DRAFTING OPINION LETTERS

Transcription

1 DRAFTING OPINION LETTERS IN BUSINESS AND REAL ESTATE TRANSACTIONS First Run Broadcast: September 14, :00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Opinion letters are an essential part of every significant business and real estate transaction. Researching these letters is part of due diligence and obtaining them is frequently a condition of closing a deal. They help reduce the risks involved in any transaction and are often required by one or the parties, lenders, or investors. They are also complicated instruments with the potential for real-world liability for attorneys and the parties. This program will provide you with a practical guide to drafting, reviewing and negotiating opinion letters, the rights and responsibilities of the parties, determining the underlying factual assumptions or ascertaining the law, and potential liability for lawyers. Drafting, reviewing and negotiating opinion letters in business and real estate transactions Types of letters enforceability, entity, no conflicts/no defaults, litigation, authorization and more and their role in transactions Essential provisions of opinion letters assumptions, qualifications, limitations Rights and expectations of the receipt of the opinion letter Professional standards for preparing opinion letters duty of care Speakers: Peter Tennyson is a partner in the Costa Mesa, California office of Paul, Hastings, Janofsky & Walker, LLP, where his practice focuses on corporate transactional work, including corporate buyouts, mergers and acquisitions and the public and private placement of securities. A major portion of his practice involves the negotiation, structuring and financing of acquisitions and dispositions of privately held companies. He formerly served as vice president and general counsel of Cannon Mills Company and its parent, Pacific Holding Company. He received his B.A. from Purdue University and his J.D. from the University of Virginia School of Law. Richard R. Goldberg is a retired partner, resident in the Philadelphia office of Ballard Spahr, LLP, where he established an extensive real estate practice, including development, financing, leasing, and acquisition. Earlier in his career, he served as vice president and associate general counsel of The Rouse Company for 23 years. He is past president of the American College of Real Estate Lawyers, past chair of the Anglo-American Real Property Institute, and past chair of the International Council of Shopping Centers Law Conference. Mr. Goldberg is currently a Fellow of the American College of Mortgage Attorneys and is a member of the American Law Institute. Mr. Goldberg received his B.A. from Pennsylvania State University and his LL.B. from the University of Maryland School of Law.

2 VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT Fax: (802) PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name: Middle Initial: Last Name: Firm/Organization: Address: City: State: ZIP Code: Phone #: Fax #: Address: I will be attending: Drafting Opinion Letters in Business and Real Estate Transactions Teleseminar September 14, 2012 Early Registration Discount By 09/07/2012 Registrations Received After 09/07/2012 VBA Members: $70.00 Non VBA Members/Atty: $80.00 VBA Members: $80.00 Non-VBA Members/Atty: $90.00 NO REFUNDS AFTER September 7, 2012 PLEASE NOTE: Due to New Hampshire Bar regulations, teleseminars cannot be used for New Hampshire CLE credit PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association): $ Credit Card (American Express, Discover, MasterCard or VISA) Credit Card # Exp. Date Cardholder:

3 Vermont Bar Association ATTORNEY CERTIFICATE OF ATTENDANCE Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: September 14, 2012 Seminar Title: Location: Credits: Drafting Opinion Letters in Business and Real Estate Transactions Teleseminar 1.0 General MCLE Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

4 PROFESSIONAL EDUCATION BROADCAST NETWORK Speaker Contact Information Drafting Opinion Letters in Business and Real Estate Transactions Peter Tennyson Paul, Hastings, Janofsky & Walker, LLP - Costa Mesa (o) (714) petertennyson@paulhastings.com Richard Goldberg Ballard Spahr, LLP - Philadelphia (o) (215) goldbergr@ballardspahr.com

5 OPINION LETTERS IN BUSINESS AND REAL ESTATE TRANSACTIONS Professional Education Broadcast Network Peter J. Tennyson Paul Hastings LLP Costa Mesa, California LEGAL_US_W #

6 TABLE OF CONTENTS Page I. INTRODUCTION... 1 II. PURPOSES OF OPINION... 2 III. NEGOTIATING THE OPINION... 2 A. Best to Begin Early... 2 B. Understand the Context of the Transaction... 3 C. Understand Standard Terms and Practices... 3 D. Be Reasonable... 3 E. Understand Your Role... 4 F. Understand the Costs... 4 G. Use Available Resources... 5 IV. ETHICAL ISSUES... 5 A. General... 5 B. Competence to Render Opinion... 5 C. Client Confidentiality... 7 D. Lawyer s Conduct... 8 V. FRAMEWORK OF THE OPINION... 8 A. Date... 9 B. Reliance on Opinion... 9 C. Role of Counsel/Description of the Transaction D. Reason for the Opinion E. Definitions F. Documentary Examination Assumptions G. Other Assumptions H. Qualifications I. Back-Up Certificates and Reviewed Documents J. Reference to Local Counsel K. Expression of the Opinion L. Opinion Signature VI. SPECIFIC OPINIONS AND DILIGENCE PROCEDURES LEGAL_US_W # i

7 TABLE OF CONTENTS (continued) Page A. Corporate Status Opinions B. LLC Status Opinions C. Authorization and Issuance of Stock D. Corporate or LLC Power and Corporate or LLC Authority Opinion E. Remedies Opinion F. No Breach or Default Opinion G. No Violation of Law Opinion H. General Compliance with Laws I. Environmental Law Opinions J. Regulatory Approval Opinion K. Statement of No Litigation L. UCC Opinions M. Real Estate Opinions N. Choice of Law Opinions VII. INTERNAL REVIEW PROCEDURES A. Policy Statements B. Review Procedures C. Opinion Forms D. Central Opinion Files E. Opinion Committee APPENDIX A...OPINION REPORTS AND TREATISES APPENDIX B...ANNOTATED REAL ESTATE FINANCE OPINION MARCH 8, 2011 LEGAL_US_W # ii

8 I. INTRODUCTION 1 A law firm or lawyer representing a client involved in a lending, business or real estate transaction may be requested to deliver a legal opinion of some sort regarding the transaction. The transactions involved may range from private placements of stock, sales of a privately held company or its assets, mergers of public or private companies, private or public offerings of debt or equity securities and related loan transactions. The preparation and negotiation of the legal opinion is often the subject of much time and effort. A lack of standardization of legal opinions may increase the frustration, delay, expense and waste efforts. The relative costs involved in delivering an opinion need to be adequately measured against the benefits to the client, or the client s interests suffer. Although legal opinions were first given following the Civil War, the first bar report on opinions was not published until Various efforts have been made, particularly since the 1990 s, to standardize opinion procedure. One notable effort that has not achieved widespread acceptance but is often cited is the ABA Legal Opinion Report published in 47 Business lawyer 167 (1991) which proposed a form of opinion and agreed interpretations popularly referred to as the Accord and is referred to below as the ABA Report or the Accord. While the Accord s format of opinion is not widely used, its discussion of concepts and standard approaches is regularly cited. Appendix A to this outline lists a number of other reports discussing forms of opinion and their interpretations which have been published, but this should not be considered an exhaustive bibliography. Citations to these materials in this discussion generally use the titles identified in Appendix A. Appendix B discusses real estate opinions. This outline generally addresses the types of opinions a practitioner might be asked to deliver to a third-party recipient on behalf of his or her client in the context of a transaction. Particular topics relevant to real estate will be discussed in the telephone conference and some references are included. The many other transactions in which opinions may be required, including opinions rendered directly to a client, opinions related to securities laws, real estate title opinions, tax shelter opinions, audit response letters and opinions in partnership transactions, are beyond the scope of this outline. This outline discusses the purposes of opinions, approaches to negotiating the opinion, ethical issues involved, types of matters often covered, the bases and assumptions for such opinions, typical exceptions, qualifications and limitations, and other related matters. 1 An earlier version of this outline was written by Charles Cain, Senior Vice President of Legal and Public Affairs at Banner Pharmacaps, Inc. for the North Carolina Bar Association s Basics of Business Law Program and previously updated by John R. Miller, Robinson, Bradshaw & Hinson, P.A., Charlotte, North Carolina. Richard Goldberg of Ballard Spahr has provided valuable real estate insight. Their contributions are acknowledged but any errors are the author s. LEGAL_US_W #

9 II. PURPOSES OF OPINION The common purpose of the traditional legal opinion to third-party buyers and lenders is to satisfy a condition of a loan or acquisition agreement. While the specific requirement is very clear, the basis for it lies in its significant unstated purposes as part of the negotiating process, including replacing or confirming due diligence review. Third-party opinions assure the recipient that a lawyer has placed his or her reputation and skill behind a process of review and verification of the legal context of the transaction. This has a sometimes less noble purpose of providing an additional source of recovery but also can, in the process of negotiating and preparing an opinion. uncover legal questions and possible conflicts with other transactions that might otherwise go unseen. These may then be eliminated by changes in the documents and by obtaining consents of those involved in the other transactions. There are several purposes for which a legal opinion generally should not be used. An opinion should not serve the purpose of merely repeating the client s factual representations and warranties or of shifting to the attorney the risk of an acknowledged uncertainty. See Third-Party Closing Opinions: A Report of the TriBar Opinion Committee, 53 Bus. Law. 591 (1998) (the TriBar Report ). Most opinion givers believe that representations and warranties should place the burden of misstatement of facts on those most intimately acquainted with the facts, not on the lawyer. Despite this, as discussed below in the context of no litigation opinions, third parties have sometimes sought to have lawyers repeat or conform factual matters and in recent times sought recovery against opinion givers, especially when the maker of the actual similar representation and warranty is not solvent enough to provide recovery. Furthermore, a legal opinion should not be required where the costs of delivering the opinion outweigh the benefits of receiving it. An example is the opinion that a corporation is qualified to do business in every state in which the character or quantity of business done so requires. See Glazer & FitzGibbon. Similarly, opinions that are rendered innocuous as the result of necessary qualifications or assumptions result in little value, and should be avoided (e.g., an opinion based on hypothetical facts). Finally, attorneys should remember the Golden Rule : It is not appropriate to insist upon any opinion the requesting lawyer would be unwilling to give in like circumstances. III. NEGOTIATING THE OPINION A. Best to Begin Early. Although the opinion is formally delivered at the closing, the opinion should not be thought of merely as a closing document since its provisions often affect the substance or structure of the transaction itself. In fact many benefits of the opinion are derived from the review needed to prepare it and the uncovering of issues that must be resolved. Perhaps the most common and yet most avoidable mistake made in negotiating and preparing opinion letters is beginning too late in the course of the transaction. The opinion should be negotiated at the same time as the written agreement between the parties, and the substance of the required opinion should either be set forth in the text of the agreement or appear in a proposed form of opinion attached. To provide some flexibility for making minor changes prior to the closing, the final LEGAL_US_W #

10 agreement may provide that the parties agree to deliver and accept an opinion in substantially the form attached hereto. But an agreement that provides for a favorable opinion on such legal matters as receiving counsel or its client may reasonably request, creates an unnecessary risk that the closing may be delayed because the parties counsel are later unable to agree on what is reasonable. Also, if counsel deems it necessary to render a reasoned opinion on any particular aspect of the transaction, this possibility should be made known as early as possible so that the parties can consider alternative structures that may eliminate the need for other than a clean opinion. B. Understand the Context of the Transaction. Although standardized terminology and provisions typically appear in corporate or real estate transaction opinion letters, the appropriateness of such provisions must be evaluated in each transaction. An opinion that was reasonable to request or give in one transaction may not be reasonable in another similar transaction because of the lawyer s relationship with the client, knowledge of or ability to confirm the facts, the costs associated with giving the opinion or a host of other reasons. C. Understand Standard Terms and Practices. Although each opinion must conform to the particular transaction, lawyers should be familiar with the standard terminology and practices that have evolved over the years for similar transactions. The reports and treatises cited in the Appendix describe many of those terms, and several suggest opinion formats. Because many firms have developed their own forms, this discussion does not attempt to suggest a single standard. The attorney should be aware that certain opinions are expected to be given (and can be given with minimal diligence), even if they are of little apparent value to the receiving party. Even though this practice has diminished (for example with the disappearance of the Public Utility Holding Company Act, an opinion about its non-applicability was for some period still commonly requested) it survives in some forms. A lawyer who attempts to deviate from the norm should be prepared to support his or her reason for doing so. Standards, do, however, deviate depending on the circumstances. See, e.g. Reliance on Opinion below. D. Be Reasonable. Both the requesting and the opining attorney should avoid taking an adversarial posture toward negotiating the opinion letter. Counsel should remember that an opinion is not a warranty or guarantee by the opining lawyer that the receiving party will suffer no harm with respect to the transaction in question. Instead, an opinion is given to provide added assurance regarding legal issues relating to the transaction and to facilitate the due diligence process. The requesting lawyer should ask only for an opinion as to matters reasonably necessary to protect the client s interests and for which the necessary investigations or legal conclusions are reasonable for the opining lawyer under the circumstances. If the required investigation can be done equally well by both parties (e.g., a litigation search or lien search) legal opinions on such matters essentially represent statements of fact and are often inappropriate. By asking for more, the requesting lawyer improperly forces the opining lawyer to assume the risk of factual or legal uncertainties that are beyond his or her power to eliminate or to make assumptions that make the LEGAL_US_W #

11 opinion meaningless. To the extent that a lawyer is unable to give an unqualified favorable opinion, the recipient is duly warned of a legal risk that can then be evaluated and dealt with in that particular transaction. Furthermore, a requesting or opining lawyer should not use the provisions of an opinion as bargaining chips to obtain a concession on a business point. The scope of an opinion should be governed by professional and ethical considerations, separate from the process of negotiating the best deal for the client. E. Understand Your Role. The nature of the opinion, and the related investigation and due diligence, will depend in part on the opining lawyer s relationship with the client and the lawyer s role in the transaction. The general counsel for a business being acquired may reasonably be expected by the buyer to give an extensive opinion regarding business and operational matters, such as compliance with licensing requirements, knowledge of pending or threatened litigation, or the status of relationships or contracts with key customers or suppliers. However, in-house counsel, especially in larger companies, face many of the same difficulties that outside lawyers face and many decline as a matter of policy to issue such opinions. Special counsel engaged for the limited purpose of a particular transaction may properly limit their opinion to matters about which the lawyers involved have knowledge, perhaps with some agreed-upon obligation to inquire or investigate. Also, the opining attorney should evaluate early in the opinion process whether there is a need to associate local counsel or special counsel with expertise in a particular area, such as securities or environmental laws. Because in many instances the other party and its counsel will also investigate many of the same issues, formalizing the result of the investigation in a formal opinion may not be cost-effective. For this, among other reasons, there is a developing (though not universal) trend not to render opinions in large public company mergers. Given that in such a merger the acquired company and its holders are in a practical sense not a source of recovery for misrepresentations or mistakes, having a law firm on the hook for such issues lacks proportion. F. Understand the Costs. When negotiating the terms of an opinion letter, both the requesting and opining counsel should be aware of the difficulty, and therefore the cost, of giving certain opinions. Depending on the size of the transaction, both in absolute dollars and in relation to the businesses of the parties, certain opinions may require an unjustifiable investment of time and expense. For example, the opinion that the client has all licenses and permits necessary for the conduct of the client s business could involve significant time, investigation and expense that may not be warranted in each situation. Rather than render such an opinion, it may be entirely reasonable for the attorney to insist that this is really a business issue and that the other side should accept the client s representations or other assurances on this point. In a regulated industry it may be appropriate to request opinions about particular licenses or permits, although even in this case the opinion may essentially be a statement of fact. Another area, particularly in smaller transactions, likely to cause problems is a request for an opinion that all of a client s stock is validly issued, fully paid and non-assessable. The process of identifying the resolutions and other records related to each share issuance is costly and time-consuming and records of payment may be hard to trace. While it may be helpful to a LEGAL_US_W #

12 later-stage investor or a purchaser, the degree of certainty obtained from the work needed for an opinion may not be justified. Obviously, facts may make a difference. If there are only two or three holders the burden may be less. It is especially important that from the outset clients understand the time and expense involved in giving an opinion, if for no other reason than to avoid unpleasant surprises when they receive the bill for legal services. Also, the payment of all or part of such fees by the requesting party may be a subject of negotiation in the transaction and should be resolved early. G. Use Available Resources. A greater number of reference sources are available to today s opinion giver than in the past. By using these sources, the opinion giver can not only expedite the preparation process, but he or she can adopt a standardized approach to one or more opinion topics. The result should be less time and attention required to be devoted to the opinion by the giver and the recipient. Useful referral sources include Glazer, the Accord, the ABA Guidelines, the ABA Principles, and the TriBar Report, as well as the various state reports, most of which are published in the Appendices to the Glazer treatise. IV. ETHICAL ISSUES A. General. The ABA s Model Rules of Professional Conduct (the Rules ) do not expressly address a lawyer s ethical considerations in rendering an opinion in a commercial transaction. However, three basic ethical obligations govern the lawyer s role: (i) the lawyer must be competent to render the opinion, (ii) the lawyer must preserve the attorney-client privilege, and (iii) the lawyer s conduct must be beyond reproach. The proper remedy for a violation of the ethical requirements of the Rules is through the disciplinary process, and not civil liability. However, the lawyer s duties to a client are dictated, in part, by the Rules and therefore a violation of the Rules may be evidence of breach of duty. See, e.g., Vance v. Robinson, 292 F. Supp. 786 (W.D.N.C. 1968). Certain violations of ethical duties, such as rendering opinions without the legal knowledge or experience required to be competent, likely will also constitute a breach of the attorney s duty to represent a client with such skill, prudence and diligence as lawyers of ordinary skill and capacity commonly possess and exercise in the performance of the tasks that they undertake. The applicable standard is that of members of the profession in the same or similar locality under similar circumstances. Rorrer v. Cooke, 313 N.C. 338, 356, 329 S.E.2d 355, 366 (1985). B. Competence to Render Opinion. Each state has rules of professional conduct which apply to a lawyer s ethical duty to clients and third parties. When rendering an opinion, the lawyer must not only consider whether client confidences may be revealed (usually permitted because the client has explicitly consented to such disclosure by requesting the opinion be issued) but also what duties the opinion giver has assumed to the recipient. The Dean Foods case discussed below and the more recent case of Santo Nostrand, LLC v. Cozean O Connor [Supreme Court of County of New York, August 10, LEGAL_US_W #

13 2009] seem to apply a malpractice/negligence standard. It is noteworthy that in the Santo Nostrand case, which involved a zoning opinion, the standard applicable was that of lawyers experienced in this particular specialty. Such concerns often lead general practitioners to seek specialized counsel for such issues, and lead out-of state counsel to seek opinions of local counsel. Use of Special and Local Opinions. The lawyer should only opine on those matters within his or her legal knowledge and competence. The transaction involved may require that the lawyer render an opinion regarding a substantive area of law in which he or she is not knowledgeable or regarding the laws of another jurisdiction. If the lawyer lacks the legal competence to render the opinion, then the lawyer should associate another lawyer who is competent to render the opinion. In relying upon the specialist s opinion, the lawyer should refer to the specialist s opinion in the primary opinion letter (with the better practice being to append the specialist s opinion to the primary opinion letter whenever possible), restate the substance of the specialist s opinion and state that the lawyer is relying solely on the specialist s opinion and has not made an independent inquiry into the facts underlying the specialist s opinion. Many firms prefer, instead, to deliver the specialist opinion and disclaim any independent opinion on the issue, reasoning that to do otherwise adopts the opinion or endorses it, when the reason for the specialist opinion was the primary firm s lack of the skill or experience needed to do so. The lawyer rendering the primary opinion should be satisfied that the specialist is competent to render the opinions given. This requires special care to assure that the specialist understands the transaction and the issues involved. The opining lawyer should evaluate the specialist s assumptions, limitations, and qualifications and determine the reasonableness of the opinion. If the lawyer has any reason to doubt the validity of the specialist s conclusions, the lawyer should discuss them with the specialist and advise the client of the nature and significance of any problem. The issues discussed above also apply to the need for, and use of, opinions from local counsel where laws of other states or ordinances of other local governments are involved. In each transaction involving such issues, the attorneys involved should determine the need for a specialist in such local issues. A recent Maryland opinion report states: The opinion giver may rely on opinions issued by local counsel with respect to the laws of a foreign jurisdiction if satisfied as to the competence of local counsel. If the use of a local counsel opinion is adopted, the Maryland opinion giver should take care to ensure that its opinion is no broader as to substantive matters than those substantive matters addressed in the opinion of local counsel upon which reliance is placed. Reliance upon or reference to local counsel s opinion does not require the opinion giver to investigate independently or otherwise verify the opinion of local counsel. The opinion recipient should presume that such local counsel s opinion is the sole basis of knowledge of the opinion giver as to the substantive matters covered by the local counsel s opinion unless otherwise specifically stated. Any statement in an opinion that the opinion giver concurs in the opinion of local counsel, or that the opinion of local counsel is satisfactory in form and LEGAL_US_W #

14 substance, implies a broader scope of responsibility of the opinion giver to conduct its own review Preparation and Factual Investigation. The opining lawyer must undertake such investigation of the facts and review of the relevant statutes and case law as is reasonable for the lawyer to render the specific opinion. This duty includes gathering and reviewing all facts and legal documents that form the foundation for the opinion. Most firms specifically list the documents covered and reviewed. 2. Reliance on Certificates. Often, the lawyer requires the aid of professionals working with the client on the project (e.g., architects and engineers) in order to establish the factual basis necessary to render the opinion. If the lawyer is asked to opine on a matter such as compliance with zoning law, building codes or OSHA regulations, the lawyer might be remiss to opine on such matters without consulting a professional who is knowledgeable about the subject. The lawyer must evaluate the reasonableness of the various certificates received and upon which the ultimate opinion is based, and reasonably believe that they are truthful. It is good practice to obtain the professional s opinion in writing together with the professional s consent to the lawyer s reliance on the opinion, and the lawyer should state in the opinion that reliance is made on the specific certificates as the factual basis for the opinion. C. Client Confidentiality. A lawyer has the obligation to preserve the client s confidential information. In the typical transaction, the lawyer rendering an opinion is providing it for someone other than the lawyer s client (e.g., the lender or the other party to a transaction), and the opinion might contain information that is or could be considered confidential (such as the existence of pending or threatened litigation). Confidential information within the context of Rule 1.6 is closely related to the ethical duty that is protected by the evidentiary attorney-client privilege. See Annotated Model Rule of Professional Conduct, Rule 1.6 (5th ed. 2002). But the term also encompasses other information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client. The rule applies to all information relating to the representation of the client, whatever the source of information. Under certain circumstances, however, confidential information of the client may be disclosed. Rule 1.6(a) permits disclosure when it is (i) impliedly authorized by the client in order to carry out the goals of the representation or (ii) expressly authorized by the client but only after consultation with him or her. If a loan commitment contains an express obligation for the lawyer to render an opinion and the client has signed and returned the loan commitment to the lender, consent to the lawyer s disclosure in the opinion letter is probably implied. However, the lawyer would be well advised also to obtain his or her client s express consent to disclose those opinions to the lender, especially in transactions in which the commitment letter does not specifically identify the substance of the opinions required. 2 Maryland Opinions Project Report dated June 14, 2007 revised October 6, LEGAL_US_W #

15 D. Lawyer s Conduct. Rule 3.3(a) states: A lawyer shall not knowingly make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact previously made to the tribunal. A tribunal includes an administrative agency, such as the Securities and Exchange Commission. Rule 1.0(m). In addition, Model Rule 4.1 states that in the course of representing a client a lawyer shall not knowingly make a false statement of material fact or law to a third person or fail to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6. The lawyer cannot succumb to the client s insistence to provide the exact form of opinion that the other party requires if the opinion is not accurate. Further, the opining lawyer may not rely on a certificate of the client or of another person as the basis of a legal opinion if the lawyer knows the certificate is inaccurate or misleading, even though the lawyer may qualify that the opinion is based solely on the client s certificate. If the lawyer must reveal factual information that the client has requested be held confidential, but which information forms a necessary basis for the legal opinion or if the lawyer cannot truthfully give an opinion, the lawyer should discuss with the recipient an acceptable modification of the opinion language or refuse to give the opinion. If the recipient does not consent to a modification or omission of the objectionable opinion, the lawyer then has a duty to withdraw from representing the client in that transaction rather than violating the confidences of his client or giving the opinion when the lawyer knows or has reason to know that it is without foundation. V. FRAMEWORK OF THE OPINION The form and content of opinions have developed over time through custom, negotiation and common usage. Although the opining lawyer must analyze each opinion in the context of the particular transaction, developing an understanding of commonly accepted opinion forms and standard terminology will expedite the negotiation and drafting process. The common practice is for legal opinions to be embodied in letter format, and each component is significant and of consequence. A typical structure of an opinion is outlined below, and a narrative discussion follows with respect to various components: Identification of transaction and parties Scope of examination Assumptions made Knowledge qualification (which firm attorneys knowledge is included) Actual opinion paragraphs Exceptions, qualifications and limitations Law covered in the opinion (U.S. federal, state(s), non-u.s. jurisdiction) Who may or may not rely on the opinion LEGAL_US_W #

16 A. Date. An opinion is typically dated and speaks as of the closing date of the transaction. The opinion also is typically signed and delivered at the closing. An escrow arrangement can be structured, however, under which the opinion is dated the closing date but is executed in advance and delivered to counsel for one of the other parties on the condition that the opinion can be released on the closing date upon receipt of instructions to that effect from the opining attorney. The escrow arrangement is more frequently used in situations where counsel know each other well or have an established working relationship. Delivery of opinions by telecopy followed by delivery of the conforming executed original is also an accepted practice. B. Reliance on Opinion. Care should be taken to identify specifically and accurately the addressee(s) since the addressee is generally the only person expressly entitled to rely on the opinion. Most opinions traditionally included a provision, typically appearing at the end of the opinion, to the effect that the opinion is for the benefit of the addressee only and may not be used or relied upon by any other person without the prior written consent of the opining attorney. While such limitations may not be respected by the courts in all cases, they do express the intent of the parties and may be helpful in limiting the scope of the opining attorney s liability. See Restatement Third, The Law Governing Lawyers, 51(2) (2000). If it has been agreed that parties other than the addressee will be entitled to rely on the opinion, such as counsel for one of the other parties or a participant in a loan transaction, a reliance letter is often used to confirm that the opinion is also for the benefit of certain additional parties. The typical reliance letter is very short and simply refers to the principal opinion and recites that the addressee of the reliance letter may rely on the principal opinion to the same extent as if the principal opinion were addressed to the additional party. Lawyers rendering opinions in areas such as municipal bonds, and public debt or equity offerings, often face an assumption their opinion is addressed to a broad audience. That issue is beyond the scope of this discussion. Limitations on Reliance. In the 2000 s, increasing focus began to be placed on the reliance portions of a legal opinion. Firms and lawyers had customarily stated that only the persons named in a particular opinion, such as the buyer, or a buyer and its lender, could rely on that opinion and that no one else was authorized to do so. In connection with large, syndicated loans it is not uncommon for the syndicate to change significantly over time. Agents and lenders putting together such syndications feel that it materially increases their ability to do so if closing opinions in connection with the loan or other financing in question follow a standard format and state that they may be relied upon by persons becoming participants in the syndication. This is usually considered appropriate because it is not practical for those who buy loan interests in a syndication to repeat the initial due diligence and it is time consuming and expensive to negotiate and issue multiple reliance letters. In practice, there is some basis to wonder whether participants actually read the opinion, or simply get assurances that an opinion in a standard format was issued, which opens the door to questions about actual reliance. LEGAL_US_W #

17 Law firms have expressed concern about permitting broad reliance. This is particularly important in troubled economic circumstances, because if a loan encounters financial trouble, participants may sell their portion of the loan to so-called vulture funds, which are more likely than traditional lenders to view the opinion giver as a deep pocket and to make a claims in an attempt to recover a portion of the defaulted loan. And in difficult times, even more traditional lenders may seek any available source of recovery. Even if the law firm is successful in defending its opinion, the costs of doing so are significant, there is a significant amount of time loss and distraction, reputations may be damaged, and malpractice premiums are likely to increase. Firms also express concern over the possibility of multiple claims by different syndicate members, perhaps even leading to litigation in different jurisdictions. Further, some opinion givers have felt that successors and assigns may not appreciate the nuances of the negotiation that led to a particular opinion, and therefore, may rely on it in a somewhat naïve fashion. Parties putting loan syndications together have not agreed that these objections justified non-reliance language. A leading policy statement, issued by the Loan Syndications and Trading Association, Inc. statement of standards in 2005, included the following item as Item 3: 3. Borrower s Counsel s Legal Opinion. In connection with the negotiation of the Transaction Documents (as defined below), the Administrative Agent shall request, on behalf of the lenders, that the Borrower s Counsel s legal opinion permit reliance by assignees. Most banks wanting to serve as administrative or syndication agents accept this as the standard, or norm, in opinions on syndicated loans. They instruct the law firms negotiating a transaction for them not to deviate from this standard. One large bank went further and published a standard policy on the type of assignability language it would accept. This statement is reproduced in part below: Policy on Assignability of Opinions In Syndicated Loan Transactions As Administrative Agent in syndicated lending transactions, X expects to receive an opinion from borrower s counsel that extends to the benefit of successors and assigns. Over the last few years a few influential law firms active in representing borrowers in syndicated loan transactions have refused to provide opinions that extend to successors and assigns and instead specifically limited those who may benefit from the opinion to the initial lenders. This is contrary to the traditional market for borrower s opinions, the LSTA standards and the presumed expectation of loan purchasers in the secondary market. X expects to continue to receive an opinion from borrower s counsel that extends to successors and assigns. When representing LEGAL_US_W #

18 X as Administrative Agent, the following language, while qualified, is the minimum acceptable in this respect. At your request, we hereby consent to reliance hereon by any future assignee of your interest in the loans under the Credit Agreement pursuant to an assignment that is made and consented to in accordance with the express provisions of Section [ ] (reference to the assignment Section of the Credit Agreement) of the Credit Agreement, on the condition and understanding that: (i) this letter speaks only as of the date hereof, (ii) we have no responsibility or obligation to update this letter, to consider its applicability or correctness to any person other than its addressee(s), or to take into account changes in law, facts or any other developments of which we may later become aware, and (iii) any such reliance by a future assignee must be actual and reasonable under the circumstances existing at the time of assignment; including any changes in law, facts or any other developments known to or reasonably knowable by the assignee at such time. This language quoted above has been adopted by a number of large law firms. However, debate over the issue continues. Some firms representing syndication agents continue to ask for more general reliance language, and some firms continue to seek more limited reliance. Some firms limit such reliance to those becoming part of the syndicate within a stated number of days after the initial closing, and some firms add a requirement that reasonable reliance can occur only after consulting a law firm experienced in giving and receiving opinions about similar transactions. C. Role of Counsel/Description of the Transaction. The typical opinion states the capacity in which the opining lawyer has acted by describing the nature of the engagement and identifying the client in the context of the transaction. (e.g., We have acted as counsel to ABC Corp. (the Company ) in connection with the Loan Agreement dated April 1, 2010, between the Company and XYZ Bank. ) It has sometimes been thought appropriate to designate whether the lawyer is general, special or local counsel, depending on the circumstances. As a practical matter, these designations probably have little significance and little effect on the extent of the attorney s responsibility in preparing the opinion. Many firms omit such a designation and are more specific when describing the scope of a limited engagement. The general counsel designation, however, may imply a closer relationship with the client and perhaps imposes a higher standard on the opining attorney. See Glazer For this reason many firms refuse to include it. D. Reason for the Opinion. The opinion will typically identify the section of the agreement between the parties to the transaction, if any, which requires the opinion (e.g., This opinion is delivered pursuant to 7.2 of the Loan Agreement. ). This short statement clarifies the reason for the opinion and refers the LEGAL_US_W #

19 reader to the operative agreement for additional information regarding the transaction. Unless the opinion evidences the client s consent to giving the opinion in this fashion or in another form, it is possible that opining counsel will not be deemed to have a duty of care to the opinion recipient (with whom the attorney-client relationship does not exist). E. Definitions. The definitions in the opinion should be consistent with those in the agreement to which the opinion relates. This can be done either by cross-referencing the agreement (e.g., Capitalized terms used herein and not otherwise defined shall have the meanings specified in the Agreement, ) or by redefining each term in the opinion as it is used in the agreement to which the opinion relates. F. Documentary Examination Assumptions. A number of assumptions have become generally accepted in connection with the opining lawyer s documentary examination. The assumptions normally seen include assumptions as to the authenticity of all documents submitted as originals, the genuineness of all signatures (other than those of the lawyer s client), the legal capacity of natural persons, that copies of documents submitted for review conform to the executed originals and that there are no undelivered or undocumented modifications to the documents reviewed. In an era when closing often occurs by the exchange of electronically sent signatures, even the assumption that the opining firm s clients have executed the document may be appropriate. While each of these assumptions, and often additional assumptions to similar effect, are frequently included in the opinion itself, often cited commentary indicates that such assumptions are implicit and should be understood and need not be set forth in the opinion itself. TriBar Report at 615; See Accord 4. The issue of assumptions and a duty to investigate were among those hotly contested in the Dechert case, 83 A.D. 3d 615, 934 N.Y.S. 2d 119 (2011). The complaint alleged Dechert acted wrongly in only reviewing documents provided as copies and never meeting the actual client. The trial court denied Dechert s motion to dismiss. On November 29, 2011, the Appellate Division reversed and granted Dechert s motion to dismiss. According to the Appellate Division, there was no fraud because of the lack of scienter on Dechert s part, and there was no legal malpractice because Fortress (the lender) was not a client of Dechert s. As to negligent misrepresentation, the Appellate Division ultimately found that the complaint did not state a cause of action. The court s reasoning is not entirely clear, but appears to be based on Fortress failure to allege in its complaint that Fortress had instructed Dechert to investigate over and beyond a review of the documents and to verify and report on the legitimacy of the transaction. Although not clearly stated, the court appears to hold that this higher level of review and verification was beyond what would be expected by customary practice in issuing a legal opinion. The court cited the assumptions taken by Dechert and clearly stated in the opinion letter as to genuineness of signatures and the disclaimer in the opinion letter of any inquiry into the accuracy of factual representations or certificates. This is one of the very few legal opinion cases which was disposed by a motion to dismiss or summary judgment, since the court usually finds that factual matters remain in dispute. The result compels the opining law firms to settle rather than endure a trial. Law firms should not become complacent, since it is not certain that in the future, the court would be familiar with the customary practice in rendering opinion letters, and the nuanced LEGAL_US_W #

20 language of the opinion letters (including disclaimers and assumptions), as well as the Appellate Division did in the Dechert case. G. Other Assumptions. In addition to documentary examination assumptions, an opinion will frequently contain a number of other assumptions. Such assumptions are appropriate with respect to factual matters as to which the attorney should not be expected to have direct knowledge or as to other matters which the recipient of the opinion agrees may be assumed. An assumption often seen in financing opinions, for example, is that the lender has full power and authority to enter into the loan agreement and make the loan, has taken all necessary action to enter into the loan agreement and has duly executed and delivered the loan agreement. Another assumption that gives many attorneys additional comfort is that the lender will enforce its rights under the applicable loan documents in good faith and in a commercially reasonable manner. The attorney should avoid assumptions that constitute legal conclusions, unless the addressee of the opinion has specifically agreed to such an assumption. For example, such assumptions are common about the other party, as noted above, even though a legal conclusion is involved. Extensive reliance on assumptions that constitute conclusions of law can be misleading and in effect render an opinion useless. For example, if the factual issues relating to a fraudulent conveyance question are assumed (e.g., an assumption of solvency), the opinion that a fraudulent conveyance has not occurred would be of no real value. Also, it is not appropriate for an attorney to assume a state of facts that is inconsistent with information as to which he or she has actual knowledge. Accord 4.6. H. Qualifications. Virtually all opinions will contain qualifications of some type. The qualifications may be set forth generally, if they apply to the opinion as a whole, or specifically if the qualification applies only to a particular portion of the opinion. If the qualification is applicable only to a specific section of the opinion, language such as subject to... or except... is sometimes included in the particular section of the opinion and sets forth the nature of the qualification. The general type of qualification normally appears only once in the opinion, often in a listing of several qualifications, and is set forth in language such as we express no opinion with regard to... or our opinion in paragraph is subject to... or enforceability of may be limited by.... This is particularly true in real estate transactions in jurisdictions which limit or specify forms of foreclosures. There is significant debate as to the nature and extent of the qualifications that should be set forth in the opinion. One body of thought is that many qualifications are implicit and should be considered a part of any opinion, and need not be set forth in the opinion itself. A contrary philosophy suggests that all qualifications need to be specifically set forth in the text of the opinion. The Accord attempted to deal with many of the typical qualifications by permitting the opining attorney simply to include in his or her opinion the Equitable Principles Limitation and LEGAL_US_W #

21 the Other Common Qualifications exceptions, as set forth in 13 and 14 of the Accord, thereby giving the opining attorney the benefit of most, if not all, of the desired qualifications. But since most opinions do not incorporate the Accord by reference, because many lenders will not accept this, the concerns and obvious problems with the laundry list approach have led to several forms of generic qualifications that have become fairly accepted in current practice. One of these is the qualification in an opinion in a loan transaction that the loan documents will provide for the practical realization of the intended benefits or principal benefits to the lender. These qualifications, however, may leave unclear exactly what the provisions are that the lender feels are crucial. One approach is to use language such as: Certain of the remedies under the terms of the Agreement may be further limited or rendered unenforceable by applicable law, but in our opinion such law does not, subject to the other qualifications and exceptions stated elsewhere in this opinion, make the remedies afforded by the Agreement inadequate for the practical realization of the principal benefits purported to be provided thereby. N.C. Opinion Report There exists significant debate about the scope, meaning and appropriateness of such a paragraph, which continues. Many firms will not include such a paragraph, or use it only for specific types of documents, such as mortgages. Many real estate practitioners prefer: Certain remedies, waivers and other provisions of the transaction documents might not be enforceable; however, such unenforceability does not render the transaction documents invalid as a whole or preclude (i) the judicial enforcement of the obligation of the Company to repay the principal, together with interest thereon (to the extent not deemed a penalty), as provided in the transaction documents/note, (ii) the acceleration of the obligation of the Company to repay such principal, together with such interest, upon a material default by the Company in the payment of such principal or interest, and (iii) the foreclosure in accordance with applicable law of the lien on and security interest in the collateral created by the security documents upon maturity or upon the acceleration pursuant to (ii) above. I. Back-Up Certificates and Reviewed Documents. The opinion typically describes any certificates that have been obtained (such as officers certificates) and that provide a factual basis for the opinion. The opinion also normally recites that certificates of public officials (such as good standing certificates) have been relied upon. The opinion may list all documents reviewed by the opining lawyer or may simply state that the lawyer has examined such corporate documents and records as he or she deems necessary in connection with rendering the opinion. Unless there is a clear reason for limiting the scope of counsel s review (such as in a situation where special counsel has been retained to review LEGAL_US_W #