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Legal Opinions: Is Reliance by Assignees a Necessary Evil or a Recipe for Disaster?
Practical Law Legal Update 8-521-9042 (Approx. 4 pages)
Legal Opinions: Is Reliance by Assignees a Necessary Evil or a Recipe for Disaster?
by PLC Finance
| Published on 09 Nov 2012 • USA (National/Federal) |
A discussion of the extent to which assignees of loans should be entitled to rely on a closing legal opinion. This update also analyzes proposals that have been made to address opinion givers' concerns about assignee reliance. Included are links to credit agreements in PLC What's Market's comprehensive database that attach legal opinions that have been delivered in recent transactions.
Whether parties other than actual addressees can rely on a legal opinion is often hotly debated by opinion givers and opinion recipients. This is the case even in syndicated transactions when assignments of the loan are expected. Generally opinion recipients want the broadest reliance provision possible because it makes the loans easier to syndicate. In this case, transferees have the same assurances as the original lenders on the legality and validity of the loan documents and the enforceability of those documents against the borrower and other loan parties.
However, many opinion givers resist broad reliance provisions because of:
- The number of potential claims that may be brought by syndicate members. If, as is often the case, the loan has a maturity of several years and is widely syndicated, there may be dozens of lenders from many different jurisdictions who can attempt to assert a claim against the opinion giver. An opinion giver may be forced to adjudicate multiple claims in multiple jurisdictions. This is worsened by the fact that the resolution of a claim with one lender does not prevent another lender from bringing the same claim at a later date.
- The perception that loans of a bankrupt or distressed borrower are more likely to be held by a vulture fund (often described as lenders or investors that prey on distressed borrowers) that would be more likely to sue the opinion giver as the big pocket defendant.
- The concern that assignees (although subject to the same exceptions and qualifications as the original lenders) may not fully understand the opinion's limitations and may erroneously think that the opinion is reissued as of the date of the assignment.
- The concern that assignees may be subject to different limitations and restrictions that were not considered when the opinion was issued.
Unfortunately opinion practice is quite varied on this issue. Some law firms take a conservative approach and do not allow reliance by assignees without their prior written consent. Others only allow lenders who become assignees within a specified period after closing (for example, within ten to 15 business days of the closing) to rely on their opinion. These approaches have been criticized by lenders and participants in the secondary market as precluding or interfering with the efficient trading of corporate loans.
Many firms allow reliance by assignees subject to the following conditions:
- The opinion speaks only as of the date on which it was issued.
- The opinion giver has no obligation to update the opinion for applicability to the addressee or to take into account any changes in law, facts or any other developments that may have occurred after the opinion issue date.
- Reliance by the future assignee is actual and reasonable under the circumstances existing at the time of assignment, including any changes in law, facts or any other developments known or reasonably knowable by the assignee at that time.
For model language incorporating these concepts (often referred to as the Wachovia limitation), see Standard Document, Legal Opinion for Secured Loans: Drafting Note, Approaches Taken to Resolve the Reliance Issue. For examples of reliance language in legal opinions that have been filed as exhibits to credit agreements, see the results of the following search in PLC's What's Market Credit Agreements: Comprehensive Deal Database, Credit Agreements with Forms of Opinions.
The Wachovia limitation and its variants do not resolve the issues of multiple claims or extended enforcement. To address these issues, the following proposals have been made:
- Allowing only the agent to bring a claim on behalf of the lenders.
- Specifying a governing law for the opinion and requiring that any claims relating to the opinion be brought in a specific jurisdiction.
- Requiring that any action brought against the opinion giver be approved by a majority of the lenders.
- Making it clear that the opinion is subject to the statute of limitations, starting on the date the opinion is issued.
These proposals are not generally accepted opinion practice but are being considered to strike a fair balance between the concerns of opinion givers and the assurances and protections that lenders want to successfully assign the loans.
For more information on these proposals, see Standard Document, Legal Opinion for Secured Loans: Drafting Note, Proposals to Limit Claims.