What & Why: Lender’s Legal Opinion Letter

Q: What is a legal opinion letter?

A: A legal opinion letter is a document drawn up by a legal counsel that serves as a qualified third-party opinion on a particular transaction between two parties. It helps in validating the legality of the transaction and enforceability with local laws and jurisdiction, along with identifying any legal risks that should be considered.

With nearly 100 years of experience, Carlson Dash specializes in real estate and asset-based loan transactions in Illinois, Wisconsin and Michigan.

Q: If it is called a ‘Lender’s Legal Opinion Letter’, why does a borrower have to produce it and pay for it?

A: The borrower is attempting to provide additional assurances to the lender that it is okay to loan the money to the borrower; it is helping to define and reduce risk and exposure at the outset of the loan relationship.

The most common Legal Opinion Letters provide assurance to the lender that the borrower (if an entity) is an organization in good standing with the power and authority to execute the loan agreements.

Legal opinions are very specific, as the Legal Opinion Letter acts in some ways as an estoppel letter. An estoppel letter is a written statement of facts that is designed to prevent someone from claiming additional or different facts. Most folks are familiar with estoppel letters in a real estate transaction in which a lender requires a third party to establish amounts due necessary to have a closing.

Q: What should be considered when getting a legal opinion letter prepared?

A: A standard legal opinion letter should consist of a list of reviewed documents, supported by factual conclusions for the same. This will then be followed by the counsel’s legal opinion which should be prepared by a specialist and will determine the enforceability of the loan documents in accordance with the defined terms.

As this entire process requires factual research and verification, and the lawyers are accountable for their opinions (which need to be very specifically stated), it is often considered expensive. This is why a Legal Opinion Letter is usually carefully worded to advise the parties what it covers and, importantly, what it does not cover.

A legal opinion letter that covers every topic imaginable would ordinarily be cost-prohibitive. As such, corporate borrowers are wise to consult and work with their lender to determine exactly what type of legal opinion letter the lender requires. In addition, borrowers and lenders alike should engage counsel with a depth of experience in commercial loan transactions, as well as a good understanding of the Committee on Legal Opinions – ABA Section of Business Law, and the TriBar Opinion Committee, both of which can be found here.

Q: What are the different types of legal opinion letters?

A: There are multiple types of legal opinion letters that Carlson Dash can help you with. Out of these, the primary ones are:

• Due Organization Legal Opinion: This type of opinion letter is referenced above. It provides a legal opinion that the borrower is in good standing and is authorized to execute the very loan agreements that are necessary to close the loan transaction. This is perhaps the easiest and least expensive of the Lender’s Legal Opinion Letters.
• Enforceability Opinion: Another common opinion letter, this includes everything in the Due Organization opinion, plus the validity, binding nature, and enforceability of the loan documents necessary to properly memorialize the loan transaction between lender and borrower. Enforceability Legal Opinion Letters require more information and analysis, as the transaction may involve various states, types of security, and collateral, among other things. For instance, if a loan is being made in the state of Illinois and the collateral for the loan is in Wisconsin, it is necessary for an effective Enforceability Legal Opinion Letter to engage an attorney licensed in the state of Wisconsin and the state of Illinois to provide the Enforceability Legal Opinion Letter.
• Bankruptcy Remote Opinion: Primarily required for large conduit loans, this type of opinion addresses the enforceability and effectiveness of the bankruptcy-remote provisions. These are included in the formation documents of the borrowing entity, such as in the case of a Wisconsin formation, springing members, and independent directors.
• Non-Consolidation Opinion: This type of opinion is generally only needed for large conduit loans, typically those that exceed 24 million dollars. It is an opinion stating that if any equity owner with more than a 49% ownership stake were to become insolvent, the assets and liabilities of the owned entity would not be substantially combined with those of the equity owner.

Carlson Dash can also help provide legal opinions for:

• Usury – Interest Rate Opinions
• Mortgage Creation Opinions
• UCC Legal Opinions
• Choice of Law Opinions
• And many others

The list of legal opinions in secured transaction lending relationships is long. Lenders will sometimes require an attorney’s opinion on usury laws and whether the contemplated transaction will comply with interest rate laws in each jurisdiction. Often, financial institutions will seek an attorney’s opinion on mortgage creation, so that the lender has comfort that the mortgage, once recorded, is legally sufficient to create a valid lien on the real estate serving as collateral for a loan.

Similarly, financial institutions require UCC Article 9 Legal Opinions in connection with loan and security agreements to assure that the filing of a UCC-1 will be deemed a “fixture filing” or if it will be a personal property filing, which is an important distinction at the outset and through the life of the loan. Still, other banks require a choice of law legal opinion, which will help the parties understand which state laws will govern any interpretation of or enforcement proceedings in relation to the loan agreements.

Additional information on UCC Article 9 can be found here.

Carlson Dash provides legal services and opinions to a variety of nationally and regionally recognized lenders who have a comfort level in our work and experience.

For more information on this and how to get in touch us, please visit our Legal Opinion Letters service section.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.