This post was prepared by Steven D. Goldberg, a Delaware attorney who regularly practices in the area of limited liability companies and limited liability company opinions (firstname.lastname@example.org)
A large portion of our practice involves the delivery of Delaware single member LLC opinions and authority to file bankruptcy opinions in connection with CMBS, Freddie Mac and Fannie Mae loans. The single member opinion has a customary form among experienced Delaware attorneys. The opinion generally deals with issues relating to the enforcability of the loan documents against the borrower or and guarantor which is a Delaware entity. The CMBS opinions are more limited than the Freddie Mac and Fannie Mae opinions. Both Freddie mac and Fannie Mae have required forms of opinion which must be delivered in connection with the loan. Most of the opinions and form language cannot be modified by the opinion giver. The opinion giver must get comfortable with the required language, some of which is not commonly used in connection with opinions. Fannie and Freddie will ask that they receive an opinion that the loan documents are “duly executed”. The opinion giver must parce the words. Contrary to the usual conclusion, the opinion does not deal with the physical act of signing and does not require an “authenticity” opinion as to the signature. The opinion only provides that the signer had power and authority to execute the document. Notwithstanding that conclusion, we will seek to take an assumption that all “signatures on the documents are genuine” so as to avoid any later revisionist interpretation in the event of a forgery.
The authority to file bankruptcy opinion is a long, reasoned, opinion dealing with what law will be applied by a bankruptcy court to determine what person or entity has the power to file a petition in bankruptcy on behalf of the borrower. The actual opinion paragraph reads:
- Based upon the foregoing, and upon our examination of such questions of law and statutes as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that a federal bankruptcy court would hold that Delaware law, and not federal law, governs the determination of what persons or entities have authority to file a voluntary bankruptcy petition on behalf of the Borrower. Our opinion is based on the assumption that in any case in which this question is considered, the question will be competently briefed and argued. Our opinion is reasoned and also presumes that any decision rendered will be based on existing legal precedents, including those discussed below.
I say that the opinion is “reasoned” because there is no existing binding law on the subject. The opinion extends to 12 pages.
It is not unusual in our practice to receive a call or email from Borrower’s counsel the week of or several days before closing. The Delaware opinion was on the closing check list from the beginning, but Borrower’s counsel or the Borrower itself hoped that Lender’s counsel would waive the requirement or let Borrower’s counsel to deliver the Delaware opinion. Often the Borrower objects to its counsel spending any more money. For what ever reason it is not unusual to receive the request to deliver the opinion at the last minute.
Traditionally purchasers, lenders and other parties to transaction have requested a legal opinion from the seller/borrower’s counsel that such party exists in good standing under the laws of the jurisdiction in which it is formed and that it has the power and authority to enter into the transaction and perform its obligations under the transaction documents. Other opinions specific to the transaction are often requested. Historically, Delaware attorneys have delivered such opinions respecting Delaware corporations. As the Delaware General Corporation law (DGCL) has become the default “national corporate law” in the US, attorneys not admitted in Delaware have become comfortable with delivering these opinions in certain circumstances and third parties have also become comfortable with accepting these opinions when delivered by non-Delaware admitted attorneys in certain circumstances. This change has been accelerated by a general belief that the DGCL as it applies to these opinions is almost completely statutory and that, to the extent that the opinion implicates Delaware Jurisprudence, that information is readily available on electronic services. Delaware corporate opinions given by non-Delaware admitted attorneys are generally limited to Delaware’s DGCL and generally do not implicate contract or other state specific bodies of law.
The trend toward the use of a Delaware limited liability company (DLLC) and particularly the use of a Delaware single member limited liability company (DSMLLC) as the borrower or other vehicle in transactions has changed the opinion landscape. At the present time most rating agencies either require or prefer that the entity serving as the borrower be a DSMLLC. Likewise most lender will require that the borrower be a DSMLLC. The preference or requirement is simple to understand. Delaware has been the leader in the field of limited liability company law; lenders and rating agencies understand their rights under Delaware law and do not necessarily understand or even like their rights under the laws of another jurisdiction. Using a DSMLLC is simpler for the lender and its counsel as it does not have to spend time parcing through another state’s act with which they are not familiar.
As noted earlier in this note, non-Delaware attorneys and their firm’s opinion committees have developed a comfort level in delivering limited Delaware corporate opinions. Opinion committees almost universally deny authority to their firms attorneys to deliver Delaware LLC opinions. An LLC agreement under most state laws is governed by the state’s contract laws. The state LLC act will create a framework of default terms, but the LLC agreement or operating agreement is a specie of contract which is interpreted under state contract law jurisprudence, not just statutory terms. Experienced and responsible attorneys do not deliver legal opinions on contracts subject to the laws of a state in which they are not admitted. That is an invitation to a malpractice case. In some corporate opinions, opinion recipients will permit the opinion giver to assume the laws of the forum state are the same as the laws in the state in which the opinion giver is admitted. However, as the LLC’s agreement or operating agreement are so inextricably tied to Delaware law, few opinion recipients will permit the “same as” assumption and will require that the opinion be delivered by an attorney admitted in Delaware.
The elements of the Delaware Single Member LLC Opinion:
First, the opinion giver will describe the engagement:
We have acted as special Delaware counsel for _______LLC a Delaware limited liability company (the “Company”), solely for the purpose of delivering this opinion in connection with the loan (the “Loan”) made by you to the Company on or about the date hereof. The Loan is secured by the Company’s real property located at ________ (the “Property”).
The term “special Delaware counsel” is understood by the opinion recipient to mean that the engagement is limited as stated in the paragraph. Some judges, however, in jurisdictions where legal opinions are not common have interpreted “special” to be the same as “extremely knowledgeable, of special”
Second, the opinion giver will list the documents which it has reviewed in order to deliver the opinion. Those documents at a minimum include a certified copy of the certificate of formation as filed with the Delaware Secretary of State, Division of Corporations, the limited liability company or operating agreement as in effect as the date of the transaction and a certificate of good standing as issued by the Delaware Secretary of State, Division of Corporations. If the opinion giver is to opine on any documents, such as loan documents, the opinion giver will list the documents reviewed.
Following the list of documents reviewed, the opinion giver will explain that they have not reviewed any other documents or any documents referred to or incorporated into the documents reviewed. The opinion giver will also state whether or not they have conducted any independent factual investigation. Typically the opinion giver will disclaim any responsibility to conduct any such investigation and state that they have relied solely upon such documents in giving the opinion. Delaware counsel is often engaged by the Borrower’s law firm and has not contact whatsoever with the Borrower itself or its principals.
Fourth, the opinion will set out a group of assumption made by the opinion giver in delivering the opinion:
For purposes of this opinion, we have assumed (i) except to the extent provided in paragraph 1 below[ the good standing opinion], that each party to the documents examined by us is duly organized or formed, as the case may be, and validly exists in good standing under the laws of the jurisdiction governing its organization or formation and that each natural person who is a signatory to the documents examined by us have the legal capacity to sign such documents, (ii) except to the extent provided in paragraph 3 below [the opinion that a Delaware Court would conclude that the provisions of the LLC agreement requiring the consent of the Special or Springing Member to the filing of a petition in bankruptcy is enforceable], that each of the parties to the documents examined by us has the power and authority to execute and deliver, and to perform its obligations under, such documents, and (iii) that all of the documents examined by us have been duly authorized, executed and delivered by all parties thereto and that all signatures on such documents are genuine.
Fifth, the opinion giver will define the laws under which the opinion is delivered and what is excluded:
This opinion is limited to the laws of the State of Delaware (excluding the securities and blue sky laws of the State of Delaware), and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws (including federal bankruptcy law) and rules and regulations relating thereto. Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders there under that are currently in effect. In rendering the opinions set forth herein, we express no opinion concerning (i) except as provided in Opinion 4 below [the UCC opinion], the creation, attachment, perfection or priority of any security interest, lien or other encumbrance, or (ii) the nature or validity of title to any property.
The first opinion is generally the “good standing ” opinion. Contrary to general belief, in Delaware, the concept of good standing is not derived from a legal analysis similar to the analysis of fact and law necessary to reach the other opinions delivered. The only way in which a person may determine whether the LLC or any other Delaware registered entity is in good standing is to receive a certificate from the Secretary of State. Good standing means with respect to a LLC that the certificate of formation has been filed and accepted by the Secretary, that no certificate of cancellation has been filed, that no certificate of merger has been filed whereby the LLC is merged out of existence and the LLC tax has been paid in full. With respect to a corporation good standing also includes the filling and paying the fee to file the annual report required of corporations but not LLC’s.
The opinion is in two parts, first: The Company is duly formed as a limited liability company. To give this opinion the opinion giver must review all documents which have been filed with the Division of Corporations. The opinion giver must confirm that the LLC has adopted a LLC agreement. Under Delaware law the LLC agreement may be written, oral or implied. Oral or implied agreements present particular challenges to opinion givers. We will not give an opinion on an oral or implied agreement.
The second part of the first opinion is :
- Based solely on the Good Standing, the Company exists in good standing as a limited liability company under the laws of the State of Delaware.
Some opinion givers use the phrase “validly exists”, however the Good Standing certificate only states that the LLC “is duly formed under the laws of the State of Delaware and is in good standing and has a legal existence [emphasis added] so far as the records of this office show, as of [the date of the certificate]. “Validly exists” with respect to a Delaware LLC is a meaningless term.
The second opinion is short, however it requires the greatest legal analysis of the LLC agreement. The opinion giver must analyze the entire LLC agreement under both Delaware LLC law and Delaware contract law, to determine that the agreement is valid, binding and enforceable against the member and any special or springing member. Opinion givers do not want to see LLC agreements that contain economic terms such a buy/sell, put/call, employment provisions, etc., as such terms, depending on circumstances and terms may not be “entirely” valid or enforceable and may be subject to various exceptions which the opinion recipient will not want to see in an otherwise “clean” opinion:
- The LLC Agreement constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member and the Springing Member, in accordance with its terms.
In most loans today in excess of five million dollars the lender will require that the LLC agreement include a “special member” or “springing member” or “an independent manager or director”. The function of this person is first to avoid the problem under the Delaware Act that he LLC automatically dissolves when it no longer has a member and second this person acts as a second set of eyes with special, enumerated duties in the case of the filing of bankruptcy. There are carve outs from default fiduciary duties. The agreement will require that prior the filing of a petition in bankruptcy the company must receive the unanimous consent of all members, including the special or springing member or the independent manager or director. The opinion recipient will want an opinion that the section of the agreement requiring the consent of the springing member, special member, independent manager or independent director will be enforceable.
- If properly presented to a Delaware court, a Delaware court applying Delaware law would conclude that (i) for so long as a mortgage lien exists on the Property, in order for a Person to file a voluntary bankruptcy petition on behalf of the Company, the prior written consent of the Springing Member or Special Member, as provided for in Section __ of the LLC Agreement, is required, and (ii) such provision, contained in Section __ of the LLC Agreement, that requires, for so long as a mortgage lien exists on the Property, the prior written consent of the Springing Member or Special Member in order for a Person to file a voluntary bankruptcy petition on behalf of the Company, constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member, in accordance with its terms.
The fourth opinion deals with the issue of charging orders. Charging orders are the traditional manner in which the creditor of a partner in a partnership could charge the interest of the partner in the partnership and receive any distribution to which the debtor would otherwise be entitled under the partnership agreement. Traditionally the judgment creditor could “foreclose” on the charging order so as to sell the interest at sale. This concept has been brought over into section 18-703 of the Delaware Act. The lender is concerned that the creditor may have some right to receive specified property owned by the LLC in discharge of the member’s debt or have the right to foreclose on the LLC interest and to have the LLC interest sold under a judicial or quasi-judicial sale. To resolve those concerns Delaware has created 18-703 (d) and (e):
(d) The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or a member’s assignee may satisfy a judgment out of the judgment debtor’s limited liability company interest and attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor, whether the limited liability company has 1 member or more than 1 member.
(e) No creditor of a member or of a member’s assignee shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.
The fourth opinion reads as follows:
- While under the LLC Act, on application to a court of competent jurisdiction, a judgment creditor of the Member may be able to charge a Member’s share of any profits and losses of the Company and the Member’s right to receive distributions of the Company’s assets (a “Member’s Interest”), to the extent so charged, the judgment creditor has only the right to receive any distribution or distributions to which a Member would otherwise have been entitled in respect of such Member’s Interest. Under the LLC Act, no creditor of a Member shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the Company. Thus, under the LLC Act, a judgment creditor of a Member may not satisfy its claims against a Member by asserting a claim against the assets of the Company.
The fifth opinion is generally included, but not in all opinions. The fifth opinion deals with the enforceable of a UCC security interest granted to the secured party. The opinion does not opine on “priority”. If the secured party seeks a priority opinion the will not receive that opinion from a knowledgeable attorney and will be told to purchase a UCC policy from a title insurance company which commonly will insure priority. Some opinion recipients will accept the UCC opinion from the Borrower’s counsel.
- A valid and enforceable security interest in favor of Lender has been granted by Borrower in the personal property collateral referred to in the Security Instrument (the “Collateral”) to the extent a security interest can be created therein under the Uniform Commercial Code as enacted in the State of Delaware (the “UCC”). The Delaware Financing Statement is in proper form so as to comply with the filing requirements of the U.C.C. Upon filing of the Delaware Financing Statement with the Secretary of State, Lender’s security interest in the Collateral will be perfected to the extent a security interest in such Collateral can be perfected by filing in the State of Delaware of UCC-1 financing statements under the UCC.
The sixth opinion implicates an analysis of Section 18-201(b):
(b) A limited liability company is formed at the time of the filing of the initial certificate of formation in the office of the Secretary of State or at any later date or time specified in the certificate of formation if, in either case, there has been substantial compliance with the requirements of this section. A limited liability company formed under this chapter shall be a separate legal entity, the existence of which as a separate legal entity shall continue until cancellation of the limited liability company’s certificate of formation.
The opinion provides:
- Under the LLC Act, (i) the Company is a separate legal entity, and (ii) the existence of the Company as a separate legal entity shall continue until the cancellation of the LLC Certificate.
The final opinion generally delivered provides that under the Act and the Agreement, the bankruptcy of the member will not cause the company to dissolve and wind up its affairs. Section 18-304 deals with the bankruptcy of a member. The section provides that “Unless otherwise provided in a limited liability agreement…” the bankruptcy of a member causes the member to ceases to be a member of the company and then has the status of an “assignee”. The typical agreement for a loan transaction contains savings language which provides generally:
- Notwithstanding any other provision of this Agreement, no Bankruptcy Action with respect to the Member or a Special Member shall cause the Member or Special Member, respectively, to cease to be a member of the Company and upon the occurrence of such an event, the Company shall continue without dissolution.
- Notwithstanding any other provision of this Agreement, each of the Member and each Special Member waives any right it might have to agree in writing to dissolve the Company upon a Bankruptcy Action of the Member or a Special Member or the occurrence of an event that causes the Member or a Special Member to cease to be a member of the Company.
The opinion reads:
- Under the LLC Act and the LLC Agreement, the Bankruptcy or dissolution of the Member will not, by itself, cause the Company to be dissolved or its affairs to be wound up.
While these are the most common opinions, the following are also often given particularly in Freddie Mac and Fannie Mae guaranteed transactions where they are required conditions of their loan commitments:
- Borrower has the authority under its Operating Agreement to execute, deliver and perform its obligations under the Loan Documents.
- The execution and delivery of the Loan Documents by or on behalf of Borrower, and the consummation by Borrower of the transactions contemplated thereby, and the performance by Borrower of its obligations there under, have been duly and validly authorized by or on behalf of Borrower.
- The execution and delivery of, and the performance of the obligations under, the Loan Documents, will not violate the Organizational Documents of Borrower.
- Based solely upon (a) our knowledge and (b) the Borrower’s Certificate, the execution and delivery of the Assumption Documents will not (i) cause Borrower to be in violation of, or constitute a material default under the provisions of any agreement to which Borrower is a party or by which Borrower is bound, (ii) conflict with, or result in the breach of, any court judgment, decree or order of any governmental body to which Borrower is subject, and (iii) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Borrower, except as specifically contemplated by the Loan Documents.
- Based solely upon (a) our knowledge and (b) the Borrower’s Certificate, there is no litigation or other claim pending before any court or administrative or other governmental body or threatened against Borrower, the Mortgaged Property, or any other properties of Borrower, Guarantor or Key Principal, except as identified on Exhibit __. [In all transactions where we deliver an opinion we require that each party upon which we opine delivers to us a General Certificate on our firm’s form which makes factual representations about the party upon which we may rely in delivering the opinion.]
- Based solely on (a) our knowledge and (b) the Borrower’s Certificate, no authorization, consent, approval, or other action by, or filing with, the State of Delaware or federal court or governmental authority is required in connection with the execution and delivery by Borrower of the Assumption Documents.