Appendix 10: Exceptions Subcommittee Report
Table of Contents
Exceptions Subvcommittee Report
- Limitations, Qualifications and Other Exceptions
- Defining the Bankruptcy and Equitable Principles Exceptions
- Bankruptcy Exception
- Equitable Principles Limitation
- Analysis of Survey Provisions
- Further Notes
- Choice of Law
- Covenants not to Complete
- Provisions for Penalties
- Time of Essence
- Confession of Judgement
- Waivers of (i) Broadly or Vaguely Stated Rights, (ii) Statutory or Constitutional Rights, (iii) Unknown Future Defenses, or (iv) Rights to Damages
- Waivers of Statutory or Constitutional Rights See endnote 6
- Waivers of Unknown Future Defenses See endnote 6
- Waivers of Rights to Damages See endnote 6
- Provisions that Contain a Waiver of Obligations of Good Faith, Fair Dealing, Diligence and Commercial Reasonableness
- Provisions that Attempt to Change or Waive Rules of Evidence or Fix the Method or Quantum of Proof to be Applied in Litigation or Similar Proceedings
- Appointment of Receiver
- Forum Selection Clauses and Consents to Jurisdiction
- Provisions Appointing an Adverse Party as Attorney in Fact
- Waivers of Rights to Jury Trials
- Provisions Stating that Remedies are Cumulative
- Provisions Stating that the Provisions of a Contract are Serverable
- Provisions Waiving Defenses of Guarantors
- Provisions Limiting Rights to Cure, Without Considering Materiality
- Arbitration Provisions
- Provisions Limiting The Award of Attorneys' Fees
- Prohibitions of Oran Modifications
- Indemnity/Exculpation of a Party in Respect of its own Misconduct
- Self Help Remedy Provisions
- Indemnification for Securities Law Liabilities
- Voting Agreements
- Provisions That Grant Rights of Setoff to Loan Participants or to Affiliates of Parties to the Agreement
- Provisions that are Unconscionable as a matter of Law at the Time of Closing
- Payments Free of Setoff or Counterclaim
- Waiver of Statute of Limitations
- Provisions that Permit the Exercise of Remedies without Consideration of the Materiality of Breach/Consequence of the Breach to the Non-Breaching Party
- Provisions that would Permit the Other Party to Require Performance without Requiring Consideration of the Impracticality or Impossibility of Performance at the Time of Attempted Enforcement due to Unforeseen Circumstances not within the Contemplation of the Parties
A. Limitations, Qualifications and Other Exceptions.
As discussed in Part VII of the Umbrella Report and in Appendix 8 at part V, opinion givers generally include limitations, qualifications, and other exceptions when rendering remedies opinions. These exceptions communicate to the opinion recipient that in the opinion giver's professional judgment (a) one or more of the contractual provisions covered by the remedies opinion is not enforceable, or (b) there exists a level of uncertainty regarding the enforceability of one or more such provisions that prevents the opinion giver from reasonably concluding that the highest court of the applicable jurisdiction would enforce the provision.
The bankruptcy exception and the equitable principles limitation (each discussed below) should be understood to be included in every remedies opinion, regardless of whether they are expressly stated. The Exceptions Subcommittee was formed to assess what exceptions to the remedies opinion, other than the bankruptcy exception and the equitable principles limitation, should, consistent with customary practice, be separately stated.
The Subcommittee identified, from a number of sources, the provisions ("Survey Provisions") to be evaluated for this purpose. The Accord, adopted in 1991, identified, at Section 14, a list of "Other Common Qualifications" that were considered not to be included within either the "Bankruptcy and Insolvency Exception"1 ("bankruptcy exception") or the "Equitable Principles Limitation,"2 but that should normally be accepted as qualifying remedies opinions where applicable.3 In May 1992, the Business Law Section of the State Bar of California published its "Report on the Third-Party Legal Opinion Report of the ABA Section of Business Law" (the "1992 Report"), "to provide guidance to members of the California bar who wish to adopt the Accord for third-party opinions rendered under California law." The 1992 Report set forth additional "California Qualifications"--"contractual provisions not fully covered by the Accord's exclusions that should not be automatically covered by an opinion because there could be a significant question as to the enforceability of the provision."4 Lastly, responses to a survey conducted by the Opinions Committee's predecessor, the Opinion Task Force, in 2001 (the "2001 Survey"), identified additional provisions that one or more respondents considered of questionable enforceability.5 A complete list of the Survey Provisions is attached as part of Annex A.6
B. Defining the Bankruptcy and Equitable Principles Exceptions.
The Subcommittee determined, after discussion with a broad group of practitioners, that understanding the scope of the two universally accepted standard exceptions (bankruptcy and equitable principles)--i.e., understanding what they are properly understood to encompass as a matter of customary usage--might assist in determining whether one or more of the Survey Provisions should be separately stated in opinion letters. A brief description of those two exceptions follows:
1. Bankruptcy Exception.
a. Common formulations of the bankruptcy exception include:
1989 Opinions Report of the Corporations Committee of the California State Bar's Business Law Section ("1989 Report")7:
The [enforceability of the agreement] may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors.
[The Remedies Opinion] is subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights and remedies of creditors generally."
"Third-Party 'Closing' Opinions," A Report of The Tri-Bar Opinion Committee ("1998 TriBar Report")8:
Our opinions above are subject to ... general principles of equity.
b. Scope of bankruptcy exception.
1989 Report: The 1989 Report did not go into great detail regarding the scope of the bankruptcy exception, but did express the view that it encompasses questions of fraudulent transfer, equitable subordination and other similar concerns.9
Accord: Section 12 of the Accord set forth its drafters' understanding that the bankruptcy exception applicable to an opinion that has adopted the Accord includes:
- the Federal Bankruptcy Code and thus comprehends, among others, matters of turn-over, automatic stay, avoiding powers, fraudulent transfer, preference, discharge, conversion of a non-recourse obligation into a recourse claim, limitations on ipso-facto and anti-assignment clauses and the coverage of pre-petition security agreements applicable to property acquired after a petition is filed;
- all other Federal and state bankruptcy, insolvency, reorganization, receivership, moratorium, arrangement and assignment for the benefit of creditors laws that affect the rights and remedies of creditors generally (not just creditors of specific types of debtors);
- all other Federal bankruptcy, insolvency, reorganization, receivership, moratorium, arrangement and assignment for the benefit of creditors laws that have reference to or affect generally only creditors of specific types of debtors and state laws of like character affecting generally only creditors of financial institutions and insurance companies;
- state fraudulent transfer and conveyance laws; and
- judicially developed doctrines relevant to any of the foregoing laws, such as substantive consolidation of entities.
The bankruptcy exception, as viewed by the Accord, does not include laws affecting creditors generally but that are not similar to the listed laws--for example, the UCC or usury laws. Under the Accord, if a provision of the UCC affects the enforceability of a contractual provision as written, that contractual provision should be specifically identified and excepted from the opinion, unless covered by the equitable principles limitation or otherwise not covered by the opinion.
1998 TriBar Report: According to the 1998 TriBar Report, the bankruptcy exception "is more aptly an 'insolvency law exception' in that it covers not only the federal Bankruptcy Code but also any other similar insolvency laws (state or federal) of general application."10 Moratorium, fraudulent transfer and conveyance, and reorganization laws are included; usury laws (because they are not similar to insolvency laws) are not.11 State insolvency laws relating to financial institutions or insurance companies as debtors should be understood to be covered by the bankruptcy exception, but state laws relating to the insolvencies of other types of entities, because they are not likely to be widely known, should not.12
Case law: The Subcommittee found a single case addressing the scope of the bankruptcy exception: In re Kar Development Associates, L.P.13 In that case, the court found that an opinion to the effect that a document (purporting to be a lease of a hotel) was enforceable in accordance with its terms, "except as enforcement thereof may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights," did not provide assurance that the lease constituted a true lease that would not be recharacterized as a mortgage in a bankruptcy proceeding involving the purported lessee.14
The Subcommittee believes that the interpretations of the scope of the bankruptcy exception expressed in the 1989 Report, the Accord, and the 1998 TriBar Report are equivalent in all material respects and that no difference in scope should be inferred from the differences among their formulations of that exception.
2. Equitable Principles Limitation.
a. Common formulations of the equitable principles limitation include:
1989 Report: The 1989 Report considered this formulation to be traditional:
The enforceability of the Company's obligations under the agreement is subject to general principles of equity [including the possible unavailability of specific performance or injunctive relief]15, regardless of whether considered in a proceeding in equity or at law.
It recommended, however, that the traditional wording be modified to read as follows (added language bolded):
The enforceability of the Company's obligations under the agreement is subject to general principles of equity, including without limitation concepts of materiality, reasonableness, good faith and fair dealing [and the possible unavailability of specific performance or injunctive relief], regardless of whether considered in a proceeding in equity or at law.
[The Remedies Opinion] is subject to the effect of general principles of equity, whether applied in a court of law or equity.
1998 TriBar Report:
Our opinions above are subject to . . . general principles of equity
b. Scope of equitable principles limitation.
1989 Report: The 1989 Report expressed the view that the equitable principles limitation addresses:
- the possibility that one or more provisions of an agreement might not be specifically enforced, or that injunctive relief might not be granted;
- traditional equitable defenses, such as waiver, estoppel or laches;
- court decisions holding some loan provisions "to violate public policies rendering the provisions unenforceable unless they are demonstrated under the circumstances to be reasonably necessary for the lender's protection"; and
- the "effect of the implied covenant of good faith and fair dealing that is embodied in every contract under California law."16
The 1989 Report also expressed the view that the equitable principles limitation includes:
the effect of California Civil Code Section 1670.5, which permits a court that, as a matter of law, finds a contract or any clause of a contract to have been unconscionable at the time it was made, to refuse to enforce the contract, to enforce the remainder of the contract without the unconscionable clause, or to limit the application of the unconscionable clause so as to avoid any unconscionable result.
Accord: Section 13 of the Accord reflected its drafters' agreement that the equitable principles limitation applicable to an opinion that has adopted the Accord includes principles:
- governing the availability of specific performance, injunctive relief or other equitable remedies, which generally place the award of such remedies, subject to certain guidelines, in the discretion of the court to which application for such relief is made;
- affording equitable defenses (e.g., waiver, laches and estoppel) against a party seeking enforcement;
- requiring good faith and fair dealing in the performance and enforcement of a contract by the party seeking its enforcement;
- requiring reasonableness in the performance and enforcement of an agreement by the party seeking enforcement of the contract;
- requiring consideration of the materiality of (i) the Client's breach and (ii) the consequences of the breach to the party seeking enforcement;
- requiring consideration of the impracticability or impossibility of performance at the time of attempted enforcement; and
- affording defenses based upon the unconscionability of the enforcing party's conduct after the parties have entered into the contract
1998 TriBar Report: The 1998 TriBar Report does not attempt a precise definition of the equitable principles limitation, noting that "courts have an interest in justice (as well as predictability) and concepts relating to fair dealing provide broad discretion."17 It notes, however, that the limitation does cover "the availability of traditional equitable remedies (such as specific performance or injunctive relief)", and "defenses rooted in equity that result from the enforcing party's lack of good faith and fair dealing, unreasonableness of conduct [including concepts such as coercion, duress, unconscionability, undue influence, and, "in some cases," estoppel] or undue delay (e.g., laches)."18
In contrast to the 1989 Report, which viewed the equitable principles limitation as including unconscionability existing at the time an agreement is made, the 1998 TriBar Report states its view that, "[i]f before rendering the remedies opinion the opinion preparers believe that coercion, duress or similar inequitable conduct has prevented the formation of the agreement in question, they should not render the opinion (or should disclose their concerns, if the client consents). Unless they have knowledge to the contrary, the opinion preparers are entitled to assume [without so stating] the absence of conduct so egregious as to preclude formation of an agreement . . .."19
The Subcommittee, like the TriBar Committee, recognizes the broad discretion accorded to courts in the interest of doing justice, and endorses the 1998 TriBar Report's approach to the equitable principles limitation--including (for the reasons described below, in endnote 28) the TriBar Committee's conclusion that the limitation should apply, with respect to unconscionability, only to unconscionable conduct that occurs after an agreement has been formed.20
The Subcommittee further endorses, and adopts for purposes of this appendix, the understanding, first expressed in the 1992 Report, that the equitable principles limitation encompasses (in addition to judicially developed rules) statutes, rules and regulations that codify traditionally recognized equitable principles.21
The Subcommittee believes that no difference in the scope of the equitable principles limitation should be inferred from any particular formulation of that limitation--i.e., that a limitation stating simply that "Our opinions above are subject to general principles of equity" should understood to be equivalent to one that adds "including without limitation concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law."
II. Analysis of Survey Provisions
In assessing whether the Survey Provisions are (or should be) customarily addressed by separately stated exceptions to the remedies opinion, the Subcommittee considered only California case law and California statutes and regulations. The standard against which the Subcommittee assessed enforceability was not absolute assurance of enforcement in all conceivable circumstances. Few, if any, contractual provisions could meet that standard. Instead, the Subcommittee focused on whether there exists, independently of the circumstances in which enforcement of a Survey Provision might be sought, a significant degree of uncertainty as to the enforceability of that Survey Provision. Where the Subcommittee concluded that there exists such a significant degree of uncertainty, the Subcommittee considered whether in all circumstances the Survey Provision should be separately called out in the opinion, or whether a basis exists for suggesting that a separate exception with respect to that Survey Provision is unnecessary. For example, a separate exception may not be necessary because the reasons for which a court might refuse to enforce the Survey Provision as written are equitable in nature (and therefore included in the equitable principles limitation) or are otherwise beyond the scope of the opinion.22
The Subcommittee classified each Survey Provision into one of the following four categories:
- "Equitable Principles Limitation": The Survey Provision generally is not enforceable as written. No separate exception is necessary, however, because, as a matter of customary usage, the equitable principles limitation is understood to include the principal basis that would cause the Survey Provision not to be enforceable.23
- "Generally Enforceable": The Survey Provision is generally enforceable.24 Consequently, a separate exception is not necessary and should not be taken.
- "Exception Sometimes Required": There may be limited circumstances in which courts will not enforce the Survey Provision as written; but only if those circumstances are present is it appropriate to take a separate exception.25
- "Exception Usually Required": The Survey Provision is generally unenforceable and is not within category 1 above. An exception, if deemed to be appropriate under the circumstances, should be separately stated.26
The table set forth below, together with Annex A, indicates the Subcommittee's conclusions regarding each of the Survey Provisions. These tables are intended to assist opinion preparers in considering the enforceability of provisions that are commonly included in contracts, however, and not as a substitute for careful consideration. In general, opinion preparers should read the entire agreement and consider the proper characterization of its provisions in light of the language and structure of the agreement and the transaction to which it relates.27
At-a-Glance: Classification of Exemptions28
|| Equitable Principles Limitation
|| Generally Enforceable
||Exception Sometimes Required
||Exception Usually Required
|Survey Provisions Included in Classification:
- Waivers of obligations of good faith and fair dealing (10)
- Waivers of rights to cure (where harm not material) (19)
- Exercise of remedies without consideration of materiality of breach, consequences of breach (31)
- Exercise of remedies without considering impracticability or impossibility due to unforeseen circumstances (32)
- Choice of law (1)
- Time is of the essence (4)
- Forum selection/ consents to jurisdiction (13)
- Appointment of attorney-in-fact (14)
- Severability (17)
- Prohibition of oral modifications (22)
- Self-help remedy provisions (24)29
- Rights of setoff (27)
- Payments free of setoff, counterclaims, etc. (29)
- Provisions for penalties, etc. (3)
- Remedies cumulative (16)
- Arbitration provisions (20)
- Indemnities/releases (23)
- Unconscionable provisions (28)
- Waivers of statutes of limitation (30)
- Covenants not to compete (2)
- Confessions of judgment (5)
Waivers of (i) broadly or vaguely stated rights (6); (ii) statutory, regulatory, or constitutional rights, except as permitted (7); (iii) unknown future defenses (8); or (iv) damages (9)
- Changes/waivers of rules of evidence, etc. (11)
- Appointment of receiver (12)
- Waivers of jury trials (15)
- Waivers of guarantor’s defenses (18)
- Attorneys’ fees to one party only (21)
- Indemnification for securities law liabilities (25)
As a general matter, the Subcommittee has attempted to reflect relevant statutory and case law and the customary practice of California opinion preparers and givers, and not to prescribe what practice should be. Where what has been customary practice appears no longer to be supported by developments in statutory or case law, however--as is the case, for example, with respect to choice-of-law provisions--the Subcommittee has recommended that customary practice evolve to reflect those developments.
Limited Universe: The Survey Provisions do not constitute an exhaustive list of provisions that can present enforceability issues in the context of a remedies opinion. Certain transactions--for example, mergers--present issues regarding the enforceability of other types of provisions, such as provisions requiring the payment of break-up fees if the transaction is not consummated.
Law Covered by Remedies Opinion: "Law" means statutory, decisional, and regulatory law at the state or federal (but not the local) level. As noted in the 1998 TriBar Report (and consistent with the Accord), a remedies opinion is customarily understood not to address the following areas of law30:
1. Local law is not covered:
- "Thus, an opinion should not be read to cover matters such as local zoning or building codes unless it does so expressly." 1998 TriBar Report § 1.9(n).31
- "Local Law", excluded from an opinion under Section 19 of the Accord unless explicitly addressed in an opinion letter, means "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." Accord, Glossary.32
2. Certain areas of law are not covered unless specifically addressed:
a. 1998 TriBar Report.
- Regulatory issues involving other parties to the agreement (e.g., for an opinion by counsel to a borrower, whether a loan would violate the lender's lending limit).
- Tax laws.
- Insolvency laws.33
- Antitrust laws.
- Securities laws (except for the Investment Company Act, if the opinion giver's client is a registered investment company, or where the opinion giver recognizes that a company's activities may make it an inadvertent investment company).
- The Exon-Florio amendment.34
b. Accord (Section 19).
- Federal securities laws and regulations administered by the SEC (other than the Public Utility Holding Company Act of 1935 [as it affects the opinion giver's client]), state "Blue Sky" laws and regulations, and laws and regulations relating to commodity (and other) futures and indices and other similar instruments.
- Federal Reserve Board margin regulations.35
- ERISA and other pension and employee benefit laws and regulations.
- Hart-Scott-Rodino (antitrust laws) and Exon-Florio.
- Compliance with fiduciary duty requirements.36
- The characterization of a transaction as one involving the creation of a lien or a security interest, as one in a form sufficient to create a lien or security interest, and the creation, attachment, perfection, priority or enforcement of a lien or security interest.
- Fraudulent transfer and fraudulent conveyance laws.37
- Environmental laws.
- Land use and subdivision laws.
- Tax laws.
- Intellectual property laws.
- RICO and other racketeering laws.
- OSHA and other health and safety laws.
- Labor laws.
- Laws relating to national and local emergency, possible judicial deference to acts of sovereign states, and criminal and civil forfeiture laws.
- Other criminal statutes of general application.
The 1992 Report, in concluding that use of the Accord by members of the California Bar would "be generally appropriate," did not expand upon Section 19. The Subcommittee believes that California lawyers customarily do not expect that laws described in Section 19 of the Accord are addressed by a legal opinion, absent specific mention.
Use of Assumptions to Close Gaps: In addition, certain issues relating to the enforceability of agreements are customarily dealt with by assumptions made by the opinion giver. See, for example, Section 4 of the Accord, "Reliance by Opinion Giver on Assumptions," to the effect that an opinion giver may rely upon the several assumptions set forth in that Section "unless in a given case the particular assumption states, directly or in practical effect, a legal conclusion expressed in the [o]pinion."38
Assumptions, however, must be reliable. An opinion giver may not rely on an unstated assumption that is unreliable. Thus, for example, an opinion giver who is aware of the existence of coercion or duress in the formation of a contract, or of facts that give rise to an inference that coercion or duress may exist, may not rely on an implicit assumption of their absence for purposes of rendering a remedies opinion.39 Nor may an opinion giver rely upon a stated assumption if the opinion giver is aware of facts that give rise to an inference that the assumption is not true--i.e., a stated assumption may be used to bridge a gap in the opinion giver's knowledge of the facts that need to be established to support a legal opinion, but only where it is not misleading, to do so.40
Opinions must not be misleading: If, under the circumstances of a given transaction, the opinion preparers believe that an opinion would be misleading to the recipient were the opinion giver (in reliance upon customary practice or otherwise) to leave unstated an exception that this appendix concludes it is not necessary to state, the opinion giver should consider making an appropriate disclosure, so as to avoid rendering a misleading opinion. The 2007 Report, at Part III, Section B, concurs that, "regardless of compliance with other standards, and even if an opinion is technically correct, a lawyer should not render an opinion that the lawyer recognizes would be misleading to the opinion recipient."41
1 Section 12 of the Accord. Back
2 Section 13 of the Accord. Back
3 The Other Common Qualifications included generally applicable rules of law that:
- 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;
- provide that forum selection clauses in contracts are not necessarily binding on the court(s) in the forum selected [included within, but slightly narrower than, California Qualification No. 9];
- limit the availability of a remedy under certain circumstances where another remedy has been elected;
- limit the right of a creditor to use force or cause a breach of the peace in enforcing rights;
- relate to the sale or disposition of collateral or the requirements of a commercially reasonable sale [probably subsumed within California Qualification No. 6];
- limit the enforceability of provisions releasing, exculpating or exempting a party from, or requiring indemnification of a party for, liability for its own action or inaction, to the extent the action or inaction involves gross negligence, recklessness, willful misconduct or unlawful conduct;
- may, where less than all of a contract may be enforceable, limit the enforceability of the balance of the contract to circumstances in which the unenforceable portion is not an essential part of the agreed exchange;
- govern and afford judicial discretion regarding the determination of damages and entitlement to attorneys' fees and other costs;
- may, in the absence of a waiver or consent, discharge a guarantor to the extent that (i) action by a creditor impairs the value of collateral securing guaranteed debt to the detriment of the guarantor, or (ii) guaranteed debt is materially modified; and
- 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. Back
4 The California Qualifications encompassed:
- Choice-of-law provisions.
- Covenants not to compete.
- Provisions for penalties, liquidated damages, acceleration of future amounts due (other than principal) without appropriate discount to present value, late charges, prepayment charges, and increased interest rates upon default).
- Time is of the essence clauses.
- Confession of judgment clauses.
- Provisions that contain a waiver of (i) broadly or vaguely stated rights, (ii) the benefits of statutory, regulatory, or constitutional rights, unless and to the extent that the statute, regulation, or constitution explicitly allows waiver, (iii) unknown future defenses, and (iv) rights to damages.
- Provisions that attempt to change or waive rules of evidence or fix the method or quantum of proof to be applied in litigation or other proceedings.
- Provisions that provide for the appointment of a receiver.
- Forum selection clauses and consent to jurisdiction clauses (both as to personal and subject matter jurisdiction).
- Provisions appointing one party as attorney-in-fact for an adverse party.
There is some overlap between the California Qualifications and the Other Common Qualifications; the Subcommittee adjusted for that overlap in preparing this appendix. Back
5 The form of the survey is included as Appendix 6 to the Umbrella Report. The "Survey Provisions" include the limitations on enforceability described in paragraphs (e) and (f) of the Accord's Equitable Principles Limitations (Survey Provisions No. 31 and 32, respectively). This is because, while the drafters of the California Qualifications accepted all of the Accord's Equitable Principles Limitations as limitations on the enforceability of contracts that are based on "equitable principles," they did so on the basis that those limitations had been agreed to as part of the process of negotiating the Accord, not because the drafters of the California Qualifications had independently determined that all of the limitations included in the Accord's list properly fell within the purview of "equitable principles." The members of the Subcommittee believe there to be enough question concerning limitations (e) and (f) to merit their inclusion as "Survey Provisions" for purposes of this appendix. Back
6 The remedies opinion is, by customary practice, rendered only with respect to laws of general application--in the words of the 1998 TriBar Report, "laws that lawyers who render legal opinions of the type involved would reasonably recognize as being applicable (i) to transactions of the type covered by the agreement and (ii) to the role of the [opinion giver's client] (but not other parties to the agreement) in the transaction." 1998 TriBar Report § 3.5.1. (See infra "Further Note," as well as Appendix 8, at n. 50 and accompanying text.) Back
7 As of September 2004 (the date the Umbrella Report was originally published), the Corporations Committee of the Section was preparing a report to revise and restate the 1989 Report. That new report--issued in May 2005 and revised in 2007 (the "2007 Report")--does not address remedies opinions except by reference to the Umbrella Report and its appendices, which collectively supersede the relevant portions of the 1989 Report. References herein to the 1989 Report have been retained because of their relevance to the preparation of this appendix. Back
8 53 Bus. Law. 591 (1998). The 1998 TriBar Report also notes that the bankruptcy exception and equitable principles limitation are "sometimes stated as being generally applicable to all opinions," rather than just to the remedies opinion, and the Illustrative Opinion Letters included in the 1998 TriBar Report take that approach. Back
9 1989 Report, ¶ V.C.1. Back
10 1998 TriBar Report, § 3.3.2. Back
11 Id. The 1998 TriBar Report, at § 3.3.2, n. 75, expresses the view of the TriBar Committee that, while "the use of the word 'similar' makes clear that the exception does not comprehend those laws that affect creditors' rights generally but are unrelated to laws grounded in insolvency," such as usury laws (see n.11, supra), "omission of the word 'similar' [as in the case cited above] should not be construed to broaden the scope of the exception: clearer language is required to do that."
The Subcommittee concurs with the view, expressed in the Accord and the 1998 TriBar Report, that the remedies opinion should be understood to cover usury law issues generally, and that a California remedies opinion includes an opinion to the effect that the interest rate stated in the agreement to apply to any loan or forbearance of money does not violate applicable provisions of California usury law. Nevertheless, an out-of-state lender who is unfamiliar with California's usury law regime may request that an opinion giver render a separately articulated opinion addressing the absence of any violation of that regime; and it is not uncommon for California opinion givers to render such an opinion.
Provisions relating to permissible interest rates with respect to loans or forbearances of money are not included among the Survey Provisions. This is due partly to historical reasons--California opinion givers have customarily dealt with California's Byzantine set of exemptions from its usury laws by assuming that the lender(s) qualified for one or more exemptions--and partly to the enactment in 2000 of California Corporations Code § 25118, which provides an exemption, available even to many non-regulated lenders, with respect to commercial loans (i) made to borrowers (or guarantied by affiliates) having at least $2,000,000 in assets, or (ii) of at least $300,000, for which no individual (as principal obligor, as general partner or as guarantor) is responsible. The statute requires that lender and borrower (or their principals) either have a pre-existing personal or business relationship or, by reason of their own business and financial experience or that of their professional advisers, could reasonably be assumed to have the capacity to protect their own interests in connection with the transaction; the Subcommittee believes that, if the opinion preparers are not sure whether the statutory condition is satisfied, the opinion giver could properly include (and an opinion recipient should accept) an appropriate express assumption with respect to the existence of a qualifying relationship or the possession, by the parties or their professional advisers, of qualifying business and financial experience. (Section 25118 does not, however, exempt lenders from compliance with any requirement that they be licensed under California law.)Back
12 1998 TriBar Report, § 3.3.3. Back
13 180 B.R. 597 (Bankr. D. Kan. 1994). Back
14 Id. at 619. The Subcommittee believes, however, that whether a lease will be recharacterized as a mortgage or security agreement is actually governed by principles of law that are not included within the bankruptcy exception, as that exception is described in any of the 1989 Report, the Accord, and the 1998 TriBar Report. A remedies opinion simply does not include any opinion on the characterization of a "lease" as a "true lease" (or any other characterization), and does not need an express exclusion to that effect. See, e.g., N.Y. TriBar Opinion Comm., "Special Report of The TriBar Opinion Committee: U.C.C. Security Interest Opinions – Revised Article 9", 58 Bus. Law 1449 (2003), at Appendix C (noting that a remedies opinion does not address whether or not an agreement creates a security interest). See also Appendix 4, at n. 22. Back
15 The exception "encompasses both specific performance and injunctive or other relief, whether or not the specific bracketed reference is used." 1989 Report at ¶ V.C.1. Back
16 1989 Report, ¶ V.C.1. Back
17 1998 TriBar Report, § 3.3.4. Back
18 Id. and n. 78. Back
19 Id .at n. 77. The 1987 report by the Joint Committee of the Real Property Law Section of the State Bar of California and the Real Property Section of the Los Angeles County Bar Association on Legal Opinions in Real Estate Transactions (the "1987 Real Property Report") took the same view: ". . . the Joint Committee believes that the unconscionability issue should not be deemed to be included in the generic qualification set forth above and that a lawyer should not be permitted to include unconscionability as a qualification to the enforceability opinion unless the lawyer identifies the particular provision that he or she believes to be unconscionable." Id., 42 Bus. Law. 1167. While the quoted language addressed specifically the scope of the generic exception, it would not be necessary had the drafters of the report concluded that unconscionability was encompassed by the equitable principles limitation. (See Appendix 11 to the Umbrella Report for a discussion of the generic exception.) Back
20 Similarly, reasonableness and good faith apply to conduct by the enforcing party after the formation of the contract. Back
21 Thus, for example, the 1992 California Report did not recommend that an express exception be taken for provisions that purport to require waivers and amendments to be in writing; Civ. Code § 1698, which provides that certain oral amendments will be given effect, was best viewed as a codification of the traditional equitable principle that gives effect to oral amendments that have been fully executed. 1992 California Report, § III.F. Back
22 E.g., because they (i) arise under a body of law that is generally understood not to be covered by the opinion (see, e.g, infra, "Further Notes"), (ii) are generally understood to be covered by the bankruptcy exception, or (iii) encompass an issue that opinion givers customarily do not address, as in the case of certain of the economic remedies referred to in Survey Provision No. 3. See also Umbrella Report at ¶ V; Appendix 8 at ¶ V(3). As will be noted from the categories included in this appendix, the Subcommittee also determined that some of the Survey Provisions need not be made the subject of a separate exception in all circumstances, but only where enforcement of the provision, as drafted, would not be permitted under the governing statute, regulation or legal principles.
Unless the context otherwise requires, further references in this appendix to "statutes" or to "statutory" limitations or the like include regulations and regulatory limitations. Back
23 The reasons for which the Survey Provision is not enforceable do not depend upon the circumstances in which enforcement is sought. The Survey Provision, if given effect, would negate the application of a mandatory equitable principle--for example, it purports to permit a party to act in bad faith. Back
24 The Survey Provision, as written, is generally enforceable. Circumstances might arise after the agreement becomes effective, however, that would prevent the Survey Provision from being enforced as written. One such circumstance--the subsequent bankruptcy of the obligor--is covered by the bankruptcy exception. Other such circumstances might make it inequitable to enforce the Survey Provision as written--for example, by reason of laches. Unenforceability for this reason is covered by the equitable principles limitation. (N.B.: "Generally Enforceable", in this context, also does not address reasons for which the Survey Provision might not be enforced that are beyond the scope of the opinion. See, e.g., infra, "Law Covered by Remedies Opinion", under "Further Notes.") Back
25 Although the Survey Provision is often enforceable, there exist circumstances under which a court might refuse to enforce the Survey Provision for reasons that, as a matter of customary usage, are understood not to be encompassed by either the bankruptcy exception or the equitable principles limitation, and, if an exception is believed to be appropriate under the circumstances, it should be separately stated. This does not mean that, in all cases, the inclusion of the Survey Provision in an agreement that is being opined upon should result in an exception being taken with respect to the Survey Provision. Back
26 The Survey Provision is generally unenforceable for reasons that, as a matter of customary usage, are understood not to be encompassed by either the bankruptcy exception or the equitable principles limitation, and not to be beyond the scope of the opinion. (For example, a provision that provides for a lender to recover its attorneys' fees and expenses of litigation, regardless of whether it is the prevailing party, would not be enforceable under Cal. Civ. Code § 1717 (see infra endnote 21), and it would be appropriate to include an exception regarding the enforceability of that provision.) Back
27 The Subcommittee decided that, for purposes of its report, it would base its recommendations primarily on an unsecured commercial loan paradigm. In the experience of its members, remedies opinions are rarely requested in the consumer context. The Subcommittee also considered, however, certain other provisions (for example, covenants not to compete) that are generally not implicated by loan transactions but which must often be considered by opinion givers in other contexts. The Subcommittee anticipates that the UCC Committee of the Section and the Real Property Law Section of the California State Bar will address exceptions to the remedies opinion that are peculiar to transactions secured by personal or real property, respectively. Back
28 Voting agreements (26) are not classified. Back
29 But see endnote 24 with respect to purported authorizations of breaches of the peace. Back
30 See also Appendix 8, at n. 52 and accompanying text, with respect to what law an opinion does cover. Unless otherwise indicated, references in this appendix to the "laws" of a particular authority include regulations promulgated thereunder. Back
31 The 2007 Report concludes that a "no violation" opinion likewise excludes local law. 2007 Report, Part IV, Section D.3; Part V, Section C.4.c. In addition, the 1998 TriBar Report advises that "[i]f an opinion does not state that it covers federal law, . . . that law is understood not to be covered unless the context indicates otherwise." 1998 TriBar Report § 4.1. Back
32 The Accord did not purport to reflect customary practice, but sought to establish rules that would apply to opinions that experessly adopted it. Accord, Foreword. The Subcommittee believes, however, that the quoted statement accurately reflects customary practice. Back
33 Note that insolvency laws are automatically excluded by the bankruptcy exception, in any event.Back
34 1998 TriBar Report § 3.5.2. Back
35 The 1998 TriBar Report thought it "unclear" whether Federal margin regulations are covered unless specifically mentioned, and recommended that an opinion recipient who wanted the issue covered ask that it be expressly addressed. 1998 TriBar Report § 3.5.2. The Subcommittee endorses the approach taken by the Accord: as a matter of customary practice, a remedies opinion does not address Federal margin regulations unless they are specifically stated to be addressed. See also the 2007 Report, at Part IV, Section D.3 and Part V, Section C.5.Back
36 The 1998 TriBar Report reaches the same result by taking the view that an assumption to the effect that "those who have approved an agreement have satisfied their fiduciary obligations and have disclosed any interest" is understood to be applicable whether or not stated, on the ground that the issue is one of fact that is "common to transactions generally and [is] customarily assumed [subject to the customary limits on unstated assumptions] as a matter of course." 1998 TriBar Report §§ 2.3(a)), 3.5.2(b). Back
37 By customary usage, fraudulent transfer laws are understood to be excluded by virtue of the bankruptcy exception, in any event. Back
38 Such issues as compliance by other parties to the transaction with legal requirements applicable to them, to the extent necessary to make the agreements being opined upon enforceable against them, compliance by the parties to the transaction with the terms of the agreements being opined upon, etc., are commonly dealt with by assuming the relevant facts, rather than by qualifying the remedies opinion (e.g., "[w]e express no opinion regarding the compliance by the lender with any legal requirements applicable to lender by reason of its being engaged in the business of making loans"). As noted in the text, the Subcommittee concurs with the view that these specific assumptions are customarily understood to apply to a remedies opinion, whether or not they are separately stated. Cf. Paragraphs 2.3 (Use of Opinions as Fact Substitutes) and 2.5 (Officers' and Other Certificates) of the 1998 TriBar Report. While such matters are beyond the scope of this appendix, the Subcommittee notes that, in the experience of its members, the assumptions listed in Section 4 of the Accord are customarily understood by opinion recipients to apply, whether or not expressly stated. See also The TriBar Opinion Committee, "The Remedies Opinion -- Deciding When To Include Exceptions And Assumptions," 59 Bus. Law. 1483 (2004) (the "TriBar Remedies Opinion Report") at Part II. The 2007 Report, at notes 84 and 117, also supports this view. Back
39 See the discussion of unconscionability, infra, at endnote 28. Back
40 Cf. Paragraph 2.3(c) of the 1998 TriBar Report ("Opinion preparers should not rely on an unstated assumption if it is unreliable. . . . "By way of contrast, stated assumptions, like opinion exceptions, put the opinion recipient on notice that the opinion preparers have not established the facts being assumed. . . . [and] shift to the opinion recipient the responsibility for confirming the assumed facts for itself or taking the risk that what is assumed might turn out to be untrue."). The 2007 Report, at note 84, concurs with the 1998 TriBar Report. As the TriBar Committee further notes, it is inappropriate to rely on a stated assumption if doing so would result in the rendering of a misleading opinion. See also the caution against the rendering of a misleading opinion, infra, in "Final Admonition." Back
41 See also the discussion, at note 45 of the 2007 Report, of Roberts v. Ball, Hunt, Hart, Brown & Baerwitz, 57 Cal. App. 3d 104, 128 Cal. Rptr 901(1976), as it relates to the rendering of misleading opinions. Back
Appendix 10: Annex A / Appendix 10: Annex B / Appendix 11 / Report on Third-Party Remedies Opinions