A Proposal on Opinion Letters in Colorado Real Estate Mortgage Loan Transactions-part Ii
| Publication year | 1990 |
| Pages | 1 |
| Citation | Vol. 01 No. 1990 Pg. 1 |
1990, January, Pg. 1. A Proposal on Opinion Letters in Colorado Real Estate Mortgage Loan Transactions-Part II
Part I of this proposal [18 The Colorado Lawyer 2283 (December 1989)] discussed general aspects of opinion letter practice. This Part II discusses definitions, qualifications and specific recommendations of opinion letter language for use by lawyers 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"). It is presented in draft form for comment by the Colorado Bar. Send all comments to Edward N. Barad, Esq., Committee Chairman, Brownstein Hyatt Farber & Madden, 410 17th St., 22nd Floor, Denver, Colorado 80202.
Opinion letters in mortgage loan transactions generally cover the following issues:
1) The parties to the agreement have the legal capacity or power to enter into the agreement.
2) The agreement has been duly authorized, executed and delivered by the client.
3) An effective contract has been formed under the law of the applicable jurisdiction and, upon inception, contractual defenses to the entire agreement, such as statute of frauds, are not available; the contract is not invalid in its entirety by reason of a specific statutory prohibition or the public policy of the jurisdiction. (This does not mean that all provisions of the agreement are effective, such as a covenant to pay interest at a rate in excess of the applicable usury law.)
4) Some remedy is available if a party to the contract does not comply with its terms generally. (This does not mean that specific enforcement is available as a remedy, or that every provision of the agreement, such as the right to accelerate indebtedness in the event of default, will be upheld by a court.)(fn1)
In issuing the opinion as to any of the foregoing, certain words and phrases are crucial. The meaning of some of them is discussed below.
The phrase "duly organized and in good standing" means that the entity has been legally created and organized under the applicable laws and has taken all necessary steps to maintain its existence under such laws.
If the borrower is legally "authorized" to undertake and perform the actions which are the subject of the loan, it has the "power" to do so. Thus, the phrase, "power and authority" has been described as redundant by some commentators.(fn2) The phrase does not imply that regulatory compliance has been obtained. The phrase means that the borrower has the legal capacity to perform the acts contemplated by the agreement, given its charter (in the case of entities) and controlling documents, as well as applicable statutes. Thus, the legal status of the entity must be reviewed. The entity must be validly existing. For a corporation, that also means that no proceedings for dissolution have commenced.
A lawyer should examine appropriate copies of the official documents evidencing the borrowing entity's existence and authority to enter into the transaction contemplated by the opinion letter. However, unless a specific request has been made for the lawyer to render an opinion on the formation(fn3) or the organization of the borrower, a lawyer may assume that the recitals of government officials(fn4) are correct and that the events recited in the official documentation of the entity(fn5) did in fact occur.
Such presumptions are not always appropriate for a corporate attorney in rendering an opinion as to the proper incorporation, existence and good standing of a corporation. However, the Committee believes these presumptions are reasonable in mortgage loan opinion letters, since in most mortgage loan transactions the authority and existence of the borrowing entity is not the central issue.
Nevertheless, the lawyer should mention any current actual knowledge he or she may have concerning the questionable validity of government recitals or the recitals in official documents. Also, the corporate minutes should be reviewed or a certificate of incumbency obtained to inform counsel as to whether proper elections have been held to appoint the officers entering into the transaction on behalf of the corporation.
Corporate resolutions may be required in transactions not within the ordinary course of business. For a partnership or trust, the partnership agreement or declaration of trust should be reviewed to determine which persons are authorized to bind the entity. If a general partnership is involved, it may be desirable to have all partners execute the loan documents or to execute a resolution authorizing the managing partner to execute the loan documents.
The terms "execution" and "delivery" refer to all actions necessary to render the specified instrument fully effective. The two terms have been characterized as redundant.(fn6) Black's Law Dictionary defines "to execute" as "... to perform all necessary formalities, as to make and sign a contract, or sign and deliver a note."(fn7) However, the word "execute" is commonly thought to be solely the act of signing, thus implying that delivery is an act independent of or in addition to execution. The Committee therefore recommends that the phrase "execute and deliver" be utilized if an opinion as to each term is desired. "Duly executed" means that the parties executing the documents are expressly authorized or are in fact authorized by virtue of their position with the entity. Review of the formative documents, incumbency certificates and resolutions will constitute a proper investigation. To be certain of delivery, the lawyer personally should be aware that delivery has occurred.
"Valid" means legally sufficient and incapable of being rightfully overthrown or set aside. When used with the word "binding," "valid" may also be redundant.(fn8) "Binding" means the instrument imposes a definite legal obligation on the borrower to perform following execution.(fn9) "Valid" also means no violation has occurred of any documents creating and evidencing the existence of the borrower and, further, that the execution of the instrument has been authorized by all requisite action. Bankruptcy proceedings may not always result in a determination that the loan was originally invalid. However, if a fraudulent conveyance has occurred, under state or federal law, the loan may be invalid upon inception.(fn10)
Often called the "remedies opinion," this is the most significant concept of the opinion letter. It is generally thought that the phrase "enforceable in accordance with its terms" means that all material terms of the specified instruments are enforceable by the lender against the borrower, a meaning which is also probably included in the phrase "valid and binding."(fn11)
The phrase "in accordance with its terms" connotes an expansion of the opinion to each particular provision of the agreement rather than the agreement as a whole. Because some lawyers believe that the phrase imposes an extraordinary risk, many opinion letters generally include a detailed list of qualifications to enforceability. These qualifications require much lengthier bargaining and often include certain overbroad concepts which may not always be accurate. The lawyer utilizing the detailed list approach is loathe to omit any potential qualification for fear of the implication that every covenant of the loan documents is specifically enforceable in accordance with its terms, without regard to its materiality.
The phrase should not be deemed to mean that breach of every particular covenant will result in the ability to utilize every remedy provided, nor that every particular remedy which is specified is available following default (although the availability of the primary legal purpose of the instrument, the right to foreclose a mortgage, is implicit in the phrase). Post-closing conduct of the parties (such as the improper appointment of a receiver) may affect the ability of the lender to utilize all remedies set forth, and equitable defenses (such as laches) may become available. For example, loan documents generally provide that the lender may obtain a receiver to operate the property with an ex parte order of the court. Although this remedy may be available, it may or may not be obtainable if a court determines that the lender has "unclean hands."(fn12)
To counteract the effect of the overly broad list of qualifications, lenders often ask borrower's counsel to opine that "nothing will prevent the lender from practical realization of the material benefits set forth in the loan documents." The concept of "practical realization" is not intended to imply compliance with any real property aspects of the transaction, such as zoning, building codes or environmental laws, nor is it intended to assure the lender that the borrower can satisfy the indebtedness.
However, the breadth of the practical realization opinion is troublesome. For instance, if the borrower defends enforcement of a mortgage by seeking to prohibit the appointment of a receiver prior to commencement of a foreclosure action, and the property deteriorates during the ensuing period when the lender is procedurally delayed, the lender may assert that its loss during that time has "practically" made it unable to realize the benefits of the provisions of the loan documents. If the lender is prohibited from collecting rents or taking possession prior to commencement of a foreclosure proceeding, although...
To continue reading
Request your trial