With all due respect to Jonathan Swift, and although we are living through a pandemic and not a famine, I have “A Modest Proposal” for the legal opinion community—we need guidance on opinions dealing with amendments to credit facilities. Opinion givers have seen a rise in opinion requests regarding amendments to current financing transactions. Unfortunately, there is little guidance in the opinion literature for amendment opinions. My modest proposal is not to kill the babies, but to form a drafting committee among various interested groups, including the ABA RPTE Committee on Legal Opinions in Real Estate Transactions, the American College of Real Estate Lawyers Attorneys’ Opinion Committee, the Working Group on Legal Opinions, the American College of Commercial Finance Lawyers, the Commercial Finance Committee of the ABA Business Law Section, as well as other groups, to issue some sort of report regarding these type of opinions. Sentiments have been moving in that direction.
Customary practice is beginning to coalesce regarding these types of opinions. As a first step, there seems to be a consensus on what to call these types of opinions: “Follow-On Opinions.” In the past, these opinions have been called “continuing perfection,” “no adverse affect,” “bring down” or “amendment” opinions. Now that “follow-on opinions” have a name, it is time for guidance from the legal opinion community regarding the specifics of these opinions.
The general scenario arises where there was an original credit facility, represented by a credit (or loan) agreement, with numerous other loan documents. Some, if not most, facilities include a security agreement and a mortgage. A closing opinion was issued at the original closing, including the typical entity opinions (good standing, power and authority, and due authorization, execution and delivery), enforceability, and in the case of a secured financing, creation or perfection of security interests or a mortgage lien, or both. At a later date, the credit agreement, and possibly some of the other loan documents, are amended. A new legal opinion is requested at the closing of the amendments.
A new report would give the opinion giver and the opinion recipient guidance on issues that arise in this follow-on opinion scenario. The first threshold issue in follow-on opinions is whether the opinion addresses the existing documents, the amendment documents only, the existing loan documents as amended, or the amendment documents and the existing documents as amended. Anecdotal evidence seems to indicate that there is a growing consensus that it is the amended documents only, but a recitation that the original documents were reviewed (but no opinion is given as to these documents) is not outside that consensus. I personally like listing (and limiting my scope of review to) particular existing loan documents. Would this consensus change, if there were new money and new lenders under the amendments? It should not, particularly if the original opinion dealt with successors and assigns to the lender by a so-called “Wachovia” reliance limitation or something similar—the new lenders would be able to rely on the old opinion as of its date (with its other caveats) for the existing loan documents, like new lenders or participants typically do when there are no amendments, and the new follow-on opinion would cover the new money.
A second issue is whether it makes a difference whether your firm issued the original opinion. My initial feeling is that it should not, although it seems that to the extent that your firm did not render the initial opinion, there will be more due diligence necessary, in particular an initial review of the entity organizational documents and a more in depth review of the original loan documents. As a practical matter, it is a cost issue not an opinion issue.
A third issue is whether you can rely on the original consents/resolutions (assuming they authorized amendments) or whether to require new resolutions for the authorization, execution and delivery opinion. My conservative lawyer approach would be to require new resolutions.
Another important issue deals with security interests. At first my position was that I will give the standard UCC creation and perfection opinions, but you will need to do an amended and restated security agreement and file a new financing statement; we will not give “continuing perfection” opinions. My position has matured, and I think there is a growing consensus that “continuing perfection” or “reaffirmation” opinions are acceptable. There is no consensus, however, as to the formulation of these opinions, except that they generally start with the amendment document “does not, in and of itself.” Some opinion givers like to follow with “impair the validity and perfection of the security interest.” Others like “adversely affect the validity and perfection of the security interest.” Another formulation is “result in the security interest becoming invalid or unperfected.” Most will follow with something to the effect that “to the extent that the security interest was and remained validly created and perfected, prior to the amendment.” I generally find these different formulations are a distinction without a difference, as a practical matter. I will note in the mortgage situation, however, that there is more push-back on issuing these “reaffirmation” opinions since the lender can rely on the original title policy, and a mortgage modification endorsement, if necessary, although if I am the title insurance agent, my opinion to this effect is the basis for the mortgage modification endorsement in any event.
A fourth issue is whether special assumptions, in addition to the typical assumptions (implicit or explicit), are needed. I would suggest additional assumptions may be needed. One additional assumption would be to the effect that “the parties to the existing loan documents were validly existing at the time of execution of the existing loan documents, the parties had the power and authority to execute and deliver the existing loan documents, and the existing loan documents prior to the amendment (i) were duly authorized, executed and delivered, (ii) were the valid and binding obligations of the parties thereto, (iii) remain in full force and effect, and (iv) have not been otherwise amended.” There could be an additional acceptable caveat to (iv), something like “in a manner that would materially affect the opinions in this opinion letter,” although a materiality caveat may be problematic to some opinion givers, even though I find it personally acceptable. This lengthy suggestion can be broken down into several separate assumptions. An assumption as to no defaults under the existing loan documents may also be acceptable. In a secured transaction, an assumption that the financing statement has not been terminated, released or amended might be necessary as well, particularly if the existing financing statement is not a defined “existing loan document.” Attaching a copy of the filed financing statement to the opinion may also be a good idea, but may not be necessary if properly described in the opinion. The opinion giver should also consider adding an assumption to the effect that the amendment does not amount to a novation, if any opinion is given as to continuing security interests or mortgage liens.
There are many other issues that should also be dealt with in any report. Guidance is needed for opinion givers and recipients of follow-on opinions. This article is “A Modest Proposal” to the legal opinion community to come together and draft a report dealing with follow-on opinions. It is, with all due respect to Ernest Hemmingway, “A Call to Arms” to all the groups in the legal opinion community to get to work on this project.
