DraftingLegalOpinionsforArticle9SecurityInterests:NavigatingtheComplexitiesandAvoidingLiability

ErikW.Hepler,Kirkland&EllisJamesC.Schulwolf,Shipman&Goodwin

Overview• Opinionsaretypicalinfinancingtransactions

u Alwaysgivenatinitialclosing

u Giveninconnectionwithsome,butnotall,amendments

Ø Alwaysif“newmoney”

• ContrasttoM&Atransactions

u Formanyyears,opinionswereroutinelygiveninM&Adeals

u Todaytheyarealmostnevergiven

Overview• Whogivesopinions

u Borrower’scounselu Somelenders/investorsrequireopinionsfromtheirowncounsel

u LocalCounselØ State-by-stateissues

u Foreigncounsel

Overview• Whatdoesanopinionlooklike?

u IntroductionØ Describeswheretheopinionrequestcomesfrom

u Listofdocumentsreviewedandbeingopinedonu Standardassumptions

Ø ExecutionbypartiesØ GenuinenessofsignaturesØ Certificatesofgovernmentalofficials,etc.

Overview• Whatdoesanopinionlooklike?(cont.)

u Standardassumptions(cont.)Ø Officers’certificates

u Knowledgedefinition

u Actualopinions

u Entityandcontractopinions

u UCCopinionsØ Attachment

Ø Perfection

Ø Priority(?)

Overview• Whatdoesanopinionlooklike?(cont.)

u Assumptionsu Qualificationsu Whatlawiscovered?u Concludingparagraphs

Ø Whattimeperiodiscovered?Ø Whocanrely?

SourcesofOpinions• Officialsources

u ABAReportsØ ABAGuidelinesØ ABAPrinciples

u TriBarReportsØ TriBarIIØ TriBarLLC&PartnershipReportsØ TriBarRemediesReport

SourcesofOpinions(cont.)• OfficialSources(cont.)

u TriBarReports(cont.)Ø TriBarArticle9Report

Ø TriBarReportonSecondarySalesofSecurities(UCCArticle8– mayapplytosecurityinterestininvestmentproperty)

u StateBarReportsØ Corporate,LPandLLCReports

Ø RealEstateOpinions

Ø RemediesReports

SourcesofOpinions(cont.)• OfficialSources(cont.)

u Other“Official”SourcesØ ALIRestatementoflawgoverninglawyers

Ø NationalCustomaryPracticeStatement

u GoodSummaryattheABALegalOpinionResourceCenter–http://apps.americanbar.org/buslaw/tribar/

• UnofficialSourcesu LawFirm“model”opinions

u Doyouuse“yourform”ortheformsentbyLender’scounsel?

§ “Predicate”opinions

§ Noconflicts/noconsents

§ SpecificStatusOpinions

§ DiligenceIssues

§ Organization,existenceandgoodstanding

§ Corporatepower

§ Dueauthorization

§ Dueexecution

§ “CreditPartyisan[entity]existingandingoodstandingunderthe[stateentitylaw].”

§ Opinionisoftenlimitedtoinformationgainedfromcertificatesissuedbythestateinquestion

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§ “CreditPartyhasthe[typeofentity]powertoexecute,deliverandperformitsobligationsundertheOpinionDocumentstowhichitisaparty”

§ RequiresanalysisoforganizationaldocumentsoftheCreditParty,aswellastherelevantentitylawofthestateoforganization

§ someentitiesmayhaverestrictionsondebtactionsthattheycantakeintheirorganizationaldocuments

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§ “CreditPartyhastakenthe[typeofentity]actionnecessarytoauthorizeitsexecution,deliveryandperformanceoftheOpinionDocumentstowhichitisaparty.”

§ needtodiligencethatproperboard/managerand/orshareholder/memberactionhasbeentakentoauthorizethetransaction

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§ “TheOpinionDocumentshavebeendulyexecutedanddeliveredonbehalfoftheCreditParty.”

§ ensurethatdocumentsaresignedbyproperlyauthorizedpersons

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“Theexecution,deliverybytheCreditPartyoftheOpinionDocuments[performancebytheCreditPartythereunder/thepaymentbytheCreditPartyofitsobligationsthereunder]willnot(i)constituteaviolationoftheorganizationaldocumentsoftheCreditParty,(ii)constituteaviolationofanyapplicableprovisionofexisting[coveredstate]laworUnitedStatesfederalstatutorylaworpublishedregulation,or(iii)resultinaviolationof,orresultinthecreationofalienunder,anyagreementindentifiedinExhibitAattachedhereto”

§ Noconflictswithotheragreementsshouldbelimitedtoaspecifiedlist–not“allagreements”or“allmaterialagreements”

§ needtoreviewlistedagreementstomakesurethereisnoconflict

§ noconflictsmerelyrequiresthatareasonablefutureperformancewillnotconflict–notthatthereisnowayinthefuture(suchasadefault)therewouldnotbeaconflict

§ shouldstatelawbelimitedtostatutorylawandregulationsaswell?

§ treatmentoffinancialcovenants

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§ “Noconsent,approval,authorizationororderof,orfilingwith,anyUnitedStatesfederalof[coveredstate]governmentalauthorityorbody,isrequiredforCreditPartytoobtaintherighttoexecute,deliver,andperformitsobligationsunder,theOpinionDocuments,exceptfor

(1)thosealreadyobtained,(2)thoserequiredbyCreditPartyfortheordinarycourseofbusiness,and(3)thoserequiredundertheSecuritiesLaws.

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§ ifCreditPartyisaregulatedentity(e.g.,apublicutilityorarailroad),mayexcludethingsrelatingtotheirregulation

§ sometimesseparateregulatorycounselwillcoverthosematters

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§ InvestmentCompanyAct

§ Litigation

§ RegulationU

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§ “TheCreditPartyisnotan“investmentcompany”requiredtoberegisteredassuchundertheInvestmentCompanyActof1940,asamended,ortherulesandregulationsthereunder”

§ requiresdiligenceontheCreditPartytodetermineitsstatus

§ evenifthisopinionisnotgiven,someconsideritanelementofenforceability

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§ “Toouractualknowledge,(1)therearenoactions,suitsorproceedingspendingorthreatenedagainsttheCreditPartywithrespecttotheOpinionDocumentsand(2)theredoesnotexistanyjudgment,orderorinjunctionprohibitingtheconsummationofthetransactionscontemplatedbytheOpinionDocuments”

§ shouldnotcoverlitigationingeneral(evenmateriallitigation),ifnotwithrespecttotheOpinionDocuments

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§ “AssumingapplicationoftheloansascontemplatedbythecreditagreementandthatthelenderisnotsubjecttoRegulationT,theexecutionanddeliveryofthecreditagreementbytheCreditPartyandthemakingoftheloansthereunderwillnotviolateRegulationUorX.”

§ ifnomarginstockownedbyCreditParty,simpleopiniontogive

§ wheremarginstockispresent,moreanalysisisnecessary

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§ Diligenceismostimportantwithrespecttoentityopinions

§ mostlikelyareatofaceliability

§ Diligenceimportantbothtolawandtoorganizationaldocuments

§ neverassumetheeasyanswer§ wheremarginstockispresent,more

analysisisnecessary

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§ Coverage§ Limitations

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“EachoftheOpinionDocumentsisavalidandbindingobligationoftheCreditPartyandisenforceableagainsttheCreditPartyinaccordancewithitsterms.”

§ Unlessexceptionstaken,coversmostprovisionsofagreements

§ Includingusury,choiceoflaw,etc.

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§ Shouldnotbereadtocovercreationandperfectionofsecurityinterests

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UCCOpinions• Attachment• Perfection• Priority• Remedies

UCCOpinions(cont.)• UCCOpinions- Example

u TheSecurityAgreementcreatesinyourfavoravalidsecurityinterestintheitemsandtypesofpropertyoftheBorrowerdescribedinSection____oftheSecurityAgreementtotheextentthatasecurityinterestmaybecreatedinsuchpropertyundertheUCC.Assumingthatthereisnoagreementamongthepartiestopostponethetimeofattachment,suchsecurityinteresthasattachedandisenforceableagainsttheBorrowerwithrespecttosuchCollateral.

u TheFinancingStatementshallbedeliveredforfilingtotheOfficeoftheSecretaryoftheStateofDelaware.Uponduefiling,suchFinancingStatementwillperfectthesecurityinterestcreatedbytheSecurityAgreementintheitemsandtypesofCollateraldescribedinsuchFinancingStatementinwhichasecurityinterestmaybeperfectedundertheUCCbythefilingofafinancingstatementinsuchoffice.WearenotadmittedtopracticeintheStateofDelawareandtheopinionsetforthaboveisbasedsolelyuponourreviewofthecompilationoftheDelawareUniformCommercialCodesetforthintheCCHSecuredTransactionsGuide.

UCCOpinions(cont.)• UCCOpinions- Attachment

u BasedoncontractopinionsØ AuthorityØ ExistenceØ Enforceability

u ScopeØ IsthetransactionsubjecttotheUCC?Ø IsthecollateralcoveredbytheUCC?

UCCOpinions(cont.)• UCCOpinions– Attachment(cont.)

u Scope(cont.)Ø Hasthesecurityagreementbeenproperlyauthenticated?

Ø Isthereappropriategrantinglanguage?

Ø Isthecollateralproperlydescribed?

v Reminder– “allassets”isOKintheUCC-1butnotinthesecurityagreement

UCCOpinions(cont.)• UCCOpinions– Attachment(cont.)

u Scope(cont.)Ø Assumptions

v Rightsincollateral

v Valuegiven

UCCOpinions(cont.)• UCCOpinions– Perfection

u Byfilingu Bypossessionu Bycontrolu DueDiligence– Thingsyouneedtoknow

Ø TypeofentityØ JurisdictionoforganizationØ Registeredorganization?

UCCOpinions(cont.)• UCCOpinions– Perfection(cont.)

u DueDiligence– Thingsyouneedtoknow(cont.)Ø ChiefExecutiveOffice

Ø Securities– certificatedoruncertificated?

Ø Locationofdepositaccount

Ø IndividualNamev Driver’sLicense

v Other?

Ø Trust- identityoftrustee

UCCOpinions(cont.)• Perfectionbyfiling– “Ordinary”collateral

u Collateralofatypeastowhichperfectionisaccomplishedbyfiling

u Properfilinglocationandfeeu UCC-1iscompletedcorrectlyandorlegallysufficient

Ø CorrectdebtornameandaddressØ Correctindicationofcollateral

v “Allassets”OKonUCC-1

UCCOpinions(cont.)• PerfectionbyFiling– Fixtures

u Typicallydoneaspartofmortgagefilingu Determineproperfilinglocation

Ø Typicallylandrecordsorrecordingoffice,notSecretaryofState

u Checkcorrectboxesu Notespecialrulesfortransmittingutilities

UCCOpinions(cont.)• Perfectionbyfiling– Non-USDebtors

u Anon-USdebtorisnotaregisteredorganization

u Looktoplaceofchiefexecutiveoffice

u Usefilingsystemforthatjurisdiction

UCCOpinions(cont.)• Perfectionbyfiling– individualandtrustdebtors

u 2010AmendmentstoArticle9clarifiedrulesu Individuals

Ø Nameofdriver’slicenseorotherrecognizedID(ifstatechose“Option-B”– otherwisedriver’slicense)

u TrustsØ Nameoftrust,ifthereisone,ornameofsettloroftrust,otherwise

UCCOpinions(cont.)• Perfectionbypossession

u CertificatedsecuritiesØ PossessiontrumpsfilingØ Howdoyoudeterminewhohaspossession?

v Agentorbailee?

v Gratuitousbaileeinmultiplelendersituations

v Acknowledgmentfrombailee

UCCOpinions(cont.)• Perfectionbycontrol

u Requiredforperfectionagainstdepositaccounts,securitiesaccounts,electronicchattelpaper

u ControlagreementØ Depositorymustagreetofollowordersofsecuredpartywithoutfurtherconsentofdebtor

Ø Whatifdepositorywillnotprovideacontrolagreement?

UCCOpinions(cont.)• Perfectionbycontrol(cont.)

u ElectronicChattelPaperØ Determinewhethercollateraliselectronicchattelpaper

Ø ChoiceofLaw

u Somestatese.g.NY,DE,havenon-uniformprovisions

UCCOpinions(cont.)• UCCOpinions– Priority

u Priorityopinionsarerarelygivenwithrespectto“filingcollateral”andareoftenconsideredtobeaninappropriaterequest

Ø SometimesgiveninratedloansØ ManyfirmshaveapolicyagainstgivingpriorityopinionsØ Whengiven,aretypicallybasedonaUCCsearchreportreview

v Canyouassumeitsaccuracy,particularlyifitwasdonebyanoutsideservice?

UCCOpinions(cont.)• UCCOpinions– Priority(cont.)

u Priorityopinionsmaybegiveninconnectionwithperfectionbypossessionorcontrol

u CanalsobegiveninthecaseofaprotectedpurchaserunderArticle8

UCCOpinions(cont.)• UCCOpinions– Remedies

u Ageneralremediesopinionistypicallynotgiven

u Standardwaiversareassumed

u “Practicalrealization”opinionisoftengivenØ Typicallylocatedwithinassumptionsandqualifications

Whocanrelyonopinion?• Addressee(s)

u Syndicatelendersu Participants

• Prospectivelendersorparticipants?• Counsel?• Thirdparties,e.g.accountants,investmentbankers,valuationfirms,turnaroundconsultants?

Periodcoveredbyopinion• Asofdateofopinion• Subsequentperiodsshouldbedisclaimed

§ Inbound– thatagreementchoosingopinionlawstateasgoverninglawisenforceable§ canoftenbegiven(ifthereisaclear

statelaw)§ manyfirmsdonotgive(orgivein

limitedfashion:“excepttotheextentsuchchoiceoflawofNewYorkasthegoverninglawismadeincompliancewiththestatutorylawsoftheStateofNewYork”)

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§ Outbound– thatopinionlawstatewillrecognizechoiceofotherjurisdiction’slaw§ generallyshouldberesisted§ comesupmostfrequentlyincross-

borderdeals

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§ Sometransactionsmayhavecreditpartiesfrommultiplejurisdictions,oragreementswithdifferentgoverninglaws

§ Whereafirmdoesnotpracticeinoneormoresuchstates,differingapproachestohandlingissues

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§ Foroutofstateparties§ mayuselocalcounsel§ mayuse“guide”opinion(relyingon

readingentitystatuteonly)§ commonapproachforDelaware

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§ Foroutofstateagreements§ mayrefusetocoverthem§ mayuselocalcounsel§ mayuse“asif”approach(opineon

documentsasiftheyweregovernedbycoveredlaw)§ needconsentofrecipientforsuch

approach

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§ Manyofthesameconcernsasmulti-statetransactions,butheightened

§ Enforcementofforeignjudgmentsopinion§ canbegiveninreasonedformin

certainstates§ outboundchoiceoflawopinions

§ typicallyrequested§ abilitytogiveinquestion(andcan

dependonstate)§ Bewaretheas-ifopinion

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§ Assumptions

§ Qualifications

§ Mustbereasonable§ can’tmakefactualassumptionsknown

tobeincorrect§ incertaininstances(“as-if”opinions,

forexample)canassumethingsifdisclosedtoanddiscussedwithrecipient

§ Can’tdirectlyorindirectlyassumelegalconclusions

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§ Accuracyofdocumentsandsignatures

§ Predicateopinionsandenforceabilityofdocumentsfornon-coveredparties

§ Nooralagreements§ Accuracyofgovernmentcertificates

§ Accuracyoffactualinformationinagreementsandinclientcertificates

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§ rightsinthecollateral§ valuehavingbeengiven§ whereopinionsgivenonspecifictypesofcollateral,assumptionsregardingtheclassificationofsuchcollateral

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§ “Exceptasexpresslyotherwisesetforthinthisletter,ouradviceoneverylegalissueaddressedinthisletterisbased exclusivelyontheinternallawsoftheStateof__________ortheFederallawoftheUnitedStateswhich,ineachcase,inourexperienceisgenerallyapplicablebothtogeneralbusinessorganizationswhicharenotengagedinregulatedbusinessactivitiesandtotransactionsofthetypecontemplatedintheOpinionDocuments(butwithoutourhavingmadeanyspecialinvestigationastoanyotherlaws),exceptthatweexpressnoopinionoradviceastoanylaworlegalissue(a)whichmightbeviolatedbyanymisrepresentationoromissionorafraudulentact,or(b)towhichanyCreditPartymaybesubjectasaresultofyourlegalorregulatorystatus.”

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§ Mayalsocovercertainspecificotherlawsforcertainspecifiedopinions

§ otherstateentitylawsforpredicateopinions

§ otherstateUCCsforfilingopinions

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§ SecuritiesLaws§ Antitrustlaws,employeebenefitlaws,fiduciarydutylaws,environmentalandlanduselaws,taxlaws,healthandsafetylaws,laborlaws,criminallaws,regulatorylaws

§ Terrorismandsanctionslaws

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§ “(i)applicablebankruptcy,insolvency,fraudulentconveyance,reorganization,moratoriumandsimilarlawsaffectingcreditors’rightsandremediesgenerallyandjudiciallydevelopeddoctrinesinthisareasuchassubstantiveconsolidationandequitablesubordination;(ii)theeffectofgeneralprinciplesofequity(regardlessofwhetherenforcementissoughtinaproceedingatlaworinequity);(iii)animpliedcovenantofgoodfaithandfairdealing;and(iv)othercommonlyrecognizedstatutoryandjudicialconstraintsonenforceabilityincludingstatutesoflimitations.”

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§ Guaranteesuponchangestotheunderlyingobligation

§ Fraudulentconveyancesavingsclauses

§ Eligiblecontractparticipantissueswithswapguarantees

§ E.U.“bail-in”provisions

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§ Waiversofunwaivablerights§ provisionsthatamounttopenalties

§ indemnificationforsecuritieslawsviolations

§ submissiontojurisdiction,venue,waiveroftrialbyjury

§ arbitrationprovisions§ covenantsnottocompete§ requirementstoamendinwriting

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§ “EachenforceabilityopinionisalsosubjecttothequalificationthatcertainprovisionsoftheOpinionDocumentsmaynotbeenforceableinwholeorinpart,althoughtheinclusionofsuchprovisionsdoesnotrendertheOpinionDocumentsinvalid,andtheOpinionDocumentsandthelawoftheStateof___________containadequateremedialprovisionsforthepracticalrealizationoftherightsandbenefitsaffordedthereby.”

§ Sometimeslimitedtosecuritydocuments

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§ Verystatespecificissue

§ Insomestates,shouldnotbecoveredatall

§ Inotherstates,shouldonlybecoveredincertaintypesoftransactions,orwithcertaintypesofborrowersand/orlenders

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§ proceeds(withreferenceto9-315)§ bankruptcyprovisionsregardingpreferencesandSection552

§ Priorityofsecurityinterests(exceptforprotectedpurchaseropinions)

§ Realestate-relatedcollateral(includingtimber,crops,farmproducts,as-extractedcollateral)

§ Money,L/Crights,certificateoftitlecollateral,commercialtortclaims,consumergoods

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§ supergenericcollateraldescriptions

§ collateralwhereperfectiongovernedbyfederallaw(airplanes,boats,etc.)

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