Appendix 11: Report of The Generic Exception Subcommittee
In addition to the bankruptcy, equitable principles and "separately stated" exceptions to the remedies opinion addressed in the Report of the Exceptions Subcommittee (Appendix 10), a general exception to the remedies opinion (the "generic exception") is sometimes included as follows:
The opinion regarding enforceability set forth above is subject to the qualification that certain provisions of the contract covered by this opinion letter may be unenforceable, but such unenforceability will not [, subject to the other exceptions, qualifications and limitations in this opinion letter,] render the contract invalid as a whole or substantially interfere with realization of the principal benefits provided by the contract.1
This report addresses issues raised by including the generic exception in an opinion, describes the current formulation of the generic exception, discusses certain alternative formulations that have been developed in recent years and summarizes the current state of customary practice regarding the use of the generic exception.
Including a general statement that "certain provisions of the contract covered by this opinion letter may be unenforceable" raises significant concerns on the part of the opinion recipient. On its face, the opinion giver is stating that some provisions of the contract may not be enforceable but not indicating which provisions may not be enforceable or why they may not be enforceable. Because of these concerns, this exception is qualified with the additional statement that: "such unenforceability will not [, subject to the other exceptions, qualifications and limitations in this opinion letter,] render the contract invalid as a whole or substantially interfere with realization of the principal benefits provided by the contract." Even with this statement, many opinion recipients believe that the generic exception is too vague and significantly weakens the ability of the opinion recipient to rely on the remedies opinion.
Historically, the generic exception arose out of complex real estate secured lending transactions where there were substantial questions about enforceability, particularly in light of complex laws relating to nonjudicial foreclosure and the interaction of comprehensive, often one-sided, over-reaching provisions. Gradually, use of the generic exception spread to other complex asset-based transactions. Moreover, as noted in Appendix 8, use of the generic exception by California lawyers has become enmeshed, to some degree, within the controversy surrounding the "each and every" versus "essential provisions" debate. Some California lawyers, seeking to clarify to the opinion recipient that they are not addressing "each and every provision" in a contract, use the generic exception as a means to put the opinion recipient on notice that the opinion is limited in scope. As a result, use of the generic exception continues to be controversial.
II. Customary Use of the Generic Exception
As noted above, the generic exception arose because lawyers opining on the enforceability of agreements in real estate secured lending transactions were uncomfortable relying on either the "laundry list" of separately stated exceptions to enforceability or "customary practice" (See Appendices 7 and 8). The hope was that including the generic exception would enable opinion givers in those transactions to avoid including a laundry list and would both clarify and simplify remedies opinions in these transactions. Over time, however, the general practice among real estate lawyers has been to use the generic exception to address general concerns about enforceability in these complex transactions while retaining the laundry list.
Opinion recipients criticize the generic exception because the phrases "realization of the principal benefits provided by the contract" and "substantially interfere" are vague and, in their view, render the remedies opinion too weak for them to rely on. It is very difficult, opinion recipients argue, for either party to know what the terms "realization of the principal benefits" or "substantially interfere" may mean at the time when the contract is being enforced. How, the argument goes, can an opinion recipient rely on the opinion or claim that an opinion was inaccurate if the opinion giver can argue that the remedy or provision that the opinion recipient could not enforce was not a "principal benefit" of the contract or that, the inability to enforce a certain remedy did not "substantially interfere" with the opinion recipient's realization of the principal benefits of the contract? Accordingly, many opinion recipients resist inclusion of the generic exception outside of the traditional areas of real estate secured lending and other complex asset-based transactions.
Conversely, use of the generic exception may not actually provide the opinion giver with any great degree of comfort. The opinion giver relying on the generic exception may be forced to argue that, notwithstanding the fact that a specific remedy unavailable to the opinion recipient actually turned out to involve a "principal benefit" to the opinion recipient or that the failure of a specific remedy actually "substantially interfered" with one of the principal benefits to the opinion recipient, nevertheless, the generic exception should protect the opinion giver because it is unreasonable to believe that such remedy or such benefit was a principal benefit to the opinion recipient at the time the opinion was delivered. Because the generic exception language promises that the "unenforceability of a remedy will not . . . substantially interfere with realization of the principal benefits provided by the contract," it is very likely that most finders of fact would place on the opinion giver the risk that a particular provision turned out to involve a "principal benefit," or "substantially interfered" with enforcement of the contract. Thus, the opinion giver may face a heavy burden if it makes such an argument.
III. Conclusion Regarding Use of the Generic Exception
The logic behind using the generic exception only in real estate secured loans and other complex asset-based transactions has never been clearly articulated. Although some opinion reports strictly limit use of the generic exception to its historical antecedents, that is, real estate secured loans and other complex asset-based transactions, the Subcommittee reiterates the view set forth in the 1992 Report that inclusion of the generic exception may be appropriate in other types of complex business transactions as well. However, it is the Subcommittee's view that the generic exception should not be included in remedies opinions as a means of limiting the opinion's coverage to "essential provisions".2
IV. Requests for General Assurances
Opinion recipients sometimes request that the opinion include "general assurance" language to the effect that "notwithstanding the exceptions stated above [which include the equitable principles limitation, the bankruptcy exception, the separately stated exceptions, and the generic exception if included], there exist in the documents or under applicable law legally adequate remedies for the realization of the principal benefits intended to be provided by the contract documents." Such an assurance overrides the warnings about enforceability contained in the bankruptcy and equitable principles exceptions, any separately stated exceptions and the generic exception, if included in the opinion. It is inconsistent with the inclusion in the opinion of these exceptions and contrary to customary practice to request that the opinion giver opine that, no matter what, the opinion recipient will receive the principal benefits of the contract. Accordingly, the Subcommittee endorses the view, expressed in Section 4.0.a of the American College of Real Estate Lawyers Attorneys' Opinion Committee and the American Bar Association Section of Real Property, Probate and Trust Law Committee on Legal Opinions in Real Estate Transactions, Real Estate Opinion Letter Guidelines 38 Real Prop. Prob. & Tr. J. 251 (2003) and in Section 3.4.2 of the 1998 TriBar Report, that requests for such "general assurances" are inappropriate.
1 This formulation of the generic exception is substantially identical to the "California Generic Exception" contained in the Bus. Law Section of the State Bar of Cal., Report on the Third-Party Legal Opinion Report of the ABA Section of Business Law, § III.G.1 (1992) [hereinafter 1992 Report]. It should be noted that alternative formulations include the phrases "practical realization" of the benefits "intended to be" provided under the contract. These alternative formulations are disfavored by the Subcommittee because the phrases "practical realization" and "intended to be" are even more vague than the suggested language. Some opinion givers include the bracketed language to clarify that the assurances provided in the generic exception do not affect the other exceptions. See discussion infra Part III. However, no such inference to that effect should be drawn from the absence of the bracketed language. Back
2 See Appendix 8 attached supra for a discussion of the "essential provisions" approach to remedies opinions. In recent years, members of the real estate bar have attempted to change the format of the generic exception for real estate secured lending transactions to more precisely define its meaning. One approach suggested by the 1987 Real Property Report is as follows: "In giving this opinion, we advise you that a California Court may not strictly enforce certain provisions contained in the Loan Documents or allow acceleration of the maturity of the obligations evidenced by the Note if it concludes that such enforcement or acceleration would be unreasonable under the then existing circumstances. We do believe, however, that subject to the limitations expressed herein, enforcement or acceleration would be available if an Event of Default occurs as a result of a material breach of a material covenant contained in the Loan Documents." Joint Comm. of the Real Prop. Law Section of the State Bar of Cal. and the Real Prop. Section of the Los Angeles County Bar Ass'n., Legal Opinions in California Real Estate Transactions, 42 BUS. LAW 1139 (1987) [hereinafter 1987 Real Property Report]. Although this language has the benefit of eliminating some of the subjectivity of the "realization of principal benefits" formulation, some have noted that determining which covenants and obligations are material is likely to be as difficult as determining what are the "principal benefits" a party is to receive under the Loan Documents.
A similar approach has been proposed by the New York real estate bar: "In addition, we advise you that certain provisions of the Loan Documents may be further limited or rendered unenforceable by applicable law, but in our opinion, such law does not render the Loan Documents invalid as a whole or preclude (i) the judicial enforcement of the obligation of the Borrower to repay the principal, together with interest thereon as provided in the Note, (ii) the acceleration of the obligation to repay such principal and interest upon a material default under the Loan Documents, (iii) the judicial foreclosure in accordance with applicable law of the lien created by the Mortgage upon failure to pay such principal and interest at maturity or upon acceleration pursuant to clause (ii) above and (iv) the judicial enforcement of the Assignment of Leases (and any similar provisions in the Mortgage) upon acceleration pursuant to clause (ii) for purposes of collecting rents accruing after the appointment of a receiver in an action to foreclose the Mortgage." Assoc. of the Bar of the City of N.Y. Committee on Real Prop. Law, 1998 Mortgage Loan Opinion Report, 54 BUS. LAW. 119, § 4 (1998). Both the New York approach and the California formulation clarify the minimum remedies comprehended by the concept of "practical realization"; that is, the acceleration and judicial enforcement of the obligation to pay principal and interest and/or foreclosure of the lien on real property securing the loan (and, in the case of New York, the judicial enforcement of the Assignment of Rents). However, the events that trigger these remedies are defined by the concept of material breach of a material covenant, a definition that can be viewed as both ambiguous and circumstantial in nature.
Another alternative has been suggested by the a Joint Committee of the American Bar Association and the American College of Real Estate Lawyers (the "ACREL Approach"): "Certain provisions of the Transaction Documents may not be enforceable; nevertheless such unenforceability will not render the Transaction Documents invalid as a whole or preclude (i) the judicial enforcement of the obligation of the [Borrower] to pay the principal, together with interest thereon (to the extent not deemed a penalty), as provided in the Note, (ii) the acceleration of the obligation of the [Borrower] to repay such principal, together with such interest, based upon a material default by the [Borrower] in the payment of such principal or interest, and (iii) the foreclosure in accordance with applicable law of the lien on and security interest in the Collateral created by the Security Documents upon maturity or upon acceleration pursuant to clause (ii) above." Probate and Trust Law of the Am. Bar Assoc. and the Am. Coll. of Real Estate Lawyers, Report on Adaptation of the Legal Opinion Accord of the Section of Business Law of the American Bar Association for Real Estate Secured Transactions of the Section of Real Property (1993); 29 REAL PROP. PROB. & TR. J. 569, 595 (1994). While addressing, as do the above alternatives, the question of remedies, the ACREL Approach also removes any doubt as to which covenants are material by specifying the payment of principal and interest. Whether the ACREL Approach, however unambiguous, will ultimately be acceptable to real estate industry opinion recipients remains uncertain.
The Subcommittee supports these efforts to describe more specifically the remedies that will be enforceable and believes that these approaches may well be preferable for real estate secured loan transactions. However, because translating these formulations from real estate secured loan transactions to personal property secured loans and corporate and other business transactions is difficult, the Subcommittee has elected not to modify substantially the recommended formulation of the generic exception in the 1992 Report. Back
Report on Third-Party Remedies Opinions