2. Security Interest Opinion Considerations Generally.
2.1 Justification for Requesting an Opinion.
Typically, requests for Security Interest Opinions are made in connection with the closing of secured financing transactions. When such a request is made, the parties should consider two threshold questions: (1) Should an opinion be provided? (2) If so, who is the appropriate lawyer to provide that opinion?
With respect to whether an opinion should be requested or provided, there are several important considerations. First, following the so-called "Golden Rule,"17 a lawyer should not request an opinion that she herself would be unwilling to give. Second, a lawyer should not request an opinion in an area of substantial legal uncertainty. Third, a lawyer should not request an opinion in situations where the delivery of that opinion is unreasonably costly in light of the size of the transaction and the relative benefit provided by the opinion18 (especially where the opinion will be subject to extensive qualifications and exceptions). In all circumstances, particularly in light of the increased simplicity in the required procedures for perfection under revised Article 9 and the greater uniformity in personal property secured transactions law engendered by the widespread adoption of revised Article 9, the parties to a transaction and their counsel should act reasonably in assessing whether there is a need for, let alone a reasonable justification for requesting, a Security Interest Opinion.
With respect to the identity of the lawyer who should deliver the opinion, the prevailing practice in the United States is for the debtor's lawyer to provide a Security Interest Opinion at closing, for reasons that relate mainly to efficiency. In some instances, however, it may be appropriate to consider whether the secured party's lawyer is in a better position to give the Security Interest Opinion.19 As with the determination of the necessity of an opinion, the parties to a transaction and their counsel should act re
2.2 Governing Law.asonably in determining who is in the best position to provide the required opinion.
This Report only addresses Security Interest Opinions under California law.20 The Code contains choice-of-law rules governing perfection, the effect of perfection or nonperfection and the priority of security interests in collateral. Frequently, those rules mandate that the law of a state other than California governs some portion or all of a transaction. A Security Interest Opinion does not cover choice-of-law issues unless expressly addressed in the opinion; as such, it does not address which state's law governs perfection, the effect of perfection or nonperfection or the priority of any security interest.21
If the law of any jurisdiction other than California governs an aspect of the transaction (for example, the perfection of a security interest) and the opinion giver is unable to give some or all of the Security Interest Opinion being requested under that jurisdiction's law, then the parties to the transaction should discuss alternatives to providing the opinion being requested.22 Those alternatives may include (1) obtaining an opinion of local counsel in the other relevant jurisdiction,23 (2) providing an opinion based upon a limited review of the other jurisdiction's UCC, but not its case law,24 and (3) in light of the cost or inconvenience of addressing the law of the other jurisdiction, not requiring an opinion under the other jurisdiction's law.25
2.3 Distinction Between Security Agreement Remedies Opinions and Security Interest Opinions.
A remedies opinion with respect to a security agreement states that the security agreement is "enforceable" or "enforceable in accordance with its terms." The Code, however, does not provide a meaning for the term "enforceable" in relation to a security agreement.26 In fact, section 9201, which addresses security agreements generally, uses the term "effective" instead of the term "enforceable."27 Division 9 uses the term "enforceable" only with respect to security interests and not security agreements.28 As a result, practitioners should bear in mind that a clear distinction exists between:
- an opinion as to the enforceability of a security agreement as against the debtor (a "Security Agreement Remedies Opinion"); and
- an opinion as to the enforceability of a security interest under the Code created by a security agreement in the collateral as against the debtor and third parties (a "Security Interest Opinion").29
A Security Agreement Remedies Opinion addresses whether: (1) the prerequisites to the creation of a binding contractual undertaking are present; and (2) the agreements of the debtor contained in the security agreement are enforceable against the debtor. By custom, however, such an opinion does not address whether:
- the record identified as the security agreement contains language effective to create or provide for a security interest;30
- a security interest in particular collateral has attached;31
- a security interest has been perfected;32 or
- the secured party's interests with respect to any collateral have priority over the interests of third parties in that collateral.33
On the other hand, a Security Interest Opinion (i.e., an opinion as to the creation, perfection or priority of a security interest in collateral) addresses whether the secured party has sufficiently complied with Division 9's requirements to establish certain rights in the subject collateral -- for example, that a security interest in the collateral has attached or been created.34
Consistent with the foregoing, a Security Agreement Remedies Opinion is customarily viewed as not implicitly containing an opinion as to the creation, attachment, perfection or priority of a security interest (including any clause granting a security interest). Similarly, a Security Interest Opinion is customarily viewed as not implicitly containing an opinion as to the enforceability of a security agreement against any particular party. Accordingly, except to the extent the same opinion letter expressly covers both opinions (a practice that is fairly common), (1) qualifications that are appropriate for a Security Agreement Remedies Opinion are unnecessary and need not be included in a Security Interest Opinion,35 and (2) a qualification that the opinion giver is assuming the enforceability against the parties of the relevant security agreement is unnecessary for purposes of a Security Interest Opinion.36
Materials addressing opinions on the enforceability of contracts generally should be consulted for a more comprehensive discussion of qualifications to, and the interpretation of, a Security Agreement Remedies Opinion.37 It may also be appropriate to consider certain qualifications specific to security agreements or Division 9, for example, qualifications concerning provisions in the record containing or identified as the security agreement that may be unenforceable under California law,38 including provisions purporting to establish standards for performance of Code-imposed duties by a secured party,39 waiving an unwaivable right granted by the Code to the debtor,40 or conferring on the secured party powers that are inconsistent with the requirements of the Code.41
2.4 Matters not Addressed by Security Interest Opinions.
A Security Interest Opinion of any type is customarily understood not to contain any of the following opinions (and no express disclaimer to this effect is required):
- a Security Agreement Remedies Opinion or any other opinion bearing on the formation of a contract;42
- a choice-of-law opinion, including any opinion as to what law governs the perfection, the effect of perfection or nonperfection or the priority of any security interest;43
- an opinion that the grant of a security interest by the debtor does not breach or cause a default under another agreement that binds the debtor or does not violate a law or judicial order;44
- an opinion that the security interest will not terminate;45 or
- an opinion as to the effect of equitable principles, which are not covered by the Code.46
17 1989 Report, supra note 2, at 793, n.4. See California Remedies Opinion Report, supra note 3, Appendix 4; ABA Guidelines, § 3.1. Back
18 See generally California Remedies Opinion Report, supra note 3, Appendix 4, text accompanying nn.4, 6-8, 27 (discussing the cost/benefit analysis attendant to remedies opinions). Back
19 Although considerations of efficiency are significant in making this determination, they are not necessarily controlling, at least from the standpoint of the secured party, who may perceive certain tactical advantages in having a favorable opinion of the debtor's counsel when dealing later with the debtor in a workout or other dispute. For a discussion of the potential "estoppel-like" effect of opinions received from debtor's counsel, see California Remedies Opinion Report, supra note 3, Appendix 4, § II.A.(3). Back
20 See also infra Section 3. Back
21 Accord, TriBar Report, supra note 1, § 2.1(d). For example, where the debtor is a California registered organization, some opinion givers may opine that the debtor is a "registered organization" under the Code. They may not, however, be willing to opine (based solely on that conclusion) that the debtor is "located" in California and, therefore, that California law governs perfection. See TriBar Report, supra note 1, Appendix B, at 1513, n.401. Back
22 Further guidance on this subject may be found in Appendix B to the TriBar Report. Back
23 See generally California Remedies Opinion Report, supra note 3, Appendix 4, § III.C.2 (obtaining local counsel to give remedies opinions). Back
24 See generally California Remedies Opinion Report, supra note 3, Appendix 4, text accompanying n.45 (requesting counsel to opine only on a discrete aspect of a remedies opinion). Back
25 See generally California Remedies Opinion Report, supra note 3, Appendix 4, text accompanying nn.4, 6-8, 27 (discussing the cost/benefit analysis attendant to remedies opinions). A fourth alternative that is sometimes considered is that of giving an opinion as if California law applies, even where the agreements do not so provide. While, as the Opinions Committee notes in the California Remedies Opinion Report, this approach is common in connection with remedies opinions, see California Remedies Opinion Report, supra note 3, Appendix 4, n.44, the Committee is of the view that, in connection with Security Interest Opinions, see infra text accompanying note 29, the opinion giver should not be asked to give an opinion as if California law governs perfection of a security interest where, under the mandatory rules of perfection, California law provides that the laws of another jurisdiction would in fact govern perfection. Back
26 Section 9203(a) uses the word "enforceable" with respect to a security interest, not the security agreement, and uses the term to provide when the security interest attaches to collateral. See Cal. Com. Code § 9203(a). Back
27 Cal. Com. Code § 9201. The use by Division 9 of the term "effective" in this context was well-considered, in that it emphasizes the separateness of the enforceability of the various contractual undertakings contained in a security agreement from the effectiveness of the security agreement in creating, for the benefit of a secured creditor, rights in particular collateral. Back
28 See, e.g., Cal. Com. Code §§ 9110(1), 9203(a)-(b) (security interest "enforceable"). For example, section 9203(a) provides that a security interest attaches to collateral when it "becomes enforceable against the debtor with respect to the collateral. . . ." Similarly, the words "effective according to its terms," as used in section 9201, are not limited to the debtor who signed the security agreement and include purchasers of the collateral and creditors. Back
29 See also text accompanying note 34 (breadth of the use of the term Security Interest Opinion in this Report). An opinion recipient occasionally will request an opinion to the effect that a "valid and enforceable" security interest has attached or has been perfected. This language, however, is not substantive and merely blurs the distinction between a Security Agreement Remedies Opinion and a Security Interest Opinion. Accord, TriBar Report, supra note 1, § 2.2, at 1461, n.44. Accordingly, the Committee believes its use is inappropriate. Back
30 Cal. Com. Code § 9102(a)(73). Contrary to the position taken in the 1989 Report, the Committee is not of the view, particularly in light of certain commentary in Article 9 (discussed below), that a Security Agreement Remedies Opinion addresses whether the security agreement contains language sufficient to grant or create a security interest in the collateral under Division 9. This conclusion, apart from being supported by long-standing custom that Security Interest Opinions are provided separately from Security Agreement Remedies Opinions, is consistent with the "well-established presumption against opinions by implication." See 1998 TriBar Report, supra note 11, § 3.5. The language of the Code also supports the distinction between Security Agreement Remedies Opinions and Security Interest Opinions. While, as noted above, Division 9 uses the terms "effective" and "enforceable" without explaining their meaning, some guidance may be gleaned from the context in which each term is used and in the comments accompanying the 2002 Official Text. For example, section 9201 provides that, "[e]xcept as otherwise provided in this code, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors." The term "effective" is used in Division 9, in relation to agricultural liens, as a synonym for attachment or perfection. See, e.g., Cal. Com. Code §§ 9308(b), 9322(a)(3). The term is also used in numerous places with respect to financing statements. E.g., Cal. Com. Code § 9507. The Official Comments accompanying section 9-201 of the UCC note that the term "security agreement" as used in the provision (and elsewhere in Article 9) means "an agreement that creates or provides for a security interest." UCC § 9-201 cmt. 2. Although the entire record containing a grant of a security interest is commonly called the "security agreement," for purposes of Division 9, only language creating or providing for a security interest is the "security agreement." See id. See also TriBar Report, supra note 1, § 2.2, at 1461, n.42. Thus, it appears that, in using the term "effective" in section 9201, the drafters intended to address the effectiveness of the language creating the security interest. The Official Comment states that "[effective] according to its terms" does not mean that "every term or provision contained in a record that contains a security agreement or that is so labeled is effective." UCC § 9-201 cmt. 2. Back
31 The customary practice is for an opinion recipient to request a specific opinion to address the creation, perfection or priority of a security interest in collateral under Division 9. Back
32 See TriBar Report, supra note 1, § 2.2, at 1461, text accompanying n.44. Back
33 It has been suggested that Prudential Ins. Co. of Am. v. Dewey Ballantine, Bushby, Palmer & Wood, 605 N.E.2d 318 (N.Y. 1992), reconsideration denied, 613 N.E.2d 972 (N.Y. 1993), lends support to the contention that a Security Agreement Remedies Opinion includes a Security Interest Opinion. The Committee believes that that decision should not be read to suggest such a conclusion. In that case, separate remedies and preferred-ship mortgage opinions were given. Id. at 319. The court, however, did not rule whether the remedies opinion, if given alone, would relate to the attachment and perfection of the ship mortgage. Back
34 Section 9203 of the Code uses the term "attachment" to describe the event that makes the security interest in collateral enforceable as between the debtor and the secured party. Cal. Com. Code § 9203. Opinion givers, however, often refer instead to the "creation" of a security interest. Because this usage has been sanctioned by time and appears not to have resulted in confusion, the terms attachment and creation are used in this Report, as in practice, interchangeably (although this Report refers primarily to attachment opinions). See infra text accompanying notes 55, 94. Back
35 For example, if a security agreement includes a waiver of notice of foreclosure, or a waiver of the right to pay the debt prior to foreclosure, the Security Agreement Remedies Opinion may be qualified using qualifications otherwise appropriate for such an opinion. These qualifications, however, are not necessary to the extent the opinion letter contains solely a Security Interest Opinion addressing the security interest in collateral created under the security agreement. See TriBar Report, supra note 1, § 2.2, at 1461, text accompanying n.43. Back
36 See infra note 42 and accompanying text. For the same reason, it is also unnecessary to include other related qualifications (for example, that the parties possess all requisite power and authority to enter into, and have duly authenticated and delivered, the security agreement). The same considerations apply in connection with other agreements referenced in Security Interest Opinions, such as control agreements. See infra note 227. Back
37 See, e.g., California Remedies Opinion Report, supra note 3. Back
38 See supra note 35. Back
39 See, e.g., Cal. Com. Code §§ 9207 (duty to exercise reasonable care in the custody and preservation of the collateral), 9608(a)(1) (duty to apply cash proceeds to the reasonable expenses of collection and enforcement), 9610 (duty to dispose of collateral in present condition or following commercially reasonable preparation or processing and duty to dispose of collateral in a commercially reasonable manner), 9611 (duty to give reasonable authenticated notice of disposition of collateral to specified persons), and 9615 (duty to apply cash proceeds to reasonable expenses of retaking, holding, preparing for disposition, processing, disposing and, to the extent permitted, reasonable attorney's fees). Back
40 See, e.g., Cal. Com. Code §§ 9208 (return or release control of collateral within ten days of satisfaction or termination of secured obligations), 9401(b) (provision restricting transfer of collateral or making transfer a default does not make transfer ineffective) and 9624 (debtor may waive right to notification of disposition of collateral pursuant to section 9611 only after default). Back
41 See, e.g., Cal. Com. Code § 9609(b)(2) (secured party may proceed to take possession of the collateral without judicial process only if it can do so without breach of the peace). A security agreement will often include other provisions the enforceability of which may be uncertain under California law. The customary practice is for the opinion recipient not to expect the Security Interest Opinion to address whether the secured party's rights in such instances will be enforceable. Back
42 See supra Section 2.3 and note 36; see also infra Section 4.2.7 and notes 53, 93. A Security Interest Opinion (for example, an Attachment Opinion) predicated upon an authenticated security agreement may be viewed as implicitly containing an opinion that the portion of the relevant document containing the grant of the security interest -- the "security agreement" under the Code, see generally supra note 30 (discussing that, while the entire record containing the grant of a security interest is commonly called a "security agreement," for purposes of Division 9, only language creating or providing for a security interest is the "security agreement") -- has been duly authenticated (for example, executed and delivered) by the debtor. See generally FitzGibbon, Glazer & Weise, supra note 14, § 12.3.1 ("The [security interest] opinion requires, therefore, that the opinion preparers satisfy themselves that the security agreement has been duly authorized, executed and delivered by the borrower, which are all matters covered by a typical enforceability opinion." (footnotes omitted)); TriBar Report, supra note 1, § 2.2 ("Security interest opinions address satisfaction of the U.C.C.'s requirements for establishing and preserving the secured party's interest in the collateral." (footnotes omitted)).
Where appropriate, it is common for an opinion letter that contains a Security Interest Opinion also to include a Security Agreement Remedies Opinion, thus rendering moot whether the Security Interest Opinion alone covers the due authorization, authentication and delivery of the "security agreement." See TriBar Report, supra note 1, § 2.2, at 1460, text accompanying n.39.
In those rare instances where the opinion letter does not also contain a Securities Agreement Remedies Opinion, it is customary practice for an opinion recipient who is interested in receiving an opinion as to the due authorization, authentication and delivery of the "security agreement" (and also its enforceability, see generally infra note 93 (discussing requirement of an "enforceable" security agreement)) to request that opinion specifically. Alternatively, where the opinion giver does not provide -- or it would otherwise be inappropriate for the opinion giver to provide -- a Security Agreement Remedies Opinion, it is also customary practice for the opinion letter to contain a qualification disclaiming any opinion as to the due authorization, authentication and delivery (as well as enforceability) of the "security agreement." While this qualification may be helpful to the opinion recipient because it highlights that a foundational element, i.e., authentication, is not covered by the opinion, the Committee believes that its absence should not result in the opinion giver implicitly having given an opinion as to these matters. See generally 1998 TriBar Report, supra note 11, § 3.5 (discussing presumption against opinions by implication).
The Committee acknowledges, however, that some practitioners believe that a Security Interest Opinion does in fact include an opinion as to the due authorization, authentication and delivery of the related "security agreement." See TriBar Report, supra note 1, § 2.2. For these practitioners, it is customary practice to include an express assumption as to these matters if they do not intend to cover them in their opinion. See TriBar Report, supra note 1, § 3.3(a), at 1465, text accompanying n.69. Back
43 See supra text accompanying note 21. Back
44 Accord, TriBar Report, supra note 1, § 2.4. Back
45 It is well-understood that opinions speak only as of the time they are given. See, e.g., California Legal Opinions (Non-Remedies) Report, supra note 3, at 22, n.85. Accordingly, a Security Interest Opinion would not address, among other things, the fact that at some subsequent date: (a) a buyer in ordinary course of business could take free of the security interest created by the buyer's seller, see Cal. Com. Code § 9320(a); (b) a licensee of a general intangible, under a nonexclusive license in ordinary course of business, could take its interest free of a security interest created by the licensor, see Cal. Com. Code § 9321(b); (c) a lessee in ordinary course of business could take its leasehold interest free of a security interest in the goods created by the lessor, see Cal. Com. Code § 9321; or (d) a transferee of money or funds from a deposit account could take the money or funds free from any security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party, see Cal. Com. Code § 9332(a)-(b). Back
46 Section 1103 provides that principles of law and equity shall supplement the Code. See Cal. Com. Code § 1103; UCC §§ 1-103, 1-103(b) (revised). For example, under the doctrine of equitable subordination, inequitable conduct by a secured party may result in a security interest being subordinated to junior liens or even to claims of unsecured creditors, thereby rendering the security interest unperfected or impairing its priority. Back
Section 3. The UCC Scope Limitation / Table of Contents