What & Why: Lender’s Legal Opinion Letter

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 power and authority to execute the loan agreements.

Types of Lender’s Legal Opinion Letters:

  • Due Organization – 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 on 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.

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.

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.

As such, 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.

Additional information on UCC Article 9 can be found here.

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.

Kurt M. Carlson | Litigation, Corporate Transactions, Commercial Bankruptcy, Restructurings and Creditors’ Rights

Kurt concentrates his practice on representing clients in litigation, corporate transactions, commercial bankruptcy, restructurings and creditors’ rights. If you need assistance with a related matter, contact contact Kurt.