Marshall Grodner, Baton Rouge, LA, replied that with respect to the enforceability of a contract for the sale of promissory notes, it does not matter whether the transaction is a “true sale” or not, although it might if it were a sale of a payment intangible. Article 9 applies to a grant of a security interest in promissory notes and, under U.C.C. §9-109(a)(3), to a sale of promissory notes (subject to certain exceptions). The definition of “security interest” in U.C.C. §1-109(a)(35), also applies to sales of promissory notes (and payment intangibles). An assignment (whether as a sale or grant of security interest) of a promissory note can be perfected by possession or filing, but possession gives the buyer/secured party certain priority rights under U.C.C. §9-330(d). It does not matter whether it is a sale or a security interest. So, a “true sale” opinion is not required or implied, in order to render a “perfection” opinion, which some would say is implied in an enforceability opinion. He identified some assumptions and qualifications that should be made:
(a) Assumptions:
(1) The notes are promissory notes (or instruments) as defined in the U.C.C. [Note: To the extent the note is not a promissory note or instrument (see U.C.C. §9-102(a)(47) and (65)), it is probably a payment intangible that cannot be perfected by possession, but there is automatic perfection given to a purchaser, and it must be a sale, not a security interest. U.C.C. §9-309(3).]
(2) The purchaser has possession of the notes (either by itself or through a bailee who has acknowledged the bailment). U.C.C. §9-313(a).
(3) The jurisdiction where the purchaser has possession of the notes is the “Opinion Jurisdiction” (or similar assumption). U.C.C. §9-301(2).
(b) Qualification:
We note that a sale of a promissory note also perfects a security interest in supporting obligations, security interests, mortgages or liens securing the note. We render no opinion as to the enforceability of any underlying supporting obligation, security interest, mortgage or lien. [See U.C.C. §9-308(d) and (c).]
2. Government Entities Asking Quasi Audit Response Questions. Gail Merel, Houston, TX, described a letter from a state regulator to its licensee who said that “in connection with an examination” of the licensee, it was asking questions and requests such as: (1) The capacity in which you are representing the licensee. (2) The amount of the fee you charge for representing the licensee. (3) Litigation in which the licensee is involved in any capacity, including your estimate of losses or potential liability (include legal actions involving consumer groups and class action lawsuits). (4) Identify any contingent liabilities of the licensee of which you have knowledge. (5) Describe all relationships you have with the licensee in which you represent more than one party in any loan transaction. State for whom the service is provided, the nature and purpose of the service and a schedule of fees charged. The licensee client forwarded the letter to its counsel asking that counsel respond. She expressed some particular concerns about (#1) and, because it implicates other clients, (#5). She asked whether others had received such letters, whether they were becoming a trend, and whether and to what extent the response should adhere to the Statement of Policy or Treaty.
Robert Gordon, Southfield, MI, agreed with the initial poster’s concern about (#5), noting that the names of other clients cannot be disclosed without their express (written) consent. Robert Dow, Birmingham, AL, noted that the regulator is not a CPA firm and is therefore not bound by the Treaty. He pointed out that the attorney-client privilege protects some information, e.g., responses to (#1) and (#5). Thus, the law firm could invoke the privilege, but the regulator could then pressure the client to waive the privilege. In that event, the client would need to weigh the consequences about waiving or not waiving the privilege.
Stanley Keller, Boston, MA, described how his firm responded to a similar request. The firm treated it similar to an audit request and the response was tailored to the specifics of the request. The response identified it as being made in connection with the regulator’s examination. The firm did not reference the Treaty because it did not want to confuse things or intimate that its response had anything to do with financial reporting as opposed to addressing specific questions. Accordingly there was no reference to unasserted claims or the attorneys’ professional responsibility. The firm included some provisions from the Treaty and the firm’s usual audit response form that the firm considered appropriate and relevant (e.g., disclaimer of waiver of privilege, the limited process undertaken, the limitations on what we know, and no duty to update). The firm identified the nature of our relationship with the client (#1) and total billing for the year (#2). It identified overtly threatened and pending litigation to which it devoted substantive attention (relying on those terms being terms of art informed by the Treaty without having to say so) (#3). The firm disclaimed being in a position to comment more broadly on contingent liabilities (#4). The firm described any other work it may have done in general terms and indicated that it did not represent more than one party in a loan transaction (#5).
He also cautioned that because the request is from a government agency the responding attorneys need to think of what public records, confidentiality and privilege considerations might apply. In this case, the firm added language requesting confidentiality and otherwise dealing with any freedom of information matters. Finally, the firm worked closely with the client and made sure the client approved and consented to the response.
3. Non-U.C.C. “Perfection” Opinion.
Christopher Devlin, Portland, ME, asked about providing an opinion, analogous to perfection, on a non-U.C.C. lien, specifically, motor vehicles. He further indicated that the vehicles would not be dealer inventory, but would be owned by the debtor. Thus, he thought the opinion would be partly under (a) Article 9 (as to attachment requirements) and (b) the state certificate of title statute (as to perfection) by reason of cases like In re: Box, 2013 Bankr. LEXIS 2696 (M.D. Ga. July 3, 2013). He clarified that his principal concern was the perfection component and assumptions and qualifications to bridge gap between nomenclature and conceptual approach of Article 9 as compared with the certificate of title statute.
Joseph Heyison, Stamford, CT, suggested reviewing U.C.C. §§9-109 and 9-303, which state that goods covered by a certificate of title are governed by Article 9, and then checking the certificate of title statute for filing and endorsement requirements.
Edward Lawrence Wender, Baltimore MD, and Robert J. Hahn, Charlotte, NC, commented that in the event the motor vehicles were inventory and not yet titled, (a) there would be no certificate of title and (b) perfection would be governed by Article 9. In this case, they are not inventory and perfection would be achieved by noting the lien on the title, through the applicable Departments of Motor Vehicles.
Norman Newman, Indianapolis, IN, noted that granting/accepting U.C.C. security interests in or liens on motor vehicle inventory is often known as “floor plan” financing. In this case his firm would simply cite the applicable statute and Bureau of Motor Vehicle regulations. The firm would do the same with security interests in or liens on aircraft and vessels.
4. Delaware Single Member (DESM) LLC Legal Opinion. Douglas Landrum, Irvine, CA, sought confirmation that the nature of the required DESM LLC legal opinion in the context of a Freddie Mac Capital Markets Exception (CME) loan is similar to that required in a syndicated loan, in which a springing member is required, where Delaware counsel gives specialized legal opinions concerning Delaware LLCs. Joseph Heyison, Stamford, CT, shared a link to an article by Delaware attorneys Michelle P. Quinn and Brian M. Gottesman describing customary Delaware legal opinions.
Charles Menges, Richmond, VA, shared the requirements of Freddie Mac’s standard form of legal opinion (rev. Oct. 18, 2017) noting that they may not be applicable in all instances or for smaller loans, and suggesting the opinion giver review the form and associated guidelines to be certain:
“[INCLUDE OPINIONS #25 AND #26 IF BORROWER OR SPE EQUITY OWNER IS A SINGLE MEMBER DELAWARE LIMITED LIABILITY COMPANY (MODIFY AS NECESSARY TO REFLECT THE PROPER ORGANIZATIONAL STRUCTURE) AND THE COMMITMENT INCLUDES A REQUIREMENT FOR AN INDEPENDENT DIRECTOR. IF THE COMMITMENT DOES NOT REQUIRE AN INDEPENDENT DIRECTOR, OPINIONS #25 AND #26 SHOULD BE REPLACED WITH “Reserved.”]
“[from counsel for State of Organization]
“25. A Delaware Court applying Delaware law would conclude that (i) in order for a person to file a voluntary bankruptcy petition on behalf of Borrower, the prior unanimous consent of the Member and the Board of Directors (including the Independent Director), as provided in Section ___ of the Operating Agreement, is required and (ii) such provision contained in Section ____ of the Operating Agreement that requires the prior unanimous consent of the Member and the Board of Directors (including the Independent Director) in order for a person to file a voluntary bankruptcy petition of behalf of Borrower, constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member in accordance with its terms.
“[from counsel for State of Organization]
“26. A federal bankruptcy court would hold that Delaware law, and not federal law, governs the determination of what persons or entities have authority to file a voluntary bankruptcy petition on behalf of Borrower.”
Marla Norton, Wilmington, DE, confirmed that engaging Delaware counsel is typical. She also noted that (a) Freddie Mac is very wedded to its forms and checklist and (b) the independent manager requirements have a higher threshold than a CMBS loan, but Freddie still wants springing members and the typical opinions. Richard Brody, Atlanta, GA, commented that Delaware counsel will give the DESM opinion as long as appropriate provisions are included in the limited liability company agreement of the borrower to support giving the opinion.
