Up the Ladder and Other Thoughts on Authorization Opinions

Third party opinion letters in real estate financing transactions regarding a borrower or guarantor (collectively called the “borrower”) that is organized under the law that is covered by the opinion letter generally include an opinion that all necessary entity actions and approvals have been taken or obtained. This is called the authorization opinion. The authorization opinion applies only to internal entity matters, but not to third-party or governmental approvals relating to the borrower.

An authorization opinion is also an integral component of an enforceability opinion, which is typically the heart of an opinion letter in loan transactions.

If the borrower is formed under the law of a state where the opinion given is not licensed or does not have expertise, the opinion giver should not render an authorization opinion about the borrower. The opinion giver should assume that the borrower has authorized the loan documents and obtained the necessary approvals. The opinion giver should also assume the existence and good standing of the borrower, the power of the borrower to enter into the transaction, and the execution and delivery of the loan documents by the borrower when the borrower is not formed under the opinion letter’s state’s law. The opinion recipient may obtain an opinion from an attorney admitted in the state where the borrower is formed in order to support these assumptions.

Tiered Entities

If there are tiers of ownership of a borrower whose acts are approved by its members (for many limited liability companies) or its partners (for partnerships) in order for the borrower to authorize the loan documents, it is necessary that the entity at each tier authorize them. Consideration of the entities above the borrower on the entity organizational chart is called “going up the ladder.” Full due diligence of an authorization opinion would require that the authorization of the loan documents at each level be confirmed. Similarly, if the organizational documents of the borrower provide that another party, such as a manager, must authorize the borrower’s actions, the opinion giver must determine that such entity has authorized the transaction. This could lead to review of the ownership chain of the manager. However, frequently the entity at one or more of those tiers or the manager itself is not organized under the law that governs the opinion letter.

There are three ways that a lawyer giving an authorization opinion may approach a situation with a multi-tiered borrower:

1. Full due diligence. The opining lawyer may examine the authorization of the loan documents by each entity in the ownership chain, or the authorization by the manager, as applicable. The difficulty in doing this will depend in part on the number of entities in the chain, where those entities are formed, and the organizational documents governing each of them. The opining lawyer may need to rely on certificates that relate to one or more of these entities and their authorizations. The opining lawyer should state what documents have been reviewed in order to render the ultimate authorization opinion. If one or more of the entities up the ladder is organized under the law of a state not covered by the opinion letter, the opinion giver would not be able to render an authorization opinion governing the borrower without one or more assumptions about authorization by those entities. The cost in pursuing this approach may not be insignificant, and this should be weighed against the benefits derived from it.

2. Stating what has been reviewed. The opinion letter may state that the opining lawyer has reviewed the organizational documents and the consents and authorizations of only the borrower itself. Under this approach it should be clear that the opining lawyer has not reviewed any relevant documents with respect to any of the parents or affiliates of the borrower or the manager of the borrower. The opinion letter should include an explicit assumption that each entity whose consent is required to authorize the borrower to execute, deliver, and perform under the loan documents is an entity in good standing under the laws of the state of its formation and that it has taken all action under its applicable organizational documents and the law governing it to authorize the borrower’s action.

   This is the approach recommended by the 2012 Report and the Local Counsel Report because it gives the opinion recipient notice of the due diligence performed and the amount of responsibility undertaken by the opinion giver. In some cases, the opinion recipient may require nothing more; in others it may insist that authorization be confirmed as to the entities at each level.

3. Implicit assumption beyond the borrower. The TriBar Opinion Committee’s report Third-Party Closing Opinions: Limited Liability Companies, states that authorization by a member or manager of the borrower may be implicitly assumed and that those acting on behalf of the borrower had the approvals required when entering into a loan transaction. For opinion givers, this is a convenient approach because it allows them to limit the due diligence they undertake. Also, opinion letters drafted with this approach do not flag for opinion recipients the fact that the opinion givers have not performed a full investigation, so the opinion recipients may be less likely to require that full due diligence be conducted. This approach requires that opinion recipients be familiar with its presumption so that they are aware of the limitations of the opinion letters they receive. If they are not aware of this implicit assumption, they may not realize that they, and not the opinion givers, are taking the risk that a member, a manager, or a parent of one of them was required to, but did not, authorize the borrower’s entry into the loan documents. If an opinion giver wanted to rely on this approach, it might be useful to incorporate the 2006 TriBar Report into the opinion letter by specific reference. That would be of enormous benefit if a disagreement about the authorization opinion led to a dispute, especially if the issue were ultimately decided by a judge or a jury. However, opinion givers following the TriBar approach generally regard this implicit assumption as being part of customary practice, and much of customary practice is not included in opinion letters, either within their four corners or by specific reference in the opinion letters.

Implicit Assumptions

Even if an opinion giver considers whether a transaction has been authorized all the way up the ladder, almost every authorization opinion includes a number of implicit assumptions. These include that the decision makers have been properly informed about the matter, that they have not violated their fiduciary duty in voting to authorize a matter, and that directors or members have disclosed any personal interest they may have. It is generally agreed that assumptions on all of these points are implicit in opinion letters containing an authorization opinion and that the opinion givers do not need to undertake any investigation about them.