The Legal Opinions Committee of the Business Law Section of the Washington State Bar Association (the “Committee”) recently released a comprehensive legal opinion report entitled Amended and Restated Report on Third-Party Legal Opinion Practice in the State of Washington (the “Report”). As the name implies, the Report integrates, amends, and restates the Committee’s 1998 and 2000 reports on third-party legal opinion practice in Washington. The Report contains an illustrative form of opinion letter and detailed footnotes that explain the procedures Washington opinion givers customarily follow when conducting the factual and legal investigations required to support their opinions, as well as the customary meaning of language typically used in opinion letters. In the paragraphs that follow, we introduce key features of the Report and highlight some of the developments in Washington law, opinion practice, and legal practice as a whole that compelled us to update and issue a new, comprehensive report.
The Committee began its work on the Report by first analyzing the 1998 and 2000 reports to determine which sections needed updating and which sections remained relevant to modern practice and continued to reflect customary practice in Washington. Of course, much has changed in the ensuing years, including the frequency with which third-party legal opinions are requested and received in certain types of transactions in Washington. When the 1998 report was published, opinion letters were customary in a wide variety of commercial transactions, including business acquisitions. For this reason, the 1998 report contained an illustrative form of opinion letter that was broad enough for use in a range of transactions, such as commercial loans, stock purchases, and mergers. Then, in light of the unique issues that arise in secured lending transactions, the Committee issued the 2000 report, setting forth an illustrative form of opinion letter that was tailored to matters involving real and personal property secured lending transactions.
Over the last decade, Washington attorneys have observed a dramatic decline in the use of opinion letters in mergers and acquisition transactions. This is consistent with national trends. A recent study conducted by the ABA Mergers and Acquisitions Committee found that the percentage of private target transactions in which the target’s counsel was required to deliver legal opinions has steadily declined from 70% in 2006 to 7% in 2017. Meanwhile, opinion letters continue to be commonly requested and given in secured lending transactions. Accordingly, the Committee chose to focus the Report’s illustrative form of opinion letter on a hypothetical secured lending transaction. However, because much of the illustrative opinion letter and related footnote comments are of general applicability to other types of transactions, practitioners may find the illustrative language and associated comments helpful when giving and receiving existence, power, and authority opinions with respect to Washington entities involved in other types of commercial transactions.
Although the Report is focused on Washington practice, the Committee reviewed, considered, and discussed many state and national opinion reports published since the 1998 and 2000 Washington reports in order to take into account the ever-evolving national dialogue on legal opinions. For instance, in recent years, the national legal opinion literature has moved closer toward a consensus regarding factual confirmations, including “no litigation” confirmations. It seems that the widely-publicized Massachusetts decision, Dean Foods Co. v. Pappathanasi, has only reinforced the view that factual confirmations expose opinion givers to added risk. In that decision, a law firm that issued an opinion letter stating that, to its knowledge, there were no pending or threatened investigations against the client, was held liable for over $9 million in damages and costs because that “opinion” turned out to be inaccurate. Today, Washington opinion givers increasingly decline to provide “no litigation” confirmations because they do not believe a transactional attorney should be a certifier of facts. The Report agrees with and adopts this position.
In a similar way, “negative assurances” have become much less common in Washington and elsewhere. Washington opinion givers are, however, still occasionally asked to include negative assurance language following a statement that the opinion giver is relying solely on certain sources of information as to factual matters. On the surface, requests of this sort may seem fairly benign and are sometimes argued by the requester as merely confirming the opinion giver’s compliance with the customary practice of not permitting reliance on factual information the opinion giver knows to be false. However, Wafra Leasing Corp. 1999-A-1 v. Prime Capital Corp., which involved federal securities claims, illustrates the dangers of including language of this sort. In Wafra, the court declined to dismiss an investor’s Rule 10b-5 claims against a law firm that issued an opinion letter with respect to a securities offering. The opinion letter included a negative assurance that no information had come to the firm’s attention that would give the firm actual knowledge or actual notice that the information it relied on was inaccurate or incomplete. The court found that this language introduced questions of fact sufficient to overcome potential legal defenses of the opining firm. Although the firm later prevailed on a motion for summary judgment, the victory was the product of years of litigation to resolve questions relating to the negative assurance language. For all of these reasons, the Report calls attention to these potential traps for the unwary, advising strongly against broad affirmative factual confirmations and negative assurances.
In terms of its structure, the Report’s illustrative opinion includes some, but not all, assumptions, qualifications, exclusions, and other limitations that are understood as a matter of Washington customary practice to be included whether or not expressly stated. The Committee chose to expressly include them in part because firms have diverse preferences with respect to the appropriateness of listing customary terms, and greater explicitness may be beneficial in certain situations. For instance, in the wake of Fortress Credit Corp. v. Dechert LLP, some practitioners have concluded that there may be value in expressly stating clearly customary assumptions. In its decision that the claims against an opinion giver’s firm should be dismissed, the court in Fortress noted that the subject opinion letter, “by its very terms” provided, among other things, that it was “clearly and unequivocally circumscribed by the qualifications that defendant assumed the genuineness of all signatures and the authenticity of the documents.” The court’s reference to the fact that the assumptions were expressly stated has left many practitioners—including many in Washington—wondering whether the court would have given similar weight to an opinion giver’s reliance on clearly customary, rather than express, assumptions.
But while the Committee has chosen to expressly state certain clearly customary terms in the illustrative form, the Report does not advocate their express inclusion in every opinion letter. To the contrary, the Report emphasizes the importance of streamlining opinion letters and tailoring express qualifications to the most important issues. And, of course, the Report reiterates that many assumptions and other limitations are customarily included in opinion letters, whether or not stated expressly.
The Report also addresses evolving trends and commercial expectations with respect to reliance on opinion letters by unknown future assignees, such as future lenders under syndicated loan transactions. Although many Washington attorneys choose to strictly limit reliance in order to reduce their potential liability, many others have embraced the so-called Wachovia limitation approach, and are willing to allow future reliance under certain limited circumstances. Accordingly, the Report provides two alternative forms of reliance language. The first alternative strictly limits reliance. The second permits full reliance by successor lenders, but expressly states that reliance must be reasonable and that consent to future reliance does not constitute reissuance of the opinions or create any obligation to update the opinions.
As noted above, in preparing the Report, the Committee reviewed state, national, and international legal developments that have the potential to impact Washington legal opinion practice. For instance, the Report addresses, among other things, uncertainty created by the Washington Supreme Court’s 2012 response to a certified question as to whether Mortgage Electronic Registration Systems, Inc. (“MERS”) was a lawful beneficiary under two deeds of trust where MERS was named as beneficiary but never held the notes evidencing the obligations secured by the deeds of trust. The court stated that only the actual holder of the instrument evidencing the obligations secured by a deed of trust may be a beneficiary with the power to proceed with a nonjudicial foreclosure on real property, and concluded that MERS was an ineligible beneficiary under Washington law if it never held the promissory notes secured by the deeds of trust. The Report’s illustrative form of opinion letter provides sample language calling attention to Bain and expressly qualifying opinions as to the enforceability of deeds of trust. Similarly, the Report details recent changes to the information set forth in certificates of existence issued by the Washington Secretary of State, provides sample language to address credit agreements that contain European Union bail-in provisions, and draws practitioners’ attention to the potential impacts of the Hague Securities Convention’s choice-of-law rules on transactions involving securities accounts.
We are confident that the Report will be a valuable resource for lawyers engaged in giving and receiving third-party legal opinion letters in the state of Washington, and that it will also serve as a useful reference tool for business and corporate lawyers working on commercial transactions in our state. But we also hope that it makes a valuable contribution to the national legal opinion literature, particularly as other state bar legal opinions committees begin the challenging work of updating their own reports.
The Report will be posted on the website of the Washington State Bar Association. Any suggestions, comments, or questions for the Committee can be directed to the Chair of the Committee, Scott W. MacCormack, at [email protected]. The other members of the Committee were Joel N. Bodansky, Diane Lourdes Dick, Troy J. Hickman, Brian D. Hulse, Berrie J. Martinis, Shannon J. Skinner, Keith A. Trefry, W. Scott Wert, David Zielke.
