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EXHIBIT 8
[KATTEN MUCHIN & ZAVIS LETTERHEAD]
February 28, 1997
Household Finance Corporation Household Consumer Loan Corporation
2700 Sanders Road 1111 Town Center Drive
Prospect Heights, Illinois 60070 Las Vegas, Nevada 89134
Re: Household Consumer Loan Asset Backed Notes, Series
1997-1, Class A-1, A-2 and A-3 Notes (the "NOTES").
Ladies and Gentlemen:
We have acted as special counsel to Household Finance Corporation, a
Delaware corporation (the "SERVICER"), Household Consumer Loan Corporation, a
Nevada corporation (the "SELLER"), and Household Consumer Loan Trust 1997-1, a
Delaware business trust (the "ISSUER") for the purpose of rendering various
opinions on matters related to the Notes and Certificates to be issued by the
Issuer. The certificates represent undivided beneficial interests in the
Issuer (the "CERTIFICATES"). This opinion (this "OPINION") is delivered in
connection with the closing of the offering for the Notes registered on Form
S-1 (Registration No. 333-20147) and Form S-3 (Registration No. 333-20147-01
and 333-20147-02), as amended (the "REGISTRATION STATEMENT") with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended, relating to the Notes.
You have asked for our opinion under the United States Federal income tax
laws and the Employee Retirement Income Security Act of 1974, as amended
("ERISA") as to the characterization of the Notes, and whether the Deposit
Trust or the Issuer will be characterized as an association (or publicly-traded
partnership) taxable as a corporation. Based upon our review of the Reviewed
Documents (defined herein) and certain assumptions and representations of the
parties to this transaction described in this Opinion and for the reasons
hereinafter set forth, it is our opinion (i) that the Notes will be
characterized as indebtedness for Federal income tax purposes, (ii) that
neither the Deposit Trust nor the Issuer will be characterized as an
association taxable as a corporation, or as a publicly-traded partnership
taxable as a corporation, for Federal income tax purposes, and (iii) that the
Notes will be classified as indebtedness without substantial equity features
for purposes of ERISA.
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[KATTEN MUCHIN & ZAVIS LETTERHEAD]
Household Finance Corporation
Household Consumer Loan Corporation
February 28, 1997
Page 2
This Opinion is for the benefit of and may be relied upon by (a) Lehman
Brothers, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan
Securities Inc. and Bear, Stearns & Co. Inc. as underwriters and their counsel,
Brown & Wood LLP, in connection with respective transactions contemplated by
the Underwriting Agreement for the sale of the Notes, (b) Moody's Investors
Service, Inc., Standard & Poor's Ratings Group, Duff & Phelps Credit Rating
Co., and Fitch Investors Service, Inc., in connection with the rating of the
Notes, (c) Texas Commerce Bank National Association, in its respective capacity
as Trustee for the Deposit Trust (the "DEPOSIT TRUSTEE"), (d) The Chase
Manhattan Bank Delaware in its respective capacity as Trustee for the Issuer
(the "OWNER TRUSTEE"), and (e) The Bank of New York as Trustee under the Trust
Indenture for the Notes (the "INDENTURE TRUSTEE" and the "INDENTURE"
respectively), (f) our clients named above, and (g) prospective investors in
and purchasers of the Notes. (The persons listed in the foregoing sentence are
hereinafter referred collectively as the "RELIANCE PARTIES"). This Opinion may
not be relied upon by, nor may copies be filed with or delivered to, any other
person or used for any other purpose without our prior written consent.
Capitalized terms for which meanings are provided in the Indenture, unless
otherwise defined herein, are used herein with such meanings. The opinions
expressed herein are based solely upon and limited to the United States Federal
income tax laws, and the laws under ERISA. We do not express any opinion
herein concerning any other law.
DOCUMENTS REVIEWED; INVESTIGATION; ASSUMPTIONS
In connection with this Opinion, we have examined the Registration
Statement of the Issuer and the exhibits thereto, as such exhibits have been
finalized (the "REVIEWED DOCUMENTS"). These include, in particular, the
following documents:
a) The Trust Agreement (the "TRUST AGREEMENT") between
the Seller and the Owner Trustee;
b) The Indenture;
c) The Administration Agreement among the Seller, the
Servicer and the Owner Trustee;
d) The Pooling and Servicing Agreement (the "POOLING AND
SERVICING AGREEMENT") dated as of September 1, 1995, among
the Seller, the Servicer and the Deposit Trustee, including
exhibits thereto;
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[KATTEN MUCHIN & ZAVIS LETTERHEAD]
Household Finance Corporation
Household Consumer Loan Corporation
February 28, 1997
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e) The Series 1997-1 Supplement, pursuant to which a
participation interest in consumer receivables and
participation interests (the "SERIES 1997-1 PARTICIPATION")
will be issued to the Seller for conveyance to the Issuer;
and
f) The Receivables Purchase Agreement dated as of
September 1, 1995, between the Seller as purchaser and
various subsidiaries of the Servicer for the purchase of
consumer loan receivables by the Seller.
In our examination of the Reviewed Documents, we have assumed the genuineness
of all documents submitted to us as originals, the conformity to originals of
all documents submitted to us as copies and the authenticity of the originals
from which any such copies were made, none of which assumptions have we
independently confirmed.
In our examination, we have further assumed, without independent
investigation, the following:
a) The due execution and delivery of the Reviewed
Documents by the parties thereto;
b) The full legal power and authority of the parties
thereto to execute, deliver and perform their obligations
under the Reviewed Documents;
c) The fulfillment of and material compliance by the
parties thereto with all the terms and conditions of the
Reviewed Documents, the accuracy of all representations and
warranties contained therein, and the binding effect and
enforceability of the Reviewed Documents against the parties
thereto;
d) That the conduct of the parties to the Reviewed
Documents with respect to the transactions contemplated
thereby complies with any requirement of good faith, fair
dealing, and conscionability, and that there will not be any
mutual mistake of fact or misunderstanding, fraud, duress, or
undue influence that would serve as a basis for
non-performance of any of the terms and conditions of the
Reviewed Documents.
We are also relying upon certain representations of the officers of the
Servicer and the Seller, as referred to herein.
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[KATTEN MUCHIN & ZAVIS LETTERHEAD]
Household Finance Corporation
Household Consumer Loan Corporation
February 28, 1997
Page 4
This Opinion is expressly subject to there being no material change in the
law after the date of this Opinion, and assumes without further investigation
that all assumptions and facts set forth herein are and remain true and valid.
However, with respect to the assumptions we have made herein, nothing has come
to our attention which conflicts with such assumptions. This Opinion is given
as of the date hereof, and we expressly disclaim any obligation to update this
Opinion or to give notice to any Reliance Party of any future change in facts
or law that might affect the opinions set forth herein. Captions used in this
Opinion are for convenience only, and should not be regarded as having any
independent meaning.
1. CHARACTERIZATION OF THE NOTES. The question of whether a financial
instrument qualifies as "indebtedness" for Federal income tax purposes is
determined under relevant case law, rather than by any statute or regulations.
The multitude of cases addressing this issue rely on numerous and varying
factors in reaching their conclusions, many of which are subjective in nature,
and no case or ruling addresses the income tax consequences of a transaction on
the precise facts of the issuance of the Notes. However, we have arrived at
our conclusion that the Notes will be treated as "indebtedness" for Federal
income tax purposes based upon an application of the factors commonly used in
this analysis, as follows:
(a) The Form of the Instrument. The Notes are in the
form of debt instruments, administered under a
collateral trust indenture having an independent
institutional trustee. The Notes constitute a written
unconditional promise to pay on a specified date a sum
certain in money in return for an adequate
consideration in money.
(b) Fixed Maturity Date. The Notes have a fixed
maturity date of approximately 10 years from issuance,
within the range of commonly found forms of
indebtedness.
(c) Fixed Interest Rate. The Notes bear interest at a
stated, fixed rate, reset periodically based upon
changes in an objective index, and the calculation of
interest due will not be contingent upon the income or
profits of the Issuer.
(d) Relative Assurance of Repayment. Upon issuance,
the Notes must be rated AAA for the Class A-1 Notes,
AA for the Class A-2 Notes, and A for the Class A-3
Notes or their equivalent by two or more of the Rating
Agencies. The Notes are secured upon issuance
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Household Finance Corporation
Household Consumer Loan Corporation
February 28, 1997
Page 5
by a first perfected security interest in the Series
1997-1 Participation, the principal amount of which
exceeds the Security Balance of the Notes by the
amount of (i) the Security Balances of the Class B
Notes and the Certificates, and (ii) the
Overcollateralization Amount, and the Pass-Through
Rate of which exceeds the weighted average interest
rate of the Notes. By the terms of the Indenture,
principal payments are to be made on the Notes in
proportion to reductions in the principal balance of
the Series 1997-1 Participation Invested Amount, with
certain additional payments, so that the Notes remain
fully secured at all times.
(e) Remedies to Enforce Payment of Principal and
Interest. Pursuant to the Indenture, Noteholders will
have the right to exercise remedies in the event of a
default in the payment of principal and interest in a
full and timely manner, which remedies are typical of
the remedies afforded to secured lenders. We expect
the Indenture Trustee and the Noteholders would
exercise such remedies, and there is nothing to
indicate they would not. Similarly, the Issuer and
the Certificateholders should expect that if the debt
to the Noteholders is not repaid in accordance with
its terms, such remedies will be exercised against the
Issuer and its assets.
(f) Convertibility. The Notes are not convertible
into Certificates of the Issuer or other forms of
equity in the Issuer.
(g) Participation in Management. Noteholders will
acquire no right to participate in management of the
Issuer as a result of purchasing Notes, absent
default. As stated above, the default remedies in the
Notes are customary.
(h) Relative Seniority of the Notes. The Notes will
be senior debt of the Issuer (the Notes being
subordinated only inter se), and are in fact expected
to be the only debt of the Issuer other the Class B
Notes issued pursuant to the Indenture and the
Issuer's obligations to service providers and certain
governmental fees and assessments.
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[KATTEN MUCHIN & ZAVIS LETTERHEAD]
Household Finance Corporation
Household Consumer Loan Corporation
February 28, 1997
Page 6
(i) Intent of the Parties. By the terms of the Indenture,
the Issuer, the Indenture Trustee and the Noteholders
each agree to treat the Notes as indebtedness for
Federal, state and local income and franchise tax
purposes.
(j) Commonality of Lenders and Owners. The Notes will
not be paired with the Certificates, and are being
sold in a separate offering. There will be no
necessary relationship between the Class A Noteholders
and the Certificateholders or the Seller. Because of
differences in interest indicies and certain
accelerated principal payments on the Notes, there is
not precise matching, as a contractual matter, of the
payment terms on the Issuer's assets and the terms of
the Notes.
(k) Adequate Capitalization of the Issuer. The Notes
are senior in right of payment to the Certificates and
the Holdback. The Certificates themselves are similar
to securities issued in prior offerings related to the
Deposit Trust, credit rated by the Rating Agencies,
and sold to investors unrelated to the Seller.
(l) Ability to Borrow from Third Parties. The
Issuer's activities are restricted by the terms of the
Trust Agreement, and forbid its borrowing other than
through issuing the Notes and the Class B Notes. The
purchase of the Notes by third parties pursuant to the
offering by the Underwriter is indicative of the Notes
qualifying as debt.
See R.A. Hardman, 87-2 USTC Paragraph 9523, 827 F.2d 1409 (9th Cir. 1987)
(applying factors to purchase note between shareholder and corporation); Fin
Hay Realty Co. v. U.S., 68-2 USTC Paragraph 9438, 398 F.2d 694 (3rd Cir.
1968)(applying factors to shareholder loans to corporation); Nassau Lens Co. v.
CIR, 62-2 USTC Paragraph 9723, 308 F.2d 39 (2d Cir. 1962)(discussing relative
importance of subjective intent and objective standards in related-party
transaction); Willis L. Wright, 63 TCM 1965 (1992)(parties must have good faith
intent to act as borrower and lender); RACAL Electronics, Inc., 60 TCM 756
(1990)(applying factors to intercompany loan). See generally Mertens Law of
Federal Income Taxation, Section 26.16 (Clark Boardman Callaghan); Plumb, "The
Federal Income Tax Significance of Corporate Debt: A Critical Analysis and a
Proposal", 26 Tax Law Review 369 (1972).
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[KATTEN MUCHIN & ZAVIS LETTERHEAD]
Household Finance Corporation
Household Consumer Loan Corporation
February 28, 1997
Page 7
The IRS has announced its intent to scrutinize financial instruments
designed as debt for Federal income tax purposes, but as equity for regulatory,
rating agency or financial accounting purposes, to see if their purported debt
status for tax purposes is appropriate. Such instruments include those having
a variety of equity features, including an unreasonably long maturity or an
inability to repay the instrument's principal with the Issuer's equity. Notice
94-47, I.R.B. 1994-19, 9. The President's most recent budget proposal contains
legislation that would recharacterize instruments purporting to be debt as
equity. The Notes have none of the characteristics described in the Notice or
the President's proposal. It should be noted that under Section 385 of the
Internal Revenue Code (the "CODE"), the Treasury is authorized to prescribe
such regulations as may be necessary or appropriate to determine whether an
interest in a corporation is to be treated for purposes of the Code as stock or
indebtedness, or as part stock and part indebtedness. Such regulations were
proposed in 1980 and withdrawn in 1983. While those regulations, as proposed,
did not squarely address the treatment of noncorporate asset-backed securities
such as the Notes, and gave the IRS substantial discretion in their
application, it is our belief the Notes would have qualified as indebtedness
for Federal income tax purposes under the principles of those regulations.
However, there can be no assurance that in the future, the Treasury will not
issue regulations under Code Section 385, or issue other rulings, which call
into question the income tax characterization of the Notes. If the Notes were
recharacterized as equity, such could have the result of causing the Issuer to
be treated as a "publicly-traded partnership", with the consequences described
below.
2. CHARACTERIZATION OF THE DEPOSIT TRUST AND THE ISSUER. In form, the
Deposit Trust is a common-law trust, and the Issuer is organized as a trust
under the Delaware Business Trust Statute. However, an arrangement for the
conveyance to trustees of legal title to property for the benefit of
beneficiaries will not be classified as trusts for purposes of the Code if they
are more than arrangements simply to protect or conserve the property for the
beneficiaries. Trusts created by or on behalf of the beneficiaries simply as a
device to carry on a profit-making business which normally would have been
carried on through business organizations classified as corporations or
partnerships will not qualify as trusts under the Code if the organization more
nearly resembles an association or a partnership rather than a trust. In
particular, an investment trust will not be classified as a trust if there is a
power under the trust agreement to vary the investment of the
certificateholders. Treas. Regs. Section 301.7701-4(b), (c). We have been
asked to opine as to whether either the Deposit Trust or the Issuer would be
characterized as an association taxable as a corporation.
New regulations have been issued by the Treasury Department effective
January 1, 1997, which provide that any entity not otherwise treated as a trust
for Federal income tax purposes,
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Household Consumer Loan Corporation
February 28, 1997
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formed without being incorporated or referred to as a corporation or body
corporate under an applicable state or Federal statute, and otherwise not
falling within certain categories inapplicable here, will not be taxable as a
corporation unless it so elects. The Seller has represented to us no election
will be made to have the Deposit Trust or the Issuer treated as a taxable
corporation. Under these terms and conditions, and based upon our conclusions
under the following sections 3 and 4, it is our opinion that neither the
Deposit Trust nor the Issuer will be an association taxable as a corporation,
because (i) it is formed as a noncorporate entity, (ii) it will not elect to be
taxed as a corporation, and (iii) it will not be taxable as a corporation under
other provisions of the Code. See Treas. Regs. Section 301.7701-2(b), -3(a),
(b).
3. PUBLICLY-TRADED PARTNERSHIPS. We have been asked to opine as to
whether the Deposit Trust or the Issuer would be deemed a "publicly-traded
partnership" taxable as a corporation under Code Section 7704. It is our
opinion, based upon the assumptions and caveats set forth herein, that neither
the Deposit Trust nor the Issuer will be a publicly-traded partnership taxable
as a corporation for such purposes. In this respect, we note that in 1988, the
IRS issued guidelines for determining when it would refrain from characterizing
a partnership as being "publicly-traded". These guidelines, set forth in
Notice 88-75, are incorporated within the restrictions on the transfer of
interests in the Deposit Trust.
Notice 88-75 merely provides a "safe harbor", compliance with which
assures a partnership that it will not be challenged by the IRS as being
"publicly-traded". Noncompliance with such guidelines does not mean that the
partnership will be successfully characterized as publicly-traded, only that
the IRS need not refrain from challenging its status as such. Near the end of
1995, the Treasury promulgated regulations under Section 7704 which supersede
Notice 88-75 with respect to the Issuer immediately, and with respect to the
Deposit Trust after 2005. Both the Pooling and Servicing Agreement and the
Trust Agreement include restrictions on transferability of interests and
Certificates, respectively, that meet the applicable guidelines and
regulations. These agreements further empower the Seller to impose such
additional restrictions as may be required by subsequent changes in law,
judicial rulings or administrative pronouncements, to avoid having the Deposit
Trust and the Issuer treated as a publicly-traded partnership.
The Issuer's ability to avoid being characterized as a publicly-traded
partnership depends upon the Notes being characterized as indebtedness for
Federal income tax purposes, in that no restrictions are being placed on the
transferability of the Notes or the Class B Notes for this purpose. If either
class of Notes was characterized as an equity interest in the Issuer, and the
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Household Consumer Loan Corporation
February 28, 1997
Page 9
Issuer qualified as a partnership for Federal income tax purposes, then there
would be nothing to prevent the Issuer from being characterized as a
publicly-traded partnership.
Even if the Deposit Trust or the Issuer were characterized as a
publicly-traded partnership, it could avoid being taxed as a corporation if its
income met certain tests and it was not otherwise considered to have derived
such income "in the conduct of a financial business." It is possible the
Deposit Trust or the Issuer could meet this test, but no assurance can be given
in this regard, due to a lack of applicable authority interpreting the meaning
of "financial business" for purposes of Code Section 7704.
4. TAXABLE MORTGAGE POOL RULES. When asset-backed securities (such as the
Notes) are issued in two or more classes by any entity substantially all of
whose assets consist of direct and indirect interests in debt obligations (such
as the Issuer), the entity will be classified as a "taxable mortgage pool"
under the rules of Code Section 7701(i) if, among other factors, more than 50%
of the debt obligations it holds at the time of issuance of the asset-backed
securities (a "testing date") consist of loans secured by interests in real
estate. A taxable mortgage pool is taxable as a corporation which may not be
included within a consolidated return. The Seller has represented that upon
the Closing Date, and upon any modification of the Class B Notes, no more than
45% of the Receivables by aggregate Balance will be secured by interests in
real estate. Based upon such representation and our review of the Pooling and
Servicing Agreement, it is our opinion that the Issuer is not a "taxable
mortgage pool" as of that "testing date". We express no opinion concerning the
effect of new issuances of asset-backed securities by the Deposit Trust or the
Issuer. We note, however, that to avoid having the Issuer or the Deposit Trust
classified as a taxable mortgage pool in the future, the Pooling and Servicing
Agreement prohibits the Seller from acquiring Principal Receivables secured by
liens on real estate if such acquisition would cause such Principal Receivables
to amount to 45% or more of the cost of all Principal Receivables held by the
Deposit Trust, and to obtain an opinion of counsel prior to the issuance of any
new Series Participation Interests or Investor Certificates that such action
will not cause the Deposit Trust, the Issuer, or any portion of either to be a
taxable mortgage pool.
5. ERISA OPINION. You have asked our opinion as to the treatment of the
Notes under United States Department of Labor ("Labor") regulations concerning
the definition of what constitutes the assets of an employee benefit plan
subject to ERISA or plans or arrangements subject to Code Section 4975 (a
"PLAN") and the prohibited transaction provisions governing Plans (the "PLAN
ASSETS REGULATION") codified in 29 C.F.R. 2510.3-101. The Plan Assets
Regulation provides that, if a Plan acquires an "equity interest" in an entity
that is neither a "publicly-offered security" (as defined therein) nor a
security issued by an investment company registered under the
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Household Finance Corporation
Household Consumer Loan Corporation
February 28, 1997
Page 10
Investment Company Act of 1940, the assets of the entity will be treated as
assets of the Plan and thus as "Plan Assets" unless certain exceptions apply.
Under the Plan Assets Regulation, the term "equity interest" is defined as any
interest in an entity other than an instrument that is treated as indebtedness
under "applicable local law" and which has no "substantial equity features."
Labor Regs. Section 2510.3-101(b)(1). Although the Plan Assets Regulation is
silent with respect to the question of what law constitutes "applicable local
law" for this purpose, Labor has stated that these determinations should be
made under the state law governing interpretation of the instrument in
question. Preamble to the Plan Assets Regulation, 51 FR 41262 (Nov. 13, 1986),
III.B.(1). We assume for these purposes that the applicable local law will be
the laws of the State of New York, as provided in the Indenture. In the
preamble to the Plan Assets Regulation, Labor declined to provide a precise
definition to what features are equity features or the circumstances under
which such features would be considered "substantial", noting that the question
of whether a Plan's interest has substantial equity features is an inherently
factual one, but that in making a determination it would be appropriate to take
into account whether the equity features are such that a Plan's investment
would be a practical vehicle for the indirect provision of investment
management services. Id., at III.B.(2). Based upon our review of the Reviewed
Documents, the credit ratings which will be assigned to the Notes, the
collateral securing the Notes, our opinion as to the treatment of the Notes for
Federal income tax purposes, and the plain language of the Plan Assets
Regulation, it is our opinion that the Notes will be classified as indebtedness
under the applicable local law without substantial equity features for ERISA
purposes. Please be aware that this opinion is not binding upon Labor and if,
contrary to this opinion, the Notes are not deemed to be indebtedness without
substantial equity features and no statutory, regulatory or administrative
exemption applies, the Issuer could be considered to hold Plan Assets by reason
of a Plan's investment in the Notes.
6. PROSPECTUS DISCUSSION. We have reviewed the discussion in the section
of the Prospectus forming a part of the Registration Statement (the
"Prospectus") entitled "CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES", and
it is our opinion that the contents thereof are materially correct as to
matters of law. In rendering this opinion, we have relied upon representations
of officers of Household Finance Corporation as to matters of fact.
Very truly yours,
KATTEN MUCHIN & ZAVIS