1. finance
2. personal finance
3. lending
4. personal loans

ANATOMY OF A LEGAL OPINION
By Barry W. Hunter
Although loan officers are now much more involved in negotiating and approving loan
documents than was historically the case, they still, in most transactions, defer totally to counsel
for approval of the legal opinion. In some instances, a lender will require use of a form opinion
in a transaction without adequately understanding what is being required of the attorney to render
such an opinion, thereby causing the customer to incur costs which outweigh the benefits to be
derived by the lender. A number of articles have been written and reports prepared by Bar
Association committees to assist attorneys in the delivery of opinions1, but little guidance has
been available to a loan officer trying to grasp the technicalities of opinion drafting. This article
is intended to afford the loan officer with a basic understanding of legal opinions and provide
some general guidance as to what kinds of opinions he or she should expect to receive in a
typical loan transaction. It is, however, beyond the scope of this Article to compare all of the
legal opinion forms that have been developed across the country and for different types of
transactions. If the reader desires more detail about the opinion process and the important
nuances in regional variations of opinion forms, he or she can review the articles and reports
described in the footnote.
I will first examine the need and purpose for a legal opinion in a loan transaction and,
then, dissect a typical opinion that would be rendered in a simple loan transaction, explaining the
major components: scope, assumptions, substantive opinions, and qualifications.
NECESSITY
General
Although there are some limited circumstances in which a lender might reasonably close
a loan without receiving a legal opinion, in most cases, a lender should receive, from counsel
representing the borrower, an opinion covering the basic elements of the transaction. If the
transaction has any unusual characteristics or collateral, the lender should also require additional
opinions to reduce the lender's risk regarding those peculiarities. When a lender makes a credit
loan to a known borrower using the lender’s form documentation (and the loan is closed in the
presence of the lending officer), a cost-benefit analysis might suggest that requiring an opinion
would not be justified. However, if a new borrower, nonuniform documentation, or significant
collateral is involved, prudence dictates that the lender require an opinion. In most of these
cases, the borrower is already represented by counsel and the delivery of an opinion is not
burdensome to the transaction.
Commitment Letter
1
For a report on mortgage opinions and citations to other selected articles and reports on legal opinions see
Association of the Bar of the City of New York, Committee on Real Property Law, Subcommittee on Mortgage
Loan Opinions and the New York State Bar Association, Real Property Law Section, Attorney Opinion Letters
Committee, Mortgage Loan Opinion Report, 54 Bus. Law. 119 (1998).
The requirements for legal opinions which lenders include in their loan commitments
vary from simply requesting an "opinion letter in form and substance acceptable to lender" to
mandating delivery of an opinion which is attached to the loan commitment as an exhibit. The
simplest approach, of course, avoids the necessity of having to amend the commitment as
opinion requirements are modified and postpones the need for the parties to engage in what they
consider an incidental discussion. Nevertheless, such an approach fails to put the borrower and
its counsel on notice as to the lender’s expectations regarding opinions. All lenders who have
experienced a delay in closing because of a dispute between borrower's counsel and lender's
counsel as to the wording of an opinion realize that basic considerations of the opinion need to
be addressed early in the transaction as much as the terms of any of the other loan
documentation. Otherwise, the expectations of counsel may differ and borrower’s counsel may
have insufficient time to conduct the necessary due diligence in order to render the opinion or,
even worse, may refuse to give an opinion the lender thought it would receive.
The practice of attaching a specific form of opinion to the commitment, or specifying
detailed requirements for the opinion within the commitment, however, requires the borrower or
its counsel to negotiate the language of the opinion prior to accepting the commitment. This
approach may unduly slow the process of determining whether the loan will be made at all. The
best course lies somewhere between these two extremes. In a typical loan transaction, I
recommend that the lender either include in the commitment a section indicating the general
requirements of the opinion with the qualification that the borrower’s counsel shall include such
other opinions as the lender shall reasonably request or only state that an opinion of borrower's
counsel shall be required; but in each such case a draft of the required opinion should be
prepared for review by the borrower’s counsel early in the transaction. Any unusual
requirements of the lender dictated by the nature of the transaction, the borrower, or the
collateral, of course, should be identified in the loan commitment.
Although there has been some movement toward standardization of opinion letters, there
is still a significant diversity in approaches and the lender, therefore, should not agree in the
commitment to accept a "customary" opinion. The lender should consult its counsel (assuming
counsel has been retained at the loan commitment stage) as to what is appropriate under the
circumstances; lender’s counsel will be advising the lender as to whether the opinion delivered at
closing satisfies the lender’s particular needs and stated requirements.
PURPOSE
The greatest value a lender will derive from receipt of an opinion of counsel is not the
opinion itself but the due diligence that is conducted by the attorney in order to render the
opinion. To be sure, a lender may look to an attorney to recover an economic loss as a result of a
bad opinion in a transaction, but opinions are not insurance policies and should not be viewed as
such by the lender. Without delving into the niceties of attorney liability, suffice it to say that an
attorney who has exercised the appropriate degree of care may not be liable even if the opinion is
incorrect. The exercise of the appropriate degree of care, however, will require the attorney to
examine the law, documentation, records, etc. before passing judgment on an issue. It is this
process, or due diligence, that gives the lender the true value of the opinion – spotting, and
disclosing, before the transaction closes, deficiencies in parties, their documents, the collateral,
etc. that would prevent the lender from achieving its desired purpose or result. These difficulties
2
can then be corrected or the risk associated with them reallocated in a manner that is satisfactory
to the parties.
CONTENTS
General/Scope
The opinion letter should be addressed to the lender, identify the transaction, and clearly
indicate the parties represented by counsel. It is also customary for counsel to include a list of
the principal documents reviewed, including the transaction documents with respect to which
counsel will be rendering the enforceability opinion. Such a listing, however, should not be
considered as a limitation of counsel’s review. The best practice is to have counsel include a
statement that counsel has reviewed such other documents and made such other inquiry as
counsel deemed necessary in order to render the opinion. If, however, the lender has agreed that
a review of other documentation is not required, counsel may include a statement to the effect
that his or her examination has been confined solely to the enumerated documents. An attorney
generally should not be expected to investigate facts, but should be permitted to rely upon
certifications of third parties as to matters of fact. Certificates stating that a corporation is
incorporated under the laws of a specified jurisdiction, and in good standing thereunder, issued
by the appropriate public officials of that jurisdiction, and certificates of the secretary of a
corporation as to all litigation involving such corporation and all agreements to which the
corporation is a party are examples of certificates which an attorney would review, but rely upon
as to the accuracy of the contents, in rendering his or her opinion. A typical opinion, then, would
list, as the documents reviewed, the commitment letter, the basic loan documents, the
organizational documents of the borrower, certificates of public officials, and certificates of
officers of the borrower.
Assumptions
Every opinion in a loan transaction will contain basic assumptions which should not give
the lender any difficulty. Since an attorney cannot rely on an assumption which he knows is
untrue, a lender can, unless it otherwise agrees, accept the fact that counsel, while assuming
these facts, does not have knowledge to the contrary. A lender might, however, facilitate counsel
rendering an opinion on a specific point by allowing an assumption of a fact which the parties
recognize to be incorrect but unimportant to the recipient of the opinion. Those circumstances
should be limited, however, and the parties should be careful to make absolutely clear the
purpose of the language.
Some customary assumptions include the following:
a)
The other parties to the transaction are duly organized, validly
existing and in good standing under the laws of their jurisdiction of
organization.
b)
The other parties to the transaction have the requisite power and
authority to enter into the Loan Documents and to perform their
obligations thereunder.
3
c)
All signatures (other than those of the Borrower and the
Guarantors) on the Loan Documents are genuine.
d)
Each of the Loan Documents has been duly authorized, executed
and delivered by the parties thereto (other than the Borrower and the
Guarantors) and is enforceable against the parties thereto (other than the
Borrower and the Guarantors).
e)
The documents delivered to us are accurate and complete and each
such document delivered as an original is authentic and each such
document delivered as a copy conforms to the original document in all
respects.
Some other assumptions which may or may not be stated in the opinion (but which are in
most cases likely to be considered assumed even if not stated) are as follows:
a)
b)
The proceeds of the Loan will be used only by the Borrower for
the purposes authorized by the Lender and the Loan Documents.
The Note is issued of value.
c)
The conduct of all parties comply with legal requirements of good
faith, fair dealing and conscionability and there has been no fraud, duress,
undue influence, misunderstanding or mutual mistake of fact.
d)
There are no agreements or understandings among the parties
written or oral and there is no usage of trade or course of prior dealing
among the parties that would define, supplement or qualify the terms of
the Loan Documents.
e)
The Lender has acted in good faith and without notice of any
defense against the enforcement of any rights created by, or adverse claim
to any property or security interest transferred or created as part of the
Loan Documents.
f)
All statutes, rules and regulations are valid and constitutional.
If a transaction closes by mail, or the attorney delivering the opinion is not otherwise
present when the borrower and/or the guarantors execute the documents, the assumption on the
genuineness of the signatures would be expanded to cover those parties. In such a situation, it is
the lender’s choice as to whether such signatures should be notarized even if the document is not
customarily notarized, but counsel should not be expected to opine as to the genuineness of the
signatures if he or she is not present when the documents are signed.
4
Most of the assumptions are self-explanatory and serve the function of allowing the
closing attorney to focus on the principal issues of the loan transaction. For example, counsel to
the borrower should not be expected to investigate whether the lender has properly authorized
and executed a loan agreement even though the validity and enforceability of the loan agreement
would, in part, depend upon whether such authorized execution occurred. The purpose of the
opinion is to make sure the borrower goes through the necessary steps to make the contract
enforceable against the borrower, but not to have its counsel incur unnecessary expense to verify
for the lender what the lender should already know.
Substantive Opinions
Organization and Valid Existence.
The first item in an opinion should address the organization of the borrower. Without a
duly created borrower, there would be no entity to receive the loan proceeds and no entity
against which the lender could enforce the loan covenants. Typical language regarding existence
and good standing of a corporate borrower would read as follows: "The Borrower is a duly
organized and validly existing corporation in good standing under the laws of the State." Such
an opinion provides the lender with assurances that a charter has been issued by the appropriate
state officials, that the corporation has paid all of its annual franchise fees and that no articles of
dissolution have been filed. In short, the lender has a borrower with which it can transact
business.
If the borrower is an entity other than a corporation, such as a general partnership, a
limited partnership, limited liability company, or trust, different language may be required. For
example, the following language would be acceptable when the borrower is a general
partnership: "The Borrower was duly formed as a general partnership under the laws of the
State, and to the best of our knowledge, information, and belief, there has been no act of
dissolution thereof." Since a general partnership can exist without the filing of any
documentation with a governmental entity and because events, such as the death of a general
partner, can cause the dissolution of the general partnership, this somewhat diluted opinion
language should be acceptable. Nevertheless, the dissolution of a general partnership does not
terminate its existence, and the customary corporate language of "duly organized and valid
existing" will also work. A dissolved general partnership, however, would not have the power to
enter into a loan transaction which is not part of the winding up of the entity.
Due Authorization, Execution and Delivery.
In order for a party to be bound to a contract, the contract must be validly created. To
validly create an obligation of a party, the agreement must be authorized by the entity, executed
by the proper officer or agent and delivered to the lender. The borrower’s counsel should review
the state statutes, organizational documents, resolutions, shareholder agreements, etc. to insure
that the client has complied with these requirements. Execution and delivery are, of course,
self-explanatory. Typical language regarding this element of establishing a valid contract would
read as follows: "The Borrower has the necessary corporate authority to enter into and perform
its obligations under the Loan Documents and each of the Loan Documents has been duly
authorized, executed and delivered by the Borrower." This opinion is not intended to provide the
5
lender comfort that the borrower is in compliance with laws or has all governmental approvals
required for operating its businesses or properties. Opinions dealing with such issues should be
dealt with separately elsewhere in the opinion letter. Here, by restricting the application of the
opinion to "corporate authority", "authority under partnership law", "authority under limited
liability company statutes", etc. the attorney is concerning himself or herself solely with what is
necessary for that particular type of borrower to create a valid contract under general contract
law.
Enforceability.
The enforceability opinion is the real meat of the opinion letter. Subject to the
assumptions and qualifications, this opinion is what tells the lender that if the borrower defaults
under the loan documents, the lender can sue for repayment and enforce its collection remedies
against the borrower and the collateral. As will be discussed below, many of the qualifications
of the opinion deal with carve-outs to the enforceability opinion. Typical language for the
enforceability opinion would read as follows: "Each of the Loan Documents constitutes a valid
and binding legal obligation of the Borrower, enforceable in accordance with its terms." Without
more, this opinion would tell the lender that if a borrower failed to repay the loan or comply with
any of the provisions set forth in the loan documents, the lender could enforce any and all the
rights and remedies enumerated in the loan documents. No opinion, however, goes this far. In
the event of the borrower's bankruptcy, the rights of the lender are curtailed; the conduct of the
parties after execution of the documents can alter the rights of the parties; and lenders, of course,
include rights or remedies that might be enforceable, but which haven't been clearly sanctioned
by statutes or case law. Consequently, this opinion is circumscribed by specific or general
qualifications as discussed below.
No Conflict.
It is appropriate in every loan transaction to require that the closing attorney state that the
execution and delivery of the documents as well as the performance of the documents will not
breach the organizational documents of the borrower. Before requiring an opinion that it would
not cause a breach or default under other agreements to which the borrower is a party, however,
the lender should engage in a cost-benefit analysis. Would the breach of another agreement to
which the borrower is a party be significant enough in the instant loan transaction to justify the
expense associated with counsel reviewing those other documents? To make a determination as
to whether another agreement would be breached by entering into the loan transaction
necessarily involves some legal analysis. Accordingly, counsel cannot rely upon the borrower to
make that determination and a certificate of the borrower to that effect would be worthless. The
attorney could only obtain a certificate of the borrower as to the agreements to which the
borrower is a party (i.e. deliver a certificate as to facts) and then review each of the agreements
in order to determine whether a conflict exists. In many loan transactions which are adequately
secured, a breach or default under another agreement would not prevent the lender from making
the loan. There are, however, circumstances in which such a breach or default of another
agreement would be material to the credit of the borrower and the lender would not proceed with
the transaction under those circumstances. Typical language for this type of opinion would read
as follows: "The execution and delivery by the Borrower of the Loan Documents and the
performance by the Borrower of its obligations thereunder do not constitute a breach or result in
6
a violation of (i) the Borrower’s Articles of Incorporation or Bylaws, or (ii) any agreement to
which the Borrower is a party or by which it is bound."
All Consents.
As a general proposition, an opinion that all consents have been obtained should not be
required or given in a typical loan transaction secured by real estate or other collateral. There are
a couple of reasons for this: first, except for a limited group of borrowers in regulated industries
(such as utility companies), a borrower will not need to obtain approval from a governmental
agency in order to execute and deliver loan documentation; and, second, to the extent the opinion
covers performance under the loan documents, counsel should recognize that governmental
approvals are in fact required. If, for example, the loan documents require reconstruction of
improvements after a casualty loss, building permits, site plan approvals, environmental
authorization, etc., would be required before commencement of construction. In short, if the
lender is dealing with a borrower in a regulated industry, such an opinion or an adaptation
thereof may be required. If the borrower is not in a regulated industry, the lender should
reconsider whether the opinion is necessary. If requested, the lender should be prepared to
accept an opinion that is limited to the execution and delivery of the documents and possibly the
performance of the payment obligations under the loan documents. It should not, however,
expect to receive an opinion with respect to the performance of the borrower’s obligations under
loan documents which include activities that would require future consents and permits. Typical
language for a consents opinion would read as follows: "No consent, authorization, or approval
of any agency or authority of the State is required for the execution, and delivery of the Loan
Documents".
Compliance with Laws.
A lender should never request an opinion to the effect that the borrower is or will be in
compliance with all applicable laws. There are no circumstances that can justify the cost of
undertaking such an exhaustive examination which, by its very nature, would be incomplete in
any event. More importantly, if the lender is represented by counsel and such an opinion is
requested and obtained, a question would exist as to whether the lender would be entitled to rely
upon the opinion. The opinion is overbroad and no counsel is capable of effectively rendering
such an opinion. This is not to suggest that if the lender wants some comfort on a particular issue
that the lender should not be able to request it. The lender should focus on particular issues to be
addressed rather than trying to cover the waterfront. In many cases it would also be
inappropriate to request an opinion to the effect that the transaction or the performance of the
loan documents will be in compliance with all applicable laws, depending upon the type of loan
and the covenants contained in the documents. Similar to the opinion regarding consents, an
opinion to the effect that future performance of loan covenants will be in compliance with laws
cannot be given if those covenants relate to activities that require governmental approvals,
permits, etc. The closing attorney, however, should be able to opine as to the performance of
payment obligations which do not involve the operation of a business or the maintenance, repair,
reconstruction or foreclosure of collateral. Typical language for this type of opinion would read
as follows: "The execution and delivery of the Loan Documents by the Borrower and the
performance of the payment obligations thereunder will not result in a violation of any applicable
federal or state law, rule, or regulation."
7
No Litigation.
It is customary for lenders to receive a no litigation opinion in loan transactions. This is
one exception to the rule that counsel should not be rendering an opinion as to a factual matter,
and is simply a custom established over a long period of time. The lender could as easily rely
upon the representations of the borrower in the loan documents regarding matters involving
litigation. In any event, counsel to the borrower will except from the opinion any litigation
reported by the borrower based upon a certificate of the borrower. The end result is that the
lender will review the litigation with the borrower in order to determine the effect upon the
transaction and the credit of the borrower - the opinion is really of little practical value. The
lender, however, should not expect counsel to examine court records, to pass judgment on
threatened litigation which is not in writing and disclosed to counsel, or litigation that might
affect a borrower's properties but with respect to which the borrower is not a party. Typical
language for the litigation opinion would read as follows: "To the best of our knowledge,
information and belief, there is no litigation, at law or in equity, or any proceeding before any
governmental agency involving the Borrower pending, or overtly threatened in a written
communication, in which any liability of the Borrower is not adequately covered by insurance or
in which any judgment or order would have a material adverse effect upon the business, assets or
condition of the Borrower or which would affect the Borrower’s existence or authority to do
business, or raising any questions concerning the validity of any of the Loan Documents or the
performance of the obligations of the Borrower thereunder."
Qualifications
State of Practice.
The first qualification the lender is likely to encounter in an opinion is the practice
qualification. The closing attorney will state that he or she is licensed to practice law in a
particular jurisdiction and will be rendering an opinion as to the laws of that jurisdiction,
exclusive of its conflicts of laws principles. The closing attorney will exclude coverage of the
principles of conflicts of laws to avoid inadvertently rendering an opinion on the laws of another
jurisdiction when, after application of the laws of the attorney's jurisdiction of practice, the laws
of the other jurisdiction would govern the transaction. In most loan transactions, this
qualification is an acceptable one, but in multi-state transactions careful consideration has to be
given to the choice of law principles and whether such a qualification would result in a need for
an opinion of counsel in another state.
Enforceability Exceptions,
Bankruptcy
The bankruptcy exception is typical and should be accepted in virtually all loan
transactions. Sometimes the terms "fraudulent conveyance" are not expressly included within
the bankruptcy exception, but is implicitly recognized as part of that exception. Careful counsel,
however, might want to include the terms to make it clear that that principle is excluded from the
opinion coverage. In loan workouts and in certain circumstances where a fraudulent conveyance
might be involved, the lender may need to request a special opinion from recognized bankruptcy
8
counsel. The typical commercial or real estate lawyer, however, should not be expected to
render opinions in this specialized area. Typical language for this qualification would read as
follows: "Our opinion on the validity and enforceability of the obligations of the Borrower as
contained in the Loan Documents is subject to the provisions of applicable federal or state
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, or similar laws
relating to or affecting the enforcement of, creditors rights generally, now or hereafter in effect,
and to any judicially developed doctrines related thereto."
General Equitable Principles
If any of the provisions of the loan documents are challenged, a court will, when
considering enforceability, concern itself with the conduct of the parties subsequent to closing
the loan transaction. An attorney cannot be expected to render an opinion on matters that will be
judged by such subsequent conduct and, consequently, will exclude from his or her
enforceability opinion, the effects of equitable principles. Language which attorneys include in
their opinions to achieve this exclusion, and which lenders should readily expect, might read as
follows: "Our opinion on the validity, binding nature and enforceability of the Loan Documents
is subject to the general principles of equity, regardless of whether considered in a proceeding at
law or in equity." The following language might also be included in the opinion as a part of the
equitable considerations limitation of the opinion: "We express no opinion that any particular
provision of any of the Loan Documents will be enforceable by a decree of specific performance
or other equitable relief or that enforcement thereof may not be limited by defenses such as
estoppel, waiver, or other equitable considerations."
General Exception.
As previously mentioned, lenders traditionally include in their loan documents provisions
for which no precedent exists to establish conclusively their enforceability or which, because of
statutes or case law, might be of questionable enforceability. Counsel, therefore, will oftentimes
include a general exception to enforceability. This language is designed to protect the closing
attorney from suits claiming that the opinion is erroneous as to questionable provisions that are
not essential to the business deal, but, at the same time, afford the lender the assurance that the
loan transaction will be enforced generally as anticipated. This general exception can also save
the closing attorney from enumerating each and every provision in the loan documents that might
be of questionable validity, thereby saving the time and expense that, in all probability, will not
result in any change in the loan documents or the transaction. Sometimes a "laundry list" of
exceptions is also included with the general exception to focus the lender's attention on certain
provisions. This should not, however, circumscribe the scope of general exception. Typical
language for this general qualification would read as follows: "We advise you that certain
provisions contained in the Loan Documents may be limited or rendered unenforceable by
applicable laws or court decisions. We do believe, however, that subject to the limitations expressed
herein, none of the Loan Documents would be rendered invalid as a whole or preclude the (i)
judicial enforcement of the obligations of the Borrower or Guarantors to repay the principal,
together with interest thereon as provided in such Loan Documents, (ii) the acceleration of the
obligation to repay such principal and interest upon a material default in such Loan Documents, (iii)
the foreclosure, as against the Borrower, in accordance with applicable law of the lien created by the
Deed of Trust upon acceleration pursuant to clause (ii) above, or (iv) the judicial enforcement of the
9
Assignment of Rents upon acceleration pursuant to clause (ii) above for purposes of collecting rents
accruing after the appointment of a Receiver; subject, however, in each instance to procedural
delays resulting from contests as to the enforceability of such documents."
This qualification is one of the most important qualifications in the opinion and it should
be carefully examined by the lender or its counsel. It should be modified when security interests
are taken in personal property or when a particular remedy is of significant importance to the
lender.
Alternatively, or in conjunction with the general exception qualification, the
closing attorney might recite a "laundry list" of provisions that are of questionable enforceability.
Since an opinion to the effect that the documents are enforceable in accordance with their terms
is likely to be construed as meaning every provision is enforceable, the closing attorney must
either qualify the opinion with the general exception described above or list all of the provisions
which he or she is excluding from the enforceability opinion. The resulting "laundry list" will
identify specific areas of the loan documentation that might be subject to question by a court and
has the benefit of focusing the lender’s attention on these areas. In this way, if the lender needs
to alter the documentation in order to make a particular loan provision enforceable, it can do so.
A sample "laundry list" exception to the enforceability of the loan documents is as follows: "We
express no opinion with respect to terms in any of the Loan Documents (i) authorizing self-help or
permitting the unilateral or ex parte appointment of a receiver, (ii) permitting the Lender to bring
suit against less than all parties liable thereon without affecting the liability of the other parties
thereto, (iii) prohibiting oral modifications of the Loan Documents, (iv) regarding choice of law or
forum selection, (v) indemnifying a party for, or releasing, exculpating or exempting a party from,
liability for its own action or inaction to the extent such action or inaction is wrongful, willful,
reckless, grossly negligent or unlawful or where such indemnification, release, exculpation or
exemption is contrary to public policy, (vi) concerning the payment of late charges and penalties
where such charges and penalties bear no reasonable relation to the damages suffered by the Lender,
(vii) waiving obligations of good faith, fair dealing, diligence or reasonableness, (viii) providing that
an election of remedies does not affect the Lender's right to other remedies, (ix) permitting the
Lender to use force or otherwise breach the peace when enforcing its rights, (x) providing that any
unenforceable terms shall not affect the enforceability of any other terms where the unenforceable
terms are an essential part of the agreement, and (xi) to the effect that the Lender's failure to exercise
or delay in exercising a right or remedy will not operate as a waiver of such right or remedy." The
list, of course, will vary with the jurisdiction as well as the closing attorney's view of what is
appropriate to include in the list given the nature of the transaction and the specific loan
documentation.
Title.
To be assured of receiving collateral that the borrower has good title to must be
ascertained by the lender from sources other than the borrower’s counsel. These sources may
include representations of the borrower, copies of bills of sale, title insurance policies, and UCC
searches. To the extent a document, such as a deed of trust, is only as good as the quality of the
title to the underlying property, counsel must take exception as to matters of title in his or her
opinion. Moreover, an attorney is generally not in a position to ascertain the accuracy of a
description of real property (e.g. whether a courses and distances description closes by
10
engineering calculations). The qualification set forth in the sample language below, therefore, is
acceptable, but may need to be modified depending upon the transaction. The exception does
state that it does not include any opinion as to priority or perfection "except as herein specifically
provided". The quoted language is designed to accommodate automatically additional
paragraphs which are included to provide priority or perfection opinions. Typical language for
this qualification would read as follows: "We have made no examination of, and we express no
opinion on, the state of title to any real or personal property which may be covered by any of the
Loan Documents or, except as herein specifically provided, the priority or perfection of any lien,
security interest or other encumbrance purported to be created or perfected by any of the Loan
Documents or the effect of failure, or lack, of title on the validity, binding effect or enforceability
of any of the Loan Documents or the adequacy of any description of such property."
In most jurisdictions, attorneys no longer search titles and give lien opinions. If the
lender is obtaining title insurance, it will be getting reasonable coverage for the creation and
validity of the deed of trust lien and the opinion should not be needed. Nevertheless, counsel to
the borrower should not object to the aspect of the opinion that deals with the validity and
enforceability of the deed of trust as a loan document excluding consideration of the status of
title and the priority of the lien. With title insurance companies doing the update and
recordation, however, the attorney should not be expected to give an opinion on the creation of
the lien except to the extent it is subject to the recordation of the security instrument.
Beneficiary.
The closing attorney has a right to limit his or her potential exposure to the transaction
and the parties who have a reasonable expectation of reliance. To cut off any potential
responsibility to other parties who might receive copies of the opinion, a limitation of the type
set forth below is generally included at the end of each opinion. The lender, however, must
consider the likelihood of the sale of the loan and, where appropriate, request the attorney to
expand the reliance language to cover transferees or purchasers of the loan. Counsel, however,
may be reluctant to expand coverage in loan transactions to participants on the theory that the
seller of the participations should be the one to enforce any remedies which the owners of the
loan might have against the attorney. Typical language regarding reliance would read as
follows: "The opinions set forth herein may be relied upon by you only in connection with the
transaction described herein and for no other purpose, and may not be distributed to or relied
upon by any other person, quoted in whole or in part, or otherwise reproduced in any other
document nor may it be filed with any governmental agencies without, in each instance, our prior
written consent".
Update.
Since an opinion speaks as of its date, counsel will generally include a provision that
there is no obligation on the closing attorney to update the matters set forth in the opinion. This
would be the case whether or not the provision is included in the opinion and, accordingly,
should be accepted, without reservation, by the lender.
11
SPECIAL OPINIONS
In addition to the substantive opinions considered above, if the lender is making a loan to
a borrower in another state or receiving collateral located in other states, it should, under the
careful guidance of its counsel, obtain local counsel opinions with respect to matters governed by
the laws of these other states. These opinions should address such matters as whether the lender
must qualify to transact business in the state, whether the lender will be subject to taxation by the
state, whether no-action or anti-deficiency statutes would affect the lender’s ability to enforce its
documents as anticipated, whether the loan is usurious and whether the loan documents will be
governed by the laws of the lender’s state. Whether because of public policy, case law, or other
factors bearing on the question, local counsel may not be willing to give an unqualified, or even
a reasoned, opinion in some transactions. The lender, however, must be prepared to deal with
the issues and obtain the requisite advice of its counsel and the local attorney representing the
borrower or the lender.
Finally, in some transactions, opinions of attorneys having special expertise in a branch
of law are required to give the lender the assurances it needs that potential problems will not
surface to defeat the transaction, destroy the value of the collateral or diminish the credit of the
borrower. It is beyond the scope of this article to consider these specialized opinions, but
examples of some of the areas requiring additional attention are as follows: tax-exempt
financing, ESOP loans, environmental, securities, zoning and other land use matters, bankruptcy,
and Uniform Commercial Code transactions.
#712916 v1
12