EDWARD N. BARAD AND LAURENCE G. PREBLE, J.
This article considers the substance and form of legal opinions with a focus on legal opinions in real estate finance transactions.
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”
Humpty Dumpty would have been a master at the art of issuing legal opinions. Terms such as “enforceable in accordance with its terms,” “practical realization,” “knowledge,” and “applicable law” would have been perfect for him. What do the words in an opinion mean? Lawyers giving and receiving legal opinions often struggle with this issue. James Fuld was an early pioneer in searching for an answer to this question. In his seminal article published nearly 45 years ago, he noted the dearth of authority on the subject:
I can find hardly any cases considering the substance and form of legal opinions; there is virtually no printed word on the subject in the law books or articles; so far as I know, neither the law schools nor the institutes for practicing lawyers consider the subject; and, unlike the accountants, the lawyers do not have any generally accepted principles covering opinions.
Legal opinions are thus being delivered every day without any common understanding of the ground rules. One word which is held to mean something different from what its writer thought it meant, one careless word in an opinion, or one aspect not thought of or sufficiently investigated can be most costly to a lawyer or law firm.2
What started out as a trickle with Fuld’s article has turned into a food. In recent years, there have been numerous articles by various committees of business lawyers and real estate lawyers, all attempting to explain and define what Humpty Dumpty might have meant if he had issued a legal opinion. This article considers this extensive legal scholarship and its application to opinions in real estate financing transactions.
Through the Looking Glass to Legal Opinions
Many bar associations have published reports discussing legal opinions in the context of local custom and practice.3 The issue was first addressed in Colorado in 1989 and 1990 in a two-part report by a Special Committee of the CBA Real Estate Law and Titles Section, “A Proposal on Opinion Letters in Colorado Real Estate Mortgage Loan Transactions.”4 Since that time, the topic has been revisited by Colorado attorneys in several articles.5
What would Humpty Dumpty do when faced with this extensive, scholarly research and analysis on the topic of legal opinions? Would he still feel free to make words mean whatever he wanted them to mean? Maybe not.
A threshold question is often asked in real estate finance transactions: Why does the lender require an opinion? Many lawyers view an opinion request as a last-minute annoyance that creates unnecessary liability. Title insurance covers enforceability, lien creation, and priority. Isn’t that enough? Yet opinions in such transactions are customary, and the literature suggests that they are not likely to disappear. They can, and often do, serve a useful purpose in enabling the parties to focus on the following issues that are important to the transaction:
■ Who is the borrower? The existence of the borrower and its power and authority to enter into the loan documents are essential to the validity of the transaction. Tough title insurance covers enforceability of the deed of trust, validating these matters through borrower counsel’s opinion forces a thorough review of the essential elements necessary to create an enforceable loan. Pursuing a title company on a claim after the transaction has failed is not a desirable remedy. It is much better to confirm these issues before the transaction closes. Usually, these issues are uniquely within the scope of responsibility of borrower counsel’s responsibilities. Thus, an opinion regarding the borrower’s existence, power, and authority is customary and not normally controversial.
■ What are the important legal issues? The Enforceability Opinion, discussed below, is intended to identify important legal issues that must be resolved before the transaction closes. Although the Enforceability Opinion includes many customary assumptions, qualifications, and exclusions, these limitations do not reach (and are not intended to reach) the fundamental validity of the transaction. If there is a material legal defect in the loan documents, it should be identified before closing so it can be discussed and resolved or the transaction restructured to avoid the issue. If such issues are ignored, assumed away, or swept under the rug, neither party may be transacting as it intended. Thus, the due diligence and analysis required to give the opinion is a “litmus test” for important legal issues. However, an opinion recipient should not insist on an opinion that the opinion giver honestly believes cannot be given. If the opinion is wrong and the lender’s only remaining remedy is an action against the lawyer for negligent misrepresentation, everyone loses, not just the opinion giver. Instead, important legal issues should be fully discussed and resolved before the transaction closes.
■ Is there a basis for estoppel? It is axiomatic that the transaction represents a “meeting of the minds,” a joint agreement between the parties, and a shared purpose and objective. A borrower should not enter into a loan transaction with a concealed intent to challenge the transaction subsequently if matters do not go well. An opinion of borrower’s counsel is evidence that the borrower understood the terms of the transaction and the scope of its obligations and that it intended to be bound by the loan documents. An opinion recipient can reasonably expect that borrower’s counsel has discussed the documents with the client and explained relevant legal issues and risks. Thus, the opinion confirms that transaction documents express the intent of the parties.
■ Is there multi-state efficiency in legal representation? In many transactions, the borrower and the collateral are located in Colorado and the lender and its counsel are located out of state. The deed of trust and certain other documents may be governed by Colorado law, so the lender will want assurance that such documents are enforceable in Colorado. Of course, the lender could retain Colorado counsel for that purpose, but it is not customary to do so unless some unusual issue arises. Instead, such an opinion is requested from borrower’s counsel. In most transactions, lender’s counsel fees are passed through to the borrower, so avoiding duplicate representation reduces costs and promotes efficiency.
Two important recent articles for real estate attorneys were published by joint drafting committees, comprising members of the Opinions Committees of the American Bar Association (ABA) Section of Real Property, Trust and Estate Law; the American College of Mortgage Attorneys; and the American College of Real Estate Lawyers:
■ “Real Estate Finance Opinion Report of 2012” (2012 Report),6 and
■ “Local Counsel Opinion Letters in Real Estate Finance Transactions: A Supplement to the Real Estate Finance Opinion Report of 2012” (2016 Report).
These reports provide a comprehensive explanation of the issues involved in typical real estate finance transactions and set forth guidelines for preparing, issuing, and interpreting opinion letters.8
The ABA Business Law Section has published two important articles that also address Humpty Dumpty’s concern:
■ “Guidelines for the Preparation of Closing Opinions” (Guidelines),9 and
■ “Statement on the Role of Customary Practice in the Preparation and Understanding of Third-Party Legal Opinions” (Statement of Customary Practice).10
The Guidelines and the Statement of Customary Practice address the growing concept of “customary practice” in the preparation of legal opinions and provide additional certainty regarding the scope of the lawyer’s responsibility in issuing legal opinions and the meaning of the words used therein. Both reports are in the process of being updated.11
The Statement of Customary Practice was approved by numerous bar associations and other professional groups and explains that the concept of customary practice enables an opinion giver and an opinion recipient to have a common understanding regarding the scope and meaning of the opinion:
1. It identifies the work (factual and legal) that opinion givers are expected to...