Are Additional Opinion Limitations Appropriate to Address Emergency Orders Issued for the COVID-19 Pandemic?

This Article summarizes the March 2020 discussion in the ABA Business Law Section’s Legal Opinions Committee Connect Community, which is also summarized in the Spring/Summer 2020 issue of In Our Opinion, the newsletter of the ABA Business Law Section Legal Opinions Committee.

I. Background

In the early days of the 2020 COVID-19 pandemic events, Katherine Brandt, Cleveland, OH, initiated a March 2020 discussion in the ABA Business Law Section’s Legal Opinions Committee Connect Community (what used to be known as the listserv). She noted that new, expressly-stated limitation language (referred to in this article as “Emergency Limitations”) was beginning to appear in legal opinion letters in financing transactions and provided an example:

We do not express any opinion with respect to any laws, rules, regulations or orders concerning declared emergencies or the effect thereof on the opinions stated herein.

Noting that the appropriate issue is the effect of the emergency orders on the deal, not on the opinions, Norman Newman, Indianapolis, IN, suggested alternative language:

… or the effect thereof on the transaction and obligations addressed in this opinion.

Members of the Community were asked to share their views on whether Emergency Limitations should be included in opinion letters in financing transactions. The initial post resulted in more than 20 responses by more than 15 respondents. As described in more detail in Parts III and IV below, some respondents believed that including the Emergency Limitations was prudent, while others were wary of possible risks.

II. Issues to Consider

Stanley Keller, Boston, MA, identified three issues that should be considered.

A. Whether the Law is Complex or Unique

Mr. Keller commented that a blanket exclusion of a law may be appropriate because of its complexity or uniqueness, for example (a) Section 13 of the Bank Holding Company Act of 1956, also known as the Volcker Rule, which generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund, subject to certain exemptions. or (b) the regulations relating to the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and the Committee on Foreign Investment in the United States (CFIUS) which provide for the review of national security implications of foreign investment in the United States.

B. Whether Expressly Excluded Law is Covered by Opinion

Mr. Keller also noted that an opinion giver is only covering (i.e., responsible for) laws that a lawyer practicing in the jurisdiction would recognize as being applicable to the parties and the transaction.

1. The Accord and the Real Estate Adaptation

William Klein, Minneapolis, MN, indicated that, as early as the 1989 Silverado Conference that resulted in the publication of the Legal Opinion Accord and the subsequent Real Estate Adaptation of the Accord (the “Real Estate Adaptation”), the opinion literature has taken the position that unless an opinion giver has explicitly addressed federal and state laws, regulations and policies concerning national and local emergency, the letter does not address those legal issues. Moreover, both the Accord and the Real Estate Adaptation provide a bankruptcy and insolvency exception which makes an opinion that adopts the Accord or the Accord as modified by the Real Estate Adaptation subject to federal and state moratorium laws that affect the rights and remedies of creditors generally or federal moratorium laws that have reference to or affect only creditors of specific types of debtors and state laws of like character affecting generally only creditors of financial institutions and insurance companies. Arthur Field, New York, NY, noted that an Accord opinion is contractual and does not provide answers to questions about customary practice.

2. Customary Practice

John Burton, Santa Fe, NM, noted that the various reports that followed the Real Estate Adaptation of the Accord, which reflect current customary practice, continue in their respective Illustrative Opinion Letters both (a) an exclusion of law dealing with emergency, unless the opinion giver expressly addresses such law, and (b) a bankruptcy limitation referring to moratorium law “affecting the rights and remedies of creditors generally.” Despite that express statement, the 2012 Report makes clear that the exception also applies to moratorium “law that has reference to or affects generally only creditors of specific types of debtors and state law of like character affecting generally only creditors of financial institutions and insurance companies.”

C. Whether Emergency Laws and Executive Orders Make it Easier to Issue an Opinion

Emergency laws and executive orders can be a two-edged sword and enable giving an opinion that might otherwise be problematic. For example, to the extent notarization is required, the New York executive order dispenses with an in-person notarization requirement. Similarly, a transaction, like an issuance of a newly authorized number of shares or class of stock or a merger or sale of substantially all the assets may require shareholder approval and several emergency laws and executive orders permit remote-only (or virtual) meetings that the existing corporate statute does not authorize.

III. Rationale for Including Emergency Limitations.

Robert Gordon, Southfield, MI, commented that he (a) was not suggesting that Emergency Limitations be included within the bankruptcy exception and (b) did not believe that the bankruptcy exception necessarily addresses the impact of COVID-19 orders or actions on the documents or the rights of the parties. Similarly Martha Dwyer, New York, NY, wrote that including such language should not be objectionable, and, if counsel for the opinion recipient does object, the opinion giver could get confirmation that the issue is covered by the bankruptcy exception.

Jennifer MacGregor-Greer, Vancouver, BC, Canada, commented that any concern about previous opinion letters not mentioning Emergency Limitations should not be a significant concern because an opinion letter speaks as of its date. Only recently has the current situation developed, and she suggests that the opinion giver take that into account.

Timothy Hoxie, San Francisco, CA, noted that referring to a particular order may be helpful as an informational device, to explain that an order that temporarily suspends obligations or remedies falls within the bankruptcy exception. Norman Newman echoed this and observed:

When a deal goes bad, it’s human nature for a disgruntled party to look for someone to blame. And that’s often the attorney who provided a closing opinion. So my argument is that even if the general bankruptcy exception includes moratorium, either expressly or by implication, that’s not going to prevent the disgruntled party from asserting that the opinion giver should have clearly warned him of any known situation that might prevent him from foreclosing on his collateral.

Granted that if the opinion recipient sues the opinion giver, the bankruptcy exception should provide a successful defense. But that still leaves the opinion giver (or his/her insurer) with the cost of defense and the embarrassment of a malpractice claim. So from a purely pragmatic (i.e., CYA) point of view, I think it’s prudent to inform the opinion recipient of these governmental moratorium orders, as an adjunct to the general bankruptcy exception.

IV. Rationale for Excluding Emergency Limitations

The majority of respondents took the position that Emergency Limitations were not needed. Some went further and expressed concern about unintended consequences if they were included in opinion letters. Robert Grauman, New York, NY, queried whether an Emergency Limitation is unnecessary under customary practice. Laurence Bauer, New York, NY, agreed, and referred to the moratorium laws mentioned in the bankruptcy exception. Marshal Grodner, Baton Rouge, LA, did not see any advantage in including Emergency Limitations.

Steven Weise, Los Angeles, CA, opined that the bankruptcy exception, especially the reference to “other similar Law” in the Accord progeny (whether or not referring to “moratorium”), amply covers existing executive orders of this type (if they are covered at all under the definition of “Law”). The opinion giver does not have responsibility for changes in the Law, including executive orders (if covered in “Law”) occurring after the delivery of the opinion. He noted that the broad scope of the bankruptcy exception is addressed in the TriBar Opinion Committee’s 1998 report, Third-Party “Closing” Opinions, which states:

The use of the word “similar” makes clear that the exception does not comprehend those laws that affect creditors’ rights generally but are unrelated to laws grounded in insolvency, e.g., usury laws. However, the Committee believes that omission of the word “similar” should not be construed to broaden the scope of the exception: clearer language is required to do that. Some lawyers expressly include in the bankruptcy exception references to “reorganization” and “moratorium” laws. “Moratorium” laws refer to the type of emergency economic legislation enacted during the Great Depression as a means of halting foreclosure of certain classes of property, e.g., farms. Both moratorium and “reorganization” (a term that is integral to the Bankruptcy Code) are within the scope of the bankruptcy exception, even if not expressly mentioned.

Mr. Field questioned “why would it be helpful to have an exception covering a moratorium (the bankruptcy exception) and then add another exception covering the moratorium possibility, thereby suggesting that the bankruptcy exception did not apply?” He noted that such a suggestion runs the risk of narrowing the bankruptcy exception that is and has been broadly construed.

Alan Dubin, Washington, DC, expressed concern that including the Emergency Limitations only after the pandemic might support a conclusion that the opinion giver was negligent by not including Emergency Limitations in letters issued before the pandemic. To some extent this concern may be assuaged in part by reference to Rule 407 of the Federal Rules of Evidence and similar rules.

V. Summary

In the author’s view, the takeaway from the discussion is that it is not necessary to include Emergency Limitations and that doing so may have unintended consequences. However, when an issue is especially pertinent and topical, an opinion giver may want to identify the specific issue as an informational device as suggested by Messrs. Hoxie, Keller, Newman and others. To help avoid unintended consequences, any disclosure should indicate that it is given in explanation of the bankruptcy exception and not as a separate exception.