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This 1996 Texas Supplement Regarding Lawyers’ Opinion Letters in Mortgage Loan Transactions (hereinafter referred to as this "Texas Supplement") is presented by the State Bar of Texas Committee on Lawyers’ Opinion Letters in Mortgage Loan Transactions (hereinafter referred to as the "Committee" or "this Committee"), as a supplement to the Accord and the Report which are described below. It follows—and the Committee recommends that it should be deemed to supersede—the prior product of the Committee: Preliminary Draft of a Statement of Policy Regarding Lawyers’ Opinion Letters in Mortgage Loan Transactions, 23 State Bar Newsletter for Real Estate, Probate and Trust Laws, No. 2 (January 1985) (hereinafter referred to as the "1985 Preliminary Draft").
The Committee is pleased that its 1985 Preliminary Draft has contributed to the dialogue of lawyers throughout the country on the subject of opinion letters in mortgage loan transactions. In fact, excellent products have been published since 1985 by Bar Associations in more than twenty states. In addition, in an effort to achieve national uniformity, the Section of Business Law of the American Bar Association in 1991 completed its two-year project on business law opinion letters by publishing a work product which is comparable both in format and in objective to the 1985 Preliminary Draft. The Third-Party Legal Opinion Report of the Section of Business Law, 57 The Business Lawyer 167 (1991), republished at 29 Real Property, Probate and Trust Law Journal 487 (1994). That publication includes a Foreword, a Legal Opinion Accord (hereinafter referred to as the "Accord"), Commentary, an Illustrative Opinion Letter and Guidelines. The Accord will be the focus of this Texas Supplement; however, because the Accord expressly excludes certain legal opinion issues respecting liens on real property (see § 19(h) of the Accord), this Texas Supplement will consider the Accord as supplemented by the adaptation to mortgage loan transactions published by a Joint Drafting Committee of the Section of Real Property, Probate and Trust Law of the American Bar Association and the American College of Real Estate Lawyers. Report on Adaptation of the Legal Opinion Accord, 29 Real Property, Probate and Trust Law Journal 569 (1994) (hereinafter referred to as the "Report").
This Texas Supplement presents the overall consensus of the members of this Committee; however, it does not necessarily reflect the views of any particular member of the Committee, nor any law firm with which any Committee member is affiliated. This Texas Supplement, although approved by the Real Estate, Probate and Trust Law Section (the "Section") of the State Bar of Texas, has not been adopted or approved by the State Bar of Texas itself. None of the State Bar of Texas, the Section, this Committee or any member of this Committee warrants that the materials are completely free from error when published; therefore, readers are urged to verify all legal analysis which is included in this Texas Supplement. As emphasized in the Accord itself, this Texas Supplement does not replace careful, transaction-specific legal work as the basis for a third-party opinion.
As supplemented by the Report, the Accord offers lawyers an opportunity to prepare an opinion letter for a mortgage loan transaction with a nationally uniform format, thus contributing in a significant way to efficiency and cost effectiveness in the opinion process. In addition, the Committee believes that by incorporating the Accord and the Report, an Opinion Giver (the term used in the Accord for the opining lawyer) has a ready source for at least the basic elements of an opinion letter for a mortgage loan transaction which will be mutually acceptable in format to both the Opinion Giver and the Opinion Recipient (the term used in the Accord for the mortgagee). The Committee, therefore, recommends that lawyers in Texas adopt and incorporate the Accord and the Report into their opinion letters in mortgage loan transactions. In addition, although the Foreword, Commentary, Illustrative Opinion Letter and Guidelines (the complete title of the final item being "Certain Guidelines for the Negotiation and Preparation of Third-Party Legal Opinions") accompanying the Accord are not officially incorporated as part of the Accord itself, the Committee recommends that lawyers in Texas review the worthwhile work products represented by those accompanying materials.
Attached as Appendix 1 to this Texas Supplement is a sample Opinion Letter incorporating the Accord and the Report. Also attached, as Appendix 2 to this Texas Supplement, is the same sample opinion but with the addition of all provisions which are incorporated by reference into an Opinion Letter when the Opinion Giver expressly incorporates the Accord and the Report. The Committee does not recommend the use of the Appendix 2 format in a transaction but instead is including it solely for reference and as an explanation of all incorporated definitions, assumptions, qualifications, limitations and exclusions (as well as various footnote references of additional Opinion Letter options referred to in the Accord and/or the Report).
Assurance (also sometimes referred to as Generic Qualification Assurance): described in Sections 11 and 11A of the Report and analyzed in Article 4 of this Texas Supplement.
"Collateral: collectively or individually, all Real Property described in the Security Documents and all Personal Property described in the Security Documents, in respect of which provision is made by the Security Documents for a lien or security interest, unless a different meaning is given in the Transaction Documents."
General Qualifications: defined in Section 11 of the Accord and analyzed in Section 3.3© of this Texas Supplement.
Generic Qualification: described in Sections 11 and 11A of the Report and analyzed in Article 4 of this Texas Supplement.
Generic Qualification Assurance (or, simply, Assurance): described in Sections 11 and 11A of the Report and analyzed in Article 4 of this Texas Supplement.
"Opinion: a legal opinion that includes a declaration that it is governed by [the] Accord and is rendered by the Opinion Giver to one or more persons involved with the Transaction other than the Client."
"Opinion Giver: the lawyer or legal organization rendering the Opinion."
"Opinion Letter: the document setting forth the Opinion that is delivered to and accepted by the Opinion Recipient."
"Opinion Recipient: the addressee or addressees of the Opinion Letter."
"Remedies Opinion (or Enforceability Opinion): an opinion that a specified Transaction Document ‘is enforceable against the Client’ or an opinion that uses equivalent wording (e.g., one or more of the words ‘legal,’ ‘valid’ and ‘binding’ in addition to or in lieu of the word ‘enforceable’); the familiar following phrase ‘in accordance with its terms’ is implied and need not be stated in the Opinion Letter."
"Security Documents: mortgages, deeds of trust, security agreements, assignments of leases, rents or both (regardless of whether stated as an absolute or as a security assignment), or similar instruments which provide for the creation of a lien on or security interest in Collateral to secure the obligations of the Client under the Transaction Documents."
"Transaction: the business exchange (e.g., loan, . . .) by the Client and the other parties."
"Transaction Documents: the contract setting forth the principal terms of the Transaction addressed by the Opinion, including the Security Documents, and other contracts ancillary thereto that are explicitly addressed by the Opinion. Unless otherwise included by an express statement in an Opinion Letter, contracts of persons other than the Client (such as guaranties and letters of credit) are not included in the term Transaction Documents."
Essential to an understanding of the Accord and the Report is an awareness of one underlying goal of each work product: to eliminate unnecessary negotiations regarding the language of the basic provisions in an Opinion Letter. The Accord and the Report, therefore, permit the Opinion Giver to prepare and deliver a concise Opinion Letter which, through the incorporation of the Accord and the Report, includes various opinions, assumptions, qualifications, limitations and exclusions without the need for expressing them (and, accordingly, without making them the subject of extensive negotiations) in the Opinion Letter. Appendix 2 of this Texas Supplement demonstrates the full extent of the incorporated provisions; however, a few examples are mentioned below in this Section 3.3 with regard to the so-called "Remedies (or Enforceability) Opinion."
Existence and Good Standing: The Client validly exists and is in good standing in its jurisdiction of organization [Accord Commentary, ¶ 10.4(ii)].
Authority and Due Execution: All actions and approvals by the Client (e.g., by its board of directors) and its owners (e.g., shareholders or partners) necessary to bind the Client under the Transaction Documents have been taken or obtained and the Transaction Documents have been duly executed pursuant thereto [Accord Commentary, ¶ 10.4(ii)].
Contract Formation: A contract has been formed [Accord, § 10(a)(i)], and all of the conditions necessary under contract law for the formation of a contract have occurred, including (where necessary) its execution and delivery and the existence of consideration [Accord Commentary, ¶ 10.4(i)].
Remedies: Subject to the Qualifications and Limitations explained below, a remedy will be available with respect to each agreement of the Client in the contract or such agreement will otherwise be given effect [Accord, § 10(a)(ii)], and any remedy expressly provided for in the contract will be given effect as stated [Accord, §10(a)(iii)].
Security: The Security Documents are in a form sufficient to create a lien on or security interest in all right, title and interest of the Client in the Collateral, except to the extent the Collateral includes items or types of Personal Property in which a security interest cannot be created under Article 9 of the Uniform Commercial Code [Report, §7].
Capacity: Each individual acting for the Client has sufficient legal capacity [Accord, § 4(a)].
Title: The Client holds the requisite title and rights to the Collateral [Accord, § 4(b)].
Description of Collateral: The description of the Collateral is accurate and is sufficient under Law (i) to provide notice to third parties of the liens and security interests provided by the Security Documents and (ii) to create an effective contractual obligation under Law [Report, § 4®].
Documents. Each document submitted to the Opinion Giver for review is accurate and complete, each such document that is an original is authentic, each such document that is a copy conforms to an authentic original, and all signatures on each such document are genuine [Accord, § 4(e)].
Good Faith. The Opinion Recipient and any agent acting for it in connection with the Transaction have acted in good faith and without notice of any defense against the enforcement of any rights created by, or adverse claim to any property or security interest transferred or created as part of, the Transaction [Accord, § 4(i)].
No Other Agreements: There are no agreements or understandings among the parties, written or oral, and there is no usage of trade or course of prior dealing among the parties that would, in either case, define, supplement or qualify the terms of the Transaction Documents [Accord, § 4(j)].
Constitutionality: The constitutionality or validity of a relevant statute, rule, regulation or agency action is not in issue unless a reported decision in the Opining Jurisdiction has specifically addressed but not resolved, or has established, its unconstitutionality or invalidity [Accord, § 4(l)].
Governmental Approvals. The Client will obtain all permits and governmental approvals required in the future, and take all actions similarly required, relevant to subsequent consummation of the Transaction or performance of the Transaction Documents [Accord, § 4(o)].
Contract Compliance. All parties to the Transaction will act in accordance with, and will refrain from taking any action that is forbidden by, the terms and conditions of the Transaction Documents [Accord, § 4(p)].
"(a) limit or affect the enforcement of provisions of a contract that purport to require waiver of the obligations of good faith, fair dealing, diligence and reasonableness;"
"(e) relate to the sale or disposition of collateral or the requirements of a commercially reasonable sale;"
"(j) may permit a party who has materially failed to render or offer performance required by the contract to cure that failure unless (i) permitting a cure would unreasonably hinder the aggrieved party from making substitute arrangements for performance, or (ii) it was important in the circumstances to the aggrieved party that performance occur by the date stated in the contract;"
"(k) limit or affect the enforceability of a waiver of a right of redemption;"
"(l) impose limitations on attorneys’ or trustees’ fees;"
"(m) limit or affect the enforceability of any provision that purports to prevent any party from becoming a mortgagee in possession notwithstanding any enforcement actions taken under the Security Documents;"
"(n) limit or affect the enforceability of provisions for late charges, prepayment charges, or yield maintenance charges, acceleration of future amounts due (other than principal) without appropriate discount to present value, liquidated damages and Upenalties.U"
"(a) Federal securities laws and regulations administered by the Securities and Exchange Commission (other than the Public Utility Holding Company Act of 1935), state UBlue SkyU laws and regulations, and laws and regulations relating to commodity (and other) futures and indices and other similar instruments;"
"(iv) the creation, attachment, perfection or priority of a lien on Real Property Collateral or a security interest in Personal Property Collateral, or enforcement of a security interest in Personal Property Collateral separately from enforcement of the lien on Real Property Collateral as contemplated by UCC § 9-501(4). [Texas Business and Commerce Code § 9.501(d)]."
"(i) fraudulent transfer and fraudulent conveyance laws:"
"(j) Federal and state environmental laws and regulations:"
"(k) Federal and state land use and subdivision laws and regulations."
"Certain provisions contained in the Transaction Documents may not be enforceable . . . ."
Section 11A of the Report also discusses why some form of "Assurance" should immediately follow a Generic Qualification. Absent an Assurance, the Generic Qualification by itself would likely cause the opinion to have no substance. In other words, if "certain provisions contained in the Transaction Documents may not be enforceable," the Opinion Letter is susceptible to the interpretation that no opinion is being rendered as to the enforceability of any provisions of the Transaction Documents. Accordingly, all published state and national reports agree with the general conclusion that an Assurance must follow the Generic Qualification; however, the various reports have reached diverse conclusions as to the appropriate form of Assurance that is to be given.
General Laws. The opinions contained in Paragraph 2© [the remedies opinion] as to the enforceability of the Loan Documents are further subject to the qualification that the enforceability of certain of the remedial, waiver and other provisions of the Loan Documents is further limited by Applicable Laws in addition to those described in subparagraph (a) above; however, such additional laws do not, in our opinion, substantially interfere with the practical realization of the benefits expressed in the Loan Documents except for the economic consequences of any procedural delay which may result from such laws.
Often referred to as the "practical realization" form of Assurance, this form was the only form which the Committee deemed to be widely utilized at the time of the 1985 Preliminary Draft; and even subsequent to 1985, the "practical realization" form of Assurance appears still to be utilized more than any other form of Assurance following a Generic Qualification, both within the State of Texas and in most other states. Nevertheless, as discussed extensively in Section 11A of the Report, it is susceptible to criticism for the uncertainty inherent in the terms "practical realization" and "benefits." While the Opinion Recipient may believe that a particular provision in the Transaction Documents materially affects its "practical realization of the benefits [often sometimes qualified as "principal benefits"] expressed in the Loan Documents," the Opinion Giver may believe the same provision to be essentially irrelevant to the Opinion Recipient’s "practical realization" of such "benefits." To exacerbate the effect of the uncertainty, the two parties are not likely to understand that they have a difference of opinion until long after the Opinion has been delivered. The 1985 Preliminary Draft ameliorated the uncertainty inherent in the terms "practical realization" and "benefits" by engrafting an analysis and interpretation to the terms, but subsequent state reports have questioned whether the terms should perhaps be replaced altogether. Section 11A of the Report analyzes various Assurance alternatives, but comes to no conclusion as to a recommended preference.
(c) the judicial foreclosure or, if you elect to so pursue, the non-judicial foreclosure (i.e., pursuant to the power of sale as specified in the Deed of Trust), in accordance with applicable Law and the Transaction Documents, of the lien on and security interest in the Collateral created by the Security Documents upon maturity or upon an acceleration described in subparagraph (b) above.
(a) With regard to the first Assurance subparagraph (i.e., the assurance that the Opinion Recipient can sue on the debt), the Report states: "In states where anti-deficiency laws, one-form-of-action rules and similar provisions limit enforcement solely to foreclosure on security, an exception to the ACREL SOP form clause [(a)] must be made." Report, supra, page 596. Accordingly, this Texas Supplement includes an exception in subparagraph (a) to Sections 51.003, 51.004 and 51.005 of the Texas Property Code.
(b) As discussed in Section 11A of the Report in the subsection entitled "Broadening the ACREL SOP Form of Assurance," Report, supra, pages 598-600, the ACREL SOP form of Assurance includes an assurance as to the acceleration of the debt, but only for a default in an installment payment. The Committee concludes that an assurance should also be given as to an acceleration of the debt for "a material default of any other material provision of the Transaction Documents [i.e., other than an installment payment]." Accordingly, the form of Assurance recommended by this Texas Supplement includes the additional phrase in subsection (b).
(c) As discussed in Section 11A of the Report, in the subsection entitled "American College of Real Estate Lawyers Statement of Policy," Report, supra, page 596, the ACREL SOP form of Assurance assures that some form of foreclosure is available but does not guarantee any specific foreclosure remedy. As applied to Texas foreclosure remedies, then, the ACREL SOP form of Assurance would not include a specific assurance as to the non-judicial foreclosure procedure which is customarily accorded by a power-of-sale provision in the Deed of Trust. In fact, the Report expressly cautions in this regard as follows: "If the Opinion Recipient desires assurance that a specific form of foreclosure provided in a Loan Document is available, that specific assurance must be provided in addition to the assurances following the generic qualification." Report, supra, page 596. The Committee assumes that all Opinion Recipients of an Opinion Letter involving Texas Real Property Collateral will wish to receive an assurance with regard to the non-judicial foreclosure remedy; therefore, subsection © of the form of Assurance recommended by this Texas Supplement includes the following words: "the judicial foreclosure or, if you elect to so pursue, the non-judicial foreclosure (i.e., pursuant to the power of sale specified in the Deed of Trust) . . . (emphasis added)."
"The . . . [form of Opinion Letter recommended in this Texas Supplement] would provide assurance to the Opinion Recipient concerning (1) the right to accelerate regardless of a state reinstatement law; (2) the right to receive contingent interest, participation interest [Note from the Committee: See Article 7 of this Texas Supplement, especially Section B ("Implied Qualification") and Section C ("Potential Express Qualifications"), for analysis regarding the usury ramifications of contingent interest and participation interest.], interest rate adjustments, negative amortization, and compounded interest to the extent provided in the Transaction Documents; and (3) the ability to seek full recovery for any deficiency after foreclosure or to sue on the debt without having foreclosed. If the law of a particular state limits or restricts the specific assurances stated or implied in the opinion, the Opinion Giver should specifically mention such limitation or restriction in the Opinion Letter, as additional qualifications or exclusions for the transaction." Report, supra, page 597.
"The . . . [form of Opinion Letter recommended by this Texas Supplement] gives . . . [assurance] to the extent enforcement of a right in rents would be considered a foreclosure or to the extent that acceleration and foreclosure would be available if a borrower interfered with a lender’s exercise of rights under an assignment of rents." Report, supra, page 597.
"[T]he . . . [form of Opinion Letter recommended in this Texas Supplement] includes important assurances, for example, the right to accelerate for a violation of a provision that restricts sale, financing, leasing, or ownership interests (the Udue-onU provisions) [Note from the Committee: See Article 5 and Appendix 3 of this Texas Supplement for analysis regarding the "due-on" provisions under Texas law.], [although] it provides no assurance that a clause prohibiting the creation of a junior lien can be specifically enforced to avoid the lien." Report, supra, page 599 (emphasis in original).
(ii) that there is no law which would preclude the Opinion Recipient from accelerating the debt upon the Opinion Recipient’s discovery of a material inaccuracy in a material representation or warranty in the Transaction Documents (e.g., a representation or warranty relating to the financial statements which were submitted by the Client).
To the extent that the facts of a particular Transaction, or a change in the Law after the date of this Texas Supplement, causes the Opinion Giver to question the validity of any one or more of the above assurances, the Committee recommends that the Opinion Giver include a special qualification in the Opinion Letter to that effect.
"If the Opinion Recipient desires comfort about other benefits, such as the appointment of a receiver or the right to collect assigned leases or rents [Note from the Committee: Although not specifically stated in the Report, the Committee believes that in Texas a waiver of jury trial should logically be added to the list of "other benefits" which are not included in the recommended form of Assurance.], where enforceability may be less certain, the Recipient must specifically request it." Report, supra, page 596.
"The . . . [form of Opinion Letter recommended by this Texas Supplement] gives no assurance as to the enforceability of nonforeclosure remedies or procedures provided by the Transaction Documents, such as those pertaining to an assignment of rents [Note from the Committee: As stated above, the Committee believes that this sentence is also applicable to a waiver of jury trial.], except to the extent enforcement of a right in rents would be considered a foreclosure or to the extent that acceleration and foreclosure would be available if a borrower interfered with a lender’s exercise of rights under an assignment of rents. Other assurances would need to be expressly provided to address the rights and remedies afforded by an assignment of rents." Report, supra, page 597.
"[T]he . . . [form of Opinion Letter recommended by this Texas Supplement] provides no assurance that a clause prohibiting the creation of a junior lien can be specifically enforced to avoid the lien." Report, supra, page 599 (emphasis in original).
"By way of example only, the . . . [form of Opinion Letter recommended by this Texas Supplement] does not include assurance concerning the enforceability of provisions such as those (1) providing for prepayment fees; (2) providing for a collateral or absolute assignment of rents (except as included within the concept of foreclosure of rents as Collateral); (3) providing for a determination of the rights or protections of a mortgagee in possession; or (4) providing for the ability to add the cost of cure of a debtor’s default to the secured indebtedness." Report, supra, page 599.
To the extent that the Opinion Recipient determines it necessary for the Opinion Giver to address any one or more of the provisions which are not covered by the recommended Assurance, the Committee recommends that the Opinion Recipient and the Opinion Giver negotiate appropriate additional assurances to address those provisions specifically. See Article 6 of this Texas Supplement for examples of potential additional assurances.
Neither the Accord, the Report nor this Texas Supplement preclude the Opinion Giver from adding additional qualifications to those described above in this Texas Supplement. Although the Committee does not believe that additional qualifications should be necessary in the majority of mortgage loan transactions, Appendix 3 attached to this Supplement alerts Opinion Givers to potential additional qualifications, for possible addition as paragraph 6 of the Opinion Letter if the Opinion Giver and the Opinion Recipient agree that one or more of such additional qualifications are warranted.
Neither the Accord, the Report nor this Texas Supplement preclude the Opinion Recipient from requesting assurances or analyses in addition to the assurances discussed above. Although the Committee does not believe that any additional assurances should be necessary when the Opinion Recipient is represented by Texas counsel or is otherwise familiar with Texas law, the Committee recognizes that additional assurances may be appropriate if specific facts warrant them. The following additional opinions are included for possible addition in the Opinion Letter if the Opinion Recipient requires one or more of them and the Opinion Giver is willing to provide the requested assurances; however, the Committee does not intend, by the inclusion of the assurances set forth below, to suggest that an Opinion Recipient’s request for other assurances would be inappropriate if the facts so warranted.
(d) The signatures for our Client [and the Guarantor] on the Transaction Documents [and the Guaranty] are all genuine, i.e., we are not relying upon Section 4(e) of the Accord with regard to the signatures for our Client on the Transaction Documents.
(ii) the loan evidenced by the Note is accelerated by you in accordance with the rights granted to you in the Transaction Documents and all of the following conditions are satisfied: (A) the Transaction Documents expressly provide for the payment by our Client of the Prepayment Fee upon such acceleration; (B) the Prepayment Fee, if re-characterized as interest and added to the interest prescribed in the Transaction Documents, would not cause the loan to be usurious; (C) the Prepayment Fee is not deemed to be an unreasonable or excessive penalty; and (D) the Prepayment Fee, when considered with other provisions in the Transaction Documents (e.g., restrictions on sale of the Collateral), is not deemed to be an unreasonable restraint on our Client’s right to alienate the Collateral.
(ii) prior to foreclosure, upon your taking peaceable possession of the rents following default with the consent (express or implied) of our Client.
[Add the following three sentences only if the Transaction Documents evidence an absolute assignment of rents to the lender in a form consistent with the latest judicial interpretation]. With regard to the transfer of rents to you under the absolute assignment prior to foreclosure, if such transfer occurs (1) upon default, and (2) in the manner prescribed in the Transaction Documents, but (3) absent our Client’s consent (other than as contained in the absolute assignment), we are aware of Texas case law and analysis upholding the validity and effectiveness of your right to possession of the pre-foreclosure rents. However, the Law in this area is not yet settled; therefore, no unqualified opinion can be rendered with respect to your right to possession of the rents (absent our Client’s consent) prior to foreclosure. Nevertheless, we are of the opinion that the Transaction Documents, as drafted, conform to the requirements of the existing case law and analysis upholding the right to pre-foreclosure possession of the rents after default under the absolute assignment.
The above additional opinions are presented as so-called "reasoned" opinions (i.e., as opposed to unequivocal opinions) because the status of Texas law in each applicable area is not totally resolved. For "photograph-in-time" analyses of the current status of Texas law in these areas as of the date of preparation of this Supplement (i.e., subject to change after the date of this Texas Supplement), see Appendix 4 attached to this Texas Supplement.
"(a) The UBasic Rule,U as set out in Commentary ¶18.1 of the Accord, establishes the principle that the Remedies Opinion includes an implied opinion that a violation of usury law does not render the loan agreement or its interest provisions void or voidable by the Client. In many jurisdictions, a violation of usury law will not technically void or make voidable the obligation, but it will subject the person charging or receiving usurious interest to penalties or other unfavorable consequences. Adherence to the Basic Rule could reasonably require an implied opinion as to void or voidable and an express opinion under Accord §16 as to other consequences of violation of usury law. This Report adopts the view that an implied usury opinion, given through the Remedies (Enforceability) Opinion, addresses all consequences of violating usury law. The Opinion Giver is cautioned that a usury opinion is implied in . . . [Opinions incorporating the Accord and the Report] and that silence provides the opinion, rather than negates it." [Emphasis added.] Report, supra, page 602.
Notwithstanding the analysis in Section 7.1 immediately above which explains that a usury opinion is implied as part of the Remedies Opinion, Paragraph 3 of the Opinion Letter which is attached as Appendix 1 to this Texas Supplement contains an express opinion as to usury. This Committee acknowledges that the inclusion of an express usury opinion is contrary to the analysis in the Texas Business Law Report (cited in footnote 1 of this Texas Supplement), especially Supplement 1 thereto, which recommends that no express usury opinion be given since it is included in the Remedies (Enforceability) Opinion. "Accordingly, if an Opinion Giver is expressing a Remedies Opinion and Texas is the Opining Jurisdiction, an express usury opinion is superfluous." Texas Business Law Report, Supplement No. 1, page 3 (December 1994). This Committee agrees with the Texas Business Law Report that an express statement of the usury opinion is not absolutely necessary; however, this Committee does not believe that a usury opinion, separate and apart from the Remedies Opinion (i.e., as is shown in the form of Opinion Letter attached as Appendix 1 to this Texas Supplement), is totally superfluous inasmuch as a separate usury opinion is not subject to the General Qualifications which automatically apply to the Remedies Opinion. "If the General Qualifications are to apply to an opinion in addition to the Remedies Opinion, the Opinion Letter must specifically state that they apply to that opinion." Accord, § 11. And while such a distinction may not in itself be of sufficient substantive import to warrant a separate usury opinion, this Committee also concludes that in mortgage loan transactions it is customary for Opinion Givers to give, and Opinion Recipients prefer to receive, an express usury opinion.
The analysis at the conclusion of Section 7.2 immediately above points out that the General Qualifications do not apply to a usury opinion which is separate and apart from the Remedies Opinion. Nevertheless, as explained in the Report, certain qualifications do apply to a usury opinion. As explained in subparagraph (b) of Section 16 in the Report, the Opinion Giver may assume, without stating the assumption in the Opinion Letter, that no fees, charges, benefits, or other compensation will be paid, directly or indirectly, to or for the benefit of the Opinion Recipient, except as specified in the Transaction Documents. In addition, as confirmed by subparagraph (c) of Section 16 in the Report, the Opinion Giver gives an opinion only that the Transaction Documents, as executed, are not usurious as of the date of the Opinion. Accordingly, for example, if the Opinion Giver concludes that the Transaction Documents are not "usurious on their face" because they contain a so-called "savings clause" (Note: This Texas Supplement is not intended as an analysis of the law of the State of Texas as to when a "savings clause" assures that Transaction Documents are not "usurious on their face."), the Opinion Giver need not add any special qualification to the Opinion. The Committee also directs the readers’ attention to Section 4(1) of the Accord which permits, in most instances, an Opinion Giver to assume, without stating the assumption in the Opinion Letter, the following (which is sometimes expressly stated as a qualification in usury opinions): "The constitutionality or validity of a relevant statute, rule, regulation or agency action is not in issue unless a reported decision in the Opining Jurisdiction [i.e., the State of Texas] has specifically addressed but not resolved, or has established, its constitutionality or invalidity."
As the Committee did in the 1985 Preliminary Draft, this Texas Supplement sets out below the following express qualifications (i.e., to be included in a new paragraph 6 added to the Opinion Letter format attached as Appendix 1 to this Texas Supplement), which may on occasion be warranted in connection with the usury aspects of Opinion Letters.
The opinions contained in this Opinion Letter do not include any opinion as to whether the Transaction is usurious.
The opinion contained in paragraph 3 is qualified to the extent that a court might determine that your receiving an equity interest in our Client [substitute correct description of equity interest, if different] is additional consideration for the loan, the value of which is to be characterized as interest.
The opinion contained in paragraph 3 is qualified to the extent that a court might determine that the compensation designated as a "commitment fee" in the Transaction Documents should instead be characterized as interest on the loan or should be construed, for purposes of ascertaining compliance with applicable Laws, as reducing the amount of principal available to our Client under the loan.
The opinion contained in paragraph 3 is qualified to the extent that . . . [same as Alternate 4]. The status of applicable Law in this area is not yet settled; therefore, no absolute opinion can be rendered. Nevertheless, based upon the following assumptions, we are of the opinion that a Texas court, in a case properly presented, would not characterize the "commitment fee" as interest on the loan or, for purposes of ascertaining compliance with applicable Laws, as reducing the amount of principal available to our Client under the loan: . . . [list assumptions].
The opinion contained in paragraph 3 is qualified to the extent that the Assignment of Leases [or, if applicable, the Deed of Trust] purports to effect a so-called "absolute" assignment of rents (i.e., instead of merely assigning the rents as collateral); and the issue is not yet resolved in Texas as to whether an "absolute" assignment might require a credit to the debt in order to avoid usury concerns. Nevertheless, based upon the following aspects of the Assignment of Leases [or, if applicable, the Deed of Trust], we are of the opinion that a Texas court, in a case properly presented, would not conclude that the "absolute" assignment of rents in this Transaction requires a credit to the debt prior to your actually receiving rentals from tenants: . . . [list factors, e.g., the license back to the Client, the release of the assignment upon repayment of the Loan, etc.].
No opinion is expressed as to any usury savings provision in the Transaction Documents to the extent that it purports to permit the cure of any violation of applicable usury laws by the rescission of any demand or charge, or the refunding, or the crediting against principal, of any interest that has been charged or received in violation of any applicable usury law.
(a) With regard to the Opinion Giver’s opinion as to the existence and good standing of the Client (i.e., incorporated into the Remedies Opinion, as explained in Section 3.3(a) of this Texas Supplement), the laws of the Client’s organization are deemed to apply to such opinion [Accord, § 10(c)]. For example, if the Client is a Delaware corporation, then the laws of the State of Delaware are deemed to be applicable to the implied opinion that the Client is in existence and in good standing in the State of Delaware; accordingly, if the Opinion Giver is not licensed in the State of Delaware, he or she may wish to obtain a supporting opinion from a Delaware lawyer with regard to the Client’s existence and good standing status in that State.
(b) With regard to the Opinion Giver’s opinion as to the substantive aspects of the Transaction Documents (i.e., not the choice-of-law provisions, if any, in such Transaction Documents), the law of the jurisdiction whose laws are being addressed by the Opinion Giver in the Opinion (normally being the laws of the state of the Opinion Giver) shall be deemed to govern the Transaction Documents [Accord § 10(b) and Report § 8]. For example, even if the Transaction Documents specify the laws of the State of New York as being applicable to the Transaction, if the Opinion Letter includes a Remedies Opinion without a specific reference to the laws of the State of New York, then as to that Remedies Opinion by the Texas Opinion Giver, the laws of the State of Texas are deemed to apply to the Remedies Opinion.
(c) With regard to the choice-of-law provisions, if any, in the Transaction Documents, if and to the extent that the choice-of-law provisions designate the law of the jurisdiction being addressed by the Opinion Giver in the Opinion (which the Accord defines as the "Opining Jurisdiction"), the Opinion is deemed to include an opinion that such choice-of-law provisions will be given effect under the choice-of-law rules of the Opining Jurisdiction [Accord § 10(d)(i)]. The Report provides an exception to this rule, however, in the event that the application of the Law of the Opining Jurisdiction would be "contrary to a fundamental public policy of the Law of an Other Jurisdiction" (defined below) which has the most significant relationship to the Transaction [Report § 9]. For example, if the Transaction Documents specify the laws of the State of Texas as being applicable to the Transaction, then the Remedies Opinion is deemed to include an opinion that such choice-of-law provision will be given effect by a federal or state court in the State of Texas—unless such court determines that its application of the choice-of-law provision would be contrary to a fundamental public policy of the laws of another state which had the most significant relationship to the Transaction.
(d) If and to the extent that the choice-of-law provisions designate the law of a jurisdiction other than the Opining Jurisdiction (which the Accord defines as an "Other Jurisdiction"), the Opinion is not deemed to include an opinion as to what law governs the Transaction. For example, if the Transaction Documents specify the laws of the State of Colorado, then the Texas Opinion Giver is not deemed to be rendering any opinion on the validity of that choice-of-law provision (i.e., unless the Opinion Letter includes an express choice-of-law opinion).
"(l) The constitutionality or validity of a relevant statute, rule, regulation or agency action is not in issue unless a reported decision in the Opining Jurisdiction has specifically addressed but not resolved, or has established, its unconstitutionality or invalidity."
In determining whether the specific terms of, and performance of agreements in, the Transaction Documents would cause a breach of or default under an Other Agreement or violate the express terms of a Constituent Document or a Court Order, the Opinion Giver need only take into account information furnished to him or her by others (see Section 3 of the Accord) and "other facts of which the Opinion Giver has Actual Knowledge."
In giving the opinion that the execution and delivery by the Client of, and performance by the Client of its payment obligations [the limitation to payment obligations is effected by Section 15 of the Report] in, the Transaction Documents neither is prohibited by, nor subjects the Client to a fine, penalty or other similar sanction under, any statute or regulation, the Opinion Giver need only determine whether any such prohibition would occur under or any such fine, penalty or similar sanction would arise from a statute or regulation of the Opining Jurisdiction that a lawyer in the Opining Jurisdiction "exercising customary professional diligence" would reasonably recognize as being directly applicable to the Client, the Transaction, or both. An Opinion Recipient’s request for an opinion concerning compliance with a specific law is appropriate only if the Opinion Giver can ascertain compliance without making factual or other assumptions that effectively render the opinion meaningless.
In giving a confirmation regarding the existence of legal proceedings that are pending or threatened against the Client, an Opinion Giver relies only upon information provided by others (see Section 3 of Accord) and a review of the Opinion Giver’s litigation docket. The Opinion Giver need not review court or other public records or undertake any broader review of its own files.
"§ 7 Reliance by Opinion Recipient. The Opinion Recipient may rely upon the Opinion, without taking steps to verify the conclusions reached, with respect to the specific legal issues that the Opinion Letter affirmatively addresses. The Opinion Recipient may not rely on the Opinion or the Opinion Giver for any legal or other analysis beyond that set forth in the Opinion Letter, such as the broader guidance and counsel that the Opinion Giver might provide to the Client."
"Accord § 7 is not intended to alter the Law of any Opining Jurisdiction with regard either to the standard of care expected of an attorney or to the extent of third-party liability, i.e., the liability of an attorney to a party who is not the attorney’s client. For example, the Accord is not to be read as inconsistent with any prerequisite of the Law of the Opining Jurisdiction that requires the Opinion Recipient to demonstrate its reliance upon the Opinion Letter as a prerequisite to prevailing in a cause of action based on an erroneous Opinion contained in the Opinion Letter." Report, supra, page 581.
"(i) The Opinion Recipient and any agent acting for it in connection with the Transaction have acted in good faith and without notice of any defense against the enforcement of any rights created by, or adverse claim to any property or security interest transferred or created as part of, the Transaction."
"With respect to all parties other than the Client who have executed any of the Transaction Documents: (i) each such party is duly organized, validly existing and in good standing under all applicable laws; (ii) each such party has all requisite corporate power and authority to execute and deliver the Transaction Documents and perform the applicable provisions thereof; (iii) all Transaction Documents have been duly authorized, executed and delivered by such party; (iv) all Transaction Documents are legal, valid, binding and enforceable in accordance with their terms as to each such party (and thus such Transaction Documents have mutuality of binding effect); (v) no such party is involved in any court or administrative proceeding relating to or otherwise affecting this transaction or subject to any order, writ, injunction or decree of any court or governmental agency or commission which would prohibit the execution or delivery of the Transaction Documents or the consummation of any transaction therein contemplated; and (vi) there is no requirement of consent, approval or authorization by any person or governmental authority with respect to such parties."
Clause (i) need not be stated by virtue of Accord Section 4(d); the other clauses need not be stated by virtue of Accord Section 4©.
"All signatures (of parties other than the Client) are genuine; all documents submitted as copies or facsimiles conform to an authentic original; and all statements set forth in certificates or written documents of governmental officials and in certificates as to corporate proceedings, incumbency of officers and other corporate matters are true and correct."
The first two clauses need not be stated by virtue of Accord Section 4(e); the last clause need not be stated by virtue of Accord Section 4(f) (with respect to public authorities) and Accord Section 3(a) (with respect to corporate officers). However, Opinion Givers should be careful that the provider is reasonably believed by the Opinion Giver to be an appropriate source for the information.
"The Note is being acquired by you, for your own account, without any view to or any present intention of making any distribution thereof or of any interest therein."
The Transaction Documents may contain a representation by the Lender to this effect, in which case Accord Section 4(p) would apply. Accord Section 19(a) provides that absent Private Ordering, an Opinion Letter does not address federal or state securities laws.
"All plans, specifications and drawings referred to in the Transaction Documents are sufficient for their intended use and comply with applicable codes, laws, rules and regulations."
Section 19(g) of the Accord excludes opinions as to Local Law—the statutes and ordinances, the administrative decisions, and the rules and regulations of counties, towns, municipalities and special political subdivisions. Sections 19(j), 19(k), 19(o) and 19(p) exclude opinions as to federal and state environmental, land use, health and safety and labor laws. In addition, Section 15 of the Report limits the phrase "performance by the Client of its agreements" (which is addressed in Section 16 of the Accord) to payment obligations; therefore, no opinion on the plans, specifications and drawings is included in a standard Accord/Report Opinion.
"With respect to all instruments executed by any individual, such individual was, at the time of such execution and delivery, sui juris and under no legal disability. We have no information that such was not the case."
Section 4(a) of the Accord obviates the need to state this Assumption.
"The Lender has funded the Loan."
This assumption addresses whether the Lender has satisfied the legal requirements that are applicable to it to the extent necessary to make the Transaction Documents enforceable against it and, as such, need not be stated pursuant to Accord Section 4©.
"All remedies will be exercised in a commercially reasonable manner and without breach of peace."
Section 13(d) of the Accord provides that an Opinion to which the Equitable Principles Limitation applies includes a limitation requiring reasonableness in the performance and enforcement of an agreement by the party seeking enforcement of the contract. In addition, Section 14(d) of the Accord qualifies the Opinion to the extent that generally applicable rules of Law limit the right of a creditor to use force or cause a breach of the peace in enforcing rights.
"In connection with the loan, interest will be calculated on a 365/366 actual day year, on the principal balance of the loan from time to time remaining unpaid."
The opinion with respect to usury is given with respect to the Transaction Documents only and does not address the actions of persons in administering those documents after the closing. If the Transaction Documents permit interest to be calculated on a basis which could be usurious, the documents should be corrected prior to the issuance of the Opinion Letter.
"There are no points, fees or other sums paid or payable by Borrower to Lender other than the interest reflected in the Transaction Documents."
The opinion with respect to usury is given with respect to the Transaction Documents only. This assumption need not be expressly stated by virtue of Section §4(j) of the Accord, as further embellished by Section 16(b) of the Report.
"Any stock, warrant, option or equity interest acquired in the Transaction is being acquired for consideration other than the indebtedness evidenced by the Transaction Documents."
Section 7.4 of this Texas Supplement lists several express usury qualifications; and if the Opinion Giver has any concern for the usury effect of any stock, warrant, option or equity interest which is being acquired in connection with the Transaction, the Committee recommends that the Opinion Giver consider a qualification which adapts either Alternative 2 or Alternative 3 in that Section 7.4.
"The usury savings clause in the Transaction Documents will control other clauses in apparent conflict."
If the usury savings clause is properly drafted, it will control; if not, the solution is to draft a proper savings clause, not assume away the problem.
"In determining whether the Transaction is usurious, due weight will be given to the various yield protection provisions (reimbursements, increased costs, increased reserves, compensation for breakage and failure to borrow, capital adequacy, and the like)."
As explained in Section 16© of the Report, the opinion with respect to usury is given only as to the Transaction Documents and does not address the actions of persons in administering those documents after the closing.
"The commitment fees provided for in the Transaction Documents are reasonable and as such constitute true commitment fees and not additional interest."
See Alternative Qualifications 4 and 5 in Section 7.4 of this Texas Supplement for alternative qualifications regarding commitment fees.
"None of the parties upon whom we have relied for purposes of the opinions herein expressed has perpetrated a fraud upon either the Lender, the Borrower or us."
"We assume that neither the Lender nor the Lender’s lawyer has any current actual knowledge of any reason why any portion of this opinion is not accurate."
Section 4(i) of the Accord includes in an Opinion Letter which adopts the Accord an assumption that the Opinion Recipient and its agents have acted in good faith and without notice of any defense against the enforcement of any rights created by, or adverse claim to any property or security interest transferred or created as part of, the Transaction. Section 3 of the Accord permits an Opinion Giver, without investigation and without stating reliance, to rely upon information in Public Authority Documents and information provided by Client officials and others, if the provider is the Opinion Recipient or is reasonably believed by the Opinion Giver to be an appropriate source for the information. An Opinion Recipient who has, or whose agent has, perpetrated a fraud would probably not be able to prove reliance on the resulting opinion.
"There has been no waiver of any of the provisions of the Transaction Documents, by actions or conduct of the parties or otherwise."
This assumption need not be stated by virtue of Section 4(j) of the Accord.
"The Lender will not in the future take any discretionary action (including a decision not to act) permitted under the Transaction Documents that would result in a violation of law or constitute a breach or default under any contract to which the Lender is a party or by which it is bound or any court or administrative order, writ, judgment or decree that names the Lender or that is specifically directed to it or its property."
The Opinion Letter recommended in this Texas Supplement does not include any opinion by the Opinion Giver which would require this assumption; in other words, no opinion is required in the basic Accord/Report Opinion Letter with regard to the legality and/or propriety of the Lender’s post-closing actions. In addition, to the extent that an Opinion Giver might have a concern that the Lender might engage in an illegal or other wrongful act and then seek to accelerate the Loan because the Client fails to support the Lender’s illegal or otherwise wrongful act, Section 13 includes several examples of the Equitable Principles Limitation, such as "good faith and fair dealing," "reasonableness" and "unconscionability," which accord the Opinion Giver coverage comparable to the above-quoted assumption.
Note: This Opinion Letter is an illustration of how an Opinion Giver might implement the Accord, the Report and this Texas Supplement. It is not intended to be either prescriptive or an exemplar. Many of the definitions, assumptions, exceptions, explanations and other matters often set forth are not stated because they are automatically included as a consequence of the adoption of the Accord and the Report. Unless called for by the facts and circumstances surrounding the Opinion Letter, the provisions in italics should be omitted.
We have acted as counsel to _______________________, a ____________________ (our "Client") [and to ___________________________________________ (the "Guarantor")], in connection with that certain $____________ loan transaction (the "Transaction") evidenced by the documents described below. This Opinion Letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991), as modified by the Report of the ABA Section of Real Property, Probate and Trust Law and the American College of Real Estate Lawyers (1993) (the "Report") as to opinions pertaining to Real Estate Secured Transactions. As a consequence, it is subject to a number of definitions, assumptions, qualifications, limitations and exclusions, more particularly described in the Accord and the Report; and this Opinion Letter should be read in conjunction therewith. Terms which in this letter begin with initial capital letters and are not defined in this letter shall be deemed to have the same meanings herein as in the Accord and the Report. The law covered by the opinions expressed herein is limited to the Law of the State of Texas [and the federal Law of the United States].
We have relied upon factual representations made by our Client in [Sections (specify) of] the _________________________ [name the document].
We note that various issues concerning [specify legal issues] are addressed in the opinion of [Other Counsel — identify by name], separately provided to you [, and we express no opinion with respect to those matters].
For purposes of this opinion, the Note, the Deed of Trust, the Assignment of Leases and the Loan Agreement are collectively referred to as the "Transaction Documents."
Remedies Opinion. Subject to the applicable definitions, assumptions, qualifications, limitations and exclusions contained in the Accord, in the Report and in paragraph 5 [and, if applicable, paragraph 6] of this Opinion Letter, we are of the opinion that the Transaction Documents are enforceable against our Client [and the Guaranty is enforceable against the Guarantor].
Usury Opinion. The Transaction, as reflected in the Transaction Documents [and the Guaranty], is not usurious.
The execution and delivery by our Client of, and the performance by our Client of its agreements in, the Transaction Documents do not (i) violate the Constituent Documents of our Client, (ii) breach, or result in a default under, any existing obligation of our Client under Other Agreements, or (iii) breach or otherwise violate any existing obligation of our Client under Court Orders.
The execution and delivery by our Client of the Transaction Documents, and the performance by our Client of the payment obligations of the Transaction Documents, will not violate applicable provisions of statutory law or regulation.
There are no actions or proceedings against our Client, pending or overtly threatened in writing, before any court, governmental agency or arbitration which seek to affect the enforceability of the Transaction Documents.
A copy of this Opinion Letter may be delivered by you to [lending bank] [syndicate participants] [subsequent purchasers] [rating agency] [other] in connection with [state purpose], and such [person] [persons] may rely on this Opinion Letter as if it were addressed and had been delivered to [it] [them] on the date hereof. Subject to the foregoing, this Opinion Letter may be relied upon by you only in connection with the Transaction and may not be used or relied upon by you or any other person for any purpose whatsoever, except to the extent authorized in the Accord, without in each instance our prior written consent.
Note: This Opinion Letter sets forth opinions, assumptions, qualifications, limitations, and exclusions that are understood or implied in a Remedies Opinion that adopts the Accord and the Report. It is included in this Supplement merely as an educational tool for Opinion Givers and Opinion Recipients, as well as their Clients, to confirm, by referring to the cited Sections and Paragraphs of the Accord and Report, that Opinion Letters in the form of Appendix 1 contain the Opinions requested and are qualified appropriately. In addition, this form includes footnote references to considerations of additional Opinion Letter options referred to in the Accord and/or the Report. The Committee does not recommend the use of Appendix 2 as an Opinion Letter, but includes it only as a reference aid.
We have acted as [special] counsel to ________________, a ______________ (the "Client"), in connection with that certain $___________ loan transaction (the "Transaction") evidenced by the documents described below. This Opinion Letter is provided to you at the request of the Client pursuant to Section [ ] of the [Agreement] described below.
The law covered by the opinions expressed herein is limited to the Law of the State of Texas [and the General Corporation Law of the State of Delaware].
1.2 Transaction Documents. The documents described in items (a) through (d) above are referred to in this Opinion Letter as the "Transaction Documents." The Transaction Documents described in items (b) and (c) above are referred to in this letter as the "Security Documents." All property described in any of the Security Documents in respect of which provision is made by the Security Documents for a lien or security interest is referred to in this Opinion Letter as the "Collateral." Except as otherwise indicated herein, capitalized terms used in this Opinion Letter are defined as set forth in the Agreement or the Glossary attached to this Opinion Letter.
1.3 Scope of Review. In connection with the opinions hereinafter set forth, we have limited the scope of our review of the documents related to the Transaction to [originals/photocopies of] the Transaction Documents and the Financing Statements.] In addition, in connection with the opinions hereinafter set forth, we have reviewed such other documents and certificates of public officials and certificates of representatives of the Client, and have given consideration to such matters of law and fact, as we have deemed appropriate, in our professional judgment, to render such opinions.
1.4 Reliance without Investigation. We have relied, without investigation or analysis, upon information in Public Authority Documents (as defined in the attached Glossary). Except to the extent the information constitutes a statement, directly or in practical effect, of any legal conclusion at issue, we have relied, without investigation or analysis, upon the information contained in representations made by the Client in [Sections ________ of] the Agreement and on information provided [by officials of the Client] [in certificates of officers of the Client], which we reasonably believe, in each case, to be an appropriate source for the information. Except to the extent the information constitutes a statement, directly or in practical effect, of any legal conclusion at issue, we have relied, without investigation or analysis, upon information provided to us by you, as set forth in [_________________].
2.1 Status. The Client is a [corporation], validly existing in good standing in its jurisdiction of organization.
2.2 Authorization. All actions or approvals by the Client, and its [shareholders], necessary to bind the Client under the Transaction Documents have been taken or obtained.
2.3 Execution. The Client has duly executed and delivered the Transaction Documents and the Financing Statements for valid consideration.
2.5 Form of Security Documents. The Security Documents are in a form sufficient to create a lien on or security interest in all right, title, and interest of the Client in the Collateral, except to the extent the Collateral includes items or types of Personal Property (as defined in the attached Glossary) in which a security interest cannot be created under Article 9 of the Uniform Commercial Code.
2.6 Usury Opinion. Assuming that no fees, charges, benefits, or other compensation will be paid, directly or indirectly to you or for your benefit, except as specified in the Transaction Documents, and assuming that no amounts to be paid as specified in the Transaction Documents constitute a penalty, the Transaction, as evidenced by the Transaction Documents, does not violate the usury laws of the State.
2.7 No Breach or Default Opinion. To the best of our Actual Knowledge (as defined in the attached Glossary), execution and delivery by the Client of, and performance of its agreements in, the Transaction Documents do not (i) violate the [articles or certificate of incorporation or bylaws; partnership agreement or certificate] of the Client, (ii) breach, or result in a default under, any existing obligation of the Client under the Other Agreements specified in Attachment [___] hereto (the "Specified Other Agreements"), or (iii) breach or otherwise violate any existing obligation of the Client under any Court Order which is identified in Attachment [___] hereto (the "Specified Court Orders"), which the Client has certified to us are the only Court Orders. Our Opinion in this Paragraph does not extend to any action or conduct of the Client that a Transaction Document may permit but does not require, except to the extent that (i) such action or conduct takes place simultaneously with, and (ii) we had Actual Knowledge that it constituted part of, the consummation of the Transaction.
2.8 No Violation of Law Opinion. Execution and delivery by the Client of, and performance by the Client of its payment obligations in, the Transaction Documents neither are prohibited by applicable provisions of statutory law or regulation of the State nor subject the Client to a fine, penalty or other similar sanctions under, any statutory law or regulation of the State. Our opinion in this Paragraph relates only to statutory laws and regulations that we, in the exercise of customary professional diligence, would reasonably recognize as being directly applicable to the Client, the Transaction, or both.
(a) A Client who is a natural person, and natural persons who are involved on behalf of the Client, have sufficient legal capacity to enter into and perform the Transaction and to carry out their role in it.
(b) The Client holds the requisite title and rights to any property involved in the Transaction.
(c) Each party to the Transaction (other than the Client) has satisfied those legal requirements that are applicable to it to the extent necessary to make the Transaction Documents enforceable against it.
(d) Each party to the Transaction (other than the Client) has complied with all legal requirements pertaining to its status as such status relates to its rights to enforce the Transaction Documents against the Client.
(e) Each document submitted to us for review is accurate and complete, each such document that is an original is authentic, each such document that is a copy conforms to an authentic original, and all signatures on each such document are genuine.
(f) Each Public Authority Document is accurate, complete, and authentic and all official public records (including their proper indexing and filing) are accurate and complete.
(g) There has not been any mutual mistake of fact or misunderstanding, fraud, duress, or undue influence.
(h) The conduct of the parties to the Transaction has complied with any requirement of good faith, fair dealing and conscionability.
(i) You and any agent acting for you in connection with the Transaction have acted in good faith and without notice of any defense against the enforcement of any rights created by, or adverse claim to any property or security interest transferred or created as part of, the Transaction.
(j) There are no agreements or understandings among the parties, written or oral, and there is no usage of trade or course of prior dealing among the parties that would, in either case, define, supplement or qualify the terms of the Transaction Documents.
(k) All statutes, judicial and administrative decisions, and rules and regulations of governmental agencies, constituting the Law of the Opining Jurisdiction are generally available (i.e., in terms of access and distribution following publication or other release) to lawyers practicing in the Opining Jurisdiction, and are in a format that makes legal research reasonably feasible.
(l) The constitutionality or validity of a relevant statute, rule, regulation or agency action is not in issue unless a reported decision in the Opining Jurisdiction has specifically addressed but not resolved, or has established, its unconstitutionality or invalidity.
(m) Other Agreements and Court Orders (as such terms are defined in the attached Glossary) will be enforced as written.
(n) The Client will not in the future take any discretionary action (including a decision not to act) permitted under the Transaction Documents that would result in a violation of law or constitute a breach or default under any Other Agreement or Court Order.
(o) The Client will obtain all permits and governmental approvals required in the future, and take all actions similarly required, relevant to subsequent consummation of the Transaction or performance of the Transaction Documents.
(p) All parties to the Transaction will act in accordance with, and will refrain from taking any action that is forbidden by, the terms and conditions of the Transaction Documents.
(q) The Security Documents have been or will be duly recorded and/or filed in all places necessary (if and to the extent necessary) to create the lien as provided therein.
(r) The description of the Collateral is accurate and is sufficient under Law (i) to provide notice to third parties of the liens and security interests provided by the Security Documents and (ii) to create an effective contractual obligation under Law.
We have no Actual Knowledge that the foregoing assumptions are false. We have no Actual Knowledge of facts that, under the circumstances, would make our reliance on the foregoing assumptions unreasonable.
(iv) the creation, attachment, perfection, or priority of a lien on Real Property Collateral or a security interest in Personal Property Collateral, or enforcement of a security interest in Personal Property Collateral separately from enforcement of the lien on Real Property Collateral as contemplated by §9-501( or [d]) of the Uniform Commercial Code.
(r) other Federal and state statutes of general application to the extent they provide for criminal prosecution (e.g., mail fraud and wire fraud statutes).
(e) judicially developed doctrines relevant to any of the foregoing laws, such as substantive consolidation of entities.
(g) affording defenses based upon the unconscionability of the enforcing party’s conduct after the parties have entered into the contract.
(n) limit or affect the enforceability of provisions for late charges, prepayment charges, or yield maintenance charges, acceleration of future amounts due (other than principal) without appropriate discount to present value, liquidated damages, and "penalties."Some or all of these additional qualifications may be appropriate in certain circumstances. Qualification (q) above might be expanded, in appropriate circumstances, to disclaim any "true sale" or "true lease" opinion, as well as disclaiming any opinion that a purported absolute assignment of rents would be enforced as such.
(c) the judicial foreclosure or, if you elect to so pursue, the non-judicial foreclosure (i.e.), pursuant to the power of sale as specified in the Deed of trust), in accordance with applicable Law and the Transaction Documents, of the lien on and security interest in the Collateral created by the Security Documents upon maturity or upon an acceleration described in subparagraph (b) above.
3.7 Choice of Law. The opinion set forth in Paragraph [2.4] of this Opinion Letter is given as if the Law of the Opining Jurisdiction governs each Transaction Document, without regard to whether the Transaction Document so provides, and without regard to any choice of law rules except as provided below in this Paragraph. While the preceding sentence excludes any opinion on the effectiveness of any governing law provision in the Transaction Documents, if a Transaction Document contains a governing law provision choosing the Law of the Opining Jurisdiction to govern the contract, the opinion set forth in Paragraph [2.4] of this Opinion Letter includes an opinion (subject to the other qualifications in this Part III) that such governing law provision choosing the Law of the Opining Jurisdiction will be given effect under the choice of law rules of the Opining Jurisdiction; however, the opinion set forth in Paragraph [2.4] of this Opinion Letter does not include an opinion as to what Law governs (i) if the Transaction Document contains a governing law provision choosing the Law of an Other Jurisdiction (as defined in the attached Glossary) or does not contain a governing law provision, or (ii) to the extent the opinion as to what Law governs requires a determination that the Law of the Opining Jurisdiction is not contrary to a fundamental policy of the Law of an Other Jurisdiction.
4.1 Legal Proceedings. We hereby confirm to you, pursuant to the request set forth in Section __ of the Agreement, but without investigation, analysis, or review of court or other public records or our files, other than our litigation docket and information provided to us by the Client, that there are no legal proceedings against the Client pending before any adjudicative tribunal or arbitration panel, nor any legal proceedings overtly threatened in writing which (i) seek to affect the enforceability of the Agreement, or (ii) except as disclosed in [the Agreement or an exhibit, annex or schedule thereto] [an officer’s certificate], come within [the objective standard established in the Agreement for disclosure of such matters] [other objective threshold].
5.1 The opinions expressed in this letter are solely for your use in connection with the Transaction for the purposes contemplated by the Transaction Documents. Without our prior written consent, this Opinion Letter may not be used or relied upon by you or any other person for any other purpose whatsoever, except this Opinion Letter may be used (i) in connection with review of the Transaction by a regulatory agency having supervisory authority over you for the purpose of confirming the existence of this Opinion Letter, (ii) in connection with the assertion of a defense as to which this Opinion Letter is relevant and necessary, or (iii) in response to a court order.
Actual Knowledge: with respect to the Opinion Giver, the conscious awareness of facts or other information by the Primary Lawyer or Primary Lawyer Group.
Constituent Documents: the articles or certificate of incorporation, by-laws, partnership documentation or similar organization documents of the Client.
Court Orders: court and administrative orders, writs, judgments and decrees that name the Client and are specifically directed to it or its property.
Law: the statutes, the judicial and administrative decisions, and the rules and regulations of the governmental agencies of the Opining Jurisdiction, including its Local Law (but subject to any limitations on coverage of Local Law set forth in the Opinion Letter to which this Glossary is attached).
Local Law: the statutes and ordinances, the administrative decisions, and the rules and regulations of counties, towns, municipalities and special political subdivisions (whether created or enabled through legislative action at the Federal, state or regional level—e.g., water agencies, joint power districts, the Maine Turnpike Authority, The Southern California Rapid Transit District, the Port Authority of New York and New Jersey), and judicial decisions to the extent that they deal with any of the foregoing.
Opining Jurisdiction: a jurisdiction whose applicable Law is addressed by the Opinion Giver in the Opinion; if there is more than one such jurisdiction (e.g., the United States and a particular state), the term refers collectively to all.
Opinion Giver: the lawyer or legal organization rendering the Opinion.
Opinion Letter: the document setting forth the Opinion that is delivered to and accepted by the Opinion Recipient.
Opinion Recipient: the addressee or addressees of the Opinion Letter.
Other Agreements: contracts, other than the Transaction Documents, to which the Client is a party or by which it or its property is bound.
Other Counsel: a lawyer or legal organization (other than the Opinion Giver) providing a legal opinion pertaining to particular matters concerning the Client, the Transaction Documents or the Transaction (i) directly to the Opinion Recipient, or (ii) to the Opinion Giver in support of the Opinion.
Other Jurisdiction: the jurisdiction whose law a Transaction Document provides will govern that contract, if not the Opining Jurisdiction.
Personal Property: property or rights and interests in property treated under Law as personalty or otherwise not as Real Property.
(c) solely as to information relevant to a particular opinion issue or confirmation regarding a particular factual matter (e.g pending or threatened legal proceedings), any lawyer in the Opinion Giver’s organization who is primarily responsible for providing the response concerning that particular opinion issue or confirmation.
Primary Lawyer Group: all of the Primary Lawyers when there are more than one.
Public Authority Documents: certificates issued by the Secretary of State or any other government official, office or agency concerning a person’s property or status, such as certificates of corporate or partnership good standing, certificates concerning tax status, certificates concerning Uniform Commercial Code filings or certificates concerning title registration or ownership.
Real Property: property or rights and interests in property treated under Law as real property, including fixtures.
Appointment of receivers in Texas is governed by Section 64 of the Civil Practice and Remedies Code. This statute provides that a court may appoint a receiver: (1) in an action by a vendor to vacate a fraudulent purchase of property; (2) in an action by a creditor to subject any property or fund to his claim; (3) in an action between partners or others jointly owning or interested in any property or fund; (4) in an action by a mortgagee for the foreclosure of the mortgage and sale of the mortgaged property; (5) for a corporation that is insolvent, is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights; or (6) in any other case in which a receiver may be appointed under the rules of equity. Tex. Civ. Prac. & Rem. Code Ann. §64.001(a) (Vernon 1986). In addition, in a judicial foreclosure, the mortgagee must show (1) it appears that the mortgaged property is in danger of being lost, removed, or materially injured; or (2) the condition of the mortgage has not been performed and the property is probably insufficient to discharge the mortgage debt. Tex. Civ. Prac. & Rem. Code Ann. §64.001(c) (Vernon 1986).
The remedy of appointment of a receiver is not available absent an ancillary, independent cause of action (such as a judicial foreclosure). See Pelton v. First National Bank of Angleton, 400 S.W.2d 398 (Tex. Civ. App.—Houston 1966, no writ) and the cases cited therein.
In the case of Riverside Properties v. Teachers Insurance and Annuity Association of America, 590 S.W.2d 736 (Tex. Civ. App.—Houston [14th Dist.] 1979, no writ), in which a prior but very similar version of the statute above was in issue, the court concluded that the existence of a specific provision in a loan document providing for the consensual appointment of a receiver may eliminate the need, in the context of a mortgage foreclosure, to make the showing required by the provisions of Tex. Civ. Prac. Rem. Code §64.001©. It reasoned that a receiver could be appointed under such circumstances under the prior statute’s equivalent to subsection (6) of Tex. Civ. Prac. Rem. Code §64.001(a) rather than the prior statute’s equivalent to subsection (4). However, the court also pointed out that the existence of an agreement for the consensual appointment of a receiver is not binding on a court but is merely one of the equities to be considered.
A lender may not require a borrower to furnish evidence of insurance more than fifteen (15) days prior to the termination date of an existing policy. A borrower may recover civil damages from any lender who violates this statute in an amount equal to three (3) times the annual premium for the policy of insurance in force upon the mortgaged property.
Section 26.02 of the Texas Business and Commerce Code provides that a loan agreement with a financial institution that involves in excess of $50,000 is not enforceable unless the agreement is in writing and signed by the party to be bound or by the party’s authorized representative. The rights and obligations of the parties to such a loan transaction are to be determined solely from the written loan agreement, i.e., any prior or contemporaneous oral agreements between the parties are superseded by and merged into the loan agreement, but only if a required notice is included in the loan agreement or in a separate document signed by the debtor or obligor (and, according to the form of agreement included in the statute, also signed by the lender).
Chapter 83 of the Government Code provides that, except for (i) an attorney licensed in Texas; (ii) a real estate broker or salesman licensed in Texas; or (iii) a person performing acts relating to a transaction for the lease, sale, or transfer of any mineral or mining interest in real property, a person may not charge or receive, either directly or indirectly, any compensation for all or any part of the preparation of a legal instrument affecting title to real property, including a deed, deed of trust, note, mortgage, and transfer or release of lien. It is permissible for an attorney to pay secretarial, paralegal, or other ordinary and reasonable expenses necessarily and actually incurred by the attorney for the preparation of legal instruments. Also, this chapter does not prevent a person from completing lease or rental forms that: (i) have been prepared by an attorney licensed in this state and approved by the attorney for the particular kind of transaction involved; or (ii) have been prepared by the property owner or prepared by an attorney and required by the property owner. A person who pays a fee prohibited by this chapter may bring suit for and is entitled to: (i) recovery of the fee paid; (ii) damages equal to three times the fee paid; and (iii) court costs and reasonable and necessary attorney’s fees. A violation of this chapter constitutes the unauthorized practice of law and may be enjoined by a court of competent jurisdiction.
Because indemnification agreements and certain types of release agreements are frequently used to exculpate a party from the consequences of its own negligence, and because the Texas Supreme Court deems these types of agreements to effect extraordinary shifting of risk, the Texas Supreme Court has developed fair notice requirements that apply to these types of agreements. The fair notice requirements include the express negligence doctrine and the conspicuousness requirement.
In the case of Ethyl Corporation v. Daniel Construction Company, 725 S.W.2d 705 (Tex. 1987), the Texas Supreme Court adopted the "express negligence rule," holding that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms. In stating the rule, the Ethyl court overruled a number of older cases that had held that an indemnitee’s own negligence could be indemnified without the indemnity provision expressly so providing, but the court did not endorse any specific required wording.
A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals (as: NONNEGOTIABLE BILL OF LADING) is conspicuous. Language in the body of a form is "conspicuous" if it is in larger or other contrasting type or color. But in a telegram any stated term is "conspicuous".
Although considerable variety exists with regard to the so-called "due-on" clauses in mortgage loan documents, the essence of such clauses is to give the lender a right to accelerate the loan (i.e., cause it to be due) upon one or more of the following categories of dispositions with regard to the mortgaged property: (i) a sale or other transfer of all or a portion of the mortgaged property; (ii) another mortgage being placed upon all or a portion of the mortgaged property; or (iii) the borrower’s leasing all or a portion of the mortgaged property. Although the primary purpose of most "due-on" clauses is to preserve and protect the lender’s collateral, lenders have frequently used such clauses—especially the "due-on-sale" clauses—to improve the lender’s yield on the loan, i.e., either by exacting either an interest rate increase or a transfer fee, or both.
"(1) Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may, subject to subsection © [the Uwindow periodU provision mentioned immediately below], enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan.
"(2) Except as otherwise provided in subsection (d) [mentioned in paragraph 2 below], the exercise by the lender of its option pursuant to such a clause shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the lender and the borrower shall be fixed and governed by the contract." 12 U.S.C. § 1701j-3(b).
(a) Definition of "Transfer". The Garn Act uses the term "due on sale clause" and then defines that term to mean "a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent" (emphasis added). The word "transfer" is not defined in the Garn Act; however, a 1983 Advisory Opinion by the Federal Home Loan Bank Board (then authorized under the Garn Act "to issue rules and regulations and to publish interpretations governing the implementation [of the Udue-onU provisions in the Garn Act]") defined "sale or transfer" to mean "the conveyance of real property or any right, title or interest therein, whether legal or equitable, whether voluntary or involuntary, by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than 3 years, lease-option contract or any other method of conveyance of real property interest." (emphasis added) FHLBB Rule § 591.2(b).
(5) Transfers of beneficial interest in a trust owning real property. The beneficial interest created by virtue of a loan origination to a valid trust (in which a trustee holds legal title and other individuals or entities hold a beneficial interest) falls within the scope of a property interest which may be sold or transferred and therefore subject to due-on-sale enforcement, if language precluding transfers of such interests without lender’s consent is contained in the loan contract. FHLBB Advisory Opinions, dated August 10, 1983, September 19, 1983, and December 29, 1983."
The Santos article also questions whether the definition of "transfer" to include leases of three years or more might imply a restriction against lenders’ requiring that a lease for less than three years be a default or otherwise trigger as "due-on" provision. The Santos article, supra, p. 20. This Committee, however, has found no case since the enactment of the Garn Act that indicates the existence of such a limitation.
(b) Restrictions on Lenders in Certain Loans. It should be noted that under the Garn Act certain transfers "with respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home" may not be made the subject of "due-on" provisions. 12 U.S.C. § 1701j-3(d).
"The Federal Home Loan Bank Board, in consultation with the Comptroller of the Currency and the National Credit Union Administration Board, is authorized to issue rules and regulations and to publish interpretations governing the implementation of this section." 12 U.S.C. § 1701j-3(e)(1).
The Federal Home Loan Bank Board was abolished by Section 401 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA"); however, FIRREA transferred all functions of the Federal Home Loan Bank Board to the Office of Thrift Supervision ("OTS") of the Department of the Treasury. 12 U.S.C. §§ 1462a-1464. As of the date of this "Photograph-in-Time" Alert, the status of OTS interpretations can be obtained from the Office of the Chief Counsel, Regulations and Legislation (a/k/a "Regs and Legs"), 1700 G Street, N.W., Washington, D.C. 20552 (202/906-6251 or, for the person specifically in charge of federal administering preemption regulations, 202/906-7052).
(d) The Act in Texas. Although the Garn Act was enacted in 1982, it has not been cited in any reported Texas case since that date dealing with "due-on" clauses. See Metropolitan Savings & Loan Association v. Nabours, 652 S.W.2d 820 (Tex. App.—Tyler 1983, writ dismissed); North Point Patio Offices Venture v. United Benefit Life Insurance Company, 672 S.W.2d 35 (Tex. App.—Houston [14th Dist.] 1984, writ ref’d n.r.e.); Meisler v. Republic of Texas Savings Association, 758 S.W.2d 878 (Tex. App.—Houston [14th Dist.] 1988, no writ); and Howell v. Murray Mortgage Company, 890 S.W.2d 78 (Tex. App.—Amarillo 1994, writ denied). See also, Parker Plaza West Partners v. Unum Pension and Insurance Company, 941 F.2d 349 (5th Cir. 1991) and In re Abramoff, 92 Bankruptcy Reporter 698 (W.D. Tex. 1988). Moreover, in the first two above-cited cases the courts declined to enforce the "due-on" clauses in the mortgage loan documents (although, as will be mentioned again below, in both cases the sales in question apparently occurred prior to the date of enactment of the Garn Act). Nevertheless, while the Texas courts have not relied upon the Garn Act, courts in other states have regularly done so. Los Quatros, Inc. v. State Farm Life Insurance Company, 800 P.2d 184 (N.M. 1990); McCausland v. Bankers Life Insurance Company of Nebraska, 757 P.2d 941 (Wash. 1988); Boyes v. Valley Bank of Nevada, 701 P.2d 1008 (Nevada 1985); Weiman v. McHaffie, 470 So.2d 682 (Florida 1985); Destin Savings Bank v. Summerhouse of FWB, Inc., 579 So.2d 232 (D.C. Florida 1991); Western Life Insurance Co. v. McPherson K.M.P., 702 F.Supp. 836 (D. Kansas 1988). Perhaps the failure of the Texas appellate courts in the Nabours case and the North Point Patio Offices Venture case, cited above, to uphold the "due-on" clauses in those two cases can be explained by the fact that the transfers which precipitated the litigation occurred prior to the effective date of the Garn Act. 12 U.S.C. § 1701j-3©(2)(B) ("A lender may not exercise its option pursuant to a due-on-sale clause in the case of a transfer of a real property loan which is subject to this subsection where the transfer occurred prior to October 15, 1982.") See State v. Russell, 343 N.W.2d 30, 34-35 (Minnesota 1984), North Community Bank v. Northwest National Bank of Chicago, 467 N.E.2d 1094, 1097 (App. Ct. Illinois 1984) and Kiefer v. Fortune Federal Savings and Loan Association, 453 So.2d 430, 433-34 (Ct. App. Florida 1984) for an analysis of the prospective, and not retroactive, operation of the Garn Act. Accordingly, this Committee concludes that Texas courts will honor the federal preemption—and, accordingly, the express recognition of "due on" clauses—as set out in the Garn Act. For an analysis of the relationship between "due-on" clauses and prepayment penalties, see the first "Photograph-in-Time" Analysis in Appendix 4 of this Texas Supplement.
Prepayment Fees (including Yield Maintenance provisions) are generally enforceable in Texas and not deemed interest on the debt or as contributing to the level of interest charged in the computation of usury. This is based on the common law rule of "perfect tender in time"; that the loan documents provide for repayment in installments over time and cannot be prepaid without lender consent. To permit prepayment without the lender’s consent (under this logic) alters the loan contract. The Prepayment Fee is, therefore, a fee charged the borrower for the right to prepay the loan (which would otherwise be prohibited under the perfect tender in time rule). Fees charged for a separate right or service granted by the lender are normally not deemed interest under Texas law; and this has been the general rule for Prepayment Fees since 1929 and consistently followed where the prepayment of the loan by the borrower is voluntary. See Vela v. Shacklett, 12 S.W.2d 1007 (Tex. Comm. App., 1929); Gulf Coast Investment Corp. v. Prichard, 438 S.W.2d 258 (Tex. Civ. App. - Dallas, 1969, writ ref.’d n.r.e.); Wagner v. Austin Saving and Loan Association, 525 S.W.2d 724 (Tex. Civ. App. - Beau. 1975, no writ); Boyd v. Life Insurance Co. of the Southwest, 546 S.W.2d 132 (Tex. Civ. App. - Houston [14th Dist.], 1977, writ ref.’d); Ware v. Travelers Indemnity Co., 604 S.W.2d 400 (Tex. Civ. App. - San Antonio, 1980 writ ref.’d n.r.e.). This logic was also applied analogously in Gonzales County Savings and Loan Association v. Freeman, 534 S.W.2d 903 (Tex. 1976) ("Gonzales") to a loan initiation or commitment fee charged by the lender. The commitment fee, the Court said, is not interest nor contributing to usury and compared it to a Prepayment Fee. Id. at 906.
The Gonzales case, however, by implication places a significant limitation on the logic upholding the enforceability of Prepayment Fees in Texas. The fee cannot be excessive or an unreasonable penalty. The Texas Supreme Court held that the lender’s rights to collect fees and other service charges from borrowers are not without limits. It must be a bona-fide fee for real services rendered or real voluntary rights exercised. Id. at 906. The Court stated that the issue is one of the fee’s being a reasonable expense or penalty charged and not excessive for the right or service received by the borrower. Also, substance will control over form. The Court made it clear that the courts in general (and not the documents) will determine what is reasonable and not excessive. Id. at 907.
General Motors Acceptance Corp. v. Uresti, 553 S.W.2d 660 (Tex. Civ. App. - Tyler, 1977, writ ref. n.r.e) ("Uresti") provides a further qualification on the enforceability of Prepayment Fees. Absent clear and convincing language in the loan documents requiring payment of the Prepayment Fee upon acceleration of the loan, prepayment was stated to be payment before—not after—maturity of the loan. Once the maturity date is accelerated it is no longer possible to prepay and no fee is collectable. Id. at 663. Uresti does not involve a Real Estate Secured Transaction and deals with collection by the lender of unearned time-price differential in a consumer transaction, but its logic is equally applicable to all Prepayment Fees. Indeed, the conclusion reached in Uresti was also reached in Texas Air Finance Corp. v. Lesikar, 777 S.W.2d 559, 563 (Tex. App.—Houston [14th Dist.] 1989, no writ) ("Lesikar"), which dealt directly with collection of a Prepayment Fee upon loan acceleration. However, neither Uresti or Lesikar appear to prohibit collection of a Prepayment Fee upon loan acceleration where the loan documents expressly provide for the borrower to make such payment. Uresti does not deal with authorized collection of a Prepayment Fee upon acceleration [but rather with the lender’s right to demand unearned time-price differential under the Consumer Credit Code after acceleration of the note]. Lesikar holds that a Prepayment Fee cannot be collected after note acceleration but does not quote the applicable prepayment language and does not say if the note expressly permitted collection of the fee. However, it seems reasonable that the language of the note in Lesikar did not expressly provide for collection of the Prepayment Fee upon acceleration. Otherwise, Lesikar is in conflict with prior and subsequent case law in Meisler, infra. at 885 (decided one year before Lesikar) and with Affiliated, infra. at 525, and Parker Plaza West Partners v. Unum Pension & Ins., 941 F.2d 349 (5th Cir. 1991) ("Unum"), each of which permit collection of the Prepayment Fee after acceleration where expressly permitted under the language of the note. Moreover, it does not seem likely that Lesikar would expressly conflict with or overrule Meisler without comment, since the same Court of Appeals in Houston and the same judge rendered both opinions just one year apart. Unum at 354. In Unum the Fifth Circuit carefully considers all Texas case law to date and concludes that so long as the loan documents expressly provide for payment of the Prepayment Fee upon loan acceleration, it is enforceable and collectable under Texas law. Id. at 355. In 1992 the Austin Court of Appeals came to the same conclusion in Affiliated, one year following the Unum decision.
Notwithstanding the holdings in Affiliated, Meisler and Unum that a Prepayment Fee can be collected after acceleration where clearly and expressly provided in the note, under Texas law a Prepayment Fee may be limited as to its enforceability when combined with a due-on-transfer or similar restriction in a loan. Where the borrower is prohibited from transferring the loan security without the lender’s consent, but is required by the loan documents to pay a Prepayment Fee upon the acceleration of the loan for any breach of the due-on-transfer clause, such combination may in some circumstances constitute an unreasonable restraint on alienation under Texas law. In Sonny Arnold, Inc. v. Sentry Savings Association, 633 S.W.2d 811 (Tex. 1982) ("Arnold"), the Texas Supreme Court analyzed the principles embodied in restraints on alienation in the context of due-on-transfer clauses. The Court split 5 to 4 in a majority and concurring opinion. The majority held: (1) that to be a restraint on alienation of the property, the due-on-transfer clause needed to both prohibit transfer of the property ("the property must not be sold or conveyed") and impose a monetary or contractual liability upon violation of the prohibition; and (2) due to the harsh nature of the acceleration remedy, to be effective, contractual provisions calling for acceleration must be clear and unequivocal as written in the loan documents. The applicable clause in the Arnold case did not prohibit transfer; rather it provided for acceleration, at the lender’s option, upon transfer, and expressly authorized the lender to charge an interest rate increase as the basis for consenting to transfer of the property.
In the concurring opinion (in Arnold), authored by Justice Spears, four justices concurred in the result but not the logic of the majority. Justice Spears felt the majority opinion stressed form over substance, and language over content. The minority stressed that there is no substantive difference between loan acceleration over a default from language prohibiting transfer of the property and loan acceleration over language permitting acceleration (at the lender’s option) upon transfer of the property. In both cases, absent lender consent, either no transfer occurs or borrower financial liability occurs upon loan acceleration and shortened loan maturity. The minority in Arnold would hold every due-on-transfer clause to be a restraint on alienation, particularly when the contract also contains a Prepayment Fee (Id., at 818), and would determine enforceability of the clause based on its reasonableness, determined by considering the following four criteria: (1) are all rights being exercised by the lender specifically stated in the loan documents; (2) are the lender’s actions based on a justifiable business interest; (3) is the lender’s exercise of the restraint arbitrary or oppressive; and (4) is there a legitimate-lender concern over security impairment.
In Arnold, each of the four criteria for reasonable exercise of the restraint were met and, in the minority’s view, the clause in Arnold was enforceable.
The enforceability of due-on-transfer clauses in certain loan documents was removed from state law and made enforceable under federal law by the Garn-St. Germain Depository Institutions Act of 1982 (the "Garn Act"). However, the Garn Act does not deal with Prepayment Fees. Presumably, Prepayment Fees (in concert with a due-on-transfer clause) which would constitute a restraint on alienation under Texas law (based on Arnold), are still governed by Texas law and when unreasonable are unenforceable. See Danley, Richard and Santos, Ralph G., Due On Sale Clauses And Prepayment Penalties: Can They Coexist In Texas?, Real Estate Probate And Trust Law Reporter of the State Bar of Texas (July, 1989), 20 at 23-24 ("Danley/Santos").
(iii) express limitations, if any, in the loan documents on the lender’s rights to renegotiate the loan documents.
See Danley/Santos at 23-24 and Roberts, Kent, Prepayment Penalties in Texas: The Triumph of Logic and the Need of Legislative Reform, 45 Baylor Law Review 585 (1993) ("Roberts").
The loan documents should state clearly when a Prepayment Fee is payable and the specific requirements upon which the lender may condition its approval of any transfer under the due-on-transfer clause; or in the alternative, the documents may state the absence of the Prepayment Fee being assessed when the due-on-transfer clause is exercised and the loan involuntarily accelerated by the lender following a prohibited-property transfer. See Arnold at pages 815 and 818. Unum at pp. 354-355. Casey v. Business Men’s Assurance Company of America, 706 F.2d 559 (5th Cir. 1983). Metropolitan Savings & Loan Association v. Nabours, 652 S.W.2d 820 (Tex. App. - Tyler, 1983, writ dism’d) ("Metropolitan"). North Point Patio Offices Venture v. United Benefit Life Insurance Company, 672 S.W.2d 35 (Tex. App. - Houston [14th Dist.] 1984, writ ref.’d n.r.e.) ("North Point"). Meisler v. Republic of Texas Savings Association, 758 S.W.2d 878 (Tex. App. - Houston [14th Dist.] 1988, no writ) ("Meisler"). Danley/Santos, at p. 36.
North Point emphasizes the importance of the lender’s due-on-transfer rights being expressly and clearly set forth in the loan documents for the Court to find them reasonable and enforceable. Id. at 38.
The Metropolitan Court found great dissatisfaction where loan documents trap and compel the borrower to pay a Prepayment Fee upon acceleration of the loan, while prohibiting transfers and permitting loan acceleration upon unauthorized transfers. Id. at 822-823. The lack of limitations on what the lender can extract as the price for its consent to a transfer of the property and the borrower’s subjection to acceleration and payment of a Prepayment Fee was held in Metropolitan to be an unreasonable restraint on the borrower’s alienation of its property. Id. at 823. The combined effect of the due-on-transfer and Prepayment Fee with the lack of loan document limitations (on the lender’s ability to make demands) in the view of the Metropolitan Court made the restraint unreasonable and unenforceable. Id. at 823. [In this regard, however, note the logic of Metropolitan presupposes that the Prepayment Fee is enforceable upon loan acceleration under Texas law where expressly authorized by the documents].
Meisler holds that a Prepayment Fee is enforceable and may properly be charged by the lender upon transfer of the property, even where the loan is involuntarily accelerated for default, when (i) the loan documents authorize payment of the Prepayment Fee upon loan acceleration, (ii) the lender’s demands for consent to the transfer are limited to an interest rate increase expressly authorized in the loan documents (as authorized under Arnold), and (iii) lender’s powers to renegotiate other loan terms and conditions are specifically defined in the loan documents.
A caveat must be noted to the preceding conclusions under Meisler. In Abramoff v. Life Insurance Company of Georgia, 92 Bank 698 (Bankr. W.D. Tex. 1988) ("Abramoff"), a West Texas Bankruptcy Court stated in applying Texas law: (i) the mere presence of a due-on-transfer clause with a Prepayment Fee in the same loan documents (where the Prepayment Fee is always due upon involuntary loan acceleration) is void and unenforceable as an unreasonable restraint on alienation, (ii) the collection of the void Prepayment Fee by the lender upon any involuntary loan acceleration (i.e., not just acceleration for a prohibited property transfer under the due-on-transfer clause) is refundable to the borrower and deemed interest for purposes of determining if usury was charged or collected under the loan, and (iii) the applicable spreading period for determining if usury was charged is the period from loan funding to the date the loan is paid in full.
Many Texas attorneys view at least some portion of the Abramoff decision as being an inaccurate statement of Texas law. Danley/Santos at p. 22 and p. 36, and Roberts at p. 610 (footnote 96). However, a material segment of the Abramoff decision is likely correct. In Abramoff the court said that a Prepayment Fee collected upon involuntary loan acceleration is not a voluntary fee (paid by the borrower to exercise a right or obtain a service) and is therefore interest under the loan; as such it is not entitled to the protection of the previously cited cases (holding Prepayment Fees not to be interest, as a voluntary exercise of borrower rights). See Danley/Santos at p. 22 and p. 36. This conclusion in Abramoff is supported by subsequent case law. In Affiliated Capital Corp. v. Commercial Fed. Bk., 834 S.W.2d 521 (Tex. App.—Austin, 1992, no writ) ("Affiliated"), the Court found the Prepayment Fee is enforceable upon loan acceleration where the documents expressly provide for payment (Id. at 523); and that in such event the Prepayment Fee is a penalty on the accelerated amount of the note, interest on the loan and subject to the note’s usury savings clause and the spreading principles under Texas law. Id. at 524-526. Also, see Groseclose v. Rum, 860 S.W.2d 554, 557 (Tex. App.—Dallas 1993, no writ), finding that in determining the applicable interest and usury rate for a loan, the spreading principles of Tanner Dev. Co. v. Ferguson, 561 S.W.2d 777, 786 (Tex. 1977) would apply to the Prepayment Fee and all interest charged in connection with the loan after acceleration.
(iv) fails to articulate how the presence of an enforceable due-on-transfer clause (under the Garn Act) can couple with a Prepayment Fee (particularly when the due-on-transfer clause is not even the reason the loan is accelerated) and make the applicable Prepayment Fee void on its face.
(iii) recognize that the Prepayment Fee when collected after acceleration or other involuntary payment of the loan will likely be viewed as interest on the debt and should be capped to avoid any claim of usury under the loan documents and should be made subject to the loan documents’ usury savings clause.
2. Assignments of Leases and Rents.
Texas is a lien theory state. Prior to foreclosure, the lender holds only a lien on and the rents and leases are the property of the borrower. McGeorge v. Henrie, 94 S.W.2d 761, 762-763 (Tex. Civ. App. - Texarkana 1936, no writ) ("McGeorge"). Taylor, infra., p. 593. Except as provided in the decisions rendered in Simon, infra. and Taylor, the right to keep possession of the rents only vests under Texas law in the lender upon the lender’s taking actual peaceable possession of the real estate or the rents. McGeorge, p. 762. Such possession by the lender can be obtained by lawful foreclosure, by consent of the mortgagor (express or implied) or by other means, including invalid foreclosure, so long as done peaceably and in good faith. Jasper State Bank v. Braswell, 111 S.W.2d 1079, 1081 and 1084 (Comm. App., 1938). Possession of the rents can also be granted judicially through a receiver. McGeorge, pp.762-3. The Taylor court stated that an assignment of rents does not become operative (i.e., the lender does not have the right to collect the rents) until the lender obtains possession or secures the appointment of a receiver or takes some other action. Id. at 594. Simon emphasizes this point. The Simon court states that the assignment, unless acted upon by the parties, does not become effective until the lender actually takes possession of the property, or asserts the lender’s rights by securing the appointment of a receiver or impounding rents or profits pending foreclosure or taking some action equivalent thereto. Id. at 686. This traditional form of assignment is typically called a collateral assignment and conveys to the lender a lien but no other interest in the rents prior to the lender’s taking action and obtaining possession as described above.
The only cases granting the lender the right to keep the rents prior to possession are Simon et al v. State Mutual Life Assur. Co., 126 S.W.2d 682 (Tex. Civ. App. - Dallas 1939, writ ref.’d) ("Simon") and Taylor v. Brennan, 621 S.W.2d 592, 594 (Tex. 1981), ("Taylor"). In both Taylor and Simon, the court respectively confirms the lender’s right to keep the rents upon taking possession of the property. Simon, p. 686, Taylor, p. 594. How possession may be obtained is undefined in Taylor and Simon but presumably must occur without breach of the peace, consistent with prior case law or with the consent of the borrower. Simon and Taylor also recognize that the lender can take possession of the rents by judicial action in the appointment of a receiver or impounding the rents, and the Simon court recognized the ability of the lender to take action "equivalent thereto." Id. at 686. Such equivalent action has to date only been defined under the facts of Simon. Under those facts it is the voluntary relinquishment by the borrower of the rents (following suit by the lender to enjoin the tenant from paying rent to the borrower) to an independent third party [in Simon a bank] such that the rents are no longer in the borrower’s custody or control. Id. at 684 and 686.
The possibility under Texas law for the lender to take possession of the rents, prior to foreclosure, was expanded in Taylor. Under Taylor, the Texas Supreme Court stated that a lender could, as part of the loan documents, create an absolute assignment of the rents, giving the Lender title to the rents, with the effective date of the assignment deferred to and conditioned on a loan default. Id. at 594. Under a properly drafted absolute assignment, the rents become the lender’s property without actual possession from the date of the loan default, removing borrower’s right to the use and control of the rents. Id. at 594. In this context, the absolute assignment grants the lender the right to the rents from the moment of the default and removes any right to the rents from the borrower; the lender’s right is not dependent on possession. However, the Taylor court never discusses or tries to reconcile the concept of an absolute assignment of the rents with Texas-lien-theory principles.
(v) be more than mere words, requiring the mortgagee to take some affirmative action to collect the rents (i.e, directing tenants to pay the rents to the lender).
There is a split among Texas attorneys as to whether the absolute assignment contemplated by Taylor can effectively be created as part of a standard mortgage transaction and given effect. See: (1) Forrester, Julia, A Uniform And More Rational Approach To Rents As Security For The Mortgage Loan, 46 Rutgers Law Review 349, 1993 ("Forrester"); (2) Danley, Richard E., Jr. and Jillson, Andrew E., Absolute Assignments Of Leases And Rents: Has the Unicorn Been Found Or Is It Still Myth? Texas State Bar Real Estate Probate and Trust Law Reporter, Volume 30, No. 3 (April, 1992), p. 28 at p. 29 ("Danley/Jillson"); and (3) Danley, Richard E., Jr., Enforceability Of Assignment Of Rents: The Post-Default Availability Of Rents To The Mortgagee Prior To Foreclosure (Taylor v. Brennan), Real Estate, Probate and Trust Law Reporter of the State Bar of Texas, Volume 21, No. 2 (January, 1983) at 22. Further evidencing this split in thinking, a state appellate court relying on Taylor declined to affirm summary judgment by a trial court that an assignment (declaring itself absolute) is absolute where lender behavior and the language of the deed of trust is susceptible of more than one meaning and thus ambiguous. Oryx Energy Company v. Union National Bank of Texas, 895 S.W.2d 409, 414-15 (Tex. App. — San Antonio 1995, writ denied) ("Oryx"). The Oryx case, however, quotes favorably from Taylor and states that parties to a mortgage may agree to an absolute assignment — but notes that Texas courts are reluctant to construe an assignment of rents as absolute. Id. 414. The Oryx court then follows the criteria established in Taylor to determine if the subject assignment is absolute, finds ambiguity and remands the issue for trial.
Only one reported case to date has applied Taylor and found and enforced an absolute assignment of the rents. It is FDIC v. International Property Management, 929 F.2d 1033 (5th Cir. 191) ("International"). The International case is both thoughtful and rendered by a respected court. Nonetheless, it does not resolve the concerns of many Texas attorneys. The Fifth Circuit is not a Texas court and is applying Texas law in the context of a federal bankruptcy case. The Oryx case, which is subsequent to International, cites International, but only to confirm why the assignment in the Oryx case may be a collateral assignment. In addition, at least one prior bankruptcy case applied Texas law involving assignments of leases in a manner very inconsistent with International. See In re Fry Road Assoc., 64 B.R. 808 (Bankr. W.D. Tex. 1986) ("Fry Road"). Notwithstanding that the portions of Fry Road which are inconsistent with International are effectively overruled by International and cannot command the authority of a 5th Circuit opinion, Fry Road evidenced the possibility for varied court opinions involving absolute assignments and Texas lien law until this area of Texas law is finally resolved in all respects by the Texas Supreme Court. Also, the logic in Fry Road raises potential usury issues over the pro tanto application of rents which is not dealt with in International. While the usury logic in Fry Road has been severely criticized (see Forrester, supra at p. 383 and Danley/Jillson, supra at p. 32), it further evidences the diversity of legal opinion involving the absolute assignment and its enforceability prior to foreclosure.
The issue of whether the assignment of leases and rents is absolute or collateral is immaterial following foreclosure (both forms of assignment if properly drafted pass title and possession to the rents following foreclosure). The distinction between assignment forms is also immaterial prior to foreclosure in the event of (1) court approved appointment of a receiver or impounding the rents or (2) if the rents are voluntarily transferred to the lender by the borrower (following the lender’s taking affirmative action for control of the rents) or (3) if the lender takes peaceable possession through an illegal or invalid foreclosure. The issue of whether an assignment of rents is absolute is only material prior to foreclosure, where the borrower is in default and (a) refuses to grant the lender voluntary possession of the rents, or (b) is in bankruptcy, or (c) otherwise resists the lender’s affirmative but peaceable acts to take possession of the rents. In these circumstances, Texas law appears to permit certain advantages to an absolute assignment of rents over the traditional lien or collateral assignment of rents. This is supported by Taylor and International. While International cannot be cited as definitive case law for Texas court decisions, it is the opinion of a respected court, is well reasoned and is definitive law in the application of Taylor in Federal Bankruptcy courts. Furthermore, Taylor to date has remained unchanged by the Texas Supreme Court, with no indication that the Taylor opinion is otherwise incorrect or requires revision or that Texas courts will not give effect to a properly drafted absolute assignment.

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