A substantive non-consolidation opinion is a common feature of structured finance transactions in the U.S. Most, if not all, opine as to what a bankruptcy court would do, but express no opinion on the appellate process. We would venture a guess that most opinion recipients assume that if the bankruptcy court gets it wrong, their rights will be vindicated on appeal. The Eighth Circuit opinion in Opportunity Finance¹ casts a troubling shadow over that assumption.

Background

What happens when a debtor, whose loan is pooled and securitized, files for bankruptcy? Are payments made to investors recoverable as fraudulent transfers or preferences?

In what appears to be a matter of first impression, the U.S. Bankruptcy Court for the Northern District of Illinois recently held that payments made to investors in a two tiered securitization structure commonly employed in commercial mortgage-backed securitization (“CMBS”) transactions are largely protected from fraudulent or preferential transfer claims by the securities contract safe harbor set forth in Bankruptcy Code section 546(e). Specifically, in Krol v.