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Opinions Matters

Opinions Matters Fall 2017

Choice of Law Opinions: Bifurcation and Remedies in Third Party Opinion Letters

William B Dunn

Summary

  • The Reports suggest basing this opinion on an assumption, an example of which, based on Restatement, Conflicts of Law when applicable law supports.
  • The scope of the enforceability opinion and the scope of a choice of law opinion would not implicitly or expressly cover how remedies are to be exercised.
Choice of Law Opinions: Bifurcation and Remedies in Third Party Opinion Letters
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The decision of a Florida court in Bonita Real Estate Partners, LLC v. SLF IV Lending, L.P., Case No. 2D15-5492, 2017 WL 2988898 (Fla. D. Ct. App. Jul. 14, 2017), noted in the Listserve summary above, has prompted discussion about the enforceability and effectiveness of provisions in loan documents selecting the law of more than one jurisdiction to govern discrete matters in loan documents – so-called bifurcated choice of law provisions.

The loan documents provided – not atypically – that they would be governed by, and construed, applied, and enforced under, the law of State A (in this case, Texas), without regard to conflicts of law, except that the law of the state where the mortgaged property was located (if different than the law of State A) would govern “creation, perfection, priority, and foreclosure of the liens” of the mortgage. The focus of the court’s opinion was on the scope of foreclosure, a remedy chosen to be governed by Florida law, and the decision does not explore how differing laws might apply. The Court held that a deficiency claim was inherently part of a foreclosure remedy. In applying Florida law, which unlike that of Texas conditioned deficiency claims on a foreclosure for fair market value, lender’s deficiency claim against the borrower was defeated. However, this case provides an opportunity to look at a rare decision when a bifurcated choice of law provision is present. How might this decision inform us in giving a third party opinion letter covering bifurcated choice of law?

Choice of Law

We look at this subject in context of two recent reports providing guidance to lawyer providing opinion in real estate finance transactions. The Real Estate Finance Opinion Report of 2012 (“2012 Report”), at Chapter Two, Paragraphs 3.5(c) and (d) and 3.9, favors the view that a choice of law opinion — if relevant — should not be implicit in an enforceability opinion. The 2012 Report acknowledges that this view is not uniform, and both the 2012 Report and the report Local Counsel Opinion Letters in Real Estate Finance Transactions (“Local Counsel Report”) recommend that the opinion giver address the subject expressly.

(i) When loan documents provide that the law of a jurisdiction other than the opinion jurisdiction is to govern all or some portion of the loan documents, and the law of the opinion jurisdiction supports it, a favorable express opinion might read:

A federal court sitting in the State and the State courts in the State, applying the conflict of law rules of the State [would] [should] give effect to the choice of law provisions contained in Paragraph [___] of the Mortgage.

The Reports suggest basing this opinion on an assumption, an example of which, based on Restatement, Conflicts of Law when applicable law supports it, is:

To the extent governed by the Law of any jurisdiction other than the State (an “Other Jurisdiction”), including conflicts of law principles thereof, we have assumed that: (i) the Transaction Documents are enforceable against the parties thereto in accordance with their respective terms under the Law of the Other Jurisdiction; (ii) the Other Jurisdiction has a substantial relationship to the parties or the Transaction, or there is other reasonable basis for the choice by the parties, and application of the Law of an Other Jurisdiction would not be contrary to a fundamental policy of the State; and (iii) the selection of application of the Law of the Other Jurisdiction will be honored by courts in the Other Jurisdiction.

(ii) When the loan documents chose the law of the opinion jurisdiction to govern all or a portion of the loan documents, and no choice of law opinion is given, the enforceability opinion letter may read:

To the extent the law of the State applies, excluding choice of law rules, the Transaction Documents are enforceable ….

(iii) An express exclusion of any implicit choice of law opinion would read:

This Opinion Letter does not express an opinion on the enforceability of choice of law provisions in the Transaction Documents.

Even if enforceability of choice of law was implicit in the enforceability opinion, the generic enforceability qualification, if incorporated in the opinion letter, would apply; and the assurances given to the generic enforceability qualification would assure only that the note could be enforced judicially “in accordance with applicable law,” and the mortgage could be foreclosed “in accordance with applicable law.” Here, the Florida court ruled that the law applicable to both was Florida law, as chosen. How the Court would have decided the case if the loan documents said expressly that the law of State A was to govern any claim for a deficiency (regardless of in what remedy it was sought) – a true choice of law question – is not known.

Exercise of Remedy

In the Florida case, the document provided for Florida law or Texas law to govern discrete matters. Florida law was selected as a matter of the contract to apply to “foreclosure.” A deficiency claim was brought as part of the foreclosure action. The Florida court said that Florida law regards seeking a deficiency to be a part of the foreclosure process. It therefore applied Florida law. The Florida Court did not explore how application of Texas law to the deficiency claim might be contrary to a fundamental policy of Florida law and accordingly not honored by Florida courts.

The scope of the enforceability opinion and the scope of a choice of law opinion would not implicitly or expressly cover how remedies are to be exercised (other than conditioning exercise to being “in accordance with applicable law”) or are to achieve any particular purpose (enable a deficiency judgment). The 2012 Report notes that the enforceability opinion does not address procedural actions necessary to pursue a given remedy. The Local Counsel Report in Paragraph 3.14 notes that express opinions on the effect of exercise of a remedy are sometimes requested. That Paragraph discusses such an opinion request and the formulation of a response; and provides an example of an express opinion covering the subject of the Florida case – availability of a deficiency claim notwithstanding foreclosure. A limitation of the effect-of-remedies opinion is also provided. While neither an enforceability opinion nor even an express choice of law opinion as formulated in the Real Estate Reports would cover how remedies may be pursued, an express opinion on effect of remedies would have done so favorably, unless qualified. A Florida lawyer, and a lawyer in any jurisdiction with similar remedial law, giving such a third party opinion would need to consider the breadth of the opinion example, and note that a deficiency claim would not be available to the extent the value of the property exceeded the foreclosure bid. The limitation provided in Local Counsel Report Paragraph 3.14 provides an example.

Reference to the Local Counsel Report will provide useful guidance to an opinion giver in this situation. The decision in Bonita Real Estate does less to inform us about choice of law opinions than it demonstrates the necessity of understanding laws of jurisdictions applicable to enforcement of loan documents by choice or otherwise, and drafting to achieve intent.

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