Drafting Legal Opinions for Article 9 Security Interests: Navigating - - PowerPoint PPT Presentation
Drafting Legal Opinions for Article 9 Security Interests: Navigating the Complexities and Avoiding Liability Erik W. Hepler, Kirkland & Ellis James C. Schulwolf, Shipman & Goodwin Overview Opinions are typical in financing transactions
u Always given at initial closing u Given in connection with some, but not all, amendments
Ø Always if “new money”
u For many years, opinions were routinely given in M&A deals u Today they are almost never given
u Borrower’s counsel u Some lenders/investors require opinions from their
u Local Counsel
Ø State-by-state issues
u Foreign counsel
u Introduction
Ø Describes where the opinion request comes from
u List of documents reviewed and being opined on u Standard assumptions
Ø Execution by parties Ø Genuineness of signatures Ø Certificates of governmental officials, etc.
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Standard assumptions (cont.)
Ø Officers’ certificates
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Knowledge definition
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Actual opinions
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Entity and contract opinions
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UCC opinions
Ø Attachment Ø Perfection Ø Priority (?)
u Assumptions u Qualifications u What law is covered? u Concluding paragraphs
Ø What time period is covered? Ø Who can rely?
u ABA Reports
Ø ABA Guidelines Ø ABA Principles
u TriBar Reports
Ø TriBar II Ø TriBar LLC & Partnership Reports Ø TriBar Remedies Report
u TriBar Reports (cont.)
Ø TriBar Article 9 Report Ø TriBar Report on Secondary Sales of Securities (UCC Article 8 – may apply
to security interest in investment property)
u State Bar Reports
Ø Corporate, LP and LLC Reports Ø Real Estate Opinions Ø Remedies Reports
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Other “Official” Sources
Ø ALI Restatement of law governing lawyers Ø National Customary Practice Statement
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Good Summary at the ABA Legal Opinion Resource Center – http://apps.americanbar.org/buslaw/tribar/
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Law Firm “model” opinions
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Do you use “your form” or the form sent by Lender’s counsel?
“Predicate” opinions
No conflicts/no consents
Specific Status Opinions
Diligence Issues
Organization, existence and good standing
Corporate power
Due authorization
Due execution
§ “Credit Party is an [entity] existing and in good standing under the [state entity law].” § Opinion is often limited to information gained from certificates issued by the state in question
12 § “Credit Party has the [type of entity] power to execute, deliver and perform its obligations under the Opinion Documents to which it is a party”
§ Requires analysis of organizational documents of the Credit Party, as well as the relevant entity law of the state
§ some entities may have restrictions on debt actions that they can take in their
§ “Credit Party has taken the [type of entity] action necessary to authorize its execution, delivery and performance of the Opinion Documents to which it is a party.”
§ need to diligence that proper board/manager and/or shareholder/member action has been taken to authorize the transaction
14 § “The Opinion Documents have been duly executed and delivered
§ ensure that documents are signed by properly authorized persons
15 “The execution, delivery by the Credit Party of the Opinion Documents [performance by the Credit Party thereunder/the payment by the Credit Party of its obligations thereunder] will not (i) constitute a violation of the organizational documents of the Credit Party, (ii) constitute a violation of any applicable provision of existing [covered state] law or United States federal statutory law or published regulation, or (iii) result in a violation of, or result in the creation of a lien under, any agreement indentified in Exhibit A attached hereto”
§ No conflicts with other agreements should be limited to a specified list – not “all agreements” or “all material agreements” § need to review listed agreements to make sure there is no conflict § no conflicts merely requires that a reasonable future performance will not conflict – not that there is no way in the future (such as a default) there would not be a conflict § should state law be limited to statutory law and regulations as well? § treatment of financial covenants
17 § “No consent, approval, authorization or order of, or filing with, any United States federal of [covered state] governmental authority or body, is required for Credit Party to obtain the right to execute, deliver, and perform its
Documents, except for (1) those already obtained, (2) those required by Credit Party for the
(3) those required under the Securities Laws.
18 § if Credit Party is a regulated entity (e.g., a public utility or a railroad), may exclude things relating to their regulation
§ sometimes separate regulatory counsel will cover those matters
19 § Investment Company Act § Litigation § Regulation U
20 § “The Credit Party is not an “investment company” required to be registered as such under the Investment Company Act of 1940, as amended, or the rules and regulations thereunder”
§ requires diligence on the Credit Party to determine its status § even if this opinion is not given, some consider it an element of enforceability
21 § “To our actual knowledge, (1) there are no actions, suits or proceedings pending or threatened against the Credit Party with respect to the Opinion Documents and (2) there does not exist any judgment, order or injunction prohibiting the consummation of the transactions contemplated by the Opinion Documents”
§ should not cover litigation in general (even material litigation), if not with respect to the Opinion Documents
22 § “Assuming application of the loans as contemplated by the credit agreement and that the lender is not subject to Regulation T, the execution and delivery of the credit agreement by the Credit Party and the making of the loans thereunder will not violate Regulation U or X.”
§ if no margin stock owned by Credit Party, simple opinion to give § where margin stock is present, more analysis is necessary
23 § Diligence is most important with respect to entity opinions
§ most likely area to face liability
§ Diligence important both to law and to organizational documents
§ never assume the easy answer § where margin stock is present, more analysis is necessary
24 § Coverage § Limitations
25 “Each of the Opinion Documents is a valid and binding obligation
enforceable against the Credit Party in accordance with its terms.”
§ Unless exceptions taken, covers most provisions of agreements
§ Including usury, choice of law, etc.
27 § Should not be read to cover creation and perfection of security interests
28 u
The Security Agreement creates in your favor a valid security interest in the items and types of property of the Borrower described in Section ____ of the Security Agreement to the extent that a security interest may be created in such property under the UCC. Assuming that there is no agreement among the parties to postpone the time of attachment, such security interest has attached and is enforceable against the Borrower with respect to such Collateral.
u
The Financing Statement shall be delivered for filing to the Office of the Secretary
the security interest created by the Security Agreement in the items and types of Collateral described in such Financing Statement in which a security interest may be perfected under the UCC by the filing of a financing statement in such office. We are not admitted to practice in the State of Delaware and the opinion set forth above is based solely upon our review of the compilation of the Delaware Uniform Commercial Code set forth in the CCH Secured Transactions Guide.
u Based on contract opinions Ø Authority Ø Existence Ø Enforceability u Scope Ø Is the transaction subject to the UCC? Ø Is the collateral covered by the UCC?
u Scope (cont.)
Ø Has the security agreement been properly authenticated? Ø Is there appropriate granting language? Ø Is the collateral properly described?
v Reminder – “all assets” is OK in the UCC-1 but not in the security
agreement
u Scope (cont.)
Ø Assumptions
v Rights in collateral v Value given
u By filing u By possession u By control u Due Diligence – Things you need to know Ø Type of entity Ø Jurisdiction of organization Ø Registered organization?
u Due Diligence – Things you need to know (cont.)
Ø Chief Executive Office Ø Securities – certificated or uncertificated? Ø Location of deposit account Ø Individual Name
v Driver’s License v Other?
Ø Trust - identity of trustee
u Collateral of a type as to which perfection is accomplished
u Proper filing location and fee u UCC-1 is completed correctly and or legally sufficient Ø Correct debtor name and address Ø Correct indication of collateral
v “All assets” OK on UCC-1
u Typically done as part of mortgage filing u Determine proper filing location
Ø Typically land records or recording office, not Secretary of
u Check correct boxes u Note special rules for transmitting utilities
u A non-US debtor is not a registered organization u Look to place of chief executive office u Use filing system for that jurisdiction
u 2010 Amendments to Article 9 clarified rules u Individuals
Ø Name of driver’s license or other recognized ID (if state
u Trusts
Ø Name of trust, if there is one, or name of settlor of trust,
u Certificated securities
Ø Possession trumps filing Ø How do you determine who has possession?
v Agent or bailee? v Gratuitous bailee in multiple lender situations v Acknowledgment from bailee
u Required for perfection against deposit accounts,
u Control agreement
Ø Depository must agree to follow orders of secured party
Ø What if depository will not provide a control agreement?
u Electronic Chattel Paper
Ø Determine whether collateral is electronic chattel
Ø Choice of Law
u Some states e.g. NY, DE, have non-uniform
u Priority opinions are rarely given with respect to “filing
Ø Sometimes given in rated loans Ø Many firms have a policy against giving priority opinions Ø When given, are typically based on a UCC search report review
v Can you assume its accuracy, particularly if it was done by an outside
service?
u Priority opinions may be given in connection with
u Can also be given in the case of a protected
u A general remedies opinion is typically not given u Standard waivers are assumed u “Practical realization” opinion is often given
Ø Typically located within assumptions and qualifications
u Syndicate lenders u Participants
§ Inbound – that agreement choosing
enforceable § can often be given (if there is a clear state law) § many firms do not give (or give in limited fashion: “except to the extent such choice of law of New York as the governing law is made in compliance with the statutory laws
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§ Outbound – that opinion law state will recognize choice of other jurisdiction’s law § generally should be resisted § comes up most frequently in cross- border deals
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§ Some transactions may have credit parties from multiple jurisdictions,
governing laws § Where a firm does not practice in
approaches to handling issues
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§ For out of state parties
§ may use local counsel § may use “guide” opinion (relying on reading entity statute only) § common approach for Delaware
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§ For out of state agreements
§ may refuse to cover them § may use local counsel § may use “as if” approach (opine on documents as if they were governed by covered law) § need consent of recipient for such approach
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§ Many of the same concerns as multi-state transactions, but heightened
§ Enforcement of foreign judgments
§ can be given in reasoned form in certain states § outbound choice of law opinions § typically requested § ability to give in question (and can depend on state) § Beware the as-if opinion
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Assumptions
Qualifications
§ Must be reasonable
§ can’t make factual assumptions known to be incorrect § in certain instances (“as-if” opinions, for example) can assume things if disclosed to and discussed with recipient
§ Can’t directly or indirectly assume legal conclusions
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§ Accuracy of documents and signatures § Predicate opinions and enforceability of documents for non-covered parties § No oral agreements § Accuracy of government certificates § Accuracy of factual information in agreements and in client certificates
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§ rights in the collateral § value having been given § where opinions given on specific types of collateral, assumptions regarding the classification of such collateral
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§ “Except as expressly otherwise set forth in this letter, our advice on every legal issue addressed in this letter is
based exclusively on the internal laws of
the State of __________ or the Federal law of the United States which, in each case, in our experience is generally applicable both to general business
regulated business activities and to transactions of the type contemplated in the Opinion Documents (but without
investigation as to any other laws), except that we express no opinion or advice as to any law or legal issue (a) which might be violated by any misrepresentation or omission or a fraudulent act, or (b) to which any Credit Party may be subject as a result
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§ May also cover certain specific
§ other state entity laws for predicate
§ other state UCCs for filing opinions
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§ Securities Laws § Antitrust laws, employee benefit laws, fiduciary duty laws, environmental and land use laws, tax laws, health and safety laws, labor laws, criminal laws, regulatory laws § Terrorism and sanctions laws
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§ “(i) applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and judicially developed doctrines in this area such as substantive consolidation and equitable subordination; (ii) the effect of general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity); (iii) an implied covenant of good faith and fair dealing; and (iv)
statutory and judicial constraints on enforceability including statutes of limitations.”
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§ Guarantees upon changes to the underlying obligation § Fraudulent conveyance savings clauses § Eligible contract participant issues with swap guarantees § E.U. “bail-in” provisions
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§ Waivers of unwaivable rights § provisions that amount to penalties § indemnification for securities laws violations § submission to jurisdiction, venue, waiver of trial by jury § arbitration provisions § covenants not to compete § requirements to amend in writing
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§ “Each enforceability opinion is also subject to the qualification that certain provisions of the Opinion Documents may not be enforceable in whole or in part, although the inclusion of such provisions does not render the Opinion Documents invalid, and the Opinion Documents and the law of the State of ___________ contain adequate remedial provisions for the practical realization of the rights and benefits afforded thereby.” § Sometimes limited to security documents
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§ Very state specific issue § In some states, should not be covered at all § In other states, should only be covered in certain types of transactions, or with certain types
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§ proceeds (with reference to 9-315) § bankruptcy provisions regarding preferences and Section 552 § Priority of security interests (except for protected purchaser
§ Real estate-related collateral (including timber, crops, farm products, as-extracted collateral) § Money, L/C rights, certificate of title collateral, commercial tort claims, consumer goods
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§ supergeneric collateral descriptions § collateral where perfection governed by federal law (airplanes, boats, etc.)
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