"A Primer: Legal Opinions and Loan Modifications, Assumptions and Joinders Connor McNellis"

Legal opinions in loan modifications, assumptions, and joinders seem to have fewer generally accepted conventions than traditional loan opinions.  This article is meant to be a primer on accepted expectations as well as points of contention that may arise with respect to such opinions.  The only point of consensus may be that there is no consensus, and customary practices with respect to these types of opinions need further development.

When a borrower modifies or assumes an existing loan, it is generally appropriate and not controversial for a lender to request, and borrower’s counsel to provide, legal opinions regarding: an entity’s existence, power, and authority; execution and delivery; no conflicts and no litigation (any controversy here is not the subject of this article); perfection; and the recordability of those loan documents that the parties plan to record.  The lender typically requires these legal opinions: for a modification, often to confirm prior opinions with respect to the borrower and any guarantors and generally opinions about the new documents, and for an assumption, to provide new assurances with respect to an assuming borrower and any new guarantor.  In connection with a joinder agreement, where a new subsidiary of a borrower is joining the existing loan documents, for example, the lender may request different but similar opinions.  What may be the source of disagreement is the proper scope of an enforceability opinion in these contexts.

Opinion recipients generally expect an enforceability opinion to mean a binding contract is created, and the documents do what they purport to do.  That is, in the case of an assumption or modification, the new borrower has effectively assumed the loan, in accordance with the assumption documents, or the provisions in the existing loan documents have been validly modified, as per the modification documents.  Lender’s counsel should not expect borrower’s counsel to “date down” any enforceability opinion provided in connection with the original transaction—especially if borrower’s counsel was not involved in the original transaction.  In that case, borrower’s counsel should almost always seek to include assumptions that the original transaction documents are enforceable as of the time immediately prior to the execution of the modification or assumption documents and have not been waived, amended, or terminated.  Lender’s counsel will often accept the first of these assumptions because the lender should have received (or chose not to obtain) an enforceability opinion in connection with the original closing.  If new documents are executed in connection with the transaction, a full enforceability opinion regarding such new documents would be appropriate, with customary limitations and assumptions.

Even though an opinion should not be requested or given regarding the original transaction documents, borrower’s counsel should still review those documents in connection with the assumption or modification opinion to ensure:

1. structurally, the modification works, and
2. any defined terms or other provisions incorporated by reference into the documents for which an opinion is being rendered have been reviewed in the context of the current transaction.  It is good practice to state a list of the original transaction documents reviewed by the opinion giver, and to include language that those documents are not the subject of the current opinions.  This confirms the exact scope of review, making it more difficult for the lender to later argue that the opinion implied borrower’s new counsel reviewed all of the original documents.  This is particularly important when new counsel has no way of confirming the full list of documents executed in connection with the original transaction.  To avoid misleading opinion recipients, the opinion giver should take care to state which documents are and are not the subject of the opinions.  It may also be appropriate to expressly provide: the opinion provider has not reviewed the original transaction documents other than for the purpose of reviewing definitions common to the operative modification, assumption, or joinder agreement; the opinions assume that nothing in any of the original transaction documents materially changes any of the terms of the current transaction; and the opinions are without any regard to the effect of incorporation by reference or otherwise.

In limited circumstances, it may be appropriate for lender’s counsel to request an opinion that the loan documents, as modified, are enforceable.  Lender’s counsel should almost never request that opinion in connection with a loan assumption.  The extent of the modifications will bear on whether such a request is appropriate.  If the modification involves an extension of the maturity date or other minor changes, an “as modified” enforceability opinion is not appropriate.  If the original documents are undergoing a major overhaul, however, it may be reasonable to request an “as modified” enforceability opinion (although in that context, this raises the question why the documents are not being amended and restated in their entirety).  An assumption that the original documents are enforceable immediately prior to the modification transaction may ameliorate concerns regarding “dating down” an enforceability opinion on loan documents “as modified.”  There is often language in the transaction documents themselves renewing representations and warranties, reaffirming the terms of the original documents, etc.  In other words, it would be very unusual for a lender and borrower to close such a transaction without addressing any existing defaults or claims in the express language of the transaction documents themselves.

It may be worth considering, especially when the loan modification includes documents that are amended and restated, whether the transaction could be considered a novation.  In In re: Fair Finance Co., 834 F.3d 651, 667-70 (6th Cir. 2016), the 6th Circuit held that the question of whether the existing security interests, which were created in the original loan transaction, were extinguished by virtue of a loan modification was a factual matter and should not have been decided as a matter of law by the district court.  In that case, the loan modification included an amended and restated note and loan agreement.  However, the amended and restated documents did not include express language stating that the transaction was not a novation.  The ambiguity about the intention of the parties noted in Fair Finance may be avoided in many circumstances if amendments to loan agreements or security agreements (or amended and restated agreements) expressly state that:

1. the transaction is not a novation, and
2. the existing security interests or liens created by the original transaction continue in full force and effect after the closing of the amendment transaction.  If there is concern about a potential novation issue, the opinion giver should decline to opine that such transaction does not constitute a novation.

There may also be a distinction between enforceability opinions stating the original transaction documents are valid, binding, and enforceable, and opinions stating such documents are valid, binding, and enforceable against the original borrower.  In the latter instance, lender’s counsel may have a stronger argument for requiring an opinion on the original transaction documents “as modified.”  Some practitioners may believe, if the client is willing to pay, borrower’s counsel should be willing to give an opinion on the loan documents “as modified.”  But the benefit to the recipient of a closing opinion and of any particular opinion should warrant the time and expense required to give them.  Further, legal opinions should not be a substitute for adequate diligence.  If there are risks inherent with the modification or assumption, the opinion letter should not be treated as an insurance policy.

Many limitations and assumptions relating to a standard enforceability opinion are also appropriate for a modification or assumption opinion, although each should be considered in light of the scope of the modification or assumption.  For example, any assurance as to available remedies under the original loan documents (e.g., the assurance portion of a generic enforceability qualification) should be revised so the assurance is limited to provide that the assumption or modification is not invalid.  In many jurisdictions, specific qualifications relating to available remedies should be included.  If California law governs the loan documents, for example, it would be appropriate in many instances to reference the one-action rule (Cal. Code Civ. P. §726) and clarify that the enforcement of a modification agreement to, for example, add collateral to an existing facility would be subject to the requirement that any foreclosure occur first (or in multi-property and multi-state transactions, the requirement that there can be only one action against the borrower for recovery of the debt, even if not all jurisdictions involved have such one-action rule).

If opining as to enforceability of a guaranty (or a reaffirmation) in relation to a modification or assumption transaction, counsel should confirm that the guarantor is expressly consenting to the modification or assumption, and that there is sufficient consideration to the guarantor, if required.  Generally, the same assumptions, limitations, and qualifications that pertain to a typical enforceability opinion with respect to guarantees would apply to a modification or assumption transaction as well.

Many of the above considerations are implicated for opinions relating to joinders of new entities to existing facilities (such as when a corporate borrower forms a new subsidiary).  Generally, a borrower’s counsel will opine as to the enforceability of the joinder agreement (which provides the new subsidiary becomes a party to the underlying loan documents listed in the joinder agreement).  If, in connection with a joinder, lender’s counsel requests an opinion on the enforceability of the existing loan documents against the new subsidiary, then several additional issues must be considered, such as:

1. whether a subsidiary has the entity power to guaranty the debt of a parent (a question of whether the subsidiary has benefitted from the incurrence of the indebtedness by the parent or whether the benefit can be measured other than by reference to whether the loan proceeds are made available to the subsidiary);
2. whether incurring the indebtedness renders the subsidiary insolvent or meets the test of a fraudulent transfer under state law; and
3. whether consideration has to run to the joining subsidiary or if consideration in favor of the parent borrower is sufficient.  Here, it would almost always be appropriate to assume that there is adequate consideration (provided such an assumption does not ignore facts to the contrary), and to state that no opinion is being given regarding whether the security documents will be deemed either a fraudulent conveyance or void for lack of consideration.

There may be fewer generally accepted conventions regarding legal opinions on loan assumptions, modifications, and joinders than on traditional loan closings.  Some opinions may not be controversial, such as existence, power, authority, no conflict, no litigation, perfection, and recordable form.  Enforceability opinions and their scope may be the cause of disagreement.  Hopefully, this article serves as a starting point for a discussion regarding customary practices, potential issues, and the further development of opinion practice in the context of loan assumptions, modifications, and joinders.