A Proposal on Opinion Letters in Colorado Real Estate Mortgage Loan Transactions
| Jurisdiction | Colorado,United States |
| Citation | Vol. 18 No. 12 Pg. 2283 |
| Pages | 2283 |
| Publication year | 1989 |
1989, December, Pg. 2283. A Proposal on Opinion Letters in Colorado Real Estate Mortgage Loan Transactions
The opinion of counsel in mortgage loan transactions has attained central significance to lenders and borrowers in connection with loans secured by real property. Much has been written and discussed regarding the length and difficulty of negotiations in rendering such opinions. The problem has been the focus of efforts by many state and national legal organizations in their attempts to define the customs, characteristics and requirements of opinion letter practice.(fn1) There have been no reported cases regarding liability for opinion letters in Colorado, although the fear of exposure has generally increased steadily.
Until recently, definition of the terms set forth in opinion letters has been so difficult to determine that lawyers giving opinion letters have been as uneasy in their execution as lawyers receiving opinion letters have been in their acceptance. The resulting conflict has been described as "gamesmanship" between opposing counsel,(fn2) and has frustrated and been counterproductive to the process of consummating the loan transaction.
In order to enhance opinion letter practice in real estate transactions in Colorado, this work is published by the Special Committee on Opinion Letters of the Real Estate Law and Titles Section of the Colorado Bar Association ("Committee"). Edward N. Barad served as Chairman. Participating members included: A. Bruce Campbell, Donald L. Cook, James L. Cunningham, Bruce Johnson, Gary LaPlante, Richard Linquanti, Pamela McClune, Charles E. Rhyne, Mark A. Senn, and John Stoller. This work is presented in draft form to solicit comment from the Colorado Bar. Send all comments to Edward N. Barad, Esq., Brownstein Hyatt Farber & Madden, 410 17th St., 22nd Floor, Denver, Colorado 80202.
This proposed draft is presented in two parts. Part I includes a discussion of general aspects of opinion letter practice. Part II, which will appear in the January issue of The Colorado Lawyer, will discuss definitions, qualifications, and specific recommendations of opinion letter language.
A legal opinion constitutes a formal expression by a lawyer of his(fn3) judgment concerning issues which are material to the effectiveness of contract documents.(fn4) Opinions may be required for various purposes, such as:
(1) by governmental agencies due to regulations;
(2) by lenders due to underwriting requirements; and
(3) in order to comfort opposing parties as to uncertain results in business transactions.
The basic purposes of the opinion letter, however, are (1) to provide information regarding the probable legal consequences of a contemplated transaction and (2) to provide a higher degree of assurance that the covenants contained in the agreements drafted by the parties are legal and can be utilized for the benefit of the party requesting the opinion.
Generally, lenders require opinion letters as a part of their underwriting policies due to the custom and practice of the industry. The lender looks to the opinion for assurance that the transaction is valid and that the rights and duties contained in the documents are enforceable to the extent they conform to applicable law. Additionally, the lender seeks assurance that any conditions to the borrower's performance have been satisfied.
The tension between counsel often arises when borrower's counsel questions the need to deliver an opinion letter because the documents were written by lender's counsel. If lender's counsel wrote the documents, why are they not in fact enforceable; and if not enforceable, why try to shift liability to borrower's counsel? Should borrower's counsel bear the sole risk of liability for the improper practice of lender's counsel? If lender's counsel attempts to overreach for the benefit of the client, should borrower's counsel be forced to bear the risk of loss if the client later chooses to challenge the effect of any provisions of the document? It has been suggested that the answer to these questions lies in the mutuality of covenants which contracts require, i.e., that each party seeks mutually binding covenants to enforce its rights under the documents.(fn5) Therefore, regardless of which party's counsel wrote the documents, the ultimate
The opinion letter is to aid in this process as an investigative tool, not an insurance policy. It is not designed to be a guarantee of any of the borrower's obligations or to make borrower's counsel an insurer.(fn6) The opinion letter process should be utilized to promote the thoroughness of the due diligence investigation and to disclose any information which borrower's counsel believes will have an adverse impact on the ability of the lender to enforce the covenants and obligations which are intended to bind each party.
If a defect in language, execution or capacity would render the documents or any portion of them ineffective, the charge of lender's counsel is not to gain a guarantee that the defect will never obstruct enforcement, but rather to discover the true nature of the defect and to obtain a cure or, with informed consent of the client, to risk utilization of the documents despite the uncovered defect. Often this process will produce information which can be beneficial to both parties in tailoring language which will govern enforcement of the instruments.
An opinion letter is not a guarantee unless the letter expressly contracts for such guarantee. If no such contract exists, opining counsel is not liable for an erroneous opinion, unless he or she is guilty of negligence.(fn7)
Negligence constitutes a breach of the standard of care which the lawyer has a duty to maintain.(fn8) Borrower's counsel represents to the client that he or she possesses a requisite degree of learning, skill and ability necessary to the practice of law which others similarly situated ordinarily possess, will exert his or her best judgment in the prosecution of the task, and will exercise reasonable and ordinary care and diligence.(fn9) If the matter should require the skill of a specialist, the general practitioner may not be able to exercise proper skill and care, and will be judged by the standard of whether he or she possessed a knowledge and skill ordinarily possessed and used by a specialist in similar circumstances.(fn10) The attorney, however, is not liable for every mistake made in the practice of law nor solely for an error in judgment.(fn11)
A lawyer's conduct should not involve gross incompetence, indifference, inadequate preparation under the circumstances, or consistent failure to perform obligations to the client. Although the lawyer is not the guarantor of the borrower's obligations to third parties, the lawyer's duty of care to those who foreseeably will justifiably rely upon the opinion is the same duty that he or she owes to the client.(fn12) Thus, the Committee believes that the opinion letter may be addressed to the lender and lender's counsel and may be relied upon by later holders of the instruments which are the subjects of the opinion, unless the opinion letter otherwise expressly limits those who may rely upon its content.
The Colorado Code of Professional Responsibility ("Code") in EC 7-5 encourages the lawyer's role in giving opinions for the benefit of the client:
A lawyer as adviser furthers the interest of his client by giving his professional opinion as to what he believes would likely be the ultimate decision of the courts on the matter at hand and by informing his client of the practical effect of such decision. . . .
The lawyer must not make a false statement of fact.(fn13) The lawyer must not counsel or assist the client in conduct that he or she knows to be illegal or fraudulent.(fn14) If a lawyer receives information clearly establishing that in the course of representation the client has perpetrated a fraud upon a person or tribunal, the lawyer must promptly call upon the client to rectify the fraud. If the client refuses or is unable to do so, the lawyer must withdraw. If the lawyer would become party to dishonest, fraudulent or misleading behavior by failing to disclose improper conduct, the lawyer is permitted and may be required to reveal the fraud to the affected person or tribunal.(fn15)
This may make the lawyer's duty to the client and to the lender difficult to reconcile. Often the nature of a fraud is not readily distinguishable. Determination of certain types of fraud require a subjective decision. Borrower's counsel must use his or her best judgment given the ethical requirements set forth above, and err on the side of not misleading the lender. Furthermore, the lawyer should not give the requested opinion in questionable circumstances solely to accommodate the client and then obtain an indemnity or waiver from the client. DR 6-102 of the Code specifically prohibits an attorney from attempting to exonerate himself or to limit his liability to the client for his personal conduct.
The lawyer may not accept as true facts which the client tells him when the lawyer should know that further inquiry would...
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