- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: November 25, 1997
(Date of earliest event reported)
MERRILL LYNCH MORTGAGE INVESTORS INC. (as depositor under the Trust Agreement,
dated as of November 1, 1997, and pursuant to which an Indenture was entered
into, providing for, inter alia, the issuance of NovaStar Home-Equity Loan
Asset-Backed Bonds, Series 1997-2)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 333-24327 13-3416059
- -------- --------- ----------
(State or Other Juris- (Commission (I.R.S. Employer
diction of Incorporation) File Number) Identification No.)
250 Vesey Street World Financial Center,
North Tower-10th Floor,
New York, New York 10281
------------------ -----
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code:(212) 449-1000
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MERRILL LYNCH MORTGAGE
INVESTORS, INC.
By: /s/ Peter Cerwin
-----------------------
Name: Peter Cerwin
Title: Vice President
Dated: January 23, 1998
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
On January 20, 1998 following the closing of the initial issuance of
the NovaStar Home Equity Loan Notes Series 1997-2, pursuant to a Subsequent
Transfer Instrument (the "Instrument") the NovaStar Home Equity Loan Trust,
Series 1997-2 (the "Issuer") purchased from NovaStar Financial, Inc. (the
"Seller") certain Subsequent Mortgage Loans, as defined in the Home Equity Loan
Purchase Agreement (the "Purchase Agreement") among the Issuer, First Union
National Bank, the Seller and NovaStar Assets Corp., with an aggregate principal
balance equal to $49,127,269.32 with funds on deposit in the pre-funding account
established pursuant to the Purchase Agreement at a purchase price equal to the
principal balance thereof (the Mortgage Loan Schedule that is the subject of
such Instrument is filed in paper pursuant to a hardship exemption, as provided
in Rule 202 of Regulation S-T).
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Not applicable
(b) Not applicable
(c) Exhibits:
Item 601(a) of
Regulation S-K
Exhibit No. Exhibit No. Description
- ----------- ----------- -----------
1 99.1
Subsequent Transfer
Instrument, dated as of
January 20, 1998 between
NovaStar Financial, Inc. as
seller, and NovaStar Home
Equity Loan Trust Series
1997- 2, as issuer.
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
1 Subsequent Transfer Instrument 5
<PAGE>
EXHIBIT 1
SUBSEQUENT TRANSFER INSTRUMENT
Pursuant to this Subsequent Transfer Instrument (the
"Instrument"), dated January 20, 1998, between NovaStar Financial, Inc. as
seller (the "Seller"), and NovaStar Home Equity Loan Trust Series 1997-2 as
issuer (the "Issuer"), and pursuant to the Home Equity Loan Purchase Agreement,
dated as of December 3, 1997, among the Seller, the Issuer, NovaStar Assets
Corp. and First Union National Bank, as the Indenture Trustee (the "Indenture
Trustee"), (the "Home Equity Loan Purchase Agreement"), the Seller and the
Issuer agree to the sale by the Seller and the purchase by the Issuer of the
subsequent Mortgage Loans listed on the attached Mortgage Loan Schedule (the
"Subsequent Mortgage Loans").
Capitalized terms used and not defined herein have their
respective meanings as set forth in the Definitions contained in Appendix A to
the Indenture dated as of November 1, 1997 (the "Indenture") between the Issuer
and the Indenture Trustee, which Definitions are incorporated by reference
herein. All other capitalized terms used herein shall have the meanings
specified herein.
Section 1. CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS.
(a) The Seller does hereby sell, transfer, assign, set over
and convey to the Issuer, without recourse, all of its right, title and interest
in and to the Subsequent Mortgage Loans, all scheduled principal payments due
after the Subsequent Cut-off Date, all other payments of principal due and
collected after the Subsequent Cut-off Date, and all payments of interest on the
Subsequent Mortgage Loans, minus that portion of any such payment which is
allocable to the period prior to the Subsequent Cut-off Date; provided, however,
that no scheduled payments of principal due on or before the Subsequent Cut-off
Date and collected after the Subsequent Cut-off Date shall belong to the Issuer
pursuant to the terms of this Agreement. The Seller, contemporaneously with the
delivery of this Agreement, has delivered or caused to be delivered to the
Indenture Trustee each item set forth in Section 2.1(b) of the Home Equity Loan
Purchase Agreement with respect to such Subsequent Mortgage Loans. The transfer
to the Issuer by the Seller of the Subsequent Mortgage Loans identified on the
attached Mortgage Loan Schedule shall be absolute and is intended by the Seller,
the Issuer, the Indenture Trustee and the Bondholders to constitute and to be
treated as a sale by the Seller.
The parties hereto intend that the transactions set forth
herein constitute a sale by the Seller to the Issuer on the Subsequent Transfer
Date of all the Seller's right, title and interest in and to the Subsequent
Mortgage Loans, and other property as and to the extent described above. In the
event the transactions set forth herein shall be deemed not to be a sale, the
Seller hereby grants to the Issuer as of the Subsequent Transfer Date a security
interest in all of the Seller's right, title and interest in, to and under the
Subsequent Mortgage Loans, and such other property,
<PAGE>
to secure all of the Issuer's obligations hereunder, and this Agreement shall
constitute a security agreement under applicable law, and in such event, the
parties hereto acknowledge that the Indenture Trustee, in addition to holding
the Subsequent Mortgage Loans for the benefit of the Bondholders and the Bond
Insurer, holds the Subsequent Mortgage Loans as designee of the Issuer. The
Seller agrees to take or cause to be taken such actions and to execute such
documents, including without limitation the filing of all necessary UCC-1
financing statements filed in the State of Maryland and the State of Kansas
(which shall be submitted for filing as of the Subsequent Transfer Date), any
continuation statements with respect thereto and any amendments thereto required
to reflect a change in the name or corporate structure of the Seller or the
filing of any additional UCC-1 financing statements due to the change in the
principal office of the Seller, as are necessary to perfect and protect the
interests of the Issuer and its assignees in each Subsequent Mortgage Loan and
the proceeds thereof.
(b) The expenses and costs relating to the delivery of the
Subsequent Mortgage Loans, this Instrument and such other items required under
the Home Equity Loan Purchase Agreement shall be borne by the Seller.
(c) Additional terms of the sale are set forth on Attachment A
hereto.
Section 2. REPRESENTATIONS AND WARRANTIES; CONDITIONS
PRECEDENT.
(a) The Seller hereby affirms the representations and
warranties set forth in Section 3.1 of the Home Equity Loan Purchase Agreement
that relate to the Seller and the Subsequent Mortgage Loans as of the date
hereof. The Seller hereby confirms that each of the conditions set forth in
Section 2.2(b) of the Home Equity Loan Purchase Agreement are satisfied as of
the date hereof and further represents and warrants that each Subsequent
Mortgage Loan complies with the requirements of this Instrument and Section
2.2(c) of the Home Equity Loan Purchase Agreement.
(b) The Seller is solvent, is able to pay its debts as they
become due and has capital sufficient to carry on its business and its
obligations hereunder; it will not be rendered insolvent by the execution and
delivery of this Instrument or by the performance of its obligations hereunder
nor is it aware of any pending insolvency; no petition of bankruptcy (or similar
insolvency proceeding) has been filed by or against the Seller prior to the date
hereof;
(c) All terms and conditions of the Home Equity Loan Purchase
Agreement are hereby ratified and confirmed; provided, however, that in the
event of any conflict the provisions of this Instrument shall control over the
conflicting provisions of the Home Equity Loan Purchase Agreement.
Section 3. RECORDATION OF INSTRUMENT.
To the extent permitted by applicable law, this Instrument, or
a memorandum
<PAGE>
thereof if permitted under applicable law, is subject to recordation in all
appropriate public offices for real property records in all of the counties or
other comparable jurisdictions in which any or all of the properties subject to
the Mortgages are situated, and in any other appropriate public recording office
or elsewhere, such recordation to be effected by the Servicer, but only when
accompanied by an Opinion of Counsel to the effect that such recordation
materially and beneficially affects the interests of the Bondholders or is
necessary for the administration or servicing of the Mortgage Loans.
Section 4. GOVERNING LAW.
This Instrument shall be construed in accordance with the laws
of the State of New York and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with such laws, without giving
effect to principles of conflicts of law.
Section 5. COUNTERPARTS.
This Instrument may be executed in one or more counterparts
and by the different parties hereto on separate counterparts, each of which,
when so executed, shall be deemed to be an original; such counterparts,
together, shall constitute one and the same instrument.
<PAGE>
Section 6. SUCCESSORS AND ASSIGNS.
This Instrument shall inure to the benefit of and be binding
upon the Seller and the Issuer and their respective successors and assigns. The
Bond Insurer and the Indenture Trustee shall be express third party
beneficiaries hereto.
NOVASTAR FINANCIAL, INC.
By: /s/ David J. Lee
------------------------
Name: David Lee
------------------------
Title: Vice President
------------------------
NOVASTAR HOME EQUITY LOAN TRUST
SERIES 1997-2
By: WILMINGTON TRUST COMPANY, not in its
individual capacity but solely in its
capacity as Owner Trustee
By: /s/ Donald G. Mackelcan
----------------------------
Authorized Signatory
ATTACHMENTS
A. Additional terms of the sale.
B. Schedule of Subsequent Mortgage Loans.
C. Opinions of Seller's Counsel (bankruptcy, corporate).
D. Seller's Officer's Certificate.
E. Bond Insurer's Certificate.
<PAGE>
NOVASTAR HOME EQUITY LOAN
ASSET-BACKED-
BONDS, SERIES 1997-2
ATTACHMENT A
TO
SUBSEQUENT TRANSFER INSTRUMENT
Series 1997-2
January 20, 1998
A.
1. Subsequent Cut-off Date: January 1, 1998
2. Pricing Date: January 1, 1998
3. Subsequent Transfer Date: January 20, 1998
4. Aggregate Principal Balance of the
Subsequent Mortgage Loans as of the
Subsequent Cut-off Date: $49,127,269.32
5. Purchase Price: 100.00%
B. As to all the Subsequent Mortgage Loans the subject of this Instrument:
1. Longest stated term to maturity: 360 months
2. Minimum Mortgage Rate: 7.50 %
3. Maximum Mortgage Rate: 19.875 %
4. WAC of all Mortgage Loans: 10.22%
5. WAM of all Mortgage Loans: 345 months
6. Largest Principal Balance: $1,775,000
7. Non-owner occupied Mortgaged Properties: 5.1655%
8. California zip code concentration: 18.86%
9. Condominiums: 2.79 %
10. Single-family: 90.34%
11. Weighted average term since origination:
12. December/ January/February 1998 first payment date: 96.76 %
<PAGE>
ATTACHMENT B.
Schedule of Subsequent Mortgage Loans
FILED IN PAPER PURSUANT TO A HARDSHIP EXEMPTION
<PAGE>
ATTACHMENT C
Opinions of Seller's Counsel (bankruptcy, corporate)
January 20, 1998
To the Addressees Listed
on the Attached Annex A
Re: NovaStar Home Equity Loan Asset-Backed Bonds and
Certificates Series 1997-2 (True Sale Opinion --Sale of
Subsequent Mortgage Loans)
-------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to NovaStar Financial, Inc., a
Maryland corporation (the "Seller"), NovaStar Assets Corp., a Delaware
corporation ("NovaStar Assets"), NovaStar Mortgage, Inc., a Virginia corporation
(the "Servicer") and NovaStar Certificates Financing Corporation, a Delaware
corporation ("NCFC"; the Seller, NovaStar Assets, the Servicer and NCFC are
sometimes referred to collectively herein as the "NovaStar Entities") in regard
to (i) the sale by the Seller of certain subprime home mortgage loans (the
"Initial Mortgage Loans") to NovaStar Assets, pursuant to Section 2.1 of the
Home Equity Loan Purchase Agreement, dated as of December 3, 1997 (the "Purchase
Agreement"), between the Seller, NovaStar Assets, the Indenture Trustee and the
Issuer; (ii) the sale by NovaStar Assets of the Initial Mortgage Loans to
Merrill Lynch Mortgage Investors, Inc., a Delaware corporation (the "Company"),
under the Ownership Transfer Agreement, dated as of December 3, 1997 (the
"Transfer Agreement"), between NovaStar Assets and the Company; (iii) the sale
by the Company to NovaStar Home Equity Loan Trust Series 1997-2, a Delaware
Business Trust (the "Issuer"), pursuant to the Amended and Restated Trust
Agreement, dated as of November 1, 1997 (the "Trust Agreement"), between the
Company and Wilmington Trust Company, as owner trustee (the "Owner Trustee");
(iv) the servicing of the Initial Mortgage Loans by the Servicer pursuant to the
Servicing Agreement, dated as of November 1, 1997 (the "Servicing Agreement"),
among the Servicer, the Issuer and the Indenture Trustee (as defined below); (v)
the sale by NovaStar Assets of the Certificates to NCFC pursuant to the
Certificates Transfer Agreement, dated as of December 11, 1997 (the
"Certificates Transfer Agreement"); and (vi) the sale by Seller to the Issuer of
the Subsequent Mortgage Loans pursuant to the Subsequent Transfer Instrument,
dated as of January 20, 1998 (the "Subsequent Transfer Agreement"), between the
Seller and the Issuer.
The documents evidencing the Initial Mortgage Loans are held
by First Union National Bank, as indenture trustee (the "Indenture Trustee").
The Indenture Trustee holds such documents as an agent and bailee with notice of
the security interests granted in favor of the Bondholders, the Insurer, the
Issuer, the Company and NovaStar Assets respectively. Pursuant to the Indenture,
dated as of November 1, 1997 (the "Indenture"), between the Issuer and the
Indenture Trustee, the Issuer issued the Home Equity Loan Asset-Backed Bonds
Series 1997-2 (the "Bonds"). The Bonds are secured in part by the Initial
Mortgage Loans and will also be secured in part by the Subsequent Mortgage
Loans, hereinafter described. Pursuant to the Trust Agreement, the Issuer
<PAGE>
issued the Home Equity Loan Asset-Backed Certificates (the "Certificates"),
which evidenced ownership interests in the Issuer (the Bonds and the
Certificates, collectively, the "Securities").
The Issuer entered into the Insurance Agreement, dated as of
December 3, 1997 (the "Insurance Agreement"), among the Seller, the Servicer,
NovaStar Assets, the Issuer, the Indenture Trustee and MBIA Insurance
Corporation, as bond insurer (the "Insurer") pursuant to which a bond insurance
policy (the "Bond Insurance Policy") was issued in respect of the Bonds. The
Seller also entered into an Indemnification Agreement, dated December 3, 1997
(the "Indemnity Agreement"), among the Seller, the Insurer and the Underwriter
(as defined below).
The Company sold the Bonds to Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the "Underwriter") pursuant to the Underwriting Agreement,
dated December 3, 1997 (the "Underwriting Agreement"), among the Company and the
Underwriter. The Underwriter sold the Bonds to unaffiliated investors on the
Closing Date or thereafter pursuant to offers to purchase in effect on the
Closing Date. The Seller, the Company and the Underwriter entered into an
Indemnification and Contribution Agreement, dated December 3, 1997 (the
"Indemnification Agreement").
The Initial Mortgage Loans were sold by the Seller to NovaStar
Assets, NovaStar Assets sold the Initial Mortgage Loans to the Company, as agent
for NovaStar Assets, and the Company sold the Initial Mortgage Loans to the
Issuer on December 11, 1997 (the "Closing Date"). The consideration paid for the
Initial Mortgage Loans by NovaStar Assets to the Seller consisted of the
Purchase Price (as defined in Section 2.1 of the Purchase Agreement), which
included a portion of the cash proceeds from the sale of the Bonds and the cash
proceeds from the sale of the Certificates. The consideration paid for the
Initial Mortgage Loans by the Company to NovaStar Assets consisted of the
Purchase Price (as defined in Section 4 of the Transfer Agreement), which
included a portion of the cash proceeds from the sale of the Bonds and delivery
of the Certificates issued by the Issuer. The Company sold the Initial Mortgage
Loans to the Issuer in exchange for a portion of the cash proceeds from the sale
of the Bonds and receipt of the Certificates. The Bonds are entitled to the
benefits of the Bond Insurance Policy.
On the Closing Date, a portion of the proceeds of the sale of
the Bonds equal to the Original Pre-Funded Amount was deposited into the
Pre-Funding Account and a portion of the proceeds of the Sale of the Bonds equal
to the Interest Coverage Amount was deposited into the Interest Coverage
Account, which accounts were created under the Indenture and held by the
Indenture Trustee, as security for the Bondholders, in segregated trust accounts
established in the name of the Indenture Trustee. Moneys on deposit in the
Pre-Funding Account will be used to fund the acquisition by the Issuer of
certain additional subprime home mortgage loans (the "Subsequent Mortgage
Loans") from the Seller and, to the extent not so used, will be distributed to
holders of the Bonds. Moneys on deposit in the Interest Coverage Account will be
used to make certain interest payments on the Bonds during the Pre-Funding
Period and, to the extent not so used, will be deposited into the Collection
Account under the Indenture. The Pre-Funding Account and the Interest Coverage
Account moneys will not be used to support losses or delinquencies on the
Initial Mortgage Loans. Further, such moneys will be obtained from the sale
proceeds of the Bonds and not from either the Seller or the Company.
<PAGE>
On the Subsequent Transfer Dates, the Seller will sell to the
Issuer the Subsequent Mortgage Loans, pursuant to the Subsequent Transfer
Agreement in exchange for a portion of the cash proceeds from the sale of the
Bonds, such cash proceeds to be transferred from the PreFunding
Account.
The Purchase Agreement, the Transfer Agreement, the Subsequent
Transfer Agreement, the Trust Agreement, the Indenture, the Servicing Agreement,
the Certificates Transfer Agreement, the Insurance Agreement, the Indemnity
Agreement, the Indemnification Agreement and the Underwriting Agreement are
collectively referred to herein as the "Agreements." Capitalized terms not
defined herein have the meanings assigned to them in Appendix A to the
Indenture, or, if not defined therein, then in the other Agreements. This
opinion is rendered pursuant to Section 5(b) of the Underwriting Agreement.
In rendering this opinion letter, we have examined execution
copies of each of the Agreements, together with the documents, instruments and
agreements referenced in other opinions we have delivered in connection with the
Agreements. We have also examined such other certificates, documents, materials
and other matters of law as we have deemed necessary in order to give the
opinions hereinafter set forth. As to certain issues of fact material to the
opinions expressed herein, we have, with your consent, relied to the extent we
deemed appropriate, upon the representations in the Agreements, and the
certifications of officers, of the Seller, NovaStar Assets, the Servicer, NCFC,
the Company, the Issuer, the Owner Trustee, the Indenture Trustee, the Insurer
and public officials.
In making our examinations and rendering the opinions herein
expressed, we have made, with your permission, the following assumptions:
(1) Each of the Agreements and the Bonds has been duly and
properly authorized, executed, acknowledged (to the extent necessary), delivered
and accepted, and, as may be required under the applicable laws of jurisdictions
other than the State of Kansas (the "State"), sealed and attested, by each of
the parties thereto. We have further assumed the genuineness of all signatures
on all documents.
(2) All corporate, partnership and other action requisite for
the execution, delivery and performance of each of the Agreements and the Bonds
by each of the parties thereto has been
duly and effectively taken.
(3) Each of the parties to the Agreements and the Bonds (i)
has all necessary power and authority (corporate, partnership and otherwise) to
execute, enter into, deliver and perform the same; (ii) is duly organized,
validly existing and in good standing in the jurisdiction of its formation, and
(iii) has all necessary licensing and qualifications needed in the jurisdiction
of its formation and in all the jurisdictions in which it does business.
(4) The execution, delivery and performance of each of the
Agreements and the Bonds by each of the parties thereto do not and will not
contravene or conflict with any provision of the charter documents or bylaws of
any of such parties or any partnership agreement or other agreement or
instrument which is binding upon any of such parties or their respective
properties.
<PAGE>
(5) Each of the Agreements and the Bonds is the legal, valid
and binding obligation of each of the parties thereto and is enforceable against
each such party in accordance with
its terms.
(6) Any and all certifications and representations made to us
by public officials and by the Seller, NovaStar Assets, NCFC, the Servicer, the
Company, the Issuer, the Owner Trustee, the Indenture Trustee, and the Insurer
concerning factual matters are accurate and complete.
(7) There exists valid and lawful consideration for the
parties to the Agreements to enter into the Agreements and the Bonds. Further,
we have assumed the absence of any circumstance (such as but not limited to
fraud in the inducement, duress, waiver or estoppel) extrinsic to the Agreements
and the Bonds which might give rise to a defense against enforcement
of the Agreements or the Bonds.
(8) We have assumed that (i) all documents submitted to us as
certified, conformed, draft, photostatic or telefacsimilied copies conform to
the original documents, (ii) all such original documents and all documents
submitted to us as originals are authentic, (iii) all unexecuted copies of
documents submitted to us conform to the original executed documents, and (iv)
that as to each of the Agreements and the Bonds, in such executed copies all
blank spaces have been or shall be properly completed and all exhibits and
schedules referred to therein have been or shall be attached in their final
forms and none of the completions or attachments are or shall be inconsistent
with the forms which we have reviewed.
(9) We have, to the extent we have deemed appropriate, assumed
that the statements, recitals, representations and warranties as to matters of
fact set forth in the Agreements
and the Bonds are accurate and complete.
(10) There is no agreement, course of dealing or performance
or usage of trade defining, supplementing, amending, modifying, waiving or
qualifying the terms of any of the Agreements or the Bonds.
(11) The conduct of each of the parties to the Agreements and
the Bonds has complied with any requirement of good faith, fair dealing and
conscionability.
(12) The opinion recipients have acted in good faith and
without notice of any defense against enforcement of any rights created by, or
any adverse claim to, any property or security interest transferred or created
as part of, or contemplated by, the Agreements or the Bonds.
(13) The parties to the Agreements and the Bonds are validly
organized and existing corporations in good standing under applicable law, and
the execution of the Agreements and the Bonds is within the power of the parties
thereto, and not in violation of any provisions of law, governmental regulation,
or judicial or administrative order or decree, applicable to any party.
(14) The Indenture Trustee is authorized by regulatory
authority to act as bond trustee under the Indenture.
<PAGE>
(15) In rendering this opinion, we have made no independent
investigation of the facts referred to herein, but have relied exclusively on
those facts that have been represented or certified to us as set forth above.
Our opinion is based upon the assumption that the facts set forth herein,
certain of which have been certified to us to be true and correct in (i) the
Certificate of an officer of the Seller annexed hereto as Exhibit A, and (ii)
the Certificate of an officer of NovaStar Assets, annexed hereto as Exhibit B
are, and will continue to be, accurate. We understand the facts to be as
follows:
(a) PURCHASE AND SALE OF INITIAL MORTGAGE LOANS. Concurrently
with the execution and delivery of the Purchase Agreement, the Seller
conveyed without recourse to NovaStar Assets all of its right, title
and interest in and to the Initial Mortgage Loans and the related
Mortgages in accordance with the Purchase Agreement (the "Seller
Transaction"). As payment for the Initial Mortgage Loans, NovaStar
Assets paid to the Seller the Purchase Price (as defined in Section 2.1
of the Purchase Agreement), which included a portion of the cash
proceeds from the sale of the Bonds and the cash proceeds of the sale
of the Certificates. Also, concurrently with the execution and delivery
of the Transfer Agreement, NovaStar Assets conveyed without recourse to
the Company, as agent of NovaStar Assets, all of its right, title and
interest in and to the Initial Mortgage Loans and pursuant to the Trust
Agreement, the Company conveyed without recourse to the Issuer all of
its right, title and interest in and to the Initial Mortgage Loans (the
"NovaStar Assets Transaction" and together with the Seller Transaction
and the Seller Subsequent Transaction hereinafter described,
collectively, the "Transactions"). As payment for the Initial Mortgage
Loans, the Company paid to NovaStar Assets the Purchase Price (as
defined in Section 4 of the Transfer Agreement), which included a
portion of the cash proceeds from the sale of the Bonds and delivery of
the Certificates. As consideration for the Initial Mortgage Loans, the
Issuer delivered to the Company the Bonds and the Certificates.
(b) PURCHASE AND SALE OF SUBSEQUENT MORTGAGE LOANS.
Concurrently with the execution and delivery of the Subsequent Transfer
Agreement, the Seller will convey without recourse to the Issuer, all
of its right, title and interest in and to the Subsequent Mortgage
Loans (the "Seller Subsequent Transaction") in exchange for a portion
of the cash proceeds from the sale of the Bonds, such cash proceeds to
be transferred from the Pre-Funding Account.
(c) INTENT/NOMENCLATURE. The Purchase Agreement, the Transfer
Agreement and the Trust Agreement respectively recite the intention of
the parties that the Seller Transaction and the NovaStar Assets
Transaction each be treated as a sale and absolute transfer of the
Initial Mortgage Loans. The Purchase Agreement and the Subsequent
Transfer Agreement respectively recite the intention of the parties
that the Seller Subsequent Transaction be treated as a sale and
absolute transfer of the Subsequent Mortgage Loans.
(d) ECONOMICS OF THE TRANSACTION. We understand that (a) the
economics of the Seller Transaction reflect the intent of the parties
that the transfer of the Initial Mortgage Loans be considered an
absolute transfer of the Initial Mortgage Loans by the Seller to
NovaStar Assets rather than a loan by NovaStar Assets secured by the
Initial Mortgage Loans, (b) the economics of NovaStar Assets
Transaction reflect the intent of the parties that
<PAGE>
the transfer of the Initial Mortgage Loans be considered an absolute
transfer of the Initial Mortgage Loans by NovaStar Assets to the
Company and by the Company to the Issuer rather than a loan by the
Company or the Issuer secured by the Initial Mortgage Loans and (c) the
economics of the Seller Subsequent Transaction reflect the intent of
the parties that the transfer of the Subsequent Mortgage Loans be
considered an absolute transfer of the Subsequent Mortgage Loans by
Seller to the Issuer rather than a loan by the Issuer secured by the
Subsequent Mortgage Loans.
(e) COMPLETE. IRREVOCABLE TRANSFER OF INITIAL MORTGAGE LOANS. Under the
Purchase Agreement, the Seller relinquishes all control and title over
the Initial Mortgage Loans transferred to NovaStar Assets, and under
the Transfer Agreement and the Trust Agreement NovaStar Assets
relinquishes all control and title over the Initial Mortgage Loans
transferred to the Company and transferred by the Company to the Issuer
except, in each case, as described below.
Under the Purchase Agreement, the Seller will be required to repurchase
any Mortgage Loan (or substitute certain Eligible Substitute Mortgage
Loan(s)) upon discovery that any of the Mortgage File documentation
with respect to such Mortgage Loan is missing or defective or any of
the representations or warranties of the Seller as set forth in Section
3.1 (b) of the Purchase Agreement with respect to such Mortgage Loan
were incorrect as of the time made (the "Warranty Obligation"). The
Warranty Obligation covers matters for which the selling party is
typically held responsible in asset sales in the nature of the
Transactions. In addition to the Warranty Obligation, under the
Insurance Agreement the Seller will indemnify the Issuer and the
Insurer for any damages caused by the breach of the representation that
none of the Initial Mortgage Loans are "mortgages?" as such terms are
defined in 15 U.S.C. Sec. 1602(aa) (the "Limited Indemnity").
Servicer has the option, under the Servicing Agreement and the
Indenture, to purchase any Mortgage Loan which is delinquent in payment
by 60 days or more (the "Purchase Option"). Any such purchase will be
at a price equal to 100% of the principal balance of such delinquent
Mortgage Loan plus accrued interest thereon at the applicable mortgage
interest rate from the date through which interest was last paid by the
related mortgagor or advanced to the first day of the month following
the month in which such amount is to be distributed. We understand from
the Servicer that the purpose for the Purchase Option is to prevent a
servicing Default under the Servicing Agreement which would result in
termination of the Servicer's rights thereunder, with a resulting loss
of future servicing fees and not as a mechanism for recourse to the
Seller for defaults on the Initial Mortgage Loans. The Servicer may
exercise this option at its sole discretion. The Servicer is required
to segregate from and not commingle collections on the Initial Mortgage
Loans with any other assets in its possession.
Other than the Warranty Obligation, the Limited Indemnity and the
Purchase Option: (i) the transfers of the Initial Mortgage Loans by the
Seller and by NovaStar Assets are irrevocable; (ii) the Seller has no
right or obligation to substitute other assets for the Initial Mortgage
Loans, to transfer or cause NovaStar Assets to transfer the Initial
Mortgage Loans to any party, or to reacquire any Initial Mortgage Loan
from any party; (iii) NovaStar Assets has
<PAGE>
no right or obligation to substitute other assets for the Initial
Mortgage Loans, to transfer or cause the Company or the Issuer to
transfer the Initial Mortgage Loans to any party or to reacquire any
Initial Mortgage Loans from any party; (iv) NovaStar Assets has no
right or obligation to accept other assets from the Seller in
substitution for the Initial Mortgage Loans and has no right or
obligation to transfer any Initial Mortgage Loans to the Seller; and
(v) neither the Company nor the Issuer has any right or obligation to
accept other assets from NovaStar Assets in substitution for the
Initial Mortgage Loans, and neither has any right or obligation to
transfer any Initial Mortgage Loans to NovaStar Assets.
(f) COMPLETE. IRREVOCABLE TRANSFER OF SUBSEQUENT MORTGAGE
LOANS. Under the Purchase Agreement and the Subsequent Transfer
Agreement, the Seller relinquishes all control and title over the
Subsequent Mortgage Loans transferred to the Issuer except as described
below.
Other than the Warranty Obligation, the Limited Indemnity and the
Purchase Option: (i) the transfers of the Subsequent Mortgage Loans by
the Seller are irrevocable; (ii) the Seller has no right or obligation
to substitute other assets for the Subsequent Mortgage Loans, to
transfer or cause the Issuer to transfer the Subsequent Mortgage Loans
to any party, or to reacquire any Subsequent Mortgage Loan from any
party; and (iii) the Issuer has no right or obligation to accept other
assets from the Seller in substitution for the Subsequent Mortgage
Loans, and has no right or obligation to transfer any Subsequent
Mortgage Loans to the Seller.
(g) NO OBLIGATION DUE FROM THE SELLER OR NOVASTAR ASSETS. The
Seller was not indebted to NovaStar Assets at the time of the Seller
Transaction. The Seller has no obligation to pay any amount in respect
of the Bonds to NovaStar Assets, the Company or the Issuer, and the
Seller does not pay any interest to the Indenture Trustee with respect
to the Bonds. Except with respect to the Warranty Obligation and the
Limited Indemnity, the holders of the Bonds have no right to look to
the Seller for the recoupment of their investment in the Bonds.
NovaStar Assets was not indebted to the Company or the Issuer at the
time of the NovaStar Assets Transaction. NovaStar Assets has no
obligation to pay any amount in respect of the Bonds to the Company or
the Issuer and NovaStar Assets does not pay any interest to the
Indenture Trustee with respect to the Bonds. The holders of the Bonds
have no right to look to NovaStar Assets for the recoupment of their
investment in the Bonds.
The Seller is not indebted to the Issuer at the time of the Seller
Subsequent Transaction.
(h) NO RIGHT TO SURPLUS. Neither the Seller nor NovaStar
Assets has any direct or indirect right to receive any proceeds
allocable to the Initial Mortgage Loans or the Subsequent Mortgage
Loans, even if the Issuer should receive more than the principal amount
of the Bonds from collections on or the sale of the Initial Mortgage
Loans or the Subsequent Mortgage Loans. Accordingly, the Issuer should
not account to the Seller or NovaStar Assets for or return any Mortgage
Loan or proceeds thereof.
<PAGE>
(i) TREATMENT FOR GAAP ACCOUNTING AND FEDERAL INCOME TAX
PURPOSES. We have been informed by each of the Seller and NovaStar
Assets, as applicable, that it has been advised by and confirmed with
its independent public accountants that the Seller Transaction, the
Seller Subsequent Transaction and the NovaStar Assets Transaction, as
applicable, will each be classified for GAAP accounting and federal
income tax purposes as a financing in accordance with the Financial
Accounting Standards Board No. 125 and the Internal Revenue Code of
1986, as amended. Such classification was made by each of the Seller
and NovaStar Assets and their independent public accountants with full
knowledge of the opinions set forth herein.
(j) LIMITED RECOURSE FOR DEFAULTS. The Seller has not
guaranteed to NovaStar Assets, the Company, the Issuer, the Insurer,
the Indenture Trustee or the holders of the Bonds the payment of any
Mortgage Loan. The Seller is not obligated to purchase from NovaStar
Assets any Mortgage Loan, and, except to the extent of the Warranty
Obligation and the Limited Indemnity, is not obligated to purchase from
the Issuer or the Indenture Trustee any Mortgage Loan or pay damages in
connection therewith.
NovaStar Assets has not guaranteed to the Company, the Issuer, the
Indenture Trustee or the holders of the Bonds the payment of any
Mortgage Loan, nor is it obligated to purchase from the Issuer or the
Indenture Trustee any Mortgage Loan. NovaStar Assets is not obligated
to purchase from the Company any Mortgage Loan, and is not obligated to
purchase from the Issuer or the Indenture Trustee any Mortgage Loan or
pay damages in connection therewith. The Certificates represent the
equity securities in the Issuer and, accordingly, payments thereon are
effectively subordinated to payments on the Bonds being sold to
investors as provided in the Indenture. The Certificates received by
NovaStar Assets and sold to NCFC constitute an amount not materially in
excess of credit losses that could be reasonably anticipated on the
Mortgage Loans over the life of the Mortgage Loans.
(k) LIMITED CALL OR PUT FEATURE. The Bonds are redeemable at
the option of the Issuer after the earlier to occur of (a) seven years
after issuance of the Bonds and (b) the date on which the aggregate
Principal Balance is reduced to 25% or less of the sum of the initial
aggregate principal balance of the Initial Mortgage Loans and the
Original PreFunded Amount. If the Bonds are not redeemed at the time
they first become eligible for redemption, the interest rate on the
Bonds will be increased by 0.25%. Any increase in interest payable to
Bondholders under this feature will be paid out of payments on the
Collateral or the Bond Insurance Policy. Hence, although such an
increase may have the effect of reducing the residual cash flow
available to be paid to the holder of the Certificates, the election
not to redeem the Bonds would not require the Seller or NovaStar Assets
to contribute additional assets to the Issuer or have any other adverse
impact on the Seller or NovaStar Assets. If market conditions are such
at the time the Bonds become eligible for redemption that such
redemption is not advantageous to the Issuer and the Certificateholder,
the Issuer will be free to leave the Bonds outstanding. The ability of
the Certificateholder to cause the Issuer to redeem the Bonds at a time
when such redemption would be advantageous to the Certificateholder is
not unlike a socalled "clean-up" call that is typical in most
structured mortgage financings. We are advised by the Servicer that the
redemption terms reflect the fact that the servicing compensation
payable to the Servicer when the aggregate principal
<PAGE>
balance of the Initial Mortgage Loans has been reduced to this level
may not be sufficient to enable the Servicer to continue to
economically perform its full servicing duties.
(l) PERFECTION OF TRANSFER OF INITIAL MORTGAGE LOANS. The
original executed Mortgage Notes were endorsed and delivered by the
Seller to NovaStar Assets and by NovaStar Assets to the Company and by
the Company to the Issuer in order to consummate the transfer of the
Initial Mortgage Loans from the Seller to NovaStar Assets and from
NovaStar Assets to the Company and from the Company to the Issuer. Such
delivery or deliveries took place prior to or on the Closing Date. In
addition, assignments of all Mortgages were recorded in the name of the
Indenture Trustee on behalf of the Bondholders promptly after the
Closing Date. In addition, financing statements signed by the Seller in
favor of NovaStar Assets, NovaStar Assets in favor of the Company, the
Company in favor of the Issuer, and the Issuer in favor of the
Indenture Trustee, were be filed with the appropriate offices in the
States of Kansas, Delaware, Maryland and New York.
(m) PERFECTION OF TRANSFER OF SUBSEQUENT MORTGAGE LOANS. The
original executed Mortgage Notes relating to the Subsequent Mortgage
Loans will be endorsed and delivered by the Seller to the Issuer in
order to consummate the transfer of the Subsequent Mortgage Loans from
the Seller to the Issuer. Such delivery or deliveries will take place
prior to or on the Subsequent Transfer Date. In addition, assignments
of all Mortgages will be recorded in the name of the Indenture Trustee
on behalf of the Bondholders promptly after the Subsequent Transfer
Date. In addition, financing statements signed by the Seller in favor
of the Issuer and the Issuer in favor of the Indenture Trustee will be
filed with the appropriate offices in the States of Kansas, Maryland
and Delaware.
(n) GOVERNING LAW. The Purchase Agreement, the Transfer
Agreement, the Subsequent Transfer Agreement, the Servicing Agreement
and the Indenture provide that they are to be construed in accordance
with and governed by the laws of the State of New York. The Trust
Agreement provides that it is to be construed in accordance with and
governed by the laws of the State of Delaware.
LEGAL ANALYSIS
Section 541 of title 11 of the United States Code (the
"Bankruptcy Code") provides that property of the estate includes "all legal or
equitable interests of the debtor in property as of the commencement of this
case." You have requested that we consider the possibility that a bankruptcy
trustee of the Seller, or the Seller as a debtor in possession, might assert
that the Seller retained an interest in the Subsequent Mortgage Loans because
they were never truly or validly conveyed to the Issuer, but were merely pledged
as security for a loan to the Seller from the proceeds of the sale of the Bonds.
Under this theory, the bankruptcy trustee of the Seller or the Seller as debtor
in possession, might seek a court order requiring turnover of the Subsequent
Mortgage Loans to the bankruptcy estate, as provided by Section 542 of the
Bankruptcy Code, or assert the automatic stay under Section 362(a) of the
Bankruptcy Code to prevent payment of amounts collected with respect to the
Subsequent Mortgage Loans to the Indenture Trustee, as assignee, or to prevent
the Indenture Trustee from exercising control over the Subsequent Mortgage
Loans.
<PAGE>
Whether assets are part of a bankruptcy estate is governed by
applicable nonbankruptcy law, usually state law. SEE BUTNER V. UNITED STATES,
440 U.S. 48, 54-55 (1979); MNC COMMERCIAL CORP. V. JOSEPH T. RVERSON & SON.
INC., 882 F.2d 615, 619 (2d Cir. 1989). While there is an abundance of case law
distinguishing true sales of assets from secured transactions, the body of law
is not definitive. M. Simms, "Asset Securitization," ASSET-BASED FINANCING 337,
345 (1997). Courts have focused upon varying factors in determining whether an
assignment of receivables operates to create a security interest or constitutes
a true sale. These factors focus upon:
(1) whether the assignee has a right of recourse on the
debt if the assigned assets do not provide sufficient
funds or the underlying obligors default;
(2) the degree of post-transfer control of the assets
vested in the assignor;
(3) whether the assignor retains benefits of ownership,
for example, through repurchase or redemption rights
on the assets or take any surplus received from the
assigned assets in excess of the purchase price;
(4) the accounting treatment accorded the transaction by
the assignor; and
(5) whether the language used in the assignment
instrument indicates an intention to make a sale or
an assignment for security.
Gussett, "Bankruptcy Remote Entities in Structured Financings," 15 Am. Bankr.
Inst. J. 14 (1996); Committee on Bankruptcy and Corporate Reorganization of the
Association of the Bar of the City of New York, "Structured Financing
Techniques," 50 Bus. Law. 527, 543 (1995) ("Techniques").
When determining whether a transaction is a true sale or a
disguised loan, courts will not be bound by the language of written agreements
since they may look to the practices, objectives, relationships and intention of
the parties in determining the true meaning of the document. See ENDICO
POTATOES. INC. V. CIT GROUP/FACTORING~ INC., 67 F.3d 1063, 1068 (2d Cir. 1995);
MAJOR'S FURNITURE MART~ INC. V. CASTLE CREDIT CORP., 602 F.2d 538, 544 (3d Cir.
1979); IN RE CORONET CAPITAL CO., 142 B.R. 78, 82 (Bankr. S.D.N.Y. 1992).
In applying these factors to the present transaction, we find
the following:
(1) Courts have often focused on a right of recourse as
the most significant factor in determining the true nature of a transaction. IN
RE SACKMAN MORTG. CORP., 158 B.R. 926, 933-35 (Bankr. S.D.N.Y. 1993) (loan found
due to multiple guarantees and "with recourse" provision); SEE IN RE WOODSON
CO., 813 F.2d 266, 271-72 (9th Cir. 1987) (loan where investor guaranteed
against all risk).1 " In a leading case, the court determined that the
transaction was a loan and emphasized
- --------
(1) SEE ALSO Steven L. Schwartz, THE PARTS ARE GREATER THAN THE WHOLE:
HOW SECURITIZATION OF DIVISIBLE INTERESTS CAN REVOLUTIONIZE STRUCTURED FINANCE
AND OPEN THE CAPITAL MARKETS TO MIDDLE-MARKET COMPANIES, 1993 Colum. Bus. L.
Rev. 139, 145 (1993) ("The most significant factor in determining whether a
transaction is a true sale or a secured loan appears to be the extent and nature
of the recourse that the transferee of the payment stream has against the
transferor."), citing MAJOR'S FURNITURE MART, 602 F.2d at 545 n.l.; IN RE GOLDEN
PLAN OF CALIFORNIA~ INC., 829 F.2d 705, 709 -10 (9th Cir. 1986) (sale found
since it was "without recourse" though purchaser would receive advances if the
borrower failed to make payments to the servicer since there was no contractual
guarantee of repayment or compensation in the case of foreclosure).
<PAGE>
the full recourse nature of the debt. However, the court noted that "the
presence of recourse in a Transfer Agreement without more will not automatically
convert a sale into a security interest." The proper inquiry "is whether the
NATURE of the recourse and the true nature of the transaction, [footnote
omitted] are such that the legal rights and economic consequences of the
agreement bear a greater similarity to a financing transaction or to a sale."
MAJOR'S FURNITURE MART, 602 F.2d at 544; SEE ALSO GOLDSTEIN V. MADISON NAT'L
BANK, 89 B.R. 274, 277 (D.D.C. 1988); IN RE LEMONS ASSOCS.. INC., 67 B.R. 198,
209-10 (Bankr. D. Nev. 1986); IN RE EXECUTIVE GROWTH INVS.. INC., 40 B.R. 417,
422 (Bankr. C.D. Cal. 1984).
The Uniform Commercial Code ("UCC") leaves the determination
of whether a transfer of property is for security or constitutes a sale to a
determination of the parties' intent. UCC 9- 102(1)(a). In this regard, a
related provision of the UCC concerning sale of accounts states that a sale can
exist despite the existence of recourse. UCC 9-502 com. 4:
(T)here may be a true sale of accounts or chattel paper
although recourse exists. The determination whether a
particular assignment constitutes a sale or transfer for
security is left to the courts.
The Seller Subsequent Transaction contemplated by the Purchase
Agreement and the Subsequent Transfer Agreement involves no recourse to the
Seller for losses on the Subsequent Mortgage Loans stemming from the lack of
creditworthiness of the mortgagors, except with respect to the circumstances
relating to the Warranty Obligation. The Servicer, however, may at its sole
discretion purchase delinquent Subsequent Mortgage Loans pursuant to the
Purchase Option.
There is no debt outstanding from the Seller to the Issuer in
the Seller Subsequent Transaction.
The Trustee's only right to require the Seller to purchase or
substitute Subsequent Mortgage Loans arises in connection with the Warranty
Obligation for defective or missing documentation or the breach of
representations and warranties as to the Subsequent Mortgage Loans. This right
results only from conditions in existence at the time of the Transactions and
does not relate to any decline in value of the Subsequent Mortgage Loans. The
subject representations and warranties do not confer any additional rights or
impose any burdens beyond those applicable under general contract law and, by
analogy, under Section 2-608 of the UCC in the context of sales of
non-conforming goods. While no court has expressly addressed whether these
obligations should be distinguished from the type of recourse arising from the
inability of a mortgagor to pay, it is likely that a court squarely presented
with the distinction by a purchaser arguing for true sale treatment would
recognize it. SEE, IN RE FEDERATED DEP'T STORES. INC., 1990 Bankr. Lexis 2453
(Bankr. S.D.Ohio
<PAGE>
1990) (sale of credit card receivables to affiliates with limited right of
recourse were "true arms-length sales"); R. Aicher & W. Fellerhoff,
CHARACTERIZATION OF A TRANSFER OF RECEIVABLES AS A SALE OR A SECURED LOAN UPON
BANKRUPTCV OF THE TRANSFEROR, 65 Am. Bankr. L.J. 181, 189 (1991); Techniques,
SUPRA, at 545. Though the 25% option for a redemption could be viewed as an
issue, we understand that this benchmark has been established as a reflection of
the point at which the Mortgage Loan portfolio will no longer economically bear
the cost of the subject structured financing.
(2) The Seller does not retain post-transfer control over the
Subsequent Mortgage Loans with the exception of the servicing undertaken by the
affiliated Servicer. Generally, these servicing rights are not problematic if
they include an arms length fee. Techniques, SUPRA, at 548. We have been advised
and assume that the Servicing Agreement reflects arms length terms and should
not constitute sufficient post-transfer control to raise serious issues
concerning true sale treatment.
(3) One court relied upon IN RE JOSEPH KANNER HAT CO., 482
F.2d 937 (2d Cir. 1973), as authority for the second factor. IN RE EVERGREEN
VALLEY RESORT. INC., 23 B.R. 659, 661 (Bankr. D. Me. 1982). In KANNER, a bank's
$25,000 interest in a receivable was reduced as a result of amounts collected
from a source other than the receivable itself.2 We can foresee no circumstances
in which the Seller's or the Issuer's interest in the Subsequent Mortgage Loans
would be similarly reduced or extinguished other than (in limited circumstances)
by a repurchase of Subsequent Mortgage Loans pursuant to the Warranty Obligation
or by the Servicer's exercise of the Purchase Option. The Issuer has no
obligation to remit to the Seller any surplus received for the Subsequent
Mortgage Loans.
(4) It should be noted that the accounting and tax treatment
of the Transactions by the Seller as a financing is NOT indicative of a sale.
This treatment represents greater risk of characterization of the Seller
Subsequent Transaction as a secured transaction rather than a sale because it
may be interpreted to be indicative of the intent of the parties.
(5) The language used in the Purchase Agreement and the
Subsequent Transfer Agreement clearly indicates the intention to make absolute
transfers of the Subsequent Mortgage Loans in the Seller Subsequent Transaction.
The foregoing factors are key to a determination of a
transaction as a sale. We note that other factors have on occasion been
considered. For example, some courts have examined whether the credit of the
underlying obligors was disclosed to the purchaser. SEE GOLDEN PLAN, 829 F.2d at
710; MID-ATLANTIC SUPPLY. INC. V. THREE RIVERS ALUMINUM CO., 790 F.2d 1121, 1123
(4th Cir. 1986). We are advised that the information relating to the
creditworthiness of the obligors on the Subsequent Mortgage Loans has been
disclosed to the Issuer and the Insurer of the Bonds.
- --------
2 SEE ALSO IN RE LADD, 106 B.R. 174, 175 (Bankr. C.D. 111.
1989) (loan found where, if the loan had been repaid through other sources,
assignor would be entitled to the disaster payments).
<PAGE>
We note that courts have accepted the intent of commercially
sophisticated parties to a transaction as expressed by the terms employed in the
transaction documents, as well as relevant extrinsic evidence of intent,
including trade, custom and usage, market realities and the parties' course of
conduct and performance, while rejecting an analysis based on the transaction's
economic similarity to a loan or sale transaction. SEE IN RE BEVILL. BRESLER &
SCHULMAN ASSET MANAGEMENT CORP., 67 B.R. 557, 597 (D.N.J. 1986) (court rejected
contention that certain "repo" and "reverse repo" transactions should be treated
as loans given parties' intent "viewed in the context of the entire market in
which these transactions take place"); SEE ALSO GOLDSTEIN, 89 B.R. at 276 ("the
Court must search the intent of the parties"); GOLDEN PLAN, 829 F.2d at 709
("did the parties intend outright SALES of the note and trust deed or did they
intend LOANS for security.").3 These decisions strongly support the conclusion
of this opinion, and are, in our view, the correct approach to apply in
considering transactions similar to the Seller Subsequent Transaction
contemplated by the Purchase Agreement and the Subsequent Transfer Agreement.
In rendering this opinion letter, we do not express any
opinion concerning any law other than the Bankruptcy Code, a proceeding
thereunder, and the law of the State of Kansas to the extent that it may be
applicable thereto. We express no opinion with respect to the ability of any
person or entity to obtain a temporary restraining order or injunction
prohibiting or limiting any person or entity from obtaining any property of or
from the Seller prior to a final judicial resolution of any assertion that the
automatic stay provisions of Section 362(a) of the Bankruptcy Code preclude such
action.
Based on the facts and assumptions set forth earlier in this
opinion and the legal considerations discussed above, it is our opinion that in
a properly presented and argued case, as a legal matter, and based upon existing
case law:
1. In the event of the Bankruptcy of the Seller, a court
in such a proceeding: (i) would not hold that the
transfer of the Subsequent Mortgage Loans by the
Seller to the Issuer pursuant to the Purchase
Agreement and the Subsequent Transfer Agreement
should be characterized as a loan secured by the
Subsequent Mortgage Loans rather than as a sale of
the Subsequent Mortgage Loans to the Issuer; and (ii)
accordingly, on the basis of such a characterization
would not hold that the Subsequent Mortgage Loans or
any proceeds thereof constitute property of the
estate of the Seller pursuant to Section 541 of the
Bankruptcy Code, thereby subject to the automatic
stay provisions of the Section 362(a) of the
Bankruptcy Code that would be applicable to the
property of the Seller in such a proceeding.
In expressing the opinions expressed above, we wish to note
that, while we believe the opinions are supported by a sound analysis of the
Seller Subsequent Transaction, there is no
- --------
3 BEVIL's reliance on the testimony of the parties to determine their
intention has been expanded to purchaser who did not completely understand the
nature of the transactions in which he was participating. IN RE COMARK, 145 B.R.
47, 53 (Bankr. 9th Cir. 1992) (repurchase agreement held to be "security" rather
than "loan").
<PAGE>
reported controlling favorable judicial precedent directly on point. Moreover,
there is distinguishable authority disregarding and collapsing special purpose
subsidiary transactions. SEE IN RE BEST PRODS.. INC., 157 B.R. 222 (Bankr.
S.D.N.Y.1993). We therefore examined decisions in which certain of the facts and
circumstances of the Seller Subsequent Transaction were present as well as cases
discussing more generally whether the transfer of an asset was a transfer of
ownership or a transfer of a limited interest for the purpose of security.
Moreover, the authorities we have examined contain certain cases and authorities
that are arguably inconsistent with the conclusions expressed in our opinion.
These cases and authorities are, however, in our opinion, distinguishable in the
context of the Seller Subsequent Transaction. SEE OCTAGON GAS SYSTEMS. INC. V.
RIMMER, 995 F.2d 948 (l0th Cir. 1993) (holding sale of accounts is always a
secured transaction under provision of UCC 9-102 which is inapplicable to sales
of instruments).
Judicial analysis has typically proceeded on a case-by-case
basis. The determination is usually made on the basis of an analysis of the
facts and circumstances of the particular case, rather than as a result of the
application of consistently applied legal doctrines. It should also be
remembered that bankruptcy courts view themselves as courts of equity. Existing
reported decisional authority is thus not conclusive as to the relative weight
to be accorded to the factors present in the Seller Subsequent Transaction and
does not provide consistently applied general principles or guidelines with
which to analyze all of the factors present in the Seller Subsequent
Transaction. There are also facts and circumstances present in the Seller
Subsequent Transaction which we believe to be relevant to our conclusion but
which, because of the particular facts at issue in the reported cases, are not
generally discussed in the reported cases as being material factors.
In the event it were asserted that the beneficial interest in
and legal title to the Subsequent Mortgage Loans were part of the Seller's
estate if the Seller were to become a debtor under the Bankruptcy Code, we
express no opinion as to how long the Indenture Trustee would be denied
possession of the Subsequent Mortgage Loans before the validity of such
assertions could be finally decided. Furthermore, in the event the Seller were
to become a debtor under the Bankruptcy Code, we express no opinion as to how a
court would adjudicate any rights, claims or defenses raised by Mortgage
obligors and the terms of the Seller's agreements with any such obligors. In any
event, we note that the Purchase Agreement and the Subsequent Transfer Agreement
require that actions be undertaken to perfect the interests of the Issuer (such
as possession of the Mortgage Notes, recording of mortgage assignments and
filing of financing statements to perfect certain security interests) in the
event a determination should be made that the Seller Subsequent Transaction is a
loan.
This opinion is furnished by us as counsel to the NovaStar
Entities and shall not be relied upon by any party other than the Addressees in
connection with the transactions contemplated by the Agreements. This opinion is
not to be otherwise used, circulated, quoted or referred to in connection with
any other transaction, nor filed with any governrnental agency or other person,
without our prior written consent. This opinion is issued only with respect to
the present status of law in the State Kansas and Title 11 of the United States
Bankruptcy Code, and we undertake no obligation or responsibility to update or
supplement this opinion in response to subsequent changes in the law or future
events affecting the transactions contemplated by the Agreements. The foregoing
opinion is expressly subject to there being no material change in the law, and
there being no additional facts that would materially affect the validity of the
assumptions and conclusions set forth
<PAGE>
herein or upon which this opinion is based.
Very truly yours,
STINSON, MAG & FIZZELL, P.C.
By
Michael W. Lochmann
<PAGE>
ANNEX A
1. Merrill Lynch, Pierce, Fenner & Smith Incorporated
250 Vesey Street
World Financial Center/North Tower
New York, NY 10281
2. MBIA Insurance Corporation
113 King Street
Armonk,NY 10504
3. Moody's Investors Service, Inc.
99 Church Street
New York, NY 10007
4. Standard & Poor's
26 Broadway
New York, NY 10004- 1064
5. Wilmington Trust Company
1100 North Market Street
Wilmington, DE 19890
6. First Union National Bank
230 South Tryon Street, 9th Floor
Charlotte, NC 28288-1179
<PAGE>
January 20, 1998
To the Addressees Listed
on the Attached Annex A
Re: NovaStar Home Equity Loan Asset-Backed Bonds and
Certificates Series 1997-2 (Closing Opinion--Sale of
Subsequent Mortgage Loans)
----------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to NovaStar Financial, Inc., a
Maryland corporation (the "Seller"), NovaStar Assets Corp., a Delaware
corporation ("NovaStar Assets"), NovaStar Mortgage, Inc., a Virginia corporation
(the "Servicer") and NovaStar Certificates Financing Corporation, a Delaware
corporation ("NCFC"; the Seller, NovaStar Assets, the Servicer and NCFC are
sometimes referred to collectively herein as the "NovaStar Entities") in regard
to (i) the sale by the Seller of certain subprime home mortgage loans (the
"Initial Mortgage Loans") to NovaStar Assets, pursuant to Section 2.1 of the
Home Equity Loan Purchase Agreement, dated as of December 3, 1997 (the "Purchase
Agreement"), between the Seller, NovaStar Assets, the Indenture Trustee and the
Issuer; (ii) the sale by NovaStar Assets of the Initial Mortgage Loans to
Merrill Lynch Mortgage Investors, Inc., a Delaware corporation (the "Company"),
under the Ownership Transfer Agreement, dated as of December 3, 1997 (the
"Transfer Agreement"), between NovaStar Assets and the Company; (iii) the sale
by the Company to NovaStar Home Equity Loan Trust Series 1997-2, a Delaware
Business Trust (the "Issuer"), pursuant to the Amended and Restated Trust
Agreement, dated as of November 1, 1997 (the "Trust Agreement"), between the
Company and Wilmington Trust Company, as owner trustee (the "Owner Trustee");
(iv) the servicing of the Initial Mortgage Loans by the Servicer pursuant to the
Servicing Agreement, dated as of November 1, 1997 (the "Servicing Agreement"),
among the Servicer, the Issuer and the Indenture Trustee (as defined below); (v)
the sale by NovaStar Assets of the Certificates to NCFC pursuant to the
Certificates Transfer Agreement, dated as of December 11, 1997 (the
"Certificates Transfer Agreement"); and (vi) the sale by Seller to the Issuer of
the Subsequent Mortgage Loans pursuant to the Subsequent Transfer Instrument,
dated as of January 20, 1998 (the "Subsequent Transfer Agreement"), between the
Seller and the Issuer.
The documents evidencing the Initial Mortgage Loans are held
by First Union National Bank, as indenture trustee (the "Indenture Trustee").
The Indenture Trustee holds such documents as an agent and bailee with notice of
the security interests granted in favor of the Bondholders, the Insurer, the
Issuer, the Company and NovaStar Assets respectively. Pursuant to the Indenture,
dated as of November 1, 1997 (the "Indenture"), between the Issuer and the
Indenture Trustee, the Issuer issued the Home Equity Loan Asset-Backed Bonds
Series 1997-2 (the "Bonds"). The Bonds are secured in part by the Initial
Mortgage Loans and will also be secured in part by the Subsequent Mortgage
Loans, hereinafter described. Pursuant to the Trust Agreement, the Issuer issued
the Home Equity Loan Asset-Backed Certificates (the "Certificates"), which
evidenced ownership interests in the Issuer (the Bonds and the Certificates,
collectively, the "Securities").
The Issuer entered into the Insurance Agreement, dated as of
December 3, 1997 (the
<PAGE>
"Insurance Agreement"), among the Seller, the Servicer, NovaStar Assets, the
Issuer, the Indenture Trustee and MBIA Insurance Corporation, as bond insurer
(the "Insurer") pursuant to which a bond insurance policy (the "Bond Insurance
Policy") was issued in respect of the Bonds. The Seller also entered into an
Indemnification Agreement, dated December 3, 1997 (the "Indemnity Agreement"),
among the Seller, the Insurer and the Underwriter (as defined below).
The Company sold the Bonds to Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the "Underwriter") pursuant to the Underwriting Agreement,
dated December 3, 1997 (the "Underwriting Agreement"), among the Company and the
Underwriter. The Underwriter sold the Bonds to unaffiliated investors on the
Closing Date or thereafter pursuant to offers to purchase in effect on the
Closing Date. The Seller, the Company and the Underwriter entered into an
Indemnification and Contribution Agreement, dated December 3, 1997 (the
"Indemnification Agreement").
The Initial Mortgage Loans were sold by the Seller to NovaStar
Assets, NovaStar Assets sold the Initial Mortgage Loans to the Company, as agent
for NovaStar Assets, and the Company sold the Initial Mortgage Loans to the
Issuer on December 11, 1997 (the "Closing Date"). The consideration paid for the
Initial Mortgage Loans by NovaStar Assets to the Seller consisted of the
Purchase Price (as defined in Section 2.1 of the Purchase Agreement), which
included a portion of the cash proceeds from the sale of the Bonds and the cash
proceeds from the sale of the Certificates. The consideration paid for the
Initial Mortgage Loans by the Company to NovaStar Assets consisted of the
Purchase Price (as defined in Section 4 of the Transfer Agreement), which
included a portion of the cash proceeds from the sale of the Bonds and delivery
of the Certificates issued by the Issuer. The Company sold the Initial Mortgage
Loans to the Issuer in exchange for a portion of the cash proceeds from the sale
of the Bonds and receipt of the Certificates. The Bonds are entitled to the
benefits of the Bond Insurance Policy.
On the Closing Date, a portion of the proceeds of the sale of
the Bonds equal to the Original Pre-Funded Amount was deposited into the
Pre-Funding Account and a portion of the proceeds of the Sale of the Bonds equal
to the Interest Coverage Amount was DEPOSITED INTO the Interest Coverage
Account, which accounts were created under the Indenture and held by the
Indenture Trustee, as security for the Bondholders, in segregated trust accounts
established in the name of the Indenture Trustee. Moneys on deposit in the
Pre-Funding Account will be used to fund the acquisition by the Issuer of
certain additional subprime home mortgage loans (the "Subsequent Mortgage
Loans") from the Seller and, to the extent not so used, will be distributed to
holders of the Bonds. Moneys on deposit in the Interest Coverage Account will be
used to make certain interest payments on the Bonds during the Pre-Funding
Period and, to the extent not so used, will be deposited into the Collection
Account under the Indenture. The Pre-Funding Account and the Interest Coverage
Account moneys will not be used to support losses or delinquencies on the
Initial Mortgage Loans. Further, such moneys will be obtained from the sale
proceeds of the Bonds and not from either the Seller or the Company.
On the Subsequent Transfer Dates, the Seller will sell to the
Issuer the Subsequent Mortgage Loans, pursuant to the Subsequent Transfer
Agreement in exchange for a portion of the cash proceeds from the sale of the
Bonds, such cash proceeds to be transferred from the PreFunding Account.
<PAGE>
The Purchase Agreement, the Transfer Agreement, the Subsequent
Transfer Agreement, the Trust Agreement, the Indenture, the Servicing Agreement,
the Certificates Transfer Agreement, the Insurance Agreement, the Indemnity
Agreement, the Indemnification Agreement and the Underwriting Agreement are
collectively referred to herein as the "Agreements." Capitalized terms not
defined herein have the meanings assigned to them in Appendix A to the
Indenture, or, if not defined therein, then in the other Agreements. This
opinion is rendered pursuant to Section 5(b) of the Underwriting Agreement.
In rendering this opinion letter, we have examined execution
copies of each of the Agreements, together with the documents, instruments and
agreements referenced in other opinions we have delivered in connection with the
Agreements. We have also examined such other certificates, documents, materials
and other matters of law as we have deemed necessary in order to give the
opinions hereinafter set forth. As to certain issues of fact material to the
opinions expressed herein, we have, with your consent, relied to the extent we
deemed appropriate, upon the representations in the Agreements, and the
certifications of officers, of the Seller, NovaStar Assets, the Servicer, NCFC,
the Company, the Issuer, the Owner Trustee, the Indenture Trustee, the Insurer
and public officials.
In rendering this opinion letter, we have examined executed
copies of each of the Agreements, together with the following documents,
instruments and agreements:
A. The Bonds;
B. The Certificates;
C. The Financing Statements showing the Seller, as the debtor,
and the Issuer, as the secured party, to be filed by CT Corporation
System on or prior to the Subsequent Transfer Date (the "Financing
Statements") in the Offices of the Secretary of State of Kansas and the
State of Maryland (collectively, the "Filing Offices");
D. The following corporate organizational
documents of the Seller:
(i) A copy of the Amended and Restated Articles
of Incorporation of the Seller, as certified
on September 17, 1997, by the Department of
Assessments and Taxation of the State of
Maryland (the "Department");
(ii) Bylaws of the Seller, certified as of a
recent date by the Secretary of the Seller;
(iii) Certified copy of Corporate Resolutions of
the Board of Directors of the Seller; and
(iv) Certificate of Corporate Good Standing of
the Seller, dated January 6, 1998, issued by
the Secretary of State of Maryland;
<PAGE>
We have also examined such other certificates, documents, materials and other
matters of law as we have deemed necessary in order to give the opinions
hereinafter set forth.
In making our examinations and rendering the opinions herein
expressed, we have made, with your permission, the following assumptions:
(1) Each of the Agreements and the Financing Statements has
been, duly and properly authorized, executed, acknowledged (to the extent
necessary), delivered and accepted, and, as may be required under the applicable
laws of jurisdictions other than the State of Kansas (the "State"), sealed and
attested, by each of the parties thereto (other than the NovaStar Entities). We
have further assumed the genuineness of all signatures on all documents.
(2) All corporate, partnership and other action requisite for
the execution, delivery and performance of each of the Agreements and the
Financing Statements by each of the parties thereto (other than the NovaStar
Entities) has been duly and effectively taken.
(3) Each of the parties to the Agreements, other than the
NovaStar Entities, (i) has all necessary power and authority (corporate,
partnership and otherwise) to execute, enter into, deliver and perform the same;
(ii) is duly organized, validly existing and in good standing in the
jurisdiction of its formation; and (iii) has all necessary licensing and
qualifications needed in the jurisdiction of its formation and in all the
jurisdictions in which it does business.
(4) The execution, delivery and performance of each of the
Agreements and the Financing Statements by each of the parties thereto (other
than the NovaStar Entities) do not and will not contravene or conflict with any
provision of the charter documents or bylaws of any of such parties or any
partnership agreement or other agreement or instrument which is binding upon any
of such parties or their respective properties.
(5) Each of the Agreements is the valid and binding obligation
of each of the parties thereto (other than the NovaStar Entities) and is
enforceable against each such party in accordance with its terms.
(6) To the extent the laws of a state or jurisdiction other
than the State control or govern any of the Agreements, such Agreements are
legal, valid, binding and enforceable in accordance with their respective terms
under the laws of such other state or jurisdiction.
(7) Any and all certifications made to us by public officials
and any and all certifications made to us by the Seller, NovaStar Assets, NCFC,
the Servicer, the Company, the Issuer, the Owner Trustee, the Indenture Trustee,
and the Bond Insurer concerning factual matters are accurate and complete.
(8) There exists valid and lawful consideration for the
parties to the Agreements to enter into the Agreements. Further, we have assumed
the absence of any circumstance (such as but not limited to fraud in the
inducement, duress, waiver or estoppel) extrinsic to the Agreements which might
give rise to a defense against enforcement of the Agreements.
<PAGE>
(9) (i) All documents submitted to us as certified, conformed,
draft, photostatic or telefacsimilied copies conform to the original documents,
(ii) all such original documents and all documents submitted to us as originals
are authentic, (iii) all unexecuted copies of documents submitted to us conform
to the original executed documents, and (iv) as to each of the Agreements, in
such executed copies all blank spaces have been or shall be properly completed
and all exhibits and schedules referred to therein have been or shall be
attached in their final forms and none of the completions or attachments are or
shall be inconsistent with the forms which we have reviewed.
(10) The statements, recitals, representations and warranties
as to matters of fact set forth in the Agreements are accurate and complete.
(11) There is no agreement, course of dealing or performance
or usage of trade defining, supplementing, amending, modifying, waiving or
qualifying the terms of any of the Agreements.
(12) The conduct of each of the parties to the Agreements has
complied with any requirement of good faith, fair dealing and conscionability.
(13) The opinion recipients have acted in good faith and
without notice of any defense against enforcement of any rights created by, or
any adverse claim to, any property or security interest transferred or created
as part of, or contemplated by, the Agreements.
(14) Each of the Bonds has been authenticated in accordance
with the provisions of the Indenture, and has been delivered to and paid for by
the Underwriter in accordance with the Underwriting Agreement.
(15) The Seller has good and valid title to the Specified
Purchase Agreement Collateral. "Specified Purchase Agreement Collateral" as used
herein means the Subsequent Mortgage Loans and other collateral in which the
Seller grants to the Issuer a security interest under and pursuant to the
Subsequent Transfer Agreement, as to which a security interest may be perfected
by the filing of a financing statement pursuant to Article 9 of the Uniform
Commercial Code in effect in the State (the "UCC").
(16) None of the Specified Purchase Agreement Collateral
includes and will not include (i) goods used or bought for use primarily for
personal, family or household purposes, (ii) timber to be cut, (iii) minerals or
the like (including oil or gas) or accounts relating thereto, or (iv) fixtures.
(17) The chief executive offices (as such term is used in the
UCC) of each of the NovaStar Entities are located in the State.
(18) None of the NovaStar Entities is transacting, and will
not transact, any business in the State under a name other than its true name.
(19) At all times (i) the Indenture Trustee will not be
directly or indirectly controlled by the Issuer or any of its affiliates, (ii)
the Indenture Trustee will maintain possession
<PAGE>
of the Initial Mortgage Notes in the State of Maryland and (iv) any filing of a
continuation or other statement required to maintain the perfection of any
security interest will be made.
Based upon the foregoing and subject to the qualifications and
exceptions heretofore and hereinafter set forth, we are of the opinion that:
1. DUE INCORPORATION. QUALIFICATION AND AUTHORITY OF THE
SELLER: The Seller is (i) duly incorporated, validly existing and in good
standing under the laws of the State of Maryland, (ii) duly qualified to conduct
business as a foreign corporation in the State, (iii) in good standing in the
State, and (iv) qualified to do business in each state necessary to enable it to
perform its obligations under the Purchase Agreement and the Subsequent Transfer
Agreement. The Seller has the requisite power and authority to execute and
deliver, engage in the transactions contemplated by, and to agree to perform and
observe the conditions of the Purchase Agreement and the Subsequent Transfer
Agreement.
2. VALID AUTHORIZATION. EXECUTION AND DELIVERY BY THE SELLER:
The Purchase Agreement and the Subsequent Transfer Agreement has been duly and
validly authorized, executed and delivered by the Seller and all requisite
corporate action has been taken with respect thereto.
3. ENFORCEABILITY OF THE AGREEMENTS AGAINST THE SELLER: The
Purchase Agreement and the Subsequent Transfer Agreement are each valid and
enforceable against the Seller in accordance with its terms.
4. CONSENTS. APPROVALS: No consent, approval, authorization or
order of, registration or filing with, or notice to, any governmental authority
or court is required under federal laws or the laws of the State for the
Seller's execution, delivery of, and the agreement to perform, the Purchase
Agreement and the Subsequent Transfer Agreement, or the consummation of any
other transaction contemplated thereby by the Seller, except as may be required
under the state securities laws in connection with the purchase and the offer
and sale of the Securities, as to which we express no opinion.
5. ACTIONS. PROCEEDINGS AGAINST THE SELLER: To our knowledge,
following due inquiry made of the appropriate officers of the Seller, there are
no actions, proceedings or investigations pending or, to our knowledge,
threatened, against the Seller before any court, governmental agency or body or
other tribunal (a) asserting the invalidity of the Purchase Agreement or the
Subsequent Transfer Agreement, (b) seeking to prevent the consummation of any of
the transactions contemplated by the Purchase Agreement or the Subsequent
Transfer Agreement, or (c) which would materially and adversely affect the
performance by the Seller of obligations under, or the validity or
enforceability of, the Purchase Agreement or the Subsequent Transfer Agreement.
6. EXECUTION. DELIVERY AND PERFORMANCE/CONFLICTS: The
execution, delivery or performance by the Seller of the Subsequent Purchase
Agreement, will not, or does not, conflict with or result or will result in a
breach of, or constitute, or will constitute, a default under: (i) any term or
provision of the articles or certificate of incorporation or bylaws of the
Seller; (ii) any term or provision of any material agreement, contract,
instrument or indenture to which the Seller is a party or is bound and which has
been identified to us by the appropriate officers of the Seller; (iii) any
<PAGE>
order, judgment, writ, injunction or decree of any court or governmental agency
or body or other tribunal having jurisdiction over the Seller which has been
identified to us by the appropriate officers of the Seller; or (iv) any law,
rule or regulation of the State or the federal government.
7. To our knowledge, the consummation of the transactions
contemplated by the Purchase Agreement and the Subsequent Transfer Agreement by
the Seller will not result in (i) a breach of any applicable law or regulation
of the State or federal government, or (ii) a breach or violation of any order,
judgment or decree known to us, or identified to us by the appropriate officers
of the Seller for purposes of this opinion, of any court, arbitrator or
governmental instrumentality having jurisdiction over the Seller, or (iii)
result in the imposition of any lien or encumbrance on any of its properties,
except for the security interests contemplated by the Agreements.
8. In the event that the transfer of the Specified Purchase
Agreement Collateral from the Seller to the Issuer were deemed to be a loan
rather than a sale, the security agreement set forth in the Subsequent Transfer
Agreement is in proper form to create a security interest in the Seller's
interest in the Specified Purchase Agreement Collateral for the benefit of the
Issuer, to the extent that a security interest may be created in the Specified
Purchase Agreement Collateral pursuant to Article 9 of the UCC. The Financing
Statements comply in all respects with applicable law and are in proper form for
filing and the filing of the Financing Statements in the Filing Offices will
perfect a security interest in the Specified Purchase Agreement Collateral to
the extent that the Specified Purchase Agreement Collateral consists of the type
of property in which a security interest may be perfected by filing a financing
statement under the UCC, and no other documents or instruments need be recorded
or filed in any public office in the State in order to perfect a security
interest in said Specified Purchase Agreement Collateral except as hereinafter
provided. A UCC search of the Filing Offices conducted on January , 1998
disclosed no financing statements of the Seller that would give any person a
security interest in the Specified Purchase Agreement Collateral senior to the
security interest of the Issuer based solely on the date of filing of the
respective financing statements.
We call to your attention that to the extent that the
Specified Purchase Agreement Collateral includes the Subsequent Mortgage Notes,
and that pursuant to Section 9-304 of the Maryland Uniform Commercial Code, a
security interest in the Subsequent Mortgage Notes may be perfected only by
delivery, and continuous possession, of such Subsequent Mortgage Notes to the
Issuer (or to the Indenture Trustee as the Issuer's designee). We further note
that in the Indenture, the Indenture Trustee acknowledges that in the event the
conveyance of the Subsequent Mortgage Loans by the Seller to the Issuer pursuant
to the Subsequent Transfer Agreement is determined to constitute a financing,
the Indenture Trustee holds the Subsequent Mortgage Loans as the designee of the
Issuer, subject, however, to a prior lien in favor of the Bondholders.
The opinions and statements expressed herein are subject to
the following additional limitations and qualifications:
(a) We are admitted to the Bar of the State of Kansas and we
express no opinion as to the laws of any other jurisdiction except as to matters
that are governed by federal law, the General Corporation Law of the States of
Delaware or Maryland or the Business Trust Law of the State of Delaware. All
opinions expressed herein are based on laws, regulations and policy
<PAGE>
guidelines currently in force and may be affected by future regulations.
(b) We express no opinion with respect to any instrument or
document other than the Purchase Agreement, the Subsequent Transfer Agreement
and the Financing Statements, as expressly set forth herein; further, we are
expressing no opinion as to the validity or enforceability of any provision in
any of the foregoing if the validity or enforceability of such provision is
dependent upon or is in conflict with or is inconsistent with any instruments or
documents other than the Agreements. We express no opinion as to any choice of
law or choice of judicial forum provisions contained in the Agreements.
(c) The enforceability of each of the Purchase Agreement and
the Subsequent Transfer Agreement is subject to (i) applicable bankruptcy,
insolvency, reorganization, receivership, fraudulent transfer, fraudulent
conveyance, moratorium and similar laws relating to or affecting the
enforceability of creditors rights generally, and (ii) general equitable
principles (regardless of whether enforcement is sought in equity or at law),
limitations on the availability of equitable remedies (such as specific
performance), and similar principles governing enforceability, such as but not
necessarily limited to standards of commercial reasonableness.
(d) Particular provisions, rights, waivers and remedies in the
Purchase Agreement and Subsequent Purchase Agreement may not be enforceable in
accordance with their terms, and the enforceability of any instrument referred
to herein is subject to statutes and judicial decisions affecting the
enforcement of contracts generally; provided, however, that none of the
foregoing will prevent the counterparties to the said agreements from the
practical realization (except for delay thereof) of the benefits of the security
provided by such Agreements, subject to each and all of the other limitations.
qualifications and assumptions set forth herein.
(e) We express no opinion with respect to any laws or
regulations which govern or otherwise regulate the issuance or sale or any other
dealings in connection with investment securities or with respect to the
applicable legal investment or real estate syndication laws. Further, we express
no opinion as to the statutes, administrative decisions and rules and
regulations of county, municipal and special political subdivisions.
(f) The enforceability of any provision in the Purchase
Agreements and the Subsequent Transfer Agreement for payment of costs of
collection (including attorneys' fees) is subject to judicial discretion.
Without limiting the generality of the foregoing qualification, any such
provision is unenforceable if either (i) a court determines that the amount of
collection costs provided for or sought is unreasonable or (ii) said agreement
provides for, or a party seeks to recover, (x) costs incurred by a salaried
employee of such party or its assignee or (y) payment of both attorney fees and
collection agency fees.
(g) We express no opinion with respect to the enforceability
of any waiver contained in any of the Purchase Agreement or the Subsequent
Transfer Agreement of the right to jury trial or any provisions of said
agreements pursuant to which any party grants to the other a power of attorney.
(h) Provisions contained in the Purchase Agreement or the
Subsequent Transfer
<PAGE>
Agreement that permit any person to take action or make determinations, or to
benefit from indemnities or similar understandings, may be subject to
requirements that such action be taken or such determinations be made, or that
any action or inaction by such person that may give rise to a request for
payment under such indemnity or similar understanding be taken or not taken, on
a reasonable basis and in good faith. Additionally, indemnities may be
unenforceable or limited to the extent that they (i) violate public policy
considerations, (ii) provide for indemnification for violation of securities
law, or (iii) provide for indemnification or exculpation of parties with respect
to intentional acts or gross negligence.
(i) Whenever any opinion or statement herein with respect to
the existence or absence of facts, conditions or circumstances is qualified by
the phrase "known to us" or is based upon our "knowledge" or any similar phrase,
it is intended to indicate that, during the course of our representation of the
NovaStar Entities, no information has come to our attention that would give us
actual knowledge of the existence or absence of such facts, conditions or
circumstances. The terms "knowledge," "known to us" and similar phrases refer to
the actual present knowledge of the attorneys in our firm who have devoted
substantive attention to matters for which we have been engaged by the NovaStar
Entities and not to the knowledge of the firm or its shareholders or employees
generally. Moreover, we have made no independent investigation as to any opinion
or statement qualified by the terms "knowledge," "known to us" or similar
phrases.
(j) The opinion rendered in paragraph 8 above is subject to
the following limitations and qualifications:
(i) To the extent that the name, identity, corporate structure
or location of a debtor changes and such change would cause a filed
financing statement to be misleading, there must be a UCC-2 filed as to
that debtor, providing a change of the name, identity or location of
such debtor, within four months of such change. The UCC2 must be filed
in order for the filed financing statement to remain effective to
perfect a security interest in collateral acquired by such debtor more
than four months after such change, unless a new appropriate financing
statement is filed before the expiration of that time period.
(ii) The ability to perfect a security interest in the
Specified Purchase Agreement Collateral is subject to the limitations
contained in Sections 9-103, 9-302, 9304 and 9-305 of the UCC. The
continuation of perfection in proceeds (as defined in the UCC) is
limited to the degree set forth in Section 9-306 of the UCC. The
validity of a security interest in accessions (as defined in the UCC)
is limited to the degree set forth in Section 9-314 of the UCC, and the
validity of a security interest in fixtures (as defined in the UCC) is
limited to the degree set forth in Section 9-313 of the UCC.
(iii) You are advised that the Article 9 of the UCC conforms
substantially, in all aspects relevant to our opinion, to Article 9 of
the 1972 official text of the Uniform Commercial Code. We call
attention to the fact that under the UCC a filed financing statement is
effective for five years from the date of filing. In order to continue
perfection beyond each five-year period, a continuation statement must
be filed within six months prior to the expiration of each such
five-year period as set forth in Section 9-403 of the UCC; provided,
however, if insolvency proceedings are then pending with regard to the
Seller,
<PAGE>
there may be additional time for filing a continuation statement.
(iv) The security interest of the Issuer in proceeds of the
Specified Purchase Agreement Collateral is limited to the extent that
the Issuer's security interest will be perfected in proceeds of the
Specified Purchase Agreement Collateral only if possession thereof is
obtained or other appropriate action with respect thereto is taken in
accordance with the provisions of applicable law in order to maintain
or perfect the security interest.
(v) The perfection of the security interest of the Issuer in
the Specified Purchase Agreement Collateral may be governed by the laws
other than those of the State to the extent that any Subsequent
Mortgage Note becomes located in a jurisdiction other than the State or
to the extent that the principal place of business of the Seller
becomes located in a jurisdiction other than the State.
(vi) We have made no examinations of title with respect to any
of the collateral covered by the Financing Statements and, accordingly,
we are expressing no opinion as to the title thereto.
(vii) Except as set forth in the last sentence of the first
paragraph of 8, we express no opinion as to the priority of any lien or
security interest created by the Subsequent Transfer Agreement, and the
priority opinion set forth in such sentences is limited to the extent
of the accuracy and completeness of the UCC search conducted by CT
Corporation System and the accuracy and completeness of the records of
the Filing Offices.
(viii) We express no opinion as to the perfection or
enforceability of any security interest in the Specified Purchase
Agreement Collateral to the extent that such collateral includes
copyrights, copyright licenses, patents, patent licenses, trademarks,
trademark licenses, vehicles, insurance policies or permits or any
agreement or instrument, including franchise agreements, to the extent
that such agreement or instrument by its terms requires any consent
(which consent has not been obtained) to create a security interest
therein or permit assignment thereof (or prohibits such security
interest or assignment), and proceeds of any of the foregoing.
(k) Default, acceleration, foreclosure and repossession are
all subject to judicial supervision and, accordingly, accelerations,
repossessions or foreclosures may be limited by a court of competent
jurisdiction to material defaults.
(l) In rendering the opinions set forth in paragraphs 1 above,
we are relying, with your consent, on the opinions of Piper & Marbury L.L.P. and
of Willliams Mullen Christian and Dobbins, respectively, previously delivered to
you and the certificates of corporate good standing described in paragraphs D
above.
(m) We express no opinion as to the enforceability of any
covenants, restrictions or limitations set forth in any of the Purchase
Agreement or the Subsequent Transfer Agreement which prohibit the parties
thereto from filing a voluntary bankruptcy petition, or filing or joining as a
party to, a petition of involuntary bankruptcy against a third party.
<PAGE>
This opinion is furnished by us as counsel to the NovaStar
Entities and shall not be relied upon by any party other than the Addressees in
connection with the transactions contemplated by the Agreements. This opinion is
not to be otherwise used, circulated, quoted or referred to in connection with
any other transaction, nor filed with any governmental agency or other person,
without our prior written consent. This opinion is issued only with respect to
the present status of law in the State, federal law, the General Corporation Law
of the States of Delaware and Maryland and the Business Trust Law of the State
of Delaware, and we undertake no obligation or responsibility to update or
supplement this opinion in response to subsequent changes in the law or future
events affecting the transactions contemplated by the Agreements.
Very truly yours,
STINSON, MAG & FIZZELL, P.C.
By
Michael W. Lochmann
<PAGE>
ANNEX A
1. Merrill Lynch, Pierce, Fenner & Smith Incorporated
250 Vesey Street
World Financial Center/North Tower
New York, NY 10281
2. MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
3. Moody's Investors Service, Inc.
99 Church Street
New York, NY 10007
4. Standard & Poor's
26 Broadway
New York, NY 10004-1064
5. Wilmington Trust Company
1100 North Market Street
Wilmington, DE 19890
6. First Union National Bank
230 South Tryon Street, 9th Floor
Charlotte, NC 28288-1179
<PAGE>
ATTACHMENT D
Seller's Officer's Certificate
OFFICER'S CERTIFICATE
SUBSEQUENT TRANSFER
NOVASTAR FINANCIAL, INC.
I, Scott Hartman, hereby certify that I am the duly elected Chairman of
NovaStar Financial, Inc. (the "Seller") a corporation organized under the laws
of the State of Maryland, that I have made such reasonable investigation as I
have deemed necessary to deliver this Certificate, including discussions with
responsible officers of the Seller and further certify to the best of my
knowledge as follows:
1. The Seller is in good standing under the laws of the State
of Maryland.
2. Each person who, as an officer or representative of the
Seller, signed the Subsequent Transfer Instrument, dated as of January
20, 1998, between the Seller and NovaStar Home Equity Loan Trust Series
1997-2 (the "Issuer") and any other document delivered prior hereto or
on the date hereof in connection with the transfer of the Subsequent
Mortgage Loans and the transactions described in the Home Equity Loan
Purchase Agreement (the "Agreement"), dated as of December 3, 1998
among the Seller, NovaStar Assets Corp., First Union National Bank and
the Issuer, at the respective times of such signing and delivery, and
is now, duly elected or appointed, qualified and acting as such officer
or representative, and the signatures of such persons appearing on such
documents are their genuine signatures.
3. With respect to its transfer of the Subsequent Mortgage
Loans and the transactions contemplated by the Agreement, the Seller
has complied in all material respects with all the agreements by which
it is bound and has satisfied in all material respects all the
conditions on its part to be performed or satisfied prior to the
Subsequent Transfer Date other than those which have been waived
pursuant to the terms of the Agreement.
4. Attached hereto as Exhibit I is a certified true copy of
the resolutions of the Board of Directors of the Seller with respect to
the sale of the Subsequent Mortgage Loans subject to the Agreements,
and the same are in full force and effect and have not been revoked,
repealed or amended. Attached as Exhibit II hereto is a true and
correct copy of the Certificate of Incorporation of the Seller which is
in full force and effect on the date hereof. Attached as Exhibit III is
a true and correct copy of the By-Laws of the Seller which continue in
force on the date hereof. Attached as Exhibit IV hereto is a true and
correct copy of the Good Standing Certificate of the Seller dated
January 6, 1998.
5. Any necessary consents, approvals, authorizations or order
of any court or governmental agency or body, which are required for the
execution, delivery and performance by the Seller of or compliance by
the Seller with the Agreement, the sale of the Subsequent Mortgage
Loans as evidenced by the Agreement, or the consummation of
<PAGE>
the transactions contemplated by the Agreement, have been obtained. The
Agreement and all related agreements have been authorized by the Board
of Directors of the Seller, such authorization being reflected in the
minutes of that Board and shall be maintained from the date of their
execution as records of the Seller. The Agreement and related
agreements are and will be from the time of their execution official
records of the Seller.
6. Each of the obligations of the Seller required to be
performed by it on or prior to the Subsequent Transfer Date pursuant to
the terms of the Agreement have been duly performed and complied with
and all of the representations and warranties of the Seller under the
Agreement are true and correct as of the Subsequent Transfer Date and
no event has occurred which, with notice or the passage of time, would
constitute a default under the Agreement.
7. Each condition precedent specified in Section 2.2
of the Agreement and each condition precedent specified in the
Subsequent Transfer Instrument has been satisfied by the Seller.
Capitalized terms not defined herein have the meanings set
forth in the Agreement.
<PAGE>
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the seal
of the Seller.
Dated: January 20, 1997
NOVASTAR FINANCIAL, INC.
By: /s/ Scott Hartman
----------------------
Name: Scott Hartman
Title: Chairman
<PAGE>
ATTACHMENT E
Bond Insurer's Certificate
OFFICER'S CERTIFICATE OF
MBIA INSURANCE CORPORATION
RE: Bond Insurer approval of Subsequent Mortgage Loans
January 20, 1998
First Union National Bank
230 S. Tryon Street, 9th Floor
Charlotte, North Carolina 28288-1179
Attn: NovaStar Home Equity Loan Trust
Series 1997-2
Wilmington Trust Company
1100 North Market Street
Wilmington, Delaware 19890
Re: Home Equity Loan Purchase Agreement, dated as of
December 3, 1997 (the "Purchase Agreement"), among
NovaStar Financial, Inc. (the "Seller"), NovaStar
Home Equity Loan Trust Series 1997-2, a Delaware
business trust (the "Issuer"), First Union National
Bank, as indenture trustee (the "Indenture Trustee")
and NovaStar Assets Corp., relating to NovaStar Home
Equity Loan Asset-Backed Bonds and Certificates,
Series 1997-2 (Subsequent Mortgage Loan transfer
January 20, 1998
----------------------------------------------------
Ladies and Gentleman:
In accordance with Section 2.2(b)(vi) of the above-captioned
Purchase Agreement, the undersigned hereby certifies the following:
(a) The Subsequent Mortgage Loans identified on the Subsequent Mortgage
Loan Schedule attached to the related Subsequent Transfer Instrument delivered
by the Seller on January 20, 1997 generally conform to the representations and
warranties of the Insurance Agreement (the "Insurance Agreement") dated as of
December 1, 1997 among MBIA Insurance Corporation (the "Bond Insurer"), NovaStar
Financial, Inc., as Seller, the NovaStar Home Equity Loan Trust Series 1997-2,
as issuer, NovaStar Assets Corp., NovaStar Mortgage, Inc., as Servicer, Merrill
Lynch Mortgage Investors, Inc., as Company and First Union National Bank, as
Indenture Trustee and such Subsequent Mortgage Loans are acceptable to the Bond
Insurer.
(b) The undersigned is a duly authorized representative of the Bond
Insurer and is authorized to execute and deliver this certificate.
<PAGE>
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to them in the Purchase Agreement.
IN WITNESS WHEREOF, I have hereunto signed my name.
MBIA INSURANCE CORPORATION
Dated: January 20, 1998 By: /s/ Bruce Legan
--------------------
Name: Bruce Legan
Title: Vice President
