ss. 9-105(1).
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July ___, 2000
Page 14
In the instant transaction, none of Conseco Finance or Vendor Services have
any such rights. The SPC has no obligation to account for or repay to Vendor
Services any profit or surplus that the Leases or the Equipment may generate.
Any such profit will instead be paid to the SPC, as the owner of the Equipment.
See In re Joseph Kanner Hat Co., Inc., supra, 482 F.2d at 940; In re Evergreen
Valley Resort, Inc., supra, 23 B.R. at 661 ("a security interest is indicated if
the assignee must account to the assignor for any surplus received from the
assignment over the amount of the debt").
IV. Opinion.
In considering the opinion expressed below, you should be aware that, to
the best of our knowledge, there is no controlling statutory provision and no
judicial precedent that is directly on point. In addition, certain of the
judicial precedents which do exist may be viewed as inconsistent with our
opinion, although we believe such precedents are distinguishable from the facts
presented in this transaction. Finally, you should recognize that it is
impossible to predict with certainty the outcome of any future judicial
proceeding. Nevertheless, based on the foregoing examination and review and
based on the terms of the transaction as set forth above, it is our opinion that
if Conseco Finance or Vendor Services became a debtor under the Code, the
transfer by Vendor Services to the SPC of the Leases, the Equipment and the
proceeds thereof would ultimately be characterized, by a court exercising
reasonable judgment under existing statutes and judicial precedents, as a true
sale, such that the Leases, the Equipment and the proceeds thereof would not be
property of Conseco Finance 's or Vendor Services's estate for the purposes of
Section 541 of the Code (11 U.S.C. ss. 541), and as a result (1) neither Section
362(a) of the Code (11 U.S.C. ss. 362(a)) nor Section 543 of the Code (11 U.S.C.
ss. 543) would apply to the Leases, the Equipment and the proceeds thereof in
such an insolvency proceeding relating to Conseco Finance or Vendor Services
(except that we express no opinion as to proceeds of Leases held by Conseco
Finance or Vendor Services on the date Conseco Finance or Vendor Services were
to become a debtor under the Code), and (2) the Leases would not be subject to
rejection under Section 365(a) of the Code (11 U.S.C. ss. 365(a)) by or on
behalf of Conseco Finance or Vendor Services. We express no opinion as to the
availability of a preliminary injunction or temporary restraining order pursuant
to the broad equitable powers granted to a bankruptcy court under Section 105 of
the Code (11 U.S.C. ss. 105).
The opinion expressed herein is limited to questions of federal law and the
laws of the State of Minnesota. This opinion is being delivered to you at the
Issuer's request only for your use. It is not to be circulated or republished
to, or relied upon by, any other person without our prior written consent.
Dated: July ___, 2000
Very truly yours,
CFS
Attachments: Exhibit A: Vendor Services Officer's Certificate
Exhibit B: SPC Officer's Certificate
