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Opinions Matters

Opinions Matters Fall 2017

Applying Federal Law In Real Estate Finance Opinions: Why? What? When?

William B Dunn, Edward J Levin, and Laurence G Preble

Summary

  • Unless an opinion letter specifies it covers federal law, it's typically not covered except for expressly addressed opinions.
  • Local counsel in interstate loans typically assess the legality of specific documents and obligations, focusing on state law.
  • It may be my duty as an opinion giver to address a relevant federal law risk recognized by opinion givers generally in the opinion jurisdiction.
Applying Federal Law In Real Estate Finance Opinions: Why? What? When?
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Requests for third party opinion letters in real estate finance transactions often call for opinions based on the law of one or more jurisdictions and federal law. And often out of habit, pressure from the recipient’s counsel, or unquestioned precedent many opinion letters state that federal law is covered. The premise of this article is that pro forma inclusion of federal law coverage in most third party opinion letters in real estate finance transactions is inappropriate. This article considers coverage of federal law implicitly and expressly.

The “law” covered by an opinion letter is that which a lawyer in the jurisdiction whose law is covered by the opinion letter, exercising customary professional diligence in similar circumstances, would reasonably recognize as being applicable to the party, transaction, or agreement to which the opinion relates. In a typical real estate transaction involving an opinion with respect to the enforceability of loan documents, including a mortgage on real property located in the opinion jurisdiction, federal law is not likely to be relevant unless the transaction involves unique or regulated entities, businesses, or collateral, or other unusual circumstances. Likewise, third party opinion letters given as a condition of closing in a real estate finance transaction do not ordinarily provide opinions about the project being financed, as to which federal law could be relevant. Issues relating to governmental permits and approvals, environmental matters, or other similar matters relating to the project typically are expressly excluded from most opinion letters. Project related matters are more usually addressed in separate opinion letters or alternative certificates and documents on which a lender may rely. Thus, to what extent, if at all, is federal law relevant to the transaction or the party about which the opinions are given?

It is customary to recite in the opinion letter what law is covered, however, and in doing so to limit coverage to specified law of named jurisdictions, which are defined usually as “Applicable Law.” When the opinion letter designates law of a certain jurisdiction to be covered but does not also designate “federal law,” the opinions expressed do not cover federal law as well as the law of other states. Federal law is not impliedly covered as a matter of state law. When coverage of federal law is intended, it should follow that the opinion letter must designate that coverage.

Opinion resources seem to support this conclusion. The TriBar Closing Opinions Report states:

If in identifying the law covered an opinion letter does not state that it covers federal law, that law is understood, as a matter of customary usage, not to be covered except to the extent that it is expressly addressed by specific opinions in the letter.

This exception can be read to apply federal law either (i) where an express opinion because of its nature would apply federal law - meaning any federal law could be implicated by reason of any specific opinion, or (ii) only where an opinion is based expressly on application of that law. The latter interpretation may be supported by the following from the Legal Opinion Principles, purporting to reflect customary practice:

Even when they are generally recognized as being directly applicable, some laws (such as securities, tax, and insolvency laws) are understood as a matter of customary practice to be covered only when an opinion refers to them expressly.

The Real Estate Opinion Letter Guidelines are more explicit as to opinions of local counsel:

Local counsel in interstate loan transaction who serve for the limited purpose of passing on the legality, validity and enforceability of specific security documents and transaction obligations, as opposed to providing an opinion with respect to a foreign contracting entity and the transaction itself, normally are expected to address matters of applicable state law only, and should not be expected or requested to evaluate or address matters of federal law. Unless specified to the contrary, an opinion does not by implication address federal law (see BLS Accord [ABA Business Law Accord Report] §1).

These statements support a conclusion that certain subject matter will never be covered as a matter of implicit application of federal law, and requires an opinion expressly applying federal law even when the subject matter is governed exclusively by federal law. The scope of the laws (those “some laws” referred to above) subject to this customary practice is not elaborated beyond the examples given, however.

Both the Real Estate Finance Opinion Report of 2012 and the Local Counsel Report in their respective Paragraphs 1.3, observe that coverage of federal law is not common in real estate finance opinion letters. The 2012 Report provides this definitive statement about coverage of federal law:

If any federal law is to be considered, it should be identified and covered expressly; otherwise, no coverage of federal law should be implied or generally referred to. Federal law should be covered only if there is a reason to do so, such as a federal issue material to the transaction.

Despite statements such as those quoted above supporting the principle that federal law is not covered unless explicitly so, many opinion givers, especially local counsel, expressly exclude federal law from their opinion letters. The Local Counsel Report contains an express exclusion of federal law coverage in Illustrative Opinion Letter ¶1.3, the paragraph describing what law is covered and not covered by the opinion letter. Both Real Estate Reports provide illustrative opinion language that expressly excludes certain federal law as an overall limitation to all opinions expressed.

If absence of reference to federal law coverage could be ambiguous, consider an express statement about inclusion of federal law. As the following discussion concludes, federal law coverage should never be the result of pro forma inclusion or general reference.

An opinion letter that recites that it is given “applying the law of the State, including federal law…” creates other possible ambiguity (at least). What does “including” intend? Are the opinions to apply federal law only to the extent federal law is expressly incorporated into state law or is inconsistent with state law but is applicable by virtue of the Supremacy Clause? Is it somehow intended to provide an opinion about preemption of federal law over state law – a subject that seems hardly in the province of a specific state’s opinion giver representing a borrower party? If it intends to apply both state and federal law, that is not what the words say. This formulation makes little sense and should not be used.

If the opinion letter intends to cover federal law, it might say “applying the law of the State and federal law….” But is this clear enough? Such an inclusion would apply any federal law to any opinion given, an undoubtedly unintended scope. Does this satisfy the conditions of explicitness or of addressing application expressly, referred to above? What does explicit mean if not “in so many words” in the opinion to which the law applies? The simple inclusion of the words “and federal law” should not satisfy the standard of explicitness. The better rule, seemingly that intended by the Legal Opinion Principles, is that each opinion given covering federal law must refer to the federal law covered.

What legal conclusions expressed in a real estate finance opinion letter are governed by federal law? The Real Estate Reports do not discuss what federal law would be considered in real estate finance transaction opinion letters if covered implicitly, nor do they describe – except by exclusion – what federal law might pertain to the opinions. If you gave the opinion applying federal law, what would you be opining about in a real estate finance transaction? Why would federal law apply to a real estate finance opinion?

Answering these questions is the first appropriate step to giving an explicit opinion on federal law. Certain transactions, such as loans guaranteed by a federal agency (including HUD) or insured by Fannie Mae or Freddie Mac may have aspects controlled by or subject to federal law and regulation, and these subjects should be explicitly addressed in the opinion letter. Financing of federally licensed activities requires explicit opinions, but the participants in project finance transactions are aware of these matters, which are always addressed explicitly. Project compliance with law is not covered ordinarily in a third party closing opinion. Some opinion topics could implicate federal law matter; for example, an opinion on no violation of law; or that no governmental approvals are required. In most transactions, these specific opinions address at most performance of covenants, not the security itself, and federal law would have no application.

A lender’s proper concern may be whether making this loan to this borrower would cause the lender to do anything illegal or render the transaction unenforceable or frustrate the purpose of the loan, its security, and its repayment. If that is a proper inquiry, then it should be the obligation of the opinion recipient to tell the opinion giver what it is concerned about. Being asked to cover federal law “to the extent it supersedes state law” – a common fallback request -- is not sufficiently focused. Should the opinion giver guess what federal law, IF it superseded state law, could apply if not “obviously” so, and in which case specifically addressed; or should the recipient say (and justify) what it is concerned about in this transaction?

If federal preemption of state law would obviate the need for a limitation, for example one that relates to usury, is it the opinion giver who should consider whether preemption will apply, or should the lender party know that? What is the purpose of having a borrower confirm lender’s knowledge or supply it in matters of which the lender should be aware? But even if that were to be a matter of inquiry, it should be up to the recipient to ask for that to be considered rather than have both the giver guessing what the lender wants to know and the lender guessing that it has been considered. This is not a game. Nor is this a matter of “chicken soup,” a comfort that can never hurt. The expectation that federal law is somehow covered when it is not can lead only to miscommunication and problematic expectations. Humoring the recipient in this regard does no one any favors.

The Local Counsel Report notes that coverage of federal law would be even less pertinent to local counsel opinion letters than to closing opinions of lead counsel.

The foregoing should lead us to conclude that a non-specific reference to federal law coverage generally is probably ill-advised as potentially ambiguous and perhaps unknowingly risk assuming. So, if the project is not a federal government program, does not involve a government agency, does not involve unique or regulated parties, businesses, or collateral – circumstances in which federal law compliance may be relevant, what federal laws ARE ones a lender should be concerned about, and reasonably may request an opinion to cover? Are there any? Is there a federal law that ought to be considered?

I challenge us – opinion givers and opinion recipients - to create a list of governing federal law issues and the circumstances to which each pertains in relation to the opinion subjects covered in the Real Estate Reports – those that would pertain to a typical real estate finance transaction.

It may be my duty as an opinion giver to address a relevant federal law risk recognized by opinion givers generally in the opinion jurisdiction. There are likely none. It may be the opinion giver’s duty to address a relevant risk that it recognizes as relating to the matter or the client, and not avoid by a broad exclusion. But it ought not to be my responsibility to sort through all possible federal law applicability in every transaction. Let the recipient tell me its concerns if it has them.

To shift the burden thusly, and unless or until we have a reason to cover federal law, the opinion letter should provide “excluding federal law…” or “excluding federal law except as to the extent explicitly referenced in opinions given herein …” or similar in the opinion letter.

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