A
AMERICAN BAR ASSOCIATION
SECTION OF BUSINESS LAW
COMMITTEE ON LEGAL OPINIONS
PROGRAM
CROSSING THE THRESHOLD:
WHY ASK FOR AN OPINION AT ALL?
Panelists: Donald W. Glazer, Jonathan C. Lipson, John B. Power, William C. Viets, Ann Yvonne Walker
August 12, 2007
TABLE OF CONTENTS
Biographies of Panelists 1. List Serve Angst John B. Power 2. Power Point Presentation California Threshold Report Ann Yvonne Walker 3. California Threshold Report 4. Crossing the Threshold: The Costs and Benefits of Cost-Benefit Analysis of Closing Opinion Practice Jonathan C. Lipson 5. Price, Path & Pride: Third-Party Closing Opinion Practice Among U.S. Lawyers (A Preliminary Investigation) Jonathan C. Lipson
DONALD W. GLAZER is advisory counsel to the Boston law firm of Goodwin Procter LLP and adviser to the firm’s Legal Opinions Committee. He formerly was a partner at the Boston law firm of Ropes & Gray and a Lecturer on Law at Harvard Law School. Mr. Glazer is the author of numerous articles on legal opinions and is co-author of two books, Glazer and FitzGibbon on Legal Opinions and Massachusetts Corporation Law and Practice. He is co-chair of the TriBar Opinion Committee and past chair of the Committee on Legal Opinions of the American Bar Association’s Business Law Section, currently serving as a member of the Council of that Section. Mr. Glazer is a past chair of the Business Law Section of the Boston Bar Association and past co-chair of that Section’s Legal Opinions Committee. Mr. Glazer has chaired and served as a participant in numerous programs on closing opinions and acted as an expert witness and consultant in many cases involving claims against law firms that have given legal opinions. Mr. Glazer served as co-reporter for the ABA Business Law Section’s “Legal Opinion Principles” and the TriBar Opinion Committee’s 1998 report, “Third-Party Closing Opinions” and 2006 Report, “Third-Party Closing Opinions: Limited Liability Companies.” He served as editor-in-chief of the TriBar Opinion Committee’s 2004 Special Report on the Remedies Opinion. He also served on the Members Consultative Group for the American Law Institute’s Restatement (Third) of the Law Governing Lawyers and was involved in the drafting of the portion of the Restatement dealing with closing opinions. Mr. Glazer was graduated summa cum laude in 1966 from Dartmouth College, where he was a Senior Fellow and Rufus Choate Scholar, and magna cum laude in 1969 from Harvard Law School, where he was an editor of the Harvard Law Review. He received an L.L.M. in 1970 from the University of Pennsylvania Law School, where he was a fellow at the Center for the Study of Financial Institutions.
Bio: Jonathan C. Lipson Jonathan Lipson is a Professor of Law at Temple University – James E. Beasley School of Law. He teaches corporate and commercial law courses, including a deal-based simulation. He was a Visiting Professor of Law at the University of Pennsylvania Law School in spring 2007. Previously, he was an Assistant (1999 – 2002) and Associate (2002-2004) Professor of Law at the University of Baltimore.
Before beginning a teaching career, Professor Lipson practiced corporate, commercial and bankruptcy law in Boston, with the firm of Hill & Barlow (1995 – 1999), and in New York with Kirkland & Ellis (1992 – 1995) and Milbank Tweed (1990-1992). He is a graduate of the University of Wisconsin, B.A., with honors (1986) & J.D. (1990), where he was a note editor of the Wisconsin Law Review.
He holds several leadership positions in the Business Law Section of the
American Bar Association, where he is immediate-past Co-Chair of the Committee on Business Law Education, Co-Chair of the Law School Initiative, and Vice-Chair of the Section’s Publications Board. He was the Chair of the Section on Commercial and Related Consumer Law of the Association of American Law Schools (2002-2003). He is a member of the American Law Institute.
He is the author of numerous articles on bankruptcy, commercial and
corporate law, including the first qualitative empirical study of legal opinions. His work has appeared in, among others, the UCLA Law Review, the University of Southern California Law Review, the Minnesota Law Review, the Wisconsin Law Review and the Berkeley Business Law Journal.
John Power is a retired partner of O’Melveny & Myers LLP, having
completed a 36-year business practice career with that firm. He is the incoming
Chair of the Committee on Legal Opinions of the ABA Section of Business Law, and
a member of the TriBar Opinion Committee. John also is a member of the Steering
Committee of the recently formed national Opinion Working Group.
From 2000 to 2004 John was the founding Chair of the Opinions Committee
of the California State Bar Business Law Section, and in that capacity coordinated
the preparation of the Section’s 2004 Report on Third-Party Remedies Opinions; he
remains a member of the Opinions Committee and its steering committee. He also
was at different times Chair of the California Section’s UCC, Partnerships and
Executive Committees, currently is an advisor to its Executive Committee, and
received the Section’s lifetime achievement award in 2004.
John is a fellow of the American College of Commercial Finance Lawyers, a
member of the Board of Governors (and past President) of the Financial Lawyers
Conference, and a member of the UCC and Commercial Financial Services
Committees of the ABA Section of Business Law. He has written and spoken on a
variety of business law topics.
John graduated magna cum Laude from Occidental College in 1958, and
from New York University School of Law in 1961, where he was an associate editor
of the Law Review.
William C. Viets William C. Viets is a Managing Director and Associate General Counsel of JPMorgan
Chase & Co where he heads the Americas Credit Products Group within the Investment
Bank Legal Group. This Americas Credit Products Group serves as the primary in-house
legal counsel to the various JPMorgan business areas including Investment Banking
Coverage, Syndicated & Leveraged Finance, Loan Trading, Special Credits (restructuring
& workout), Environmental Affairs, Corporate Real Estate and Corporate Insurance.
Prior to joining J.P. Morgan predecessor Chemical Bank in 1990, Mr. Viets was with
Fried Frank Harris Shriver & Jacobson (1985-1990) and prior to that with Trubin
Sillcocks Edelman & Knapp which he joined upon graduation from St. John’s University
School of Law in 1977. Mr. Viets is a frequent lecturer and author on financing and real
estate topics. He is also a member of the TriBar Opinion Committee and the Chair of the
New York City Affairs Committee of the Association of the Bar of the City of New
York.
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#1
LIST SERVE ANGST
BY
JOHN B. POWER
2
LIST SERVE ANGST
On March 12, 2007, Carolan Berkley, Chair of the Legal Opinions Committee of the
Section of Business Law of the ABA, sent out on the list serve of the Committee a proposed
statement on customary practice prepared by Steve Weise and Bill Nimkin, proposed to be
cosponsored by Bar Association entities active in the legal opinion field. The statement is
designed to provide guidance to those involved in litigation alleging liability on a third party
legal opinion (lawyers, judges, and juries), helping them to understand that legal opinions are
understood in the context of customary legal opinion practice (primarily customary diligence and
customary usage). Carolan indicated in her email accompanying the statement that it would be
discussed at the Committee meeting on March 16. Early in April, a long string of emails sprang
up on the list serve, stimulated by the statement but only remotely related to it. The emails
addressed the threshold question whether too many third-party legal opinions are being requested.
Over twenty lawyers participated in the list serve discussion, from at least sixteen states.1
It appears that most have experience as opinion preparers, and some have represented opinion
recipients as well. Most participants expressed discomfort with the closing opinion process, and
a wish for fewer third-party legal opinions in business transactions.
Following is a summary of some of the positions taken and questions raised2:
1 Arizona, California, Colorado, Florida, Hawaii, Indiana, Illinois, Massachusetts, Minnesota, New York, North Carolina, Ohio, Pennsylvania, Utah, Virginia, Washington. 2 This summary collects excerpts from these emails under subject headings. This organization risks misunderstanding because it does not provide the full context of the excerpts, for example the chronology of the
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1. Different understandings of the historical perspective. Some participants tried to
put third-party legal opinions in historical perspective.
Some argued that third-party legal opinions have only been used for a
relatively short period of time, and represent an unhealthy shifting of risk.
A.
“There is another solution to the third-party opinion liability problem which we all should consider. Third-party opinion practice was relatively unused 30 years ago. At that point in time, if there was a legal issue in a transaction, clients would go to their own counsel, with whom they had a continuing relationship and the protection of the attorney-client relationship. Their own counsel, with a healthy dose of skepticism, would opine, express various degrees of non opinion or refuse to opine, and the client would make transactional decisions accordingly. Third-party opinion practice has resulted in an unhealthy transfer of risk without an appropriate assessment of the related cost for the risk transfer by the other counsel. Because many questions we face are mixed questions of law and fact, it has also resulted in creeping factual opinions as we discussed in Washington. The bottom line is that instead of the traditional format of an attorney giving her opinion to her client, we now have the client selling its lawyer's opinion as part of the transactional consideration. This is becoming more like insurance than simply giving legal advice to one's client. But, unlike insurance, the liability is not pooled nor reserved for, so, not only is it unhealthy, it is financially untenable Maybe the customary practice should become: (i) rely on factual evidence and not attorneys' opinions for factual determinations and (ii) rely on the opinion of your own counsel, backed up by factual representations from the other client, for legal advice. It may be revolutionary, but not without historical precedent and not unwarranted given what is happening in the profession.”
B.
See 4 D below.
emails and the complete exchange of ideas. The full chain can be found in the List Serve Archive in the Legal Opinion Resource Center on the Legal Opinions Committee web site.
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Others had different views, more supportive of current practices in
requesting third-party opinions:
C.
“This has been an interesting exchange of views concerning legal opinions, which all started off by an email responding to the circulation of the Statement on Customary Practice for the Committee meeting in March. It seems useful to me to add a contribution to clear up some points. The original email said that third-party opinion practice was relatively unused 30 years ago. This may be, but our firm has been giving legal opinions since the 19th century. The original Tri-Bar report published in 1979 was drafted because there was widespread diversity in opinion practice at that time, but many law firms had been giving legal opinions for many years. Third party opinions developed out of securities issuances because the purchasers of the securities insisted on receiving them. They insisted on receiving them because of experience that developed out of cases where they did not receive them. The reason was not to enable the principals to sue the lawyers but to be sure that the lawyers were doing all the work that had to be done to issue valid securities. In fact, in those days the “privity” requirement usually made it impossible to sue the opining lawyers. The practice was so widespread before the Securities Act was passed in 1933 that Schedule A to the Securities Act required copies of the opinions to be furnished. The practice of giving opinions in connection with bank loans was also established by this time. Legal opinions in connection with securities issues, whether public or private, continue to be given today on all transactions. This is surely going to continue. Many of the contributors to the email chain have personal experience of third-party opinions being sought in inappropriate circumstances. Lawyers who find themselves in such circumstances are certainly free to negotiate and seek to avoid giving third-party opinions that are not cost effective or serve the legitimate interests of the recipient. In many cases the outcome will not be to dispense with the third-party opinion entirely. Where a party is concerned about a particular legal issue, it often asks its own counsel for an opinion, whether or not it also seeks a third-party opinion. Third-party opinions, however, will often be requested where the counsel giving the opinion is in a better position than other counsel because of its familiarity with its client and the client's business. For example, due authorization opinions will almost always be sought from the issuer’s counsel, and usually also a remedies opinion. Factual confirmations such as the absence of conflicts with other agreements and instruments will often be sought where the opining lawyer was involved in creating those agreements and instruments. Negative assurance letters in public offerings will also be sought from the issuer’s counsel in virtually all cases. The Dean Foods case involved a factual confirmation as to the absence of litigation, and it has generated resistance to these opinions, especially in Boston, but these are still routinely given in many transactions. One of the main reasons for asking the issuer’s (or borrower’s) counsel to give an opinion in connection with securities issues and bank loans is that the opinion is viewed as reducing the legal risk that the security or loan would be held invalid or unenforceable. This enables the investor (or lender) to focus purely on the credit risk (or fundamentals in the case of stock) without having to be concerned about the validity of the security. The purpose is not to have access to the lawyer’s malpractice policy but to reduce or eliminate the legal risks. This means that these opinions are going to continue to be requested, and received. The email by Cindy Holman illustrates a situation in which the lenders wanted the opinion of a lawyer solely because of his familiarity with the company, and they were satisfied even though they did not receive an enforceability opinion, indicating that they were willing to accept some legal risk but not on the issue of due authorization.
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In my view, the problem in Dean Foods was with the procedures followed by the lawyers in giving the opinion rather than with the giving of the opinion. I am aware of many cases in which a no litigation confirmation was given which was actually incorrect, usually because the lawyer giving the opinion did not actually check the facts. These cases do not make it inappropriate for no litigation confirmations to be given, but they illustrate the risks in giving them. [Editor’s note: See 4E below] I am aware of the fact that standard practices in real estate opinions differ in many respects from those followed in the corporate area. Even in the corporate area there are many examples of overreaching opinion requests. In my experience, there is usually room for negotiation over these requests, and the negotiation often does away with the inappropriate items. There are examples today of lenders who are prepared to make small loans without legal opinions, and many public M&A transactions do not require legal opinions, but for many transactions, especially the larger transactions, they are not going to go away.”
D.
“I think you curse the darkness. I have been practicing for 30 years, and for the entire 30 years third party opinion letters were the norm, not the exception, in real estate loan transactions as well as corporate transactions I handled. In fact, every evidence I saw of opinion letters issued before I began to practice indicated that this custom had been followed for some time. James Fuld's seminal article in 1973 (Legal Opinions in Business Transactions--An Attempt to Bring Some Order Out of Some Chaos, James J. Fuld, 28 Bus. Law. 915 (1973)) also demonstrated that the practive was commonplace almost 35 years ago, at least in the corporate context. Admittedly, the courts initially had a difficult time understanding why a lawyer for one party would issue an opinion to the other side, but eventually they got it. So, I think we would be tilting at windmills to change this fundamental and long-standing practice.” And the debate continued. E.
“The darkness should be cursed. I concur that changing this will take a sea change. . . . . Maybe it can be done in tiny steps where the first step is that borrower's counsel opines on the borrower's legal status and authority but lender's counsel opines on enforceability of loan documents? There already are writings by various authors advocating this tiny step.”
2. Feelings of mistreatment by opinion givers. Some authors of emails believe that
they have been mistreated as opinion preparers and opinion givers:
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A.
“This has been a wonderful discussion, a real "breath of fresh air." Reminds me of the great line in the movie "Network": "I'm mad as hell and I'm not going to take it anymore!" I just hope we are not all somewhat delusional on the subject. Representing lenders I have required them, representing borrowers I have given them and simply as a masochist, I have written and spoken about closing opinions in CLEs. Being brow-beaten by a third year associate from a large Wall Street firm because I won't opine that "the Borrower is in compliance with all federal state and local laws..." and that "her client HAS to have that opinion" is not my idea of fun. Being told that the senior associate (in the same firm but in a different transaction) to whom my local counsel opinion will be given for review is "a real animal on borrowers' legal opinions" is offensive and unprofessional. I think this discussion thread has "energized" many of us to be more active in streamlining this process. Thank you all for your input.” B. See 4D Below C. “Seeking opinions on matters which the lawyer seeking the opinion would not (as opposed to could not if it is a matter of competence) give if similarly situated violates the golden rule set forth in paragraph 3.1 of the ABA Legal Opinion Guidelines, which is a source of customary practice.” 3. Remedies opinion by recipient counsel. Some, including some who are
recipient counsel, argued against a requirement to render a third-party remedies
opinion where the documents have been drafted by the recipient’s counsel,
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particularly where the opinion giver does not practice in the jurisdiction whose law
is chosen by the documents.
A.
“Many of our money center bank clients require us, as lender's counsel, to provide the enforceability opinion, whether or not it is provided by borrower's counsel. Note that having lender's counsel provide that opinion avoids the common conflicts of laws (or hypothetical opinion) issues involved where borrower's counsel does not practice in the jurisdiction whose laws apply to the loan documents. Although we have done so on occasion, is it really fair to require a borrower to pay for another law firm just to render the necessary enforceability opinion? And let us not forget that even if lender's counsel does not opine, as the drafter of the loan documents (when governed by the law where lender's counsel is located), it probably has malpractice liability if it drafts an unenforceable agreement.”
B.
“As lender's counsel - getting an enforceability opinion for a stack of loan documents from the lawyer who didn't write them is a foolish waste of time and clients' money. (IMHO opinion, of course.) Sophisticated or just cynical borrowers see this as a tax that our profession puts in place to run up fees for each other. Has anyone ever actually sued on a borrower's enforceability opinion?”
C.
“Long before I became the Chair of the Opinion Committee of the last law firm I worked for, I would pontificate to all who would listen as to how idiotic the practice of requiring and delivering legal opinions in closing transactions had become. Having represented borrowers and lenders in approximately equal numbers over the past several decades, I have felt equally ridiculous asking opposing counsel to opine that the credit and security agreement I had drafted was enforceable, or that the UCCs my paralegal had prepared would result in a perfected security interest in favor of my client, as I did giving the opinion that documents I had not drafted were enforceable against my client or that opposing counsel’s paralegal had done her job correctly. And don’t get me started on the true sale and non-consolidation opinions required in securitization transactions (typically “reasoned” opinions reaching one vague conclusion after 20+ pages of legal citations that would do any law student proud).”
4. More limited opinions. Some believe that third-party opinions should be even
more limited.
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A.
“I also agree with the trend towards reducing the opinions to due authorization and execution, and no knowledge of litigation. When representing the recipient of an opinion, that's the approach that I have been taking more and more.” .
B.
“It's a good thing to have borrowers' opinions on due authorization, as it holds feet to the fire to get the necessary corporate work done. But even then, isn't it really just gilding the lily? When was the last time that a corporate borrower put up a real estate loan, and got out of paying by asserting that the loan was ultra vires? Isn't due authorization really covered by the title company's policy anyway?”
C. See 1E above.
Others argued that there should be no third-party legal opinions at all.
D.
“I am not a fan of these list serve dialouges; however, I can't resist jumping in on this one. I've been involved in the practice of transactional law for 47 years (mostly commercial real estate and M&A deals) and I have witnessed and suffered with what I consider to be the unfortunate and ridiculous proliferaton of opinion requirements over the years. It has become a monster which has taken on a life of its own in every transaction.
It also has become a game of wits, in which the opinion recipient (usually an institutional lender) and its attorney try to see how far out on a limb they can get the opinion giver (often a poor shnook borrower who needs the loan) and its attorney to go, and the opining attorney fighting back by devising at least six paragraphs of exceptions, assumptions, qualifications and limitations for every paragraph of opinion. As some of you observed, it also runs up the costs of the transaction and pisses off the clients when they find out that the lawyers are arguing over opinion language and delaying the closing.
Historically, the practice of one party's attorney giving an opinion to the other party to the transaction originated in securities transactions. It was intended to save time and money based on the idea that it
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was easier and more cost effective for the issuer's attorney to give the enforceability opinion to the underwriter than for the underwriter's attorney to go to the issuer's office and examine its charter, bylaws and minute book in order to give such an opinion. That seemed logical and made good sense, even 50 years ago when lawyers worked for $25 an hour. But now it's gotten way out of hand. Like with so many things today, the law of unintended consequences has kicked in big time. And if you think there's little or no liability issue for the opining attorney, just read the Dean Foods case. That will give you a wake up call. I know, it involved a "no claims" opinion, not enforceability, but it's still scary.
It's time to put an end to the goofy third party opinion practice, at least in real estate transactions. That's what we have title insurance for. Lawyers should not be providing supplemental insurance through the medium of their opinions”
E.
“In my experience, an institutional lender who did not require closing opinions and made that fact clear would have a definite advantage over its competition in marketing savvy borrowers. Costs would definitely be lower, closings would like be quicker. And it would only take a couple of major lending institutions to take this position to turn the tide, especially if those lenders are ones who often lead syndicates. Beyond that, however, there is no incentive for lenders to drop the requirement.
So how do we begin to turn the tide? By taking an organized stance? By specifically lobbying bank counsel and the firms that service banks? Just saying “no” certainly hasn’t worked for me!”
5. Third-party legal opinions as insurance. Some complained that opinion
recipients are treating legal opinions as a kind of insurance.
A.
See 1A above.
B.
“But anyone who thinks that legal opinions are not considered a form of “insurance” and the way into another deep pocket by those who require them should try giving the same opinion as in-house counsel that s/he gave only a few months before as outside counsel. “
One response clarified that opinions are not insurance, and recovery is only
possible where fault or negligence occurs:
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C.
“Without addressing the question of the goodness or badness of opinion letters (for the moment), I would note that opinions are not “insurance”, even if the opinion giver has insurance. The opinion recipient cannot recover from the opinion giver (or its insurer) unless the opinion recipient can prove that the incorrect opinion was negligently given. True “insurance” would be contractual (strict) liability of the “insurer”, without regard to negligence (or other fault). Customary practice is of course an important element of the question of negligence.”
Here is a related concern: D. “ . . . I would like to suggest a related line of inquiry. The question I would ask is not about disputes over opinions, but the following "Is it or is it not true that when counsel to an institutional lender reviews the documentation for a defaulted loan exceeding $10MM the documentation review typically includes an analysis of any claims that could be made with respect to the legal opinions that were received?" I have over twenty years of experience as an in-house investment lawyer for insitutional lenders and that is what I always did. I found very few even colorable claims, but I certainly tried to get all the leverage I could out of such situations. In my opinion this aspect of the use of legal opinions represents a real risk to the law firm that issued the opinion.”
6. Running up legal fees. Some believe that requests for opinions are or appear to
be designed to run up legal fees.
A.
“I am the current head of our local bar association's 'Professionalism Committee' and have been a corporate and securities counsel for 30+ years. The consensus of the transactional lawyers on the professionalism committee in our debate last month on 'lack of professionalism' in the transactions practice was that debating between law firms the qualifications and assumptions in third party legal opinions was an 'observed and common but improper' means to run up a legal bill, but not conduct which we could address in our revised 'principles of professionalism'.”
B.
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See 3 B above.
It is difficult to draw too many general conclusions from this exchange. This is not a
representative group, since it is limited to those on the list serve who chose to participate. Only a
few responded who appear to represent the views of institutional money center recipients. There
is little differentiation in types of transactions. However it does seem clear that many lawyers
are frustrated by opinion requests and what they interpret as abuse in the opinion process.
John Power
June 2007
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#2
POWER POINT PRESENTATION
ON
REPORT OF THREHOLD COMMITTEE (APPENDIX 4), FROM
CALIFORNIA REPORT ON THIRD-PARTY
REMEDIES OPINIONS (2004)
BY
ANN YVONNE WALKER
Crossing the Threshold:Why Ask for an Opinion at All?
Ann Yvonne WalkerABA Annual Meeting
San Francisco, CAAugust 12, 2007
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Summary of the Report of the Threshold Subcommittee
• Published in September 2004• Appendix 4 to the Report on Third-Party Remedies
Opinions of the State Bar of California Business Law Section
– Included in the materials• Threshold Question: When should a third-party
remedies opinion be requested and given?– Little attention has been given to the purposes, risks
and costs• Explores issues and invokes a cost-benefit analysis
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Questions Implicit in the Threshold Question
• What benefits does the opinion recipient expect?• Are these benefits capable of being realized?• Do these benefits justify the costs?• Are there any negative consequences to either
party resulting from the remedies opinion?• Does the recipient have acceptable less costly
alternatives?
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Goals of the Remedies Opinion
• Primary Purpose: Assist opinion recipient in evaluating legal risks of the transaction
– Form of due diligence– But if recipient is not relying on the opinion, it
increases costs without providing a real benefit
• May be better for recipient to rely on advice of its own counsel
– Especially if counsel to the recipient drafted the transaction documents
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When is Advice of Recipient’s Counsel Not Enough?
• Transaction with multiple parties• Parties in different jurisdictions• Opinion recipient has no separate counsel• Complex, novel or unusual structures• Specialized knowledge required• Rating agency requirements• Circumstances particular to the opinion giver’s client
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Additional Benefits of a Remedies Opinion
• Discharge opinion recipient’s responsibilities to others
• Satisfy statutory or regulatory requirements• Estoppel?
– Client not usually bound by statements of its counsel– Client can always get other counsel to challenge– May have some informal estoppel-like effects
• Fleshes out any provisions of questionable enforceability
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Costs of a Remedies Opinion
• Economic – legal fees• Other
– TimeNegotiating the opinionDiligence necessary to give the opinion
– Disclosure of client’s negotiating strategy or confidential information
– Potential conflict of interest between duty to client and responsibility to opinion recipient
– May highlight unenforceable provisions that opinion giver’s client would have complied with otherwise
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Wrong Reasons for Requesting a Remedies Opinion
• It is “market”• It’s on our standard checklist• We need an insurance policy• Opinion recipient’s counsel wants another notch on
his/her gun• “Your firm gave it in the last deal”
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Alternatives to a Traditional Remedies Opinion
• Conduct due diligence in some other more cost-effective way
• Get basic opinions (due organization, authorization, execution and delivery) but no remedies opinion
• Get a remedies opinion from the recipient’s counsel• Limit the scope of the remedies opinion
– Cover only the principal transaction documents– Cover only certain provisions of a complex contract– Permit “as if” opinion under laws within the opinion
giver’s competence– Limit to enforceability of choice-of-law provisions
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Conclusions of the Threshold Report
• Benefits of a remedies opinion often do not justify the costs
– Economic– Other
• Trend is toward not delivering a remedies opinion in many transactions
– Public/public M&A deals– Smaller transactions
• Lawyers need to assist their clients in applying cost-benefit analysis to the transaction
#3
REPORT OF THRESHOLD COMMITTEE
(Appendix 4)
CALIFORNIA REPORT ON THIRD PARTY REMEDIES OPINIONS (2004)
2
APPENDIX 4
REPORT OF THE THRESHOLD SUBCOMMITTEE
Table of Contents
APPENDIX 4...................................................................................................................................2
I. Introduction..........................................................................................................................1
A. Third-Party Remedies Opinions ..............................................................................1
B. Primary Purpose.......................................................................................................2
C. Consideration of Alternatives ..................................................................................3
II. The Cost/Benefit Analysis ...................................................................................................4
A. Other Benefits ..........................................................................................................4
B. Costs and Burdens....................................................................................................6
C. Reliance on Remedies Opinions ..............................................................................7
III. Special Factors .....................................................................................................................8
A. Multi-Party Transactions .........................................................................................9
B. Opinions to Unrepresented Parties...........................................................................9
C. Specialized Legal Issues ........................................................................................10
1. Regulated Obligors ....................................................................................10
2. Counsel from Different Jurisdiction ..........................................................10
D. Regularly Used Documents ...................................................................................11
IV. Limited Scope Opinions ....................................................................................................12
A. Ancillary vs. Principal Documents ........................................................................12
B. Complex Documents..............................................................................................12
V. Conclusions........................................................................................................................13
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I. INTRODUCTION
A. Third-Party Remedies Opinions
Much has been written in the recent past about third-party closing opinions in business transactions.1 Opinions reports generally deal with the meaning and scope of opinions, and the customary practice followed prior to issuing certain parts of the opinion. While there is some discussion of the appropriateness of requests for various types of opinions, comparatively little attention has been focused on the purposes, risks and costs of remedies opinions. Often, lawyers and their clients request a remedies opinion from counsel for another party in the transaction without engaging in the recommended cost/benefit analysis.2 Lawyers requesting the opinion frequently rely on the overused flippant comment that “it is market” to receive a remedies opinion and believe that this is the only analysis required.3 The Business Law Section is of the view that lawyers should not recommend that a client request a third-party remedies opinion that will result in significant costs unless a clear benefit that justifies the costs is likely to be enjoyed by their client.
Practitioners in California report fewer requests for remedies opinions than historically have been made, especially in public merger and acquisition transactions and in smaller transactions. Even in small financing transactions, such opinions are regularly dispensed with.4 Presumably, clients and their counsel are beginning to recognize that the cost of a remedies opinion is often disproportionate to the value obtained by the opinion recipient.
The principal question addressed in this appendix is: What are the considerations in determining whether to request or give a remedies opinion? Implicit in reaching any conclusions on this question is a series of additional questions:
(1) What expected benefits are provided to the opinion recipient and under what circumstances are these benefits likely to be actually achieved?
1 For a list of relevant reports, see the 2001 Statement and the additional reports listed in Appendix 1. 2 See ABA Guidelines § 2.2 (2002) (“An opinion of other counsel should be sought by the opinion recipient only when the opinion’s benefits justify its costs.”). This cost/benefit analysis applies to all opinions contained in a third-party opinion letter (including whether to request such a letter at all), not just the remedies opinion. Applying the analysis to third-party opinions other than the remedies opinion is outside the scope of the Umbrella Report. 3 See ABA Guidelines § 1.6: (“An assertion that a specific opinion is ‘market’—i.e., that lawyers are rendering it in other transactions—does not make it appropriate to request or render such an opinion if it is inconsistent with these Guidelines.”) 4 The 2001 Survey suggests that third-party remedies opinions are not being delivered in most transactions (other than lending transactions) involving less than $10 million. Opinions almost always are requested by lenders in loan transactions exceeding $100 million. Delivery of third-party remedies opinions is reported in most M&A transactions involving $10 million or more (except in merger transactions between public companies, where the practice seems to differ). Remedies opinions apparently are given in many private securities transactions. The survey did not seek explanations for the results reported. Possibly, the practice of giving third-party remedies opinions in M&A and securities issuance transactions results from the fact that closing opinions on other subjects are customarily required, and giving a remedies opinion may be perceived as involving little additional effort by the opinion giver. Finally, some members of the Subcommittee reported that a few large institutional lenders active in the California market have de-emphasized receipt of a remedies opinion in many of their loan transactions involving lender-prepared documents, and in real estate construction loan transactions. These trends may signal a general change in approach to third-party remedies opinions.
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(2) Do any negative consequences flow to the opinion giver’s client or to the opinion recipient from delivery or receipt of a remedies opinion?
(3) Can the benefits be obtained in ways that are less “costly” than the issuance of a third-party remedies opinion?
B. Primary Purpose
The principal purpose of a closing opinion is to assist the opinion recipient’s due diligence in determining whether to enter into a transaction on the business terms discussed by the parties.5
In light of this purpose, lawyers requesting a remedies opinion need to be mindful that a remedies opinion should only be sought when its benefit justifies its cost.6 Often, especially in transactions that are routinely entered into by it, the opinion recipient (and its counsel) are most knowledgeable about enforceability of the relevant contracts. It may well be more economic and efficient for that party to rely on the advice of its own counsel rather than to request the opinion of the counterparty’s counsel, even if the counterparty has agreed to pay the fees and costs of the opinion recipient’s counsel.7 As summarized by the Restatement: “It would often be wasteful or impractical for the other party to the transaction . . . to assess a legal issue that could be determined more readily by the lawyer for the client.”8
Since the primary purpose of a remedies opinion is to assist in due diligence for the transaction, the request for a remedies opinion should have as its principal goal the identification of legal enforceability issues regarding specific contract provisions, or the existence of a potential legal defense to the contract as a whole. Unenforceability issues that pertain to the text of the document, in contrast to problems that arise as a result of circumstances particular to one or more parties to the contract, are usually as easily ascertained by the opinion recipient’s counsel as the opinion giver. In the vast majority of transactions, a third-party remedies opinion does not result in the identification of enforceability issues unknown to the opinion recipient or its counsel. On the other hand, a request for a remedies opinion frequently produces lengthy discussions between counsel regarding the extent and nature of the exceptions that will be included in relation to the remedies opinion.
5 ABA Guidelines, § 1.1. 6 See Id. § 2.2; 2005 Report, §II and § IV.B.1. 7 In assessing whether the benefit of a remedies opinion “justifies its cost,” the focus should not be simply on measuring cost from the opinion giver’s client’s perspective--any cost incurred by a party in having its counsel issue a third-party opinion is greater than that person would have otherwise borne. Rather, the inquiry should be whether the aggregate costs to all parties are greater either because of the duplication of effort (as counsel for both parties may be giving opinions or advising on the same subject), or because of the economic cost of the negotiation over the text of the opinion itself. In many business transactions, the clients collectively want the aggregate legal fees to be as low as possible consistent with obtaining effective legal representation. Because the cost of both counsel is frequently borne by one party, it is particularly important to that party that total costs of the transaction be kept as low as possible. 8 RESTATEMENT § 95, cmt. b.
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However, as discussed elsewhere9, in many situations the principal purpose of the remedies opinion is to offer legal comfort to a party not separately represented by counsel, for example, a rating agency or another person who is not a party to the contract. Further, in some situations the opinion involves issues that the opinion giver is better suited to address than the opinion recipient’s counsel. In those and other cases, the benefit obtained by the opinion recipient is substantial and is likely to justify the cost of the remedies opinion.
Ultimately, the decision whether a third-party remedies opinion will be given in a transaction should be made by the clients (and not just the lawyers). However, since costs and benefits of remedies opinions are much more familiar to lawyers than to most clients, opinion givers and counsel to opinion recipients should assist their clients in making this cost/benefit analysis.
C. Consideration of Alternatives
This appendix focuses mainly on whether to include a third-party remedies opinion as part of the due diligence in a transaction. That is just one point along a decision tree with many branches. The alternatives are as many and varied as the diversity of transactions and creativity of lawyers can make them. Here are some of the possibilities.
(1) Dispense with a third-party legal opinion altogether. Alternative sources of due diligence may be sufficient and more cost-effective.10
(2) Obtain a third-party opinion as to matters such as due organization, authorization, execution and delivery, but not obtain a remedies opinion.11
(3) Obtain a remedies opinion from the lawyer for the opinion recipient, rather than another party’s lawyer.12
(4) Even if a third-party remedies opinion is given, limit its scope:
(a) It could cover some but not all of the transaction documents.13
(b) It could cover some but not all provisions of a complex, multifaceted contract.14
(c) In a multi-state transaction in which the contractually chosen law is not within the competence of the opinion giver, it could opine as if enforceability were
9 See § III.B below. 10 A third-party opinion “should be sought by the opinion recipient only when the opinion’s benefits justify its costs.” ABA Guidelines § 2.2. 11 This possibility is expressly noted in the ABA Guidelines at § 1.2, n.7. 12 See RESTATEMENT § 95; infra text accompanying note 27. 13 See discussion infra Part IV.A. 14 See discussion infra Part IV.B.
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determined under laws within the opinion giver’s competence, or the opinion could be limited to enforceability in the opinion giver’s jurisdiction of the choice of governing law provision.15
A decision among these choices should be made after engaging in the cost/benefit analysis described in this appendix.
II. THE COST/BENEFIT ANALYSIS
A. Other Benefits
As noted above, the principal benefit of a remedies opinion is to assist the opinion recipient in determining whether to enter into the transaction on specified terms. In doing the cost/benefit analysis, it is also necessary to identify other possible benefits to the opinion recipient.
(1) Discharge of Opinion Recipient’s Responsibilities to Others. For example, parties like the agent in a syndicated loan transaction or the lead investor in a private placement of securities, where other parties are not represented by counsel, may feel there is an expectation that those parties will be provided with a remedies opinion from the borrower’s or issuer’s counsel.16
(2) Satisfying Statutory or Regulatory Requirements. For example:
(a) Banks regulated by the Comptroller of the Currency or Federal Reserve Board, or subject to the jurisdiction of the Federal Deposit Insurance Corporation, are obligated to employ safe and sound banking practices, and this is sometimes cited as the basis for requesting a third-party remedies opinion.17
(b) Regulations issued by the Department of Defense pursuant to authority granted in Title 41 of the United States Code contain a relevant condition to the effectiveness of a transfer by a government contractor of a procurement contract to a third party. This condition requires delivery to the Government of an opinion of legal counsel to each of the
15 See discussion infra Part III.C.2. 16 Counsel for the agent or lead investor could of course give the same comfort without undertaking to represent the participant lenders or purchasers. However, counsel for agents and lead investors customarily do not give these opinions, possibly because of concerns about liability and in general the increased responsibility in the transaction. This appendix does not take the position that counsel for the agent or lead investor should give the opinion. 17 See, e.g., 12 U.S.C. § 1818(b)(1) (2004). The banking regulations do not, however, mandate that an opinion should be obtained, and bank examiners are generally more concerned with whether any condition to funding a loan established by a lender’s approving body (e.g., a credit committee) that requires delivery of a legal opinion was in fact satisfied by the opinion obtained. Many banks request confirmation from their own counsel (whether in written form or orally) that the transaction documents comply with the conditions for funding the loan, and this confirmation, and the process followed by bank lawyers to provide the confirmation, seems to satisfy any “best practices” concerns that banks or other regulated institutions charged with operating in a “safe” manner may have.
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transferor and transferee which concludes that the transfer “was properly effected under applicable law.”18
(c) Federal bank regulatory agencies require that banks obtain an opinion that any bilateral derivatives netting agreement is “enforceable” if the agreement is to be considered in calculating the bank’s capital.19
(d) The U.S. Maritime Administration (part of the Department of Transportation) requires an opinion of counsel for a shipowner seeking MARAD guarantees in Title XI financings that includes the essence of a remedies opinion.20
(e) Section 314(b) of the Trust Indenture Act of 193921 requires delivery to the Indenture Trustee of an opinion as to the “effectiveness of the lien”22 created by the indenture or other security documents which secure notes or debentures issued pursuant to an indenture registered under the Indenture Act, and delivery annually of an opinion that all action necessary to be taken to maintain such lien has been taken.
In situations like these, counsel to the party that seeks the benefit of the governmental program or is subject to the regulation is usually the logical one to deliver the opinion, as the opinion is primarily for its client’s benefit. The parties may shift the burden of giving the opinion, since the requirement to deliver a remedies opinion does not necessarily specify a third-party opinion, and the opinion could be given by counsel to any party in the transaction.
(3) “Benefit” of Estoppel
It has been suggested that one reason for obtaining a third-party remedies opinion is to raise an equitable estoppel against a later assertion by the opinion giver’s client that a particular undertaking is unenforceable. For example, a party may not be willing to enter into a financing transaction that has a complex or unusual structure, or a structure that is subject to potential recharacterization, unless there is an acceptable degree of assurance that all parties and their counsel agree about the legal consequences that flow from the structure and the remedies available assuming that the parties’ chosen structure is given legal effect.23 In other transactions, one party may insist on a non-customary undertaking or a limitation of available remedies for breach, which are very important to that party’s commercial interest in the transaction. 18 48 CFR § 42.1204(f)(5) (2004). The opinion required would not technically be a “remedies opinion” as it appears to focus more on process (e.g. “duly authorized, executed and delivered” opinion) than on validity or enforceability. 19 12 CFR Part 3, App. A, Sec. 3(b)(5)(ii)(B)(4). 20 See DEP’T OF TRANSP. MAR. ADMIN., APPENDIX I TO GUARANTEE COMMITMENT, available at http://www.MARAD.dot.gov/Title XI/US_flag/C_bondpu.pdf (last visited July 15, 2004). 21 15 USC § 77nnn(b). 22 While this statutory provision does not mandate an enforceability opinion, it is an example of an opinion “required” by statute, and the term “effectiveness” implies that the opinion giver at least concludes that the lien has been validly created. 23 For example, a party may want assurance that a transaction structured as a lease will be given effect as such, and not as a secured financing, so that the lessor will have the benefit of lessor remedies. Ordinarily, absent an express opinion to such effect, a remedies opinion will not be interpreted to include a legal conclusion as to whether the transaction will be enforced as a “true lease,” or a “true sale.” Cf. 1998 TriBar Report § 3.4.1 n.80 .
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However, it is doubtful that an estoppel could be asserted successfully against the opinion giver’s client based on its counsel’s third-party remedies opinion. The client usually is not bound by statements made by its counsel.24 Even though a client has implicitly authorized an opinion,25 it is doubtful that the client will be deemed to have authorized an incorrect or misleading opinion. Accordingly, if the remedies opinion is erroneous, while the opinion giver may have responsibility, the giving of the opinion would not preclude the client from asserting that a clause or document is unenforceable.
Moreover, it is doubtful that any practical benefit would accrue to the opinion recipient from an attempt to assert an estoppel against the opinion giver in a later challenge. Even if the opinion giver is unable or unwilling to assert in litigation a position contrary to its remedies opinion, another lawyer for the opinion giver’s client is under no such disability. Indeed, another lawyer might be ethically obligated to assert, if meritorious, that a provision is unenforceable, regardless of a contrary remedies opinion by the opinion giver.
Another “estoppel” argument is that the giving of a remedies opinion by an opinion giver is evidence that the subject contract was reviewed by the opinion giver and explained by it to its client. Hence, it is argued, the opinion giver’s client is “estopped” from asserting that it did not understand the contract or provisions in question.
This argument too is weak because, as discussed above, the client is not estopped to assert a meritorious position because its counsel gave a remedies opinion. Moreover, this argument treats the opinion process as if it were designed to establish an evidentiary record, rather than a process that assists parties in their due diligence efforts incident to a transaction. To the extent an opinion recipient wants an evidentiary record, a more direct and cost effective way would be to obtain a representation from the opinion giver’s client that it was represented by counsel who explained the relevant transaction documents to it.26
Even if a third-party remedies opinion does not give rise to an estoppel, it can have an informal estoppel-like effect. For example, it can be used in subsequent negotiations related to the subject contracts. Thus, in a loan workout, for example, an earlier remedies opinion might be used in negotiations to counter an argument made by the opinion giver’s client that a contract has legal infirmities. Accordingly, the estoppel benefit of a third-party remedies opinion should not be completely ignored.
B. Costs and Burdens
The key guiding principle for determining the appropriateness of a third-party remedies opinion is that the benefits derived must warrant the time and expense required to
24 See RESTATEMENT § 28(3). While, under certain circumstances, a lawyer’s statement might be deemed an “admission,” the client would nonetheless be entitled to assert and prove that the statement is untrue. Id. §28(3) cmt. d. 25 See Id. § 21 cmt. e (“A lawyer has authority to take any lawful measure within the scope of representation that is reasonably calculated to advance a client’s objectives. . .”); see also ABA Guidelines § 2.4. 26 An example of such a provision is the following: “Each party to this Agreement represents and warrants to the other that it was represented by counsel who reviewed and explained this Agreement and related documents and the intended consequences in a manner satisfactory to such party.”
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prepare the opinion.27 The most obvious “cost” is additional fees of the opinion giver. This additional cost is difficult to justify if the opinion recipient’s counsel separately addresses the same issues in a written opinion or otherwise as part of the representation of its client. Indeed, the opinion recipient’s counsel may be in a better position to advise its client regarding the enforceability of contractual provisions if that counsel was the principal drafter of the contract or if the contract is generally in a form regularly used by counsel to the opinion recipient.28
Perhaps of equal or greater importance than the economic cost, the negotiating process often results in significant delays in completing the transaction, and sometimes injects acrimony and distraction into the transaction as well.
Another potential non-economic “cost” is the possible intentional or inadvertent disclosure of a client’s negotiating strategy or confidential communications. For example, the opinion giver might identify an enforceability issue with respect to an undertaking proposed to be given by the opinion giver’s client in favor of the opinion recipient. After the opinion giver advises its client of the questionable enforceability, the client might decide not to address this undertaking at that point in the negotiation. Later, the client might agree to the questionable provision in exchange for a contractual concession by the opinion recipient. If the opinion giver is then requested to give a remedies opinion, ABA Guidelines contemplate that early disclosure will be made to the opinion recipient that the questionable provision may not be enforceable.29 The result could be reopening of the negotiations.30 In some cases, disclosure could constitute a violation of a lawyer’s ethical duties to the client and informed client consent to any such disclosure may well be required.31
Finally, some lawyers believe that the issuance of a third-party remedies opinion might give rise to a conflict of interest with the opinion giver’s client because the issuance of the opinion could result in an informal estoppel.32 Also, as discussed above, the opinion giver may be required to identify deficiencies and risks affecting the opinion recipient’s legal position that would not be in the opinion giver’s client’s interest to reveal, which produces a potential conflict between the opinion giver’s duties to its client and the responsibility of the opinion giver to the opinion recipient.33
C. Reliance on Remedies Opinions
In many transactions, the opinion recipient may not, in fact, rely on the third-party remedies opinion in deciding to enter into the transaction. Usually, counsel for the opinion
27 See ABA Guidelines § 1.2; discussion supra Part I. 28 See supra text accompanying note 8; infra Parts II.C, III.D. 29 “Should a problem be identified that might prevent delivery of an opinion in the form discussed, the opinion giver should promptly alert counsel for the opinion recipient.” ABA Guidelines § 2.1. 30 Conversely, often an opinion recipient will not want the opinion giver to identify enforceability issues with questionable provisions (for example, if the opinion recipient’s practice is to have all of its documents read uniformly and the questionable provision is enforceable in other jurisdictions) and will prefer that the scope of the opinion be narrowed or that the troublesome issue be excluded from the conclusions reached. See 1998 TriBar Report § 1.3, n.19; discussion infra Part II.C para. 2. 31 See MODEL RULES OF PROF’L CONDUCT, R. 2.3. 32 See discussion supra Part II.A.3. 33 The opinion giver’s client could of course, on an informed basis, provide an effective waiver to any such conflict.
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recipient has already considered and given advice to its client concerning the enforceability of contractual provisions in the transaction.34 This is far more meaningful legal advice than the opinion recipient receives from a third-party remedies opinion, which is typically couched in legal conclusions without amplification. Where the attorney for the opinion recipient has advised its client of legal concerns about the documents, the opinion recipient will have difficulty successfully claiming reliance to the contrary on an erroneous opinion, since it has notice of the issues. Additionally, to the extent that the third-party remedies opinion has exceptions for particular provisions, the opinion recipient will not be able to claim reliance on the opinion when one or more of these excepted provisions turn out to be unenforceable. Moreover, inclusion of these exceptions may itself increase the risk that the subject provisions will be held unenforceable.
A principal duty of a lawyer representing a client in documenting a business transaction is to optimize the content of the documents for the client’s benefit, consistent with the understandings and intentions of the parties. An opinion recipient could be benefited by the inclusion of provisions of questionable enforceability because other parties to the contract may comply with them regardless of enforceability.35 Moreover, judicial receptivity to a questionable undertaking may change over time or from jurisdiction to jurisdiction. It is also not unusual for a client to be willing to enter into a transaction even if particular provisions, which are not deemed material, or even “essential,” by the client, are wholly unenforceable. Accordingly, unless the validity or enforceability of the contract as a whole is in question, the opinion recipient’s decision to enter into the transaction may not be impacted by the absence of a remedies opinion regarding these provisions, as the opinion recipient may want to retain the suspect provisions, regardless of enforceability. Obviously, where the issue of enforceability goes to the contract as a whole, e.g., because of a lack of consideration, it is doubtful a remedies opinion will be given. In that case, the parties may modify the agreement after consultation with their own lawyers to solve the enforceability problem. In this type of situation, the opinion recipient may rely in part on a third-party remedies opinion as an expression of the opinion giver’s concurrence with the conclusion that the entire agreement is enforceable. But the opinion recipient’s reliance is primarily on its own counsel’s advice that a solution has been found.
It should be noted that even if there is limited reliance on the conclusions reached in a remedies opinion, opinion recipients can benefit from the process of analysis that precedes the issuance of the opinion. A request for the remedies opinion can serve the purpose of surfacing previously unrecognized unenforceable provisions. If no issues are raised by the opinion giver, some comfort is provided to the opinion recipient that no such unrecognized problematic provisions are contained in the document.
III. SPECIAL FACTORS
The “cost/benefit” analysis done in connection with a transaction to determine whether a third-party remedies opinion should be requested may be affected in some transactions by the presence of special factors.
34 RESTATEMENT § 20 cmt. e. 35 See supra note 30.
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A. Multi-Party Transactions
Sometimes a third-party remedies opinion is primarily for the benefit of a person that is not a party to the contract involved but is directly affected by it. The regulation promulgated by the Department of Defense cited above36 provides an apt example. The regulation deals with the assignment by one party to another of a contract to which the United States Government is a party. The Government is not a party to the assignment transaction but is affected by it and requires a legal opinion that the assignment is valid. In a similar context, a licensor of a patent or trademark may require an opinion from counsel to the assignee that the assumption provisions of the assignment document are enforceable against the assignee, so that the licensor can enforce the license directly against the assignee.
In a project finance transaction, the enforceability of a third party’s undertaking to pay money to the issuer of a debt obligation is one of the key elements in evaluating whether the issuer has the ability to pay the debt instrument. Underwriters and ultimate purchasers of highly rated debt securities often rely on undertakings by a liquidity enhancer to pay the debt upon default, or to purchase or remarket short-term debt that is tendered for repurchase. A remedies opinion relating to the undertakings of these liquidity enhancers is typically given.
Many multi-party transactions involve interdependent contractual arrangements. A lender financing the acquisition of another business by its borrower will usually want comfort that the undertaking by the seller to indemnify the buyer (the borrower) is enforceable. The lender may want to have the buyer to enforce the buyer’s claims against the seller in case, for example, undisclosed liabilities impair the creditworthiness of the borrower. A purchaser of a business may want an enforceability opinion on an important supply contract between the business and a customer in which the customer agrees to purchase goods from the business. An investor in a business may require comfort that a previously obtained release of claims against the business by a third party or the grant of exclusive rights to exploit key technology is enforceable.
In these and many similar situations, counsel for the opinion recipient is not the most appropriate party to give the remedies opinion, because that counsel typically did not participate in the preparation or negotiation of the underlying contracts covered by the opinion.
B. Opinions to Unrepresented Parties
The foregoing analysis of whether a third-party remedies opinion should be given assumes that all parties to the transaction have the benefit of counsel. The question is which counsel is better able to provide the legal advice requested, or can do so in the most cost effective manner. In many transactions, however, some parties are not represented.
Rating agencies very frequently require remedies opinions concerning material documents that support the credit being rated, for example, the indenture and the key contracts that provide credit or liquidity enhancement. The rating agency assumes in its credit analysis that the parties will perform a contract, and a remedies opinion from counsel to an obligor provides support for the reasonableness of that assumption. Purchasers of securities from an 36 See supra note 18.
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issuer are often not represented by counsel, but probably may rely on the issuer’s counsel’s opinion filed with the Securities and Exchange Commission as an exhibit to a registration statement.37 Similarly, legal counsel to the issuer who relies on an exemption from qualification under the California Corporate Securities Law of 1968 is required to provide a written opinion filed with the California Department of Corporations that the transaction described in the filed notice is eligible for the exemption contained in Section 25102(h).38 As mentioned above,39 participants in syndicated loans and investors in private placement transactions often are unrepresented. In these situations the third-party remedies opinion usually does not result in excessive costs; indeed, it tends to minimize the need for opinion recipients to obtain separate counsel.
C. Specialized Legal Issues
1. Regulated Obligors
In some situations, the enforceability of a contract may depend on compliance with a regulatory scheme that applies to a party to the contract. For example, a standby securities purchase commitment undertaken by a corporation may not raise enforceability issues as a matter of contract law. If the commitment relates to shares of another entity and the undertaking is given by a regulated entity (for example, a bank, an insurance company, a public utility, or a governmental authority), additional issues may be raised under applicable regulations. A third-party remedies opinion given by counsel for the obligor is generally understood to include the conclusion that the undertaking is enforceable against the obligor under the applicable regulatory framework,40 and, usually, the obligor’s counsel is best suited to give an opinion that considers the effect of the regulatory elements in coming to the conclusions contained in the remedies opinion.41 But the remedies opinion is not customarily interpreted to cover regulatory requirements applicable to the opinion recipient,42 and opinion givers assume (often explicitly, but sometimes implicitly)43 that the opinion recipient has full legal and corporate authority to enter into the transaction.
2. Counsel from Different Jurisdiction
37 The so-called “Exhibit 5 Opinion” is addressed by counsel to the issuer, and concludes, with respect to debt securities, that they will be “legally issued and binding obligations” of the issuer. With respect to equity securities, it states that the shares have been legally issued and will be fully paid and non-assessable. 38 The opinion issued in conjunction with an issuer’s reliance on the exemption from qualification set forth in Calif. Corp. Code § 25102(h), to the effect that the securities issuance described is exempt from qualification under Calif. Corp. Code § 25110, could be relied upon by acquirors of such securities and potentially other third parties (e.g. lenders). 39 See discussion supra Part II.A.1. 40 See 1998 TriBar Report § 3.5.2(a)(i). 41 It is of course possible to bifurcate the enforceability opinion in this situation and to deal separately with enforceability of the contract under laws having specific application to the obligor. This is often covered by an opinion that the performance of the agreement will not violate any statute, rule or regulation having applicability to the obligor. 42 See 1998 TriBar Report § 3.5.2(a)(ii). 43 “Similarly, in giving a remedies opinion, the opinion preparers will usually assume that the agreement is binding on the other parties to it.” 1998 TriBar Report § 2.3(a).
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Counsel for the parties are not equally capable of giving a remedies opinion where the opinion covers a contract that is governed by laws on which only one counsel is competent to opine. For example, when a party and its counsel are based in a state different from that of the other party and its counsel, the contract is often governed by the laws of one of those jurisdictions.
Because state laws are often different, it is sensible for the party that is unfamiliar with the chosen law to request a remedies opinion from the counsel that is familiar with it. It is often inefficient and costly to request the party whose counsel is not familiar with the chosen law to retain local counsel solely to give a remedies opinion to a party whose counsel is familiar with the chosen law.44 In situations where neither party’s counsel is familiar with the law chosen by the contract and local counsel is retained, it may be wiser for the opinion recipient to seek to have local counsel represent it and provide the opinion recipient with local law advice directly, even where the fees of such local counsel are to be borne by the other party. Local counsel retained by the opinion recipient will be far more likely to provide advice to the opinion recipient on all relevant matters arising under the chosen law, not just uncertainties in the enforceability of contract provisions under the selected law.
Where the parties have agreed not to retain local counsel, counsel that does not regularly opine on the chosen law is sometimes asked to provide a remedies opinion assuming that enforceability of the contract would be determined under the law of the opinion giver’s jurisdiction rather than the law chosen by the contract.45 Alternatively, the opinion giver may be requested to limit its enforceability opinion solely to the question of enforceability in the opinion giver’s jurisdiction of the choice of law provision.46 Each of these approaches (whether together or as alternatives) seems to be sensible and to promote efficiency in appropriate cases.
D. Regularly Used Documents
Frequently, a third-party remedies opinion is requested on documents that are prepared and regularly used by the requesting party or its counsel, and are basically in the same form from one transaction to the next. Lenders, in particular, frequently insist on standardized agreements, as this makes for more efficient administration of loans. The benefit of this remedies opinion to the opinion recipient is doubtful. It appears to be both more beneficial and cost effective for the opinion recipient to rely on its own counsel for legal advice regarding enforceability. Therefore, a request for a remedies opinion, in this situation, in the absence of special factors in the transaction, seems inappropriate.47
44 See ABA Guidelines § 2.2. It may be prudent, however, for counsel not familiar with the chosen law to recommend engaging counsel to advise its client regarding that law, even if no remedies opinion is given, in order to obtain advice on potential legal pitfalls. 45 This approach sometimes is implemented by inclusion of an assumption that the law of the jurisdiction selected by the contract is the same as that of the opinion giver’s jurisdiction. While this assumption is probably incorrect (and therefore the approach discussed in the text is preferred), this approach is common, and if utilized, would not be misleading. 46 See 1998 TriBar Report § 4.6. 47 A large number of members of the Opinions Committee are of the view that a request for a remedies opinion in this situation would be inappropriate, although the Committee believes that customary practice should determine the appropriateness of the request.
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IV. LIMITED SCOPE OPINIONS
A. Ancillary vs. Principal Documents
In analyzing the cost of preparing the remedies opinion against the benefits provided by its receipt, the relative weightings will obviously not be the same in each transaction. In addition, the weights assigned will not even be the same for all documents in the same transaction. For example, some documents in a transaction may be simple and contain few undertakings. Others may merely be shorter forms of more complete agreements, used, for example, solely for filing purposes (e.g. copyright mortgages, patent security agreements, or memoranda of leases). Some (for example, environmental indemnities and an agreement among shareholders restricting stock transfers) may be short and ancillary but nonetheless raise significant issues that could result in additional qualifications in the remedies opinion, or require significant legal analysis because of the need to weigh many different factors. These documents are typically ancillary documents, which, while playing a role in the transaction, do not contain the principal contractual undertakings that have induced the parties to enter into the deal. Where this is the case, a request for a remedies opinion concerning these ancillary documents may provide little benefit, but on the other hand may require significant cost to analyze.48 While it is difficult to draw general and clear lines, counsel and their clients should be particularly mindful of the cost/benefit analysis in requesting remedies opinions on ancillary documents.
B. Complex Documents
Frequently, documentation in a transaction includes numerous and varied contractual undertakings. These undertakings may be in a single principal document, a number of separate documents, or combined from various documents into the text of a single master or omnibus agreement. For example, acquisition agreements not only include an agreement to purchase and sell, but will often also include undertakings about such matters as the parties’ pre-closing conduct, post-closing treatment of employees, preparation and filing of tax returns, accounting matters, collection of accounts receivable, post-closing non-competition, non-solicitation and non-disclosure, indemnification obligations, and the consideration to be paid by the buyer. If there are enforceability issues with undertakings in complex documents, they may arise under a wide variety of legal regimes, including, for example, laws relating to general corporation matters, securities regulation, employment, antitrust, tax, intellectual property, environmental and real estate law. While a remedies opinion is generally understood not to cover some of these specialized areas,49 many of these substantive laws are understood to be covered.50 In situations involving complex documentation or wide-ranging subject matter, the
48 See 1989 Report § IV.B.1 (“[t]he lawyer . . . should resist acquiescing to provisions [in the Opinion] which, while having some importance to the recipient, are peripheral to the transaction covered by the agreement at hand.”). See also 2005 Report, TAN 52 (“Generally, an opinion should not be requested or rendered on non-material matters…”) 49 See 1998 TriBar Report § 3.5.2(c); infra App. 10, Part IV.B.2. 50 For example, usury issues and certain securities matters are considered part of a remedies opinion. See 1998 TriBar Report § 3.5.2(c). In addition, corporation, employment and intellectual property laws are generally understood to be included in a remedies opinion. “Customary practice requires the opinion preparers to take account of law 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]. . . in the transaction.” Id. 3.5.1..
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cost/benefit analysis might lead the parties to conclude that a limitation on the scope of the opinion to specific undertakings is appropriate.
V. CONCLUSIONS
A request for a third-party remedies opinion should only be made when the benefit to be obtained by the opinion recipient justifies the cost of its preparation, and where there is no alternative that is more cost effective.51 The cost/benefit analysis involves measuring the cost of preparation against the benefit that the opinion recipient obtains through its reliance on the remedies opinion, taking into account the size and complexity of the transaction. It is not an anomaly that remedies opinions are regularly requested and given in many large transactions, regardless of the nature of these transactions.52 The customary practice of providing third-party remedies opinions in these transactions is recognition that even a small incremental benefit can justify significant costs where large sums of money are at stake.
Third-party remedies opinions are also clearly beneficial in many situations, regardless of the size of the transaction, as discussed in Section III above.
In the absence of special factors, the benefit to be obtained by an opinion recipient from a third-party remedies opinion can often be realized in a more cost-efficient and informative manner through advice provided by the opinion recipient’s own counsel, especially as it relates to documents regularly prepared by counsel to the opinion recipient for the opinion recipient. In general, it would seem inappropriate for a third-party remedies opinion to be requested or given in that circumstance.
While clients are usually the ultimate decision-makers about whether to request a third-party remedies opinion in a transaction, their lawyers should assist them with an appropriate cost/benefit analysis.
51 ABA Guidelines § 1.2. 52 See supra note 4.
LA1 446055v.21
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CROSSING THE THRESHOLD: THE COSTS AND BENEFITS OF COST-BENEFIT
ANALYSIS OF CLOSING OPINION PRACTICE
BY
JONATHAN C. LIPSON
Cost-Benefit Analysis of Legal Opinions . . . Page 1 of 19 DRAFT—PRELIMINARY AND TENTATIVE
Draft of 20070625 Word count: 7159
Preliminary and tentative Please do not cite or quote without the author’s permission
CROSSING THE THRESHOLD: THE COSTS AND BENEFITS OF COST-BENEFIT
ANALYSIS OF CLOSING OPINION PRACTICE
Jonathan C. Lipson∗
Closing opinion practice has never been fun or easy. While the practice has become more streamlined and standardized over the years, it would appear that there are at least enough questions and concerns to justify an American Bar Association program on when to “cross the threshold”—that is, to have a legal opinion at all.
A seemingly attractive way to decide whether to have an opinion is through the use of “cost-benefit analysis” (CBA). The Business Law Section of the State Bar of California, for example, has urged that a CBA should be used “for determining the appropriateness of requesting an enforceability opinion in a transaction.”1 Presumably, a similar analysis could apply to any of the other third-party closing opinions that might be delivered in a corporate or commercial transaction.
This is a valuable suggestion in many respects. It may, among other things, focus attention on the real utility of legal opinions. It may create grounds for resisting inappropriate opinion requests or, conversely, obtaining an opinion over an inappropriate objection. It should help to orient debates about the use of opinions around their economic value, which would certainly be an improvement over the ego-jousting that
∗ Professor of Law, Temple University – Beasley School of Law. © 2007 Jonathan C. Lipson, all rights reserved. 1 Business Law Section of the State Bar of California, Report on Third-Party Remedies Opinions (2004), at 1, available at http://www.calbar.ca.gov/calbar/pdfs/sections/buslaw/opinions/2005-01_remedies-opinion.pdf [hereinafter “California 2004 Report”]. at 1, 6 (“[T]he benefits [of a remedies opinion] must warrant the time and expense required to prepare the opinion.”), App. 4. The California 2004 Report was not the first to suggest that a kind of CBA be applied to legal opinions. Judge Ambro and Truman Bidwell made a similar proposal in 1989. See Thomas L. Ambro & J. Truman Bidwell, Jr., Some Thoughts on the Economics of Legal Opinions, 1989 COLUM. BUS. L. REV. 307 (“the necessity for and scope of an Opinion should be measured in part on the basis of a cost/benefit analysis.”). See also Am. Bar Ass’n Comm. On Legal Opinions, Report: Guidelines for the Preparation of Closing Opinions, 57 BUS. LAW. 875, § 2.2 (2002) (“An opinion of other counsel should be sought by the opinion recipient only when the opinion’s benefits justify its costs.”). I discuss some of the strengths and weaknesses of this sort of analysis, as well as lawyers’ expressed views on the subject, in Jonathan C. Lipson, Price, Path &: Third-Party Closing Opinion Practice Among U.S. Lawyers (a Preliminary Investigation), 3 BERKELEY BUS. J. 59 (2005).
I will assume that readers understand the components of the basic third-party closing opinion, with its statements about authority, the absence of conflicts and enforceability (a/k/a “remedies”). Those seeking further information are referred to any of the many treatises that provide ample guidance on the construction and use of legal opinions. See, e.g., DONALD W. GLAZER ET AL., GLAZER AND FITZGIBBON ON LEGAL OPINIONS IN BUSINESS TRANSACTIONS (2d ed. 2001 & 2006 supp.).
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sometimes plagues the practice. It may, in short, create a more objective basis for deciding whether, or to what extent, a legal opinion is appropriate in any given transaction, or even whole categories of transactions.
But CBA is not without its problems. It turns out that there is an enormous body of literature on CBA.2 CBA is an important, if controversial, decisional tool used chiefly in the public sector. If we are to take CBA seriously as a tool to use in deciding whether to have a legal opinion, we should understand a little bit about how it works, and what it can—and cannot—do for legal opinion practice. In particular, we should bear in mind three limitations with CBA that might affect its utility in opinion practice.
First, CBA is very controversial as a method of decision-making. Many question its moral foundations.3 Even if we ignore moral questions about CBA, we have to recognize that it is only as good as the quality of the quantities plugged into its formulae.4 If we do not know—or, more likely, we legitimately disagree about—the costs or benefits of a particular course of action, then CBA may tell us very little. Worse, CBA’s malleability can make it a tool of deception, cloaking unprincipled decisions with the appearance of objective precision.5
Second, CBA as proposed in the context of legal opinions may fail to account for an important class of costs. Current discussions about CBA here appear to focus on the costs and benefits of a legal opinion from the perspective of clients. While this is an intuitive starting point, it ignores the fact that legal opinions may also impose costs on lawyers and, in certain cases, other professionals or third parties who may rely on or be affected by the opinions. It is not clear that the calculation we currently envision effectively accounts for these costs. In the words of the economists, CBA as proposed
2 See, e.g., MATTHEW D. ADLER & ERIC A. POSNER, NEW FOUNDATIONS OF COST-BENEFIT ANALYSIS (2006) [hereinafter “NEW FOUNDATIONS”]; STEPHEN BREYER, BREAKING THE VICIOUS CIRCLES: TOWARD EFFECTIVE RISK REGULATION (1993); ROBERT W. HAHN, ET AL., DO FEDERAL REGULATIONS REDUCE MORTALITY? (2000); RISKS, COSTS AND LIVES SAVED: GETTING BETTER RESULTS FROM REGULATION (Robert W. Hahn ed., 1996); RISKS VS. RISKS: TRADEOFFS IN PROTECTING HEALTH AND THE ENVIRONMENT (John D. Graham & Jonathan B. Wiener eds., 1995); CASS SUNSTEIN, LAW OF FEAR: BEYOND THE PRECAUTIONARY PRINCIPLE (2005) [hereinafter “FEAR”]; CASS R. SUNSTEIN, RISK AND REASON: SAFETY, LAW AND THE ENVIRONMENT (2002) [hereinafter “RISK AND REASON”]; Matthew D. Adler & Eric A. Posner, Rethinking Cost-Benefit Analysis, 109 YALE L.J. 165 (1999) [hereinafter, “Rethinking”]; Eric A. Posner & Cass R. Sunstein, Dollars and Death, 72 U. CHI. L. REV. 537 (2005); David M. Driesen, Is Cost Benefit Analysis Neutral?, 77 U. COLO. L. REV. 335 (2006); Robert H. Frank, Why is Cost-Benefit Analysis So Controversial?, 29 J. LEGAL STUD. 913 (2000); Edward R. Morrison, Judicial Review of Discount Rates Used in Regulatory Cost-Benefit Analysis, 65 U. CHI. L. REV. 1333, 1333 (1998) (citing statutes requiring cost-benefit analyses); Edward Sherwin, The Cost-Benefit Analysis of Financial Regulation: Lessons from the SEC’s Stalled Mutual Fund Reform Effort, 12 STAN. J. L., BUS. & FIN. 1 (2006); Cass R. Sunstein, The Arithmetic of Arsenic, 90 GEO. L.J. 2255 (2002) [hereinafter, “Arsenic”]. 3 See, e.g., Driesen, supra note 2; Frank, supra note 2. 4 EDITH STOKEY AND RICHARD ZECKHAUSER, A PRIMER FOR POLICY ANALYSIS, 135 (W.W. Norton and Co. 1978) (“Logically, [CBA techniques] can be no more precise than the assumptions and valuations they employ . . . .”). 5 Id. (CBA “is especially vulnerable to misapplication through carelessness, naïveté, or outright deception. The techniques are potentially dangerous to the extent that they convey an aura of precision and objectivity.”).
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may externalize onto lawyers or third parties costs of deal failure that are not covered by price structure or malpractice insurance.
Third, CBA may fail to account for one of the more important, if subtle, benefits of opinion practice. There is some reason to believe that the chief value of a legal opinion is not within the four corners of the document, but rather in the process that goes into rendering it. The legal opinion itself is, on this view, merely the embodiment of this process. The problem is that CBA may not be especially good at valuing the benefits of process. Rather, CBA may lead us to view opinions as one more product which can be added to or subtracted from the deal, just as we can add or subtract features from the purchase of a new car. If so, this would be unfortunate, as it would tend to further commoditize practice and distract us from what the opinion really is: An expression of professional judgment.
Thus, the trick with CBA will be to figure out how to capture its strengths without losing too much to its limitations. Can we, in short, maximize the benefits of CBA in opinion practice, while minimizing its costs?
This essay has three parts. First, it provides a brief sketch of cost-benefit analysis, as it is generally understood, and as it has been proposed in the world of third-party closing opinions. Second, it notes certain limitations with CBA in this context. Third, it describes ways that CBA can make positive contributions to the development of closing opinion practice. The essay is based in part on interviews I conducted in the past several years with lawyers and clients on their views about legal opinion practice.6
I. What is Cost-Benefit Analysis?
A. CBA in the Policy World
Cost-benefit analysis has become an increasingly popular, if contentious, decisional tool. At a high level of generality, it is a kind of refined utilitarianism, setting out a methodology for measuring the effect that administrative or regulatory decisions have on social welfare.7 It is most frequently associated with governmental decision-making.8
Proponents of cost-benefit analysis urge that it has no moral or ethical content. It does not tell people how to make decisions; it just purports to provide a way of assessing
6 A fuller analysis of these interviews and what they tell us about opinion practice appears in Lipson, supra note 1. 7 See ADLER & POSNER, NEW FOUNDATIONS, supra note 2, at 13 (“In simple terms, CBA is a device for converting the utility losses and gains from a project or regulation into dollar values, and aggregating. To each person affected by the project (whether for good or for ill), one can calculate a “compensating variation,” the amount that would make her as well off as she would be in the status quo—based on her actual preferences. If the sum of the compensating variations is positive, the project is approved; otherwise, it is rejected.”). 8 See Adler & Posner, Rethinking, supra note 2, at 167 (“Government agencies now routinely use CBA. This was not always the case. Before the 1980s, agencies did not systematically rely on CBA when evaluating regulations and other projects. But executive orders issued by the Reagan and Clinton administrations have since made the use of CBA by agencies common, and Congress has enacted numerous statutes requiring agencies to perform cost-benefit analyses.”).
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information about the impact of those decisions. “[C]ollecting . . . information is what is meant by cost-benefit analysis as an evaluative tool,” Judge Posner has argued.9 Whether the questions involve levels of arsenic in drinking water or preparing for a terrorist attack, CBA likely plays a role in the answers the government provides.10
Others are not so sanguine. CBA’s intellectual roots are in 19th Century utilitarianism.11 Benthamites argued that if social planners could simply make those decisions that had the greatest utility for the greatest number, we would have a morally effective government.12 But utilitarianism presented problems. Perhaps the most important was the inability to compare the “pain” and “pleasure” (or “cost” and “benefit”) that different people would experience from a particular course of action.13 Taking a dollar from an impoverished Mary may “cost” her more than giving that same dollar would “benefit” its transferee, the wealthy John. Utilitarianism was thus largely abandoned by economists and social planners, who today use more pliable techniques, organized around the preferences people are assumed to have.14
Yet, questions about the legitimacy of cost-benefit analysis persist.15 Costs are said to be highly manipulable. For example, in the regulatory context, the subjects of
9 See Richard A. Posner, Cost-Benefit Analysis: Definition, Justification, and Comment on Conference Papers, 29 J. LEGAL STUD. 1153, 1175 (2000) (“It is not,” he continues “the equality or inequality sign that marks analysis as cost-benefit but the collection and display of costs and benefits.”). 10 SUNSTEIN, FEAR supra note 2; Sunstein, Arsenic, supra note 2. 11 ADLER & POSNER, NEW FOUNDATIONS, supra note 2, at 9-12. 12 See JEREMY BENTHAM, THE PRINCIPLES OF MORALS AND LEGISLATION (J.H. Burns & H.L.A. Hart eds., Athlone Press 1970) (1823). 13 ADLER & POSNER, NEW FOUNDATIONS, supra note 2, at 9 (“The major problem [with utilitarianism] was that of interpersonal comparability: if an apple were taken from John and given to Mary, how would we determine the effect on aggregate utility?”). 14 The work of Pareto, Kaldor & Hicks broke important ground in enabling economists to make models that could evaluate the costs and benefits of particular projects. See, e.g., J.R. Hicks, The Foundations of Welfare Economics, 49 ECON. J. 696 (1939); Harold Hotelling, The General Welfare in Relation to Problems of Taxation and of Railway and Utility Rates, 6 ECONOMETRICA 242 (1938); Nicholas Kaldor, Welfare Propositions of Economics and Interpersonal Comparisons of Utility, 49 ECON. J. 549 (1939). Vilfredo Pareto made the first famous departure from strict utilitarianism, by observing that welfare could be maximized even if we did not know the absolute amounts of pleasure or pain a particular project would produce. All we needed to know, Pareto observed, was that a project should be approved if at least one person affected by it would be made better off, and no one would suffer because of it. Because regulation often fails to compensate those subject to it, it would usually flunk Pareto’s test. See ADLER & POSNER, NEW FOUNDATIONS, supra note 2, at 10 (“The Pareto principle, then, cannot be a realistic basis for project evaluation; it is simply too strong.”). Kaldor and Hicks offered an even more malleable test, which holds that a project should be approved if its beneficiaries gain enough from the project that they could, at least hypothetically, compensate those harmed by it. Id. at 10-11. Actual compensation, however, is not required. Its hypothetical nature is what distinguishes it from the Pareto test. Attempts to render economic analysis scientific and value-neutral are based in the work of English economist Lionel Robbins. See Guido Calabresi, The Pointlessness of Pareto: Carrying Coase Further, 100 YALE L. J. 1211, 1215, n. 14 (1991) (citing L. ROBBINS, THE NATURE AND SIGNIFICANCE OF ECONOMIC SCIENCE (2d ed. 1935)). 15 Id. at 12 (“[CBA] is a practice that has no theoretical justification. The original objections to CBA have never been rebutted.”).
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regulation are said to inflate costs in order to avoid or limit the effect of regulation.16 The cost of adding scrubbers to a smokestack, for example, may vary considerably; we would expect industries being forced to add them to state the costs to be as high as possible. Benefits, by contrast, are said to be undercounted because it can be difficult to agree on what constitutes a “benefit” of regulation. How much does “society” benefit from preserving the snail darter?17 Finally, there is the inherent problem of monetizing things that are difficult to quantify.18 We may all agree that arsenic should be kept to a minimum in drinking water. But we may have no idea—or, more likely, legitimately disagree—about the monetary value of that benefit. Similar observations can be made about problems inherent in monetizing for CBA purposes the benefits of precautions against global warming, terrorism and other catastrophic losses. Precaution is doubtless a good thing19—but what is it worth?20
B. CBA and Legal Opinions
When we talk about cost-benefit analysis in the context of legal opinions, we may have in mind a fairly simple calculation. “For an Opinion to have value,” Ambro and Tidwell observe, “the transaction to which it relates must be worth more, net of the Opinion’s costs, as a result of giving the Opinion.”21 The CBA to be performed, the California Bar Association report explains, “involves measuring the cost of preparation against the benefit that the opinion recipient obtains through its reliance on the [] opinion, taking into account the size and complexity of the transaction.”22 The California report
16 See Dreisen, supra note 2, at 339 (estimates of cost “usually prove too high.”). 17 See Snail darter controversy, at http://en.wikipedia.org/wiki/Snail_darter_controversy (visited June 25, 2007). 18 See Dreisen, supra note 2. at 340 (“Monetization requires very controversial value assumptions and in many cases proves impossible.”). 19 It is also a term loaded with meaning in the CBA world. According to Professor Sunstein, the “precautionary principle” holds that "when there is scientific uncertainty as to the nature of [the] damage or the likelihood of the risk" posed by some activity, "then decisions should be made so as to prevent such activit[y] . . . unless and until scientific evidence shows that the damage will not occur." See SUNSTEIN, FEAR, supra note 2, at 19. As discussed below, much of the work of the closing opinions operates on a kind of precautionary principle as it addresses legal uncertainty. 20 Related problems involve the question of discounting. Even if we can quantify a benefit experienced today, an equally important question is whether (or how) we can discount to present value the expected value of the benefit. For an overview of the discounting debate, see Douglas A. Kysar, Sustainable Development and Private Global Governance, 83 TEX. L. REV. 2109, 2118-28 (2005). A recent symposium issue of the University of Chicago Law Review was devoted to the subsidiary problem of intergenerational discounting—how do we price today benefits (or costs) experienced in the distant future? See Symposium, Intergenerational Equity and Discounting, 74 U. CHI. L. REV. 1 (2007). 21 Ambro & Tidwell, supra note 1, at 313. This calculation is, in turn, rooted in Professor Gilson’s influential article on “value creation” by lawyers. See Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 YALE L.J. 239, 274-77 (1984). 22 California 2004 Report, supra note 1, App. 4, at 12. The California report provides further elaboration:
In assessing whether the benefit of a remedies opinion “justifies its cost,” the focus should not be simply on measuring cost from the opinion giver’s client’s perspective--any cost incurred by a party in having its counsel issue a third-party opinion is greater than
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suggests three sets of questions to ask in order to determine whether a legal opinion is cost-justified:
(1) What expected benefits are provided to the opinion recipient and under what circumstances are these benefits likely to be actually achieved?
(2) Do any negative consequences flow to the opinion giver’s client or to the opinion recipient from delivery or receipt of a remedies opinion?
(3) Can the benefits be obtained in ways that are less “costly” than the issuance of a third-party remedies opinion?23
CBA sounds simple, but it is not.24 A full-blown CBA in the legal opinions context would require several sets of comparisons, all of which must be monetized. A comparison must be made between the status quo (S), meaning the state of the world without a legal opinion, and the state of the world with the legal opinion (O). The comparison must further account for the effect that these varying states would have on the parties involved. Finally, to be intelligible, the comparisons must be reduced to a single unit of measurement, usually dollars.
When regulators think about this, the problems can obviously be quite complex, as millions of people could be involved. The population affected by the decision to give or not give a legal opinion, by contrast, should be much smaller, probably reaching only the parties, their anticipated successors and assigns (e.g., loan participants) and the lawyers and third parties potentially affected by it. But even in this more limited universe, a competent CBA would have to plot a set of curves that reflects the preferences of each constituent for state S (no opinion) versus O (an opinion). When the aggregate preference for state O exceeds the aggregate preference for state S, CBA would say the benefit of an opinion outweighs its costs.
It is unlikely that lawyers are going to engage in the sort of rigorous analysis that CBA typically calls for. So, what will they do? Probably a kind of “folk-CBA,” a rough calculation of the cost of producing the opinion, and the estimated benefits of having it or not. As discussed below, there is intuitive appeal to this. But CBA, even the “folk” variety, contains limitations that will constrain—although not eliminate—its utility in making hard decisions about legal opinions.
that person would have otherwise borne. Rather, the inquiry should be whether the aggregate costs to all parties are greater either because of the duplication of effort (as counsel for both parties may be giving opinions or advising on the same subject), or because of the economic cost of the negotiation over the text of the opinion itself.
Id. at 2, n. 7 (emphasis supplied). 23 California 2004 Report, supra note 1, App. 4, at 2. 24 ADLER & POSNER, NEW FOUNDATIONS, supra note 2, at 13 (“Some people think that a CBA . . . is conceptually straightforward and that the only problem posed by CBA is the practical difficulty of collecting data.”).
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II. Limitations
A. Costs
1. The Costs of Legal Opinions
To perform the rough calculation that would determine the expected utility of a legal opinion requires some knowledge of the costs involved. The California report focuses on the cost of legal fees associated with the preparation of the opinion.25 As in the regulatory context, cost here would be determined by reference to market equivalents: What is the standard charge for a legal opinion of this sort in this context? While cost-estimates can vary, lawyers would seem reasonably well-positioned to estimate the cost of an opinion, at least in fairly straightforward transactions.26
One problem frequently cited with CBA in the regulatory context is that whatever the cost side of the equation offers in precision is purchased at the expense of validity. That is, as noted above, costs are often inflated, to make it more difficult for regulators to justify a proposed course of action. This in itself would not seem to present a significant problem in the context of straightforward legal opinions. Lawyers appear to have a fairly good handle on what legal opinions should cost in fairly generic transactions. Since she is often billing by the hour, the opining lawyer should be able to estimate, albeit roughly, how much time the opinion will take, and multiply that by the applicable rates.
Rather, a bigger problem on the cost side of even the simplest transaction would be isolating the costs associated exclusively with the opinion. Ambro and Tidwell, for example, suggest that legal opinions create five classes of costs: (i) negotiation, (ii) diligence, (iii) legal research, (iv) firm process costs (i.e., having the “opinions committee” vet the opinion), and (v) “comfort costs” involved in drafting officers’ certificates and the like that provide factual support to the opinion.27 Some of these costs—in particular, negotiation over the opinion and drafting officers’ certificates to support the opinion—would seem to be unique to the opinion itself. Others should be incurred whether or not there was a formal opinion. One hopes that lawyers engage in diligence and legal research relevant to the transaction whether or not they provide a formal opinion on it.
Another, ultimately more significant, problem on the cost side involves prediction when a deal is not simple. In the regulatory context, the subjects of regulation can look to market rates to tell regulators what it would cost to add scrubbers to their smokestacks. While they may exaggerate costs, there will often be existing market prices by which we can measure the claimed costs. When a transaction is simple, a similar observation can probably be made about a legal opinion to be rendered.
What we cannot predict, however, are the costs of unanticipated problems that come to light only in the course of negotiating the transaction or the opinion. Sometimes
25 California 2004 Report, supra note 1, App. 4, at 6 (“The most obvious ‘cost’ [of including an opinion] is the additional fees of the opinion giver.”). 26 See Lipson, supra note 1, at 87 n. 41 (quoting attorney as saying “[Y]ou can’t get an opinion out the door, even the simplest authorization opinion, for under $5,000 . . . .”). 27 See Ambro & Tidwell, supra note 1, at 311-12.
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these negotiations are, in hindsight, worthwhile; sometimes they are not. Lawyers frequently complain about negotiations over seemingly trivial details in opinions. Yet, until the issues are raised through the negotiation process, we may not know whether they are trivial or how far to go in negotiating about them.
2. The Cost of No Opinion—Precaution and Ignorance
One way to approach this is to ask what it would cost to proceed without an opinion. Any good CBA should consider all relevant states of the world. Thus, there is not only a cost of producing an opinion, but also a cost of not doing so. This would not simply be a subtraction of the legal fees associated with the opinion. This is because, if we take opinion-giving seriously, the opinion will be evidence of a host of sound procedural practices leading to a legal judgment about the quality of the proposed transaction—in essence, that the opining lawyer has made a reasonable determination that certain legal features of the deal work.
Lawyers and authorities frequently say that the principal purpose of the legal opinion is to assist in the due diligence process.28 Due diligence is, at bottom, a term of art for the production and verification of information the parties consider important to the transaction.29 The cost of a transaction without a legal opinion is thus the cost of proceeding without this evidence that the information required to support an opinion was produced. To be sure, there is good reason to believe that most lawyers in most cases would engage in this sort of due diligence even if a legal opinion were not issued. Moreover, the link between the opinion and actual due diligence in any given transaction may be somewhat attenuated.
Nevertheless, there is reason to believe that the opinion is treated as a kind of “good housekeeping seal of approval” from the lawyer. To the extent this fairly characterizes the function of the opinion, there will be a knowledge cost in a transaction without one. The cost of that ignorance may have little correlation to the savings from having dispensed with the opinion. “We don’t know what we don’t know,” lawyers sometimes say.
The closing opinion is thus a precaution against ignorance. The hard question then becomes, What is the cost of proceeding without taking that precaution? The cost of ignorance may be great or small, and will be difficult to determine ex ante. After the fact, of course, we will know. But that’s the point: Ignorance is a poor basis for a cost-benefit analysis.
3. The Cost to Whom?
As noted above, the cost side of a CBA contemplated in literature on opinion practice focuses on the parties and their anticipated successors and assigns (e.g., loan participants). This is a logical starting point. But it is not clear that these are the only people whose costs count. Many others can be affected by a transaction, and the presence
28 See California 2004 Report, supra note 1, App. 4, at 2 (“[T]he primary purpose of a remedies opinion is to assist in due diligence for the transaction . . . .”). 29 See Gilson, supra note 21.
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or absence of a legal opinion. To the extent the decision to have an opinion imposes costs on them, that should be factored into the CBA, as well.
a. The Costs to Lawyers
Let’s start with the lawyers. I have noted elsewhere that rendering opinions can impose a variety of costs on lawyers.30 Some of these are more obviously economic, and thus susceptible to CBA; others are not. The first, and less obvious, economic costs involve the prospect that clients may balk at paying for the work that goes into the legal opinion. Clients may not understand the role that an opinion plays, or believe that being a simple letter, it should involve little attorney time or expense.31 More sophisticated clients would appear not likely to make these objections, but not all clients are sophisticated.
The second, and more important, costs to lawyers will involve legal liability in the event the deal fails and a claim is made by the recipient that there was some problem with the legal opinion. Liability on legal opinions is, not surprisingly, a contentious issue, with lawyers frequently saying that they should have no liability to a third party recipient in the absence of serious wrong-doing.32 Anecdotally, it would appear that in fact lawyers are not likely to be liable merely for an opinion error. Courts seem inclined to protect lawyers from third-party claims, on a variety of theories, including the absence of reliance on the opinion, the absence of privity of contract, or a relaxed standard of care.33 Nevertheless, the recent experience of Jenkens and Gilchrist suggests that in the right (or wrong) circumstances, legal opinion problems can spell serious trouble for a law firm.34
Opinions may also impose on lawyers non-economic costs. Some lawyers have observed that the opinion process was, at least for them, more aggravating and stressful than other aspects of practice.35 Even if a lawyer is not held liable for an error in an opinion, concerns about legal liability appear to be greater in this context than in others. Moreover, the mere fact that a legal opinion is challenged may have reputational costs. While these costs are clearly difficult to measure—and may, in many cases, be
30 See Lipson, supra note 1, at 102-114. 31 Id. at 101-102. 32 See Lipson, supra note 1, at 102-109. 33 Id. at 103. 34 See Katie Fairbank and Terry Maxon, How Jenkens & Gilchrist lost its way, Dallas Morning News, Apr/ 1, 2007, available at http://www.dallasnews.com/sharedcontent/dws/bus/stories/040107dnentjenkens.3e099d1.html# (visited June 6, 2007). Dallas-based Jenkens & Gilchrist got into the business of offering tax shelter opinions which, in the short term, proved extremely lucrative for the firm. The shelters were ultimately challenged, and the firm was sued by former clients, who claimed the firm knew or should have known that the shelters were ineffective, and was investigated by the Internal Revenue Service and the Justice Department. The firm settled with Justice in March 2007, paying a $76 million penalty “for its ‘promotion of abusive and fraudulent tax shelters, with fraudulent tax opinions.’” Id. Shortly thereafter, hemorrhaging attorneys, the firm announced that it was dissolving. Id. 35 Id. at 109-113.
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negligible—any thorough CBA of the decision to have a closing opinion should account for them.36
b. Non-Parties
Cost-benefit analysis should also factor in the costs to others of the decision to give (or not) a legal opinion. In many cases—structured financings, tax transactions—the impetus for the opinion is not (or not solely) a “third party” in a conventional sense (e.g., a lender or purchaser). Rather, in many transactions, the opinion is rendered to provide some information to a person not a party to a transaction. This person may not be the technical recipient of the opinion. This non-party may, instead, be a regulatory or rating agency, or a professional such as an accountant who will consider the legal opinion when making some other decision with respect to the transaction (or the party that is the subject of the opinion).37
The cost here involves the possibility that the legal opinion is wrong, but the non-party nevertheless relied on it in forming its own (erroneous) conclusion. For example, although we do not know exactly what happened in Enron, it may be the case that accountants Arthur Andersen relied detrimentally on legal opinions in deciding to support “true sale” accounting treatment for many of Enron’s transactions.38 It is certainly possible that Andersen was justified in its position, or that it was independently in error. But to the extent it could show it relied reasonably on legal opinions which later proved flawed, it would have suffered a cost attributable to the legal opinion. The cost-benefit analysis we currently think about in opinion practice would not account for this cost.
c. Remote Parties
We can cast the net even wider. By orienting the analysis around costs and benefits, CBA would have us look to the broader population likely affected by a legal opinion. That population will certainly be smaller than it would be in the case of public policy-making, but it may well be larger than the initial parties to the deal. For example, we may know that Mary borrows money from John, and that John has the right to participate or syndicate or otherwise dispose of Mary’s loan. John will understandably want a legal opinion on all the usual matters (Mary’s authority to borrow, etc). The legal opinion John obtains will be a signal of the legal quality of Mary’s obligations. But we may not know ex ante how often the loan will be sold, or whether its proceeds and products might end up in “public” hands—meaning some sort of publicly-traded vehicle that depends in part on the legal viability of its assets.
Lawyers can and do limit their liability to these more distant parties. Legal opinions typically “speak” only of a certain date, and run only to a limited number of 36 What about the cost to lawyers if there is no opinion? At minimum, it would be the loss of fees that could be charged for the work. At least according to the lawyer with whom I spoke, this cost would not necessarily be a great hardship. As one lawyer said, “no one becomes a rainmaker for writing opinions.” See Lipson, supra note 1, at 111 (quoting interview with Attorney L-1, transcript at 4). 37 See, e.g., California 2004 Report, supra note 1, at App. 4, at 9 (“Rating agencies very frequently require remedies opinions concerning material documents that support the credit being rated, for example, the indenture and the key contracts that provide credit or liquidity enhancement.”). 38 See Lipson, supra note 1, at 85 (discussing role of legal opinions in Enron).
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persons. Moreover, the Supreme Court’s decision in Central Bank of Denver, limited lawyers’ (and other professionals’) risks of liability in private suits under federal securities laws when not primary actors.39 Now, we know that, at least under the securities laws, wrongdoing must rise to an extremely high level, a point Judge Harmon seemed to make in her Enron pleadings decision.40
But just because lawyers may have no liability does not mean there is no cost. If these remote parties make investment decisions based in part on an erroneous legal opinion, and the deal fails, they will suffer a loss (cost). CBA tells us we cannot turn a blind eye to these sorts of costs experienced by third parties. These costs may be remote, unlikely, and difficult to estimate. But they are costs nevertheless.
What if, instead, there is no opinion? Do remote parties experience a cost if a transaction lacks an opinion? Here we enter a somewhat speculative realm. If the opinion is viewed as a signal of procedural regularity, those who are remote from the transaction—for example, loan purchasers—may be concerned if there is no opinion. The initial parties to the transaction may well have a reasonable handle on what happened, since they negotiated the deal. Later parties, by contrast, may not. They must rely on other evidence—including a closing opinion.41
The cost of no opinion to these remote parties would thus likely take one of two forms. Either the remote purchasers would incur additional due diligence costs, or they would pay less for the loans (or other assets) they purchase. Since additional diligence would be costly and difficult—what good reason would the borrower have for going through that again?—it would be more plausible to expect a reduction in the purchase price paid for these assets. The initial lender (or party in a similar position) doubtless understands this, which is why it may insist on having legal opinions that it believes the
39 In Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), the Supreme Court held that there can be no private causes of action for aiding and abetting a violation of the federal securities laws. 40 In Enron, Judge Harmon refused to dismiss a shareholder lawsuit against Enron’s principal outside counsel, Vinson & Elkins, because, among other reasons, the firm “drafted ‘true sales’ opinions that Lead Plaintiff asserts were essential to affect many of the allegedly fraudulent transactions.” In re Enron Corp. Sec. Lit., 235 F. Supp. 2d 549, 704 (S.D. Tex. 2002). Vinson & Elkins was later dismissed by lead plaintiff from the major shareholder class action. See In re Enron Corp. Sec., Derivative & “ERISA” Lit., Civ. Act. No. H-01-3624, 2007 WL 209923 (S.D. Tex., Jan. 24, 2007).
The examiner’s report in Enron indicated that Vinson & Elkins might have malpractice exposure for, among other reasons, its legal opinions. In re Enron Corp., Final Report of Neal Batson, Court-Appointed Examiner, at 50 (on file with author); First Interim Report of Neal Batson, Court-Appointed Examiner, September 21, 2002 (on file with author). The firm settled with Enron’s bankruptcy estate, for a reported $30 million. Vinson & Elkins, Enron reach settlement, Houston Bus. J., June 2, 2006, available at http://houston.bizjournals.com/houston/stories/2006/05/29/daily30.html (visited June 4, 2007). 41 A recent piece in the Wall Street Journal poses an interesting question for this logic. See Serena Ng and Henny Sender, Easy Money, WALL. ST. J. A1, June 26, 2007. The article notes that lending standards continue to slip, due in part to relaxation of loan covenants. If the loan agreements themselves impose decreasing legal obligations on the borrower, what purpose would a legal opinion serve? An interesting empirical question is thus whether the rise of so-called “collateralized loan obligations”—which are allegedly behind the current lending boom—have altered legal opinion practice. I discuss the “market-signaling” function of legal opinions in Lipson, supra note 1, at 81-87.
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“market” wants. The cost of proceeding without an opinion might be the cost of a deeper discount rate in subsequent sales of the loan (or other asset).42
4. Division of Labor
One of the chief economic complaints about legal opinions involves not the threshold question per se—whether to have an opinion—but the division of labor in their rendering. Lawyers and clients often express frustration with the fact that the “wrong” (or at least less efficient) lawyer is asked to provide certain opinions, in particular the enforceability (remedies) opinion.
As with the other closing opinions, the enforceability opinion is often written by the lawyer (e.g., for the borrower) who did not draft the underlying documents. While this lawyer may be in the best position to offer the authority and no-violations opinion—where she is opining about her client—the enforceability opinion asks the lawyer to opine on something with which she may have comparatively little familiarity—documents written by opposing counsel perhaps governed by law with which she is not familiar.43 As one lawyer who typically represented lenders explained:
When it comes to enforceability, in most cases, you [e.g., the bank’s lawyer] drafted the document, so you’re asking me to tell you that a document which probably you have drafted, used in various variations a hundred times in the past, you’re asking me to tell you that it works. I’ve never understood the justification for that.44
Another attorney expressed the same point in dollars and cents: “[L]ook, you’re paying your [recipient’s] lawyers [to draft the documents], . . . why do you need [Company counsel] to tell you they are enforceable?”45 Nor was this view confined to lawyers who represented borrowers. “[I]f I’m representing the lender,” one lawyer with a lending practice observed, “I’ve drafted the damn documents—they’re my documents. I’ve used them over and over again. I do know, or should know, whether or not they work.”46
CBA would appear to be a weapon against this seemingly irrational division of labor. If we take seriously what the lawyers—and our intuitions—tell us about legal
42 This is a cost that may ultimately be passed on to borrowers, themselves, although this seems somewhat unlikely. I am not, for example, aware of any lenders whose rates vary depending on whether the borrower obtains a legal opinion. The lawyers I interviewed indicated that the ease of credit had no bearing on whether an opinion was required. Even when a lender has “so much money [they] don’t know what to do with it and their lending officers can’t shovel it out fast enough,” a closing opinion of borrower’s counsel is usually required. See Lipson, supra note 1, at 115 (quoting interview with Attorney R-1, transcript, at 4). 43 The enforceability opinion is “the toughest opinion to give and often the toughest one that I’ve ever thought to justify” one attorney observed “because in essence what you’re asking is for the lawyer for the borrower or the lawyer for the seller or whatever to say that the document prepared by the lender’s lawyer is or isn’t enforceable.” See Lipson, supra note 1, at 89, n. 151 (quoting interview with Attorney S-1, transcript at 5). 44 See id. at 89-90 (quoting interview with Attorney H-1 (May 1, 2004), transcript at 6). 45 See id. at 90 (quoting interview with Attorney V-1, at 10). 46 See id. (quoting interview with Attorney C-1, transcript at 8).
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opinions, the remedies opinion should not come from borrower’s counsel, but from counsel to the party that drafted the contracts whose enforceability is in question. For a variety of reasons, drafting counsel will almost always be in a better position to opine on enforceability than non-drafting counsel. They should be admitted to practice under the governing law chosen in the contract (e.g., New York law), and should know whether the contract will work under that law.
Lawyers sometimes try to justify this division of labor on the grounds that the lender’s lawyer (usually New York counsel) wants to make sure that the loan and other agreements would be enforceable as if the local law of the borrower (rather than the chosen law) applied.47 The fact that the chosen law (e.g., New York) will almost certainly apply, however, draws this argument into question.
Similarly, lawyers sometimes say that the division of labor is justified by the “estoppel” effect of having borrower’s counsel render the enforceability opinion. The theory seems to be that the subject of the opinion, or counsel, would be too embarrassed to argue that the opinion was wrong. But this creates a host of problems. First, it just does not seem plausible. As the California report observers, clients will not typically be bound by their counsel’s statements in this context.48 The lawyer’s opinion should have little effect on whether a court in hindsight concludes the loan agreement was (or was not) enforceable—especially if the opinion came from non-drafting counsel. Second, there is something vaguely unethical about this justification for the division of labor. What it really does is make it more difficult—and costly—for the borrower to use deal counsel in a later workout or bankruptcy that might involve a challenge to the loan or similar agreements.49 This may add to the borrower’s cost, but it is not clear how it creates aggregate value for the parties.
47 See id. at 91 & n. 160 (“[W]hat I have done on occasion is gotten the borrower’s counsel to give an opinion that would say something like, let’s say the company’s in Kansas, to say that if an action was brought on the agreement in the courts of Kansas, the courts of Kansas would respect the New York governing law provision and provided, however, that if the courts of Kansas, notwithstanding the New York governing law provision chose to apply Kansas law, the agreement would be legal, valid, binding and enforceable.”) (quoting interview with Attorney B-1, transcript at 3). 48 See California 2004 Report, supra note 1, app. 4 at 5 (“it is doubtful that an estoppel could be asserted successfully against the opinion giver’s client based on its counsel’s third-party remedies opinion.”) (emphasis in original). 49 The recent bankruptcy of SonicBlue tells us that the mere fact that bankruptcy counsel represented a borrower in a prebankruptcy deal will not of itself create an estoppel-type problem. In that case, counsel for the debtor represented SonicBlue pre-bankruptcy. The firm issued an opinion letter in connection with certain bonds which apparently contained an error implying that certain bonds would be enforceable even if the debtor went into bankruptcy. After this came to light, the United States Trustee sought to have the law firm disqualified, its fees disgorged and the case converted to a liquidation under Chapter 7 of the Bankruptcy Code. Although Bankruptcy Judge Marilyn Morgan did not convert the case, she did disqualify the firm and appoint a Chapter 11 trustee. See In re SonicBlue Incorporated, et al., Memorandum Decision and Order on Motion to Appoint a Chapter 11 Trustee, etc, cases 03-51775--03-51778-MMC (Bankr. N.D. Calif. Mar. 26, 2007). She reserved the question of fee disgorgement for review by the Chapter 11 trustee. Id. slip op. at 19. See also Elinson, Trustee Wants Pillsbury to Repay $4 Million, Law.Com (Mar. 7, 2007), available at http://www.law.com/jsp/article.jsp?id=1173175410463 (visited June 25, 2007).
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In any event, notice what is going on here. The question is not whether the opinion itself is cost-justified, only whether it is issued in the most cost-effective way. These would seem to be two different questions. There appear to be few who suggest that we should dispense entirely with the remedies opinion. It would be striking if a bank made a loan without some assurance—formal or otherwise—that its loan agreement was enforceable against the borrower. Rather, the important economic battle will be over who prepares it. CBA can probably adequately address the latter question, telling us that it is pretty obvious that it will be more costly to have borrower’s counsel prepare the opinion than lender’s counsel. CBA may be better at telling us who should cross the threshold than it is at telling us whether to cross it.
We could take the division-of-labor point further. Not only will certain lawyers be in a better position to offer certain opinions than others, but certain questions will simply be more susceptible to legal analysis than others. Thus, it would seem that an opinion will make more economic sense when it presents a legal question within the lawyer’s area of expertise than a purely factual question, or a question of law with which the lawyer is less familiar. Some features of legal opinions would seem inefficient in this respect. To the extent that officers’ certificates duplicate representations in the contract, or obvious states of affairs—e.g., that the corporation is in good standing—they may not be cost-justified. They may be cheap to prepare, and so may wash out. But if they do add cost, the cost will be hard to justify.
B. Benefits
The benefits side of the equation really presents two distinct sets of questions. First, what constitutes a benefit; and second, what is it worth in dollars? Although both questions are probably easier to answer for legal opinions than for regulation, neither is free from difficulty.
1. What Is a Benefit?
Identifying with precision the benefits of third-party closing opinions turns out to be a challenging task. At a high level of generality—which is to say, imprecisely—we can imagine many benefits that might flow from the production of a legal opinion. The chief economic benefit associated with a legal opinion will, as discussed above, be precautionary and thus necessarily somewhat speculative. It is, as the California report suggests, the benefit from the “due diligence” supposedly evidenced by the legal opinion.50
Precaution may be beneficial, but it may not add “value” to the deal. A number of lawyers I interviewed observed that they had seen transactions collapse or change materially because of information that they believed would not have been produced but for the opinion.51 This does not mean that the transaction is cheaper; it means that it ends up being priced more accurately in the light of additional, better information generated 50 See California 2004 Report, supra note 1, at 2 (“[T]he primary purpose of a remedies opinion is to assist in due diligence for the transaction . . . .”). The connection between due diligence and the remedies opinion is not completely clear. If enforceability is a legal conclusion, it is not clear what factual information a legal opinion would produce that would not already be available to the drafting attorney. 51 See Lipson, supra note 1, at 78.
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through the opinion process. Sometimes, the greatest benefit will be in killing a deal early.
We should not overstate the informational benefits of the legal opinion, however. First, and most obviously, the opinion itself will not say much, given its many qualifications, etc. This is not a strong objection. More important will be the fact that in most cases, important information would come to light even without an opinion. Obviously, we cannot know this counterfactual state of affairs. But my sense is that most lawyers are sufficiently diligent most of the time that they would catch most real problems with the transaction, even if no opinion was required.
Thus, the principal informational benefits of the opinion will be symbolic and procedural. On the symbolic side, the opinion will be evidence of the formation of a legal judgment. This legal judgment will—or at least should—be the product of a variety of processes that the lawyer determined, in her professional judgment, relevant to form the opinion. The opinion is not exactly the judgment itself, however. Rather, it is merely the material embodiment that a legal judgment was formed. It is, in this sense, analogous to the relationship between a negotiable instrument and the underlying right to payment: A “reification” of a more complex series of rights and relations.52
This is not guaranteed, of course. Lawyers frequently note that they have been involved in transactions with unsophisticated or overworked lawyers who simply regurgitate on their letterhead the requested opinion, without any negotiation and, therefore, without any evidence that the lawyer really considered the opinion.53 Such opinions are understandably viewed skeptically.
But this suggests the second benefit of the opinion: It indicates that processes probably occurred that render the opinion acceptable. Ironically, this means that in opinion practice you should not actually want what you’ve asked for. Rather, what you should want is some push back from the opining lawyer, some give and take. This give and take may or may not produce additional information about the deal. But it should be evidence that the lawyer has thought about the opinion and the transaction, thus suggesting that the lawyer really did form a legal judgment.
What it means to form a legal judgment is beyond the scope of this discussion. It is worth noting, however, that a related benefit of opinion practice would appear to be the standardization of processes. As opinion-practice has become more routinized, and more fully analyzed by practitioners and bar associations, a consensus has emerged about “best practices.” We know from reading bar association reports and the treatises of Don Glazer and Arthur Field, among others, a great deal about how to prepare an opinion.54 And we
52 See, e.g., Dale A. Whitman, Reforming the Law: The Payment Rule as a Paradigm, 1998 B.Y.U. L. REV. 1169, 1169-71 (1998)(“negotiable instrument is a reification of the obligation it describes”). 53 See Lipson, supra note 1, at 100-101. 54 See id., at 115-120.
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know more: When we receive an opinion that has been duly negotiated, we can reasonably infer that something approaching these procedures was followed.55
Opinions may be unique in this regard. I am not aware of any studies on this, but we know that legal opinions are highly stylized writings, and the subject of an exceedingly large number of bar association and similar reports.56 Although this stylization may not enhance the readability of the opinion, it does suggest a level of standardization that may be unusual, and perhaps unique, among legal documents. If legal opinions are more standardized due to the work of the bar associations and professional authors, then legal opinions may be a tool for channeling and disciplining practice in a variety of ways. They may be what the cognitive scientists call a “schema”—a sort of template that tells lawyers what to expect and how to think about a variety of questions relevant to a transaction.57
2. Quantifying the Benefit
While there is certainly value in improved efficiency, it may be difficult to quantify and isolate in many cases. Indeed, quantifying the benefit of legal opinions generally is difficult, and breaks into two related questions: First, is it even possible to quantify the benefits of an opinion? Second, if it is possible, is that a good thing?
The practical problem with quantifying the benefits of a legal opinion will be the problem of quantifying the unknown. This is a problem with CBA in general. Most regulation will have some benefit; the hard, irreducible question is whether that benefit can be made commensurable with its associated costs in a generally accepted quantum, e.g., dollars.
As discussed above, the important informational value of a legal opinion will be precautionary. This means that in many cases the opinion simply confirms a negative: There are no serious, undisclosed legal problems with the transaction. But until you do the exploration the opinion calls for, you have less assurance that everything is as it appears to be. If the opinion process does show that reality does not match the parties’ reasonable expectations, it will clearly have had benefit, although not necessarily of a happy sort.
For example, benefit here might be calculated in terms of losses avoided. Mary avoids “losing” $100 by not making a loan to John when the legal opinion process shows that John lacks authority to engage in the transaction, and could not get this authority. But, we also know that a deal might “succeed” despite undiscovered infirmities. John might faithfully repay Mary’s loan, oblivious to the fact that he lacked the authority to borrow the money in the first place. Conversely, there might be multiple, intervening causes of loss: John’s business may fail for reasons having nothing to do with the fact that he lacked authority to borrow the money. 55 Attempts to standardize legal opinion practice have not always succeeded. The “Legal Opinion Accord”, for example, appears to have met significant resistance from attorneys who disagreed with its recommended approach. See id. at 118-119. 56 See id. at 119. 57 See Mark P. Higgins & Mary P. Tully, Hospital Doctors and Their Schemas about Appropriate Prescribing, 39 MED. EDUC. 184 (2005).
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Economists can develop complex mathematical models to account for these or similar possibilities. But, as noted at the outset, it is unlikely that lawyers will do this. Rather they will engage in a rough CBA that tells them that in deals of a certain sort, certain opinions will be expected and appropriate. I have no particular problem with this folk-CBA, although suspect that it will not answer hard questions in hard cases.
A bigger concern is how seriously we should take the quantification of the benefits of a legal opinion. If the chief value of the opinion is its role in the process of forming a legal judgment, I have doubts about whether conventional CBA will be much help. In the regulatory context, it will usually be easier to estimate the costs of products (e.g., new scrubbers) than of process—especially when, going in, you don’t know exactly how much process you’ll need. Even if we can estimate the costs of process, my concern is that in doing so we will lose sight of the legal opinion’s real, process-oriented value—evidence that a legal judgment was formed in a reasonably sound and predictable way. Legal opinions are not smokestack scrubbers, and we should be careful to avoid treating them as such.
III. What Can CBA Do?
At this point, the reader may think cost-benefit analysis has little to offer to opinion practice. That, however, would be a mistake. CBA has many problems, but is, to paraphrase Churchill’s view of democracy, doubtless better than the alternatives.58 In its folk version, CBA can help with at least two things: First, it can make even easier the decision in easy cases whether or not to have a legal opinion. Second, it should help to resolve disputes over the division of labor.
A. Making Easy Cases Easier
The first thing CBA can do is make the “easy” questions about whether to have an opinion even easier. There is anecdotal evidence that there is a kind of deal inflation associated with the threshold question. The California report notes that a remedies opinion may not be required in loans under $100 million or merger/acquisition transactions under $10 million.59 Lawyers I spoke with indicated that these numbers had grown over time, and that opinions had previously been required in smaller-denomination transactions.
The “easy” cases will thus be those under a certain dollar amount, or involving seemingly standardized sets of facts. Note that the cost-benefit analysis in these cases does not really involve the “costs” of the closing opinion in itself, but rather the benefit in relation to the size of the transaction.60 The suggestion seems to be that a transaction below a certain dollar amount will presumptively involve so little risk, or warrant so little 58 “It has been said that democracy is the worst form of government except all the others that have been tried.” Winston Churchill, available at http://thinkexist.com/quotation/it_has_been_said_that_democracy_is_the_worst_form/15815.html (visited June 25, 2007). 59 California 2004 Report, supra note 1, App. 4 at 1, n. 4. 60 See id. App. 4, at 12 (the closing opinion CBA “involves measuring the cost of preparation against the benefit that the opinion recipient obtains through its reliance on the [] opinion, taking into account the size and complexity of the transaction.”).
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cost, that the benefits of a legal opinion are unlikely to be justifiable. There is, of course, no guarantee that the real benefit of a legal opinion will be any less in a small dollar transaction.
Nevertheless, what CBA has done here is help to create certain “bright line” tests around which the parties can orient their negotiations about whether to have an opinion. CBA creates a dollar-denominated presumption for or against a legal opinion. Mostly, this means that CBA will give a borrower (or borrower’s counsel) negotiating leverage in smaller or “easier” transactions to resist a request for an opinion by arguing that there is a number that signals whether an opinion is cost-justified—e.g., a loan valued in excess of $100 million, or whatever the number may be in the future. But it can also make easier the negotiations over whether to have an opinion in larger or more complex transactions. While it strikes me as unlikely that borrower’s counsel would balk at opining in very large transactions, CBA does make such objections more difficult.
The rhetoric of CBA gives lawyers a seemingly objective metric to point to when negotiating the threshold question. It may be somewhat illusory, in the sense that it may mask the real costs or benefits of precautionary discovery associated with the process of producing an opinion. Nevertheless, in those cases which the parties might be inclined to treat as “easy,” CBA will make the decisions that much easier because it will offer a comparatively objective basis for negotiating the threshold question.
B. Division of Labor—Fee Splitting
CBA can, as noted above, be even more effective at addressing questions about the division of labor. While it is easy to come up with arguments for having an enforceability opinion in a transaction, it is much harder to justify having the borrower’s lawyer (or equivalent non-drafting counsel) render the opinion. CBA creates a strong basis for arguing against this division of labor. Even if parties are unlikely to alter the practice any time soon, CBA can help here by creating a way for parties to share costs.
For example, counsel to borrower may be asked to give an enforceability opinion, and object on the usual grounds that he does not practice under the chosen law, did not draft the contract, etc. Rather than joust about who should give this opinion—whether there is real economic benefit in “estoppel,” for example—CBA would suggest that the parties focus on the actual cost of producing this opinion in this way. If lender’s counsel can produce it for less than borrower’s counsel—and that should be the case—then borrower can ask that lender absorb the cost of borrower’s counsel above that amount attributable to the rendering of the enforceability opinion. This would require borrower’s counsel to keep careful track of the costs attributable solely to the remedies portion of the opinion, which may be difficult. Nevertheless, if we are to take seriously complaints of inefficiency in this division of labor, it must be possible to document to some rough extent its real costs.
Lenders—and their lawyers—may resist. But the logic of CBA may help to break down this resistance. If borrower can show that the transaction cost $10,000 more to have her lawyer—rather than lender’s lawyer—write the remedies opinion, the lender will be forced to develop some economic response. In many cases, it will likely be a shrug of indifference—at that point in the transaction, the borrower is not likely to walk away. But if borrowers—and, more important, their counsel—become disciplined about
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documenting and challenging the excess costs associated with this division of labor, we might see real change here, a change CBA could make possible.
IV. Conclusion
The threshold question—whether to have an opinion—actually embeds three related questions: First, should an opinion issue at all? Second, if so, who should do it? And third, who should bear its real costs? CBA can do a very good job with the second and third questions. It can also provide guidance on the first question. But it will necessarily be limited by deeper constraints on our ability to measure things that may be difficult to quantify. These are constraints that lawyers understand well. We may be cynics but, contra Oscar Wilde, we tend to understand the difference between price and value.61
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61 “The cynic knows the price of everything and the value of nothing.” Oscar Wilde, available at http://www.brainyquote.com/quotes/quotes/o/oscarwilde100579.html (visiting June 26, 2007).
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#5
PRICE, PATH & PRIDE: THIRD-PARTY CLOSING OPINION PRACTICE AMONG
U.S. LAWYERS (A PRELIMINARY INVESTIGATION)
BY
JONATHAN C. LIPSON
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Price, Path & Pride: Third-Party Closing Opinion Practice Among U.S. Lawyers (A Preliminary
Investigation)
Jonathan C. Lipson†
This Article provides a qualitative empirical analysis of third-party closing opinion practice. This practice has recently generated some controversy because, among other reasons, many of the transactions at issue in Enron were supported by closing opinions. Interviews with lawyers around the nation suggest that the traditional academic view of opinion practice—that it promotes economic efficiency—is helpful but incomplete. Many features of closing opinion practice persist despite perceived inefficiencies. Moreover, non-market actors, such as the bar associations—not private innovation—appear to be the chief engines of improvement. Based on these interviews, the Article offers some initial thoughts as to why the practice exists and what functions it may perform.
TABLE OF CONTENTS
Introduction........................................................................................................61 I. Price—A Theory of Value..............................................................................65
A. Transaction Cost Engineering ...........................................................66
† Associate Professor of Law, Temple University-James E. Beasley School of Law. This project has benefited from the comments and suggestions of, among others, Bernard Black, Cynthia Fuchs Epstein, Donald Glazer, Ronald Gilson, Alan Gold, Terrence Halliday, Robert Lawless, Gerald Lipson, Lynn LoPucki, Ronald Mann, Eleanor Myers, Kathleen Noonan, William Simon, Deborah Thorne, Elizabeth Warren, Jay Westbrook, William J. Woodward, Jr., and participants at the 2005 Harvard/Texas Commercial Realities Workshop, the 2005 Yale-Stanford Junior Faculty Forum, 2004 meetings of the Canadian Law and Economics Association, and the Midwest Law and Economics Association, as well as symposia at the Temple University and Villanova University Schools of Law. Kelly Phillips, Noa Kaumeheiwa, Gary Herwig, Sarah Ellis, Rhadika Prabakar, and Dana Eddis provided research and administrative support. The research for this project was supported, in part, by generous grants from the Temple University and University of Baltimore Schools of Law. Special thanks go to the many attorneys who gave their time and energy to this project. In addition to the usual disclaimer about errors and omissions (they are mine, alone), I wish to make the following disclosures. First, from 1992 to 1995, I was associated with the law firm of Kirkland & Ellis, one of the firms discussed briefly in this article. Second, I have held several leadership positions with the Business Law Section of the American Bar Association, an organization that has exercised influence in the development of legal opinion practice. Finally, I am a consultant and possible expert witness in a case involving legal opinions. Nevertheless, the views expressed here are entirely and exclusively my own, and are intended to be impartial. © Jonathan C. Lipson 2005.
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Berkeley Business Law Journal Vol. 3.1, 2005
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1. Information Production...............................................................67 2. Verification—Reputation Bonding.............................................68
B. A Framework for Assessing Closing Opinion Value ........................69 II. Price—What the Lawyers Say ......................................................................70
A. Due Diligence....................................................................................71 1. Due Authority .............................................................................72 2. No Violation/No Litigation.........................................................76
B. Signaling Remote Parties (the “Market”) ..........................................81 III. Price Problems .............................................................................................84
A. Enforceability Opinions.....................................................................84 B. Substantive and Procedural Limitations on Closing Opinion
Practice ...........................................................................................84 1. Qualifications..............................................................................84 2. Process Problems: Timing and Heterogeneous Expectations .....84
C. Externalizing Costs onto Lawyers .....................................................84 1. Legal Liability ............................................................................84 2. Reputational Costs ......................................................................84 3. Emotional Costs..........................................................................84
IV. Path and Pride..............................................................................................84 A. Path Dependence ...............................................................................84
1. Plus Ça Change . . ......................................................................84 2. The Bar Associations ..................................................................84
B. Pride 84 V. Conclusion: Further Inquiry..........................................................................84 Appendix............................................................................................................84
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Price, Path & Pride: Third-Party Closing Opinion
Practice Among U.S. Lawyers (A Preliminary Investigation)
Jonathan C. Lipson
“Too much time, effort and money are expended on third-party legal
opinions.”1 “In rendering legal opinions, lawyers conduct themselves as if their
professional lives were on the line.”2 “A legal opinion hits nerve centers in every direction.”3 “When I want your opinion, I’ll give it to you.”4
INTRODUCTION
Why do lawyers ask for and give third-party closing opinions? Few practices among U.S. lawyers are more curious—or (curiously) less
studied by legal scholars5—than this. Third-party closing opinions are writings
1. Business Law Section of the State Bar of California, Report on Third-Party Remedies Opinions (2004), at 1, available at http://www.calbar.ca.gov/calbar/pdfs/sections/buslaw/opinions/2005-01_remedies-opinion.pdf [hereinafter California 2004 Report].
2. SCOTT FITZGIBBON & DONALD W. GLAZER, LEGAL OPINIONS § 1.1, at 4 (1992). This leading work on third-party closing opinions has been superseded by a second edition, DONALD W. GLAZER ET AL., GLAZER AND FITZGIBBON ON LEGAL OPINIONS IN BUSINESS TRANSACTIONS (2d ed. 2001). [I will refer to the first edition as “FITZGIBBON, OPINIONS,” and the second edition and its 2006 Cumulative Supplement as “GLAZER, OPINIONS.”].
3. James Fuld, Lawyers’ Standards and Responsibilities in Rendering Opinions, 33 BUS. LAW. 1295, 1316 (1978).
4. Samuel Goldwyn (quoted in http://www.cinerhama.com/jewish/goldwyn.html) (last visited Jan. 11, 2006).
5. There has never been a full-blown theoretical or empirical attempt to understand this odd and important artifact of legal practice. There have been several useful articles that consider opinion practice in passing. See, e.g., Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 YALE. L.J. 239, 274-77 (1984); Mark C. Suchman & Mia L. Cahill, The Hired Gun as Facilitator: Lawyers and the Suppression of Business Disputes in Silicon Valley, 21 LAW & SOC. INQUIRY 679 (1996). A 1992 article in the University of Missouri-Kansas City Law Review considered how legal opinions might be used in the law school classroom. See Bryn Vaaler, Bridging the Gap: Legal Opinions as an Introduction to Business Lawyering, 61 UMKC L. REV. 23 (1992). Moreover, Professor Schwarcz has recently offered a defense of lawyers issuing opinions in one type of transaction, structured financings. See Steven L. Schwarcz, The Limits of Lawyering: Legal Opinions in Structured Finance, 84 TEX. L. REV. 1 (2005). There is also a rich body of doctrinal and practical literature discussed in Part I, infra. Yet, there has (until now) been little effort to ask the most basic question: Why do lawyers engage in this practice at all? Why academics have failed to study it is easier to understand. To the extent that academics will have practiced law, they are unlikely to have had a transactional practice, much less one at a level of sophistication involving the requesting or giving of third-party closing opinions. See generally Richard
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(typically in the form of a letter) from the lawyer to one party in a transaction (e.g., the borrower) to the other party (e.g., the lender).6 At their simplest, closing opinions focus on three matters: (1) the “authority” of the subject of the opinion (the “Company”) to engage in the transaction, (2) the enforceability of the transaction contracts against the Company, and (3) assurances that the transaction (and perhaps the Company) is not in violation of any applicable law or contract.
While the volume of third-party closing opinions is difficult to gauge, they are viewed as a “fixture of the American legal scene,”7 and are routinely delivered in financings, mergers and acquisitions, stock issuances, and other large, complex transactions.8 A recent bar association report observed that “every week . . . hundreds, if not thousands, of third[-]party legal opinions are delivered at closings for business transactions.”9 Yet, lawyers frequently complain that opinions create needless costs and risk without adding much value. Thus, opinion-writing poses a simple question: why have it at all?
The explanation thus far has principally been economic: closing opinions ostensibly reduce information asymmetries by compelling the production and verification of information that enables parties to price their transactions more
E. Redding, “Where Did You Go to Law School?” Gatekeeping for the Professoriate and Its Implications for Legal Education, 53 J. LEGAL EDUC. 594, 596 (2003). That academics have not engaged in the practice does not—and should not—render it less curious and worthy of study.
6. See The TriBar Opinion Committee, Third-Party “Closing” Opinions, 53 BUS. LAW. 592, 606 (1998) (“At the closing of many business transactions, counsel for one party to the transaction will deliver a letter to the other party expressing its conclusions on various matters of legal concern to that other party.”) [hereinafter TriBar 1998 Report]. This report, as well as many others, was authored by the “TriBar Committee,” a committee of lawyers devoted to developing standards in closing opinion practice. The TriBar Committee has “exercised great influence over the years, due not only to the importance of New York in capital markets, but also to the consistent high quality of its work product.” See Ad Hoc Committee on Third-Party Legal Opinions, Business Law Section of the Washington State Bar Association, Report on Third-Party Legal Opinion Practice in the State of Washington, at 4 n.3 (1998) (reprinted in GLAZER, OPINIONS, supra note 2, at app. 2) [hereinafter Washington State Report]. The TriBar Committee’s original contribution was Legal Opinions to Third Parties: An Easier Path, 34 BUS. LAW. 1891 (1979) [hereinafter TriBar 1979 Report]. Other TriBar efforts include An Addendum—Legal Opinions to Third Parties: An Easier Path, 36 BUS. LAW. 429 (1981); Second Addendum to Legal Opinions to Third Parties: An Easier Path, 44 BUS. LAW. 563 (1989); Special Report of the TriBar Opinion Committee: The Remedies Opinion, 46 BUS. LAW. 959 (1991). The TriBar’s most recent contribution is the Special Report of the TriBar Opinion Committee: The Remedies Opinion—Deciding When to Include Exceptions and Assumptions, 59 BUS. LAW. 1483 (2004) [hereinafter TriBar Remedies Report]. The background of the TriBar Committee is discussed in Part IV.A.2, infra.
7. GLAZER, OPINIONS, supra note 2, § 1.1, at 2. 8. A recent report by the Business Law Section of the California Bar Association observed, based
on an informal study, that the enforceability term of the closing opinion letter (sometimes called a remedies opinion) is “almost always requested by lenders in loan transactions exceeding $100 million.” California 2004 Report, supra note 1, app. 4, at 1 n.4. This report indicates that the enforceability opinion is given in merger and acquisition transactions involving $10 million or more (at least among privately-held companies) and in many private securities transactions. Id.
9. Committee on Legal Opinions, ABA Section of Business Law, Law Office Opinion Practices, 60 BUS. LAW. 327 (2004) [hereinafter Opinion Practices].
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accurately.10 In the vernacular, closing opinions are part of the “due diligence” process that occurs in most business transactions.11 Yet, the evidence, which includes interviews with lawyers around the country, tells a more complex story.12 On the one hand, attorneys acknowledge that certain aspects of certain opinions—in particular the opinions on authority and the absence of impediments to the deal—may add value in just this information-enhancing way. Moreover, and more subtly, lawyers routinely speak about the role of closing opinions in economic terms. For example, a recent report of the Business Law Section of the State Bar of California on the enforceability opinion—often the most controversial portion of the closing opinion—explicitly calls for the creation of a “cost-benefit framework for determining the appropriateness of requesting an enforceability opinion in a transaction.”13
On the other hand, the economic explanation is incomplete for at least three reasons. First, unscrupulous clients have perpetrated famous financial frauds despite the issuance of closing opinions, suggesting that they may not produce important information when it matters most. For example, Judge Harmon, presiding over the securities fraud suits against Enron’s lawyers,14 and the Enron examiner,15 both characterized legal opinions as important in the chain of alleged wrongdoing.
Nor is Enron unique. Famous frauds in the National Student Marketing
10. See Gilson, supra note 5, at 275-76. As discussed further below, Gilson developed in this article a view that lawyers are (or should be) “transaction cost engineers” who “devis[e] efficient mechanisms which bridge the gap between capital asset pricing theory’s hypothetical world of perfect markets and the less-than-perfect reality of effecting transactions in this world.” Id. at 255.
11. “When received, the closing opinion serves as a part of the recipient’s diligence, providing the recipient with the opinion giver’s professional judgment on legal issues concerning the opinion giver’s client, the transaction, or both, that the recipient has determined to be important in connection with the transaction.” See Committee on Legal Opinions, Guidelines for the Preparation of Closing Opinions, 57 BUS. LAW. 875, § 1.1, at 875 (2002) [hereinafter ABA 2002 Guidelines]; see also Committee on Legal Opinions, Third-Party Legal Opinion Report, Including the Legal Opinion Accord of the Section of Business Law, American Bar Association, 47 BUS. LAW. 167 (1991) [hereinafter Accord]. The ABA promulgated in the Accord a series of guidelines on opinion practice, later supplemented by the ABA 2002 Guidelines. [hereinafter ABA 1991 Guidelines].
12. The methodology of these interviews is described in the Appendix to this Article. In order to preserve the confidentiality of the records, while maintaining the integrity of the data, I have identified the attorneys in code, and will cite to the transcripts of the interviews in the following manner: “Interview with Attorney A-1 (date), transcript at [ ].”
13. California 2004 Report, supra note 1, at 1, 6 (“[T]he benefits [of a remedies opinion] must warrant the time and expense required to prepare the opinion.”), app. 4.
14. The opinions at issue in the Enron case appear to have been “true sale” or “true issuance” opinions, which are elaborations on the more generic authority, enforceability, and no-violations opinions. In re Enron Corp. Sec. Lit., 235 F. Supp. 2d 549, 704 (S.D. Tex. 2002) (denying law firm’s motion to dismiss charges of primary violations under § 10(b) of the Securities Exchange Act of 1934 because, among other things, the firm “drafted ‘true sales’ opinions that Lead Plaintiff asserts were essential to affect many of the allegedly fraudulent transactions.”). It is not clear that these were third-party opinions, at least in a conventional sense. The role that closing opinions played in the Enron case is discussed in Parts II.B & III.C, infra.
15. See In re Enron Corp., Final Report of Neal Batson, Court-Appointed Examiner, at 48-55, app. C, at 179-202, annex 1, at 25-31 (on file with author) [hereinafter Enron Final Report].
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Corp.16 and OPM17 cases, among others, were also perpetrated despite the presence of third-party closing opinions.18 These cases suggest that, in the right (or wrong) circumstances, closing opinions may not merely fail to deter fraud; they may actually abet it, especially if the lawyer has given the opinion knowing of the client’s malfeasance.
Second, even without fraud, lawyers acknowledge that closing opinion practice often fails to enhance in a cost-effective way the quality or quantity of information produced. Closing opinions are usually heavily qualified and, in the case of the enforceability opinion, typically require the less-expert lawyer to offer the opinion, even though he or she would not be its “least-cost” producer. A number of lawyers observe that closing opinions often serve little purpose at all; they are given simply because they are “on the checklist.”19 Lawyers thus suggest that opinion practice may exist in its current form for purposes less wholesome than the production of information. It may exist, for example, as a kind of “deal insurance” by exposing the opining attorney to potential liability if the deal has failed and there turns out to be a defect in the opinion.20
Third, and most curiously, opinion practice appears to resist market-based change. This is surprising, since Gilson’s economic model would predict that negotiated transactions should result in enhanced efficiencies over time. Thus, clients and lawyers should waive or modify third-party closing opinions to the extent that they do not add informational value. Yet, while it appears that the market does play some role in the development of opinion practice, it also appears that the chief engines of adaptation are bar associations, which produce voluminous reports and forms which solve problems that the market does not or cannot fix.21 This suggests that, so far as the market is concerned, the costs of private innovation in this context are perceived to be more than the resulting gains.22
Why might that be? Although the evidence is preliminary and qualitative (and therefore subjective), it appears that non-economic social forces, not just the market, shape closing opinion practice. Interviews with attorneys suggest
16. See SEC v. Nat’l Student Mktg. Corp., 457 F. Supp. 682 (D.D.C. 1978). 17. GEOFFREY C. HAZARD, JR., ET AL., THE LAW AND ETHICS OF LAWYERING 304-08 (3d ed. 1999)
(discussing Report of the Trustee Concerning Fraud and Other Misconduct in the Management of the Affairs of the Debtor, In re O.P.M. Leasing Servs., Inc., No. 81 B 10553 (Bankr. S.D.N.Y. Apr. 25, 1983)).
18. See Keith R. Fisher, The Higher Calling: Regulation of Lawyers Post-Enron, 37 U. MICH. J.L. REFORM 1017, 1046-67 (2004) (discussing frauds in these cases).
19. See discussion infra Part IV.A.2. 20. Cf. GLAZER, OPINIONS, supra note 2, § 1.3.2, at 11 (“Another benefit sometimes ascribed—
wrongly—to an opinion letter is that it serves as an insurance policy.”). 21. Exactly how influential these reports are is an empirical question that might be addressed in a
future survey of a broader group of practitioners than was interviewed for this Article. 22. Cf. Gilson, supra note 5, at 253 (“As long as the costs of innovation are less than the resulting
gains, private innovation to reduce the extent of market failure creates value.”).
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that inefficiencies in closing opinion practice might stem from its path-dependent character (e.g., opinions are given simply because they are on “the checklist”), as well as the “pride”—assertions of self and status—of the lawyers (and clients) involved in (or affected by) the practice.23 Thus, the title of this Article: “Price, Path and Pride.” The thesis of the Article is that we can only begin to understand third-party closing opinion practice in the United States by recognizing that it reflects both economic (price) and non-economic (path and pride) considerations.
Closing opinions are likely to become more, not less, controversial in the coming years. Many of the lawyers interviewed for this project said that they thought that lawyers were becoming increasingly attractive litigation targets when transactions failed, and that opinion letters would form an important link in the chain leading to liability. Moreover, pressure to create increasingly complex transaction structures24 will likely demand that lawyers issue more, perhaps riskier, closing opinions. If the trend identified by the lawyers interviewed for this project bears out, lawyers may have far greater exposure than they are prepared to absorb.
This Article has four major Parts and an appendix that describes the empirical methods used. Part I summarizes Professor Gilson’s theory of legal opinion practice, and uses it to propose a framework for analyzing closing opinions. Parts II and III apply this framework to lawyers’ observations about those aspects of opinion practice that (respectively) do and do not add value. Part IV develops a supplemental explanation based on the practice’s path-dependent and socially-contingent nature. The Article concludes with suggestions for further work in this important but comparatively under-studied area.
I. PRICE—A THEORY OF VALUE
To date, the principal explanation for closing opinion practice has been economic: third-party closing opinions exist because, like other aspects of business lawyering, they should provide value to the parties in excess of the cost of their preparation. The challenge, however, is that while “[a]ll legal opinions add cost to transactions . . . not all legal opinions add commensurate value.”25 Given the ubiquity of opinion practice, it would be unusual if third-party opinions in fact added no economic value to the transactions of which they are a part. How, then, might they in fact add value?
23. Both concepts (path dependence and social pride) are explained in Part IV, infra. Practical examples of the “checklist” are discussed in, among others, JAMES C. FREUND, ANATOMY OF A MERGER: STRATEGIES AND TECHNIQUES FOR NEGOTIATING CORPORATE ACQUISITIONS (1975).
24. See, e.g., Steven L. Schwarcz, Rethinking the Disclosure Paradigm in a World of Complexity, 2004 U. ILL. L. REV. 1.
25. Washington State Report, supra note 6, at 10.
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A. Transaction Cost Engineering
Professor Gilson’s Value Creation model is a good place to start.26 There, Gilson set out to answer the important and basic question: What value—if any—do business lawyers generally add to the transactions on which they work?27 If lawyers do not, in fact, add value to the transaction in the aggregate, their work is at best “[besides] the point”28 and possibly destroys (by consuming) value that would otherwise flow to the parties, themselves.
Gilson began by considering and rejecting two common hypotheses about the value that business lawyers might create: (1) that a lawyer may improve her client’s deal, even at the expense of the other party, by redistributive bargaining; and (2) that a lawyer reduces regulatory costs.29 He rejected the first because he observed that the important economic question was not whether business lawyering increases a particular party’s share, but whether the overall value of the transaction increases due to the lawyer’s contributions. If business lawyers engaged only in redistributive bargaining, rational clients would rarely use lawyers because “net of lawyers’ fees, the surplus from the transaction to be divided between the clients would be smaller as a result of the participation of the lawyer, rather than larger.”30 He rejected the second explanation—regulatory arbitrage—because, he claimed, it “does not get us far enough.”31 There are, he argued, simply too many lawyered transactions in which regulation plays little role for this to be a persuasive explanation.32
Gilson argued instead that business lawyers are “transaction cost engineers” who, in a variety of ways, reduce the difference between the value that capital assets would obtain in a perfect market (i.e., on the capital-asset pricing model) and the price actually agreed-to in the imperfect world that clients occupy:
Lawyers function as transaction cost engineers, devising efficient mechanisms which bridge the gap between capital asset pricing theory’s hypothetical world of perfect markets and the less-than-perfect reality of effecting transactions in this
26. See Gilson, supra note 5. Gilson’s analysis of business lawyering was at the time considered a new and important development. See generally OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS OF CAPITALISM 397 (1985).
27. Gilson, supra note 5, at 243 (“Precisely how do the activities of business lawyers affect transaction value?”).
28. Id. Of course it is easy to imagine that clients believe that increasing their slice of the pie does produce value—for them. See, e.g., Edward A. Bernstein, Law & Economics and the Structure of Value Adding Contracts: A Contract Lawyer’s View of the Law & Economics Literature, 74 OR. L. REV. 189, 195 (1995) (“Contract lawyers, who are properly concerned only with the well being of their clients, frequently fail to understand that a reduction in joint costs can benefit their client perhaps because, in practice, many actions that increase the value of a transaction as a whole decrease the value of a transaction to one of the parties.”).
29. Gilson, supra note 5, at 245-46. 30. Id. 31. Id. at 247. 32. See id. (“[B]usiness lawyers frequently function in a world in which regulation has made few
inroads.”). This is an empirical question that many business lawyers might challenge.
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world. Value is created when the transactional structure designed by the business lawyer allows the parties to act, for that transaction, as if the assumptions on which capital asset pricing theory is based were accurate.33 For Gilson, closing opinion letters are one such “efficient mechanism.”
Gilson argued that third-party opinion letters (as with business lawyering in general) can reduce information asymmetries (and therefore produce value) in two important ways: (1) by producing information; and (2) by providing a bonding mechanism by which the information can be verified.
1. Information Production
Often, the parties will be the best producers of information about themselves. Thus, the seller of a business will know a great deal (or at least more than the buyer, ex ante) about the value of the business. Gilson, however, recognized that the “[p]roduction of certain information concerning the character of the seller’s assets and liabilities simply requires legal analysis.”34 Thus, Gilson argued, seller’s counsel will typically provide an opinion to the buyer on a variety of matters relating to the sale because seller’s counsel is the “least-cost producer of the information in question.”35 Producing a third-party opinion, he argued, is simply part of the process of producing information that will lead to a better transaction for all. “For example,” Gilson writes:
[D]etermination of the seller’s proper organization and continued good standing under state law, the appropriate authorization of the transaction by seller, the existence of litigation against the seller, the impact of the transaction on the seller’s contracts and commitments, and the extent to which the current operation of the seller’s business violates any law or regulation, represent the production of information which neither the buyer nor the seller previously had, by a third-party—the lawyer—who is the least-cost producer [of the information].36
33. Id. at 255. The “capital asset pricing” theory posits, in part, that markets will, over time, correctly price assets. Id. at 251. If the theory held, “business lawyers cannot increase the value of a transaction. Absent regulatory-based explanations, the fees charged by business lawyers would decrease the net value of the transaction.” Id. As Gilson acknowledges, the CAPM is not without its critics, who question many of its assumptions, including that its two parameters—risk and return—are the only ones of significance. Id. at 251 n.31 (collecting citations of criticisms of the CAPM). Nevertheless, Gilson argues, the value of the CAPM is “normative: It describes why the factors it specifies [i.e., risk and return] should count.” Id.
34. Id. at 274. 35. Id. at 276. 36. Id. at 275. As discussed below, there may be problems with this description of the function of a
legal opinion. First, an opinion that the seller’s business violates no laws or regulations would run afoul of the ABA’s 2002 Guidelines. See ABA 2002 Guidelines, supra note 11, § 4.3, at 880 (“[A]n opinion giver should not be asked for an opinion that its client is not in violation of any applicable laws or regulations or that its client is not in default under any of the client’s contractual obligations.”). As Glazer notes, “[a]n opinion on the company’s, as opposed to the transaction’s, compliance with law is far too broad.” GLAZER, OPINIONS, supra note 2, § 13.3, at 463. Second, Gilson emphasizes only the authority and no-violations opinions—not the more controversial enforceability opinion. As discussed in Part III.A, infra, it will be much harder to support a claim that the enforceability opinion given by the seller’s counsel creates value on this model, unless seller’s counsel also drafted the purchase and sale agreement.
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The advantage of this mode of information production, Gilson argued, is that it “provides a non-adversarial approach to resolving the conflict” over the content of the opinion.37 It is non-adversarial, he argues, because “reducing the cost of information necessary to the correct pricing of the transaction is beneficial to both buyer and seller.”38 Rather than argue about many of the things that often concern lawyers who ask for and give opinions—the form of the opinion, for example—lawyers should principally be concerned with “the cost of producing the information” required by the transaction.39
2. Verification—Reputation Bonding
Third-party closing opinions may also reduce information costs in another way, by creating a mechanism for verifying the information produced in the transaction. Gilson argued that transactional techniques commonly deployed to verify information—indemnification provisions, hold-backs, earnouts—“are imperfect because they do not entirely eliminate the potential for opportunism inherent in one-time transactions,” such as asset sales.40 The solution, he suggests, lies in the reputational bond effectively posted by the lawyer. Unlike the parties (who may expect no future involvement with one another, and for whom final-period opportunism may be quite attractive), Gilson suggests that professionals reliably post their reputations as a bond—act as reputational intermediaries41—because they expect future work. “If the intermediary cheats in one transaction—by failing to discover or disclose seller misrepresentations—its reputation will suffer and, in a subsequent transaction, its verification will be less completely believed.”42
Legal opinions are, according to Gilson, an important tool in creating the lawyer’s reputational value.43 The legal opinion would perform this function, Gilson argued, by having the lawyers state that they “‘are not aware of any factual information that would lead us to believe that the [asset purchase] agreement contains an untrue statement of a material fact or omits to state a fact necessary to make the statements made therein not misleading.’”44 This is a
37. Gilson, supra note 5, at 275. As discussed below, interviews with lawyers suggest that under certain circumstances, negotiations over the scope of the opinion can be quite adversarial.
38. Id. at 275-76. Although beyond the scope of this paper, it would appear that this supposes, among other things, the absence of strategic behavior by either or both parties. As noted below, it would seem that recipient’s counsel often demands provisions in opinions that do not necessarily enhance the information produced.
39. Id. at 276 (“Debate over the scope of the opinion should focus explicitly on the cost of producing the information.”).
40. Id. at 288-89. 41. Id. at 290.
42. See id. 43. Id. at 291 (“[A] particular opinion often required of the seller’s lawyer . . . most prominently
highlight[s] the reputational intermediary role played by [lawyers].”). 44. Id.
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curious choice because, among other reasons, it is not clear that it is an appropriate opinion to give in an asset sale (the type of transaction Gilson was describing). Rather, as the ABA’s 2002 Guidelines indicate, “such a negative assurance opinion . . . is unique to securities offerings . . . .”45 It is “appropriate only when it is required for that purpose in connection with a . . . securities offering . . . .”46
Nevertheless, while this particular opinion may not be given in asset sale transactions, the “central characteristic” of this (or any other) legal opinion is said to be that “a third party who has been intimately involved in the seller’s production of information for the buyer does not believe the seller has misled the buyer.”47 By giving such an opinion, Gilson concludes, “it is quite clearly the lawyer’s reputation—for diligence and honesty—that is intended to be placed at risk.”48
B. A Framework for Assessing Closing Opinion Value
Taking Gilson’s analysis seriously, and applying it to what lawyers say about opinion writing, would be aided by the development of a framework for assessing the value of opinion letters. Such a framework would account for and develop the two basic features of Gilson’s model—information production and information verification. The framework I have chosen, and which I apply in the next part, considers three factors: (1) whether the opinion (whether a particular clause or the entire document) is relevant to the reasonable expectations of the parties (expectation factor); (2) whether the opinion is about matters largely within the expertise of the lawyer giving the opinion (legal factor); and (3) whether the specific attorney asked to provide the opinion is the person best suited to do so (the division of labor factor).
The significance of the first factor is axiomatic on an economic analysis. Parties that are free to contract should be permitted to realize their reasonable expectations.49 If, however, an opinion is not relevant to these expectations, it is not likely to add information that has value. The second and third factors introduce the complexities of transacting through professional agents. The costs of these agents should be associated with their comparative advantage.50 To add
45. ABA 2002 Guidelines, supra note 11, § 4.5, at 880. 46. Id. 47. Gilson, supra note 5, at 292. 48. Id. (internal footnotes omitted). 49. See, e.g., ANTHONY T. KRONMAN & RICHARD A. POSNER, THE ECONOMICS OF CONTRACT
LAW 1-5 (1979); see also Richard A. Posner, The Economic Approach to Law, 53 TEX. L. REV. 757, 761, 763-64 (1975).
50. I use the term “comparative advantage” in a general sense, not in the more specialized way used by international law experts. See, e.g., Alan O. Sykes, Comparative Advantage and the Normative Economics of International Trade Policy, 1 J. INT’L ECON. L. 49 (1998); cf. Economics A-Z, http://www.economist.com/research/Economics/alphabetic.cfm?LETTER=C#COMPARATIVE%20AD
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informational value, legal opinions should reflect either pure law, or facts of a largely legal character. If, instead, closing opinions merely regurgitate information that could be more cheaply (or more authoritatively) produced by someone else (for instance, the client), the opinion would present economic problems.
II. PRICE—WHAT THE LAWYERS SAY
Closing opinions appear to fulfill the informational aspirations of the price model in two respects. First, closing opinions are thought to aid the due diligence process. Lawyers indicate that the due authority and no-violations opinions often do this. Second, and emanating from the first point, closing opinions may perform a market-signaling function, telling the world (or at least others who might take an interest in the transaction) in shorthand that sufficient diligence occurred to enable the lawyer to give the opinion. Both functions of opinions add value because (and to the extent that) they produce and verify information that is (1) relevant to the reasonable expectations of the parties, (2) about matters uniquely within the expertise of a lawyer, and (3) issued by the attorney in the best position to do so.
The economic explanation of closing opinions is not just important for theoretical reasons; it also dominates lawyers’ discussions of the practice. Lawyers and clients speak in consciously economic terms about the merits (or the lack of merits) of opinion practice. The California Bar’s 2004 Report on enforceability opinions, for example, orients its answers to these questions almost exclusively around a cost-benefit analysis, arguing that “a remedies opinion should only be sought when its benefit justifies its cost.”51 While lawyers do not exclude other explanations for the propriety and roles of opinions, they appear to give preference to the economic analysis. This is interesting both because, as discussed below, certain aspects of opinion practice appear to persist despite economic inefficiencies, and because non-market factors—in particular, the bar associations—tend to correct for (or explain) these inefficiencies.
A. Due Diligence
Information production through the due diligence process is often said to be the leading cause of—and cure for—third-party closing opinions. “At its best,” the TriBar Opinion Committee has reported, “the opinion preparation process can serve to clarify and improve transactions.”52 It is worth noting that this
VANTAGE (“In essence, the theory of comparative advantage says that it pays countries to trade because they are different.”) (last visited Mar. 14, 2006).
51. California 2004 Report, supra note 1, at 1, 6, app. 4, at 2, 4-8. 52. TriBar 1998 Report, supra note 6, at 666; ABA 1991 Guidelines, supra note 11, at § I.B(2)
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statement refers not to the opinion itself as being the instrument of clarification, but instead “the process” of preparing the opinion. “When received,” the ABA 2002 Guidelines observe, “the closing opinion serves as a part of the recipient’s diligence, providing the recipient with the opinion giver’s professional judgment on legal issues concerning the opinion giver’s client, the transaction, or both, that the recipient has determined to be important in connection with the transaction.”53 Glazer and FitzGibbon, authors of a leading practitioner’s treatise, also indicate that closing opinions play an important role in helping parties manage transactional expectations.54
Due diligence has no precise meaning. It is often associated with disclosures to be made in connection with securities offerings under the Securities Act of 1933.55 Although closing opinions are frequently rendered in transactions with few federal securities law implications (e.g., loans and asset sales), lawyers recognize the role that closing opinions play in producing information as part of the due diligence process. “[T]he legitimate reason [for an opinion],” one attorney observed, “is that somebody forces somebody to do the homework . . . [to m]ake sure all the i’s are dotted and the t’s are crossed and things like that.”56 Writing a third-party closing opinion is “not diligence in kind of a mechanical verification sense, but rather in the broader sense. At one level it is asking for a professional, independent confirmation in the way of a second set of eyes.”57
Although closing opinion letters are not generally regulated, they have become fairly standardized in forms that are widely available. Most third-party closing opinions will address some or all of the three basic questions about
(“[T]he proper purpose of a third-party legal opinion is to assist in the Opinion Recipient’s diligence.”); see also California 2004 Report, supra note 1, at 1 (“The remedies opinion, like third-party legal opinions generally, can serve as an important part of the opinion recipient’s ‘diligence’ about the transaction.”).
53. ABA 2002 Guidelines, supra note 11, § 1.1, at 875. As noted in Part IV.B, infra, just because the recipient considers the information important does not mean that the opinion-giving lawyer will agree. Disputes about this may then ensue.
54. GLAZER, OPINIONS, supra note 2, § 1.3.1, at 7 (“Receipt of a closing opinion from counsel for the other side is another way a party obtains information about its legal position that may bear on its decision to proceed with the transaction.”) (citations omitted). They emphasize, however, that the legal opinion “is only one of the building blocks in the opinion recipient’s due diligence. Closing opinions address only specific legal issues and by design do not cover many legal matters that might be of interest to recipients.” Id. § 1.3.1, at 8 (footnote omitted).
55. “[D]ue diligence connotes the absence of negligence in the preparation of disclosure; in turn, lack of due diligence is often considered negligence.” See Donald C. Langevoort, The Statutory Basis for Due Diligence Under the Federal Securities Laws 11 (PLI Corp. L. and Prac. Course Handbook Series No. B0-00A4, 1999) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 208 (1975)). The due diligence defense under section 11(b)(3) of the 1933 Act provides that an expert, including an attorney issuing a legal opinion in connection with a public offering, may limit liability for material misrepresentations or omissions by showing that the expert made a reasonable investigation into the facts, and after so doing, had reason to believe and did believe that statements made in his or her portion of the registration statement were true and complete at the time of effectiveness. Id. at 12.
56. Interview with Attorney W-2 (June 7, 2004), transcript at 3. 57. Interview with Attorney K-2 (May 17, 2004), transcript at 3.
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authority, enforceability, and violations or conflicts noted in the introduction. In this case, I will frequently refer to the model developed by the TriBar Opinion Committee in their 1998 Report.58 While this form may not be used by all lawyers, it nevertheless provides some baseline for discussing the contents of opinions.59
1. Due Authority
The first opinion offered in the model closing opinion will be on “due authority.” This opinion goes to the agency questions that must underlie any transaction: Does the subject of the opinion (the “Company”) exist and have the power and authority to do that which the deal contemplates? The first substantive provision of the TriBar model, for example, would have the opinion-giver state that “the Company is a corporation validly existing under the law of [the state of incorporation].”60 It is obvious why this should be true—if the Company does not exist, the parties will have legitimate concerns about its ability to engage in the transaction.61 Thus, the TriBar 1998 Report observes that “[this] opinion serves as a cornerstone for many of the opinions that follow.”62 It is a simple, uncontroversial opinion.63
58. See TriBar 1998 Report, supra note 6, app. A-1, at 667. While I will refer principally to model opinions developed by the TriBar Committee, I am mindful of the fact that many lawyers view the TriBar Opinion Committee as having been dominated by mid-Atlantic (and in particular New York) lawyers, and that west coast (and in particular California) lawyers may approach opinion-writing in different ways. See, e.g., Interview with Attorney C-1 (May 13, 2004), transcript at 2-3 (discussing California-style of opinion practice); see also BUSINESS LAW SECTION OF THE STATE BAR OF CALIFORNIA, REPORT ON THE THIRD-PARTY LEGAL OPINION REPORT OF THE ABA SECTION OF BUSINESS LAW 5-8 (1992) (discussing distinctive California approach to certain aspects of enforceability opinions) [hereinafter California 1992 Report]. I also note, as discussed further below, that a significantly different approach to opinion-writing was proposed in 1991 by the Business Law Section of the American Bar Association in the Accord. See Accord, supra note 11. Although the Accord is viewed as having made an important contribution to the development of opinion practice, its specific recommendations have not generally been embraced. I discuss the development of the Accord in Part IV.A.2, infra.
59. This section and the next apply a clause-by-clause analysis of the major portions of the standard form closing opinion, something Gilson did with respect to a standard-form asset purchase agreement in Value Creation, and something which has been encouraged by others. See, e.g., Lisa Bernstein, The Silicon Valley Lawyer as Transaction Cost Engineer?, 74 OR. L. REV. 239, 253 (1995).
60. TriBar 1998 Report, supra note 6, at 667. 61. Theoretically, of course, the corporation could exist de facto or by estoppel, and so enter into
the subject transactions without having de jure existence. See id. at 641. 62. See id. There are other, more complex (and perhaps more difficult) opinions related to corporate
existence that the recipient (e.g., the lender) could request. For example, the Company’s lawyer could be asked to opine that the Company was “duly incorporated” or “duly organized.” Id. at 641-42. How do these differ from the “valid existence” opinion? They would likely be viewed as referring to compliance with applicable corporate existence requirements in effect when the Company was formed, and/or at points leading up to the time the Company’s good standing certificate is obtained. This may be a much more complex and expensive determination to make. One lawyer tells a story about the pitfalls of this opinion:
The story I tell on this is the very first opinion I did in my career was about a little hat company that was borrowing some money, and I had to do the due authorization opinion—this is 1974 or ’75—so I ask the client for the articles and bylaws and the minutes and all that and
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The second substantive provision of the model due authority opinion builds on the existential conclusion of the first opinion, to assert that the Company has corporate (or other entity) power to execute, deliver, and perform under the operative agreements.64 These provisions are generally self-explanatory. If the Company lacks authority to engage in the transaction, then it is axiomatic that any other promises that might be made in the operative documents (including those that might duplicate or overlap with legal opinions) are void.
Due authority opinions apparently have the deepest historical roots in third-party closing opinion practice. A number of lawyers interviewed said they believed that third-party closing-opinion practice began in the late nineteenth century, as an outgrowth of municipal finance transactions, where governmental authority to borrow was frequently in question. There appears to be some support for this surmise. Robert Gordon has suggested that lawyers’ opinions were a response to protracted litigation over railroad bonds.65 Even though “the U.S. Supreme Court virtually always disallowed defenses against the validity of bonds,” he has observed, “investors [by the 1890s] did not wish to risk prolonged and expensive enforcement efforts, even if the law could help them force a favorable settlement.”66 Legal opinions—especially as to the authority of the municipality to incur the bonded indebtedness—were one response to the routine challenges to these bonds, which were often mounted by taxpayers (or elected officials) reluctant to make good on the obligations.67 “When it became the standard practice of bond houses to obtain the opinion of a specially qualified attorney,” Charles Fairman has noted, “municipal bonding
they send them over, and I’m looking at the articles diligently like a brand new lawyer, and discover that when the company was formed in 1920, the articles provided that the company would have a life of fifty years. The company had in fact expired.
Interview with Attorney W-2, supra note 56, at 3. 63. The absence of controversy may stem in part from the fact that the corporate existence opinion
will usually be based on certificates issued by the secretary of state (or other government official) of the state in which the Company was formed. See discussion infra Part III.B.1. As to these matters, the lawyer will be an informational pass-through.
64. “The Company (a) has the corporate power to execute, deliver, and perform the Credit Agreement and the Note, (b) has taken all corporate action necessary to authorize the execution, delivery, and performance of the Credit Agreement and the Note, and (c) has duly executed and delivered the Credit Agreement and the Note.” TriBar 1998 Report, supra note 6, at 668.
65. Robert W. Gordon, Legal Thought and Legal Practice in the Age of American Enterprise, 1870-1920, in PROFESSIONS AND PROFESSIONAL IDEOLOGIES IN AMERICA 70, 131 n.40 (Gerald L. Geison ed., 1983) (citing Charles Fairman, Reconstruction and Reunion, 1864-88, Part One, in 6 THE OLIVER WENDELL HOLMES DEVISE: HISTORY OF THE SUPREME COURT IN THE UNITED STATES 918-1116 (New York, 1971)).
66. See Gordon, supra note 65, at 131 n.40 (emphasis in original). 67. See id. at 79 (“One could not seriously think of marketing one’s bonds among Boston investors
without an opinion on their validity from respected Boston bond counsel.”). Charles Fairman has observed that, during the period 1864 to 1888, “matters on municipal bonds bulked larger than any other category of the Court’s business.” Fairman, supra note 65, at 921 (‘“Probably no question in American jurisprudence has been more persistently and thoroughly litigated than the validity of municipal bonds in aid of railroads.’”) (quoting James A. Burhans, The Law of Municipal Bonds, at 2-3, 19-20 (S.A. Kean & Co., Bankers, Chicago & New York, 1889)).
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underwent a profound change.”68 Of course, a lawyer’s opinion that her client has authority to engage in the
transaction is no guarantee that that will be the case. In the infamous Washington Public Power Supply System (“WPPSS”) cases,69 for example, some eighty-eight law firms were sued by the holders of $2.25 billion in bonds issued by WPPSS.70 The lawyers had issued opinions to their clients, who participated in the financing by entering into so-called “take-or-pay” contracts, which functioned essentially as a guarantee that WPPSS would sell a minimum amount of power to the participants, or would receive a minimum payment from them. The lawyers for the participants, who were for the most part municipalities, gave the standard opinions that each participant was authorized to enter into the agreement binding the participant to the project, and that the agreement “constituted a valid and binding agreement [of the participant] enforceable in accordance with its terms.”71 Unfortunately for the opining lawyers, the Washington Supreme Court later concluded that many of these participants did not, in fact, have authority to provide what were, in essence, financial guarantees.72
Freed from their obligations under the take-or-pay contracts, the participants declined to do either, and the bonds went into default. The investors in these bonds sued the opining lawyers—unsuccessfully. A claim of aider and abettor secondary liability was alleged but given short shrift based on the absence of any allegations of “organization or relationship among the defendants permitting an expectation of concerted action.”73 Common law fraud and negligent misrepresentation claims were also dismissed due in essence to a lack of privity.74
68. Fairman, supra note 65, at 922. Fairman quoted at length a banker’s brochure from 1890 which might explain the early role of counsel generally in this process:
Many cases of repudiation of railroad-aid bonds (which . . . comprise by far the greater part of the defaults in the history of Municipal Bonds) have been brought about through the claim of illegality of issue. It is a matter of record that the proceedings bearing upon such issues were formerly loosely conducted, while purchasers were equally lax in giving the legal papers touching the same the attention and investigation which their importance demands, and which is invariably given them today . . . . Perfect equity between debtor and creditor demands . . . that the authority to issue shall be unquestionable, and bond-houses and other large fiduciary institutions of today meet this requirement by retaining attorneys of ability, who instead of taking for granted, as in former times, that everything had been “properly done, happened and performed,” now insist on all steps being taken in strict conformity with law.
Id. at 922-23 (quoting Eben H. Gay, Municipal Bonds, at 39-40, 45 (N.W. Harris & Co., Bankers, Boston 1890)).
69. Factual background concerning the WPPSS debacle is set forth in Chemical Bank v. Washington Public Power Supply System, 666 P.2d 329 (Wash. 1983), on appeal after remand, 691 P.2d 524 (Wash. 1984), cert. denied, 471 U.S. 1065, 1075 (1985).
70. Mirotznick v. Sensney, Davis & McCormick, 658 F. Supp. 932 (W.D. Wash. 1986). 71. Id. at 936. 72. Chem. Bank, 666 P.2d at 337-39. 73. Mirotznick, 658 F. Supp. at 941. 74. Id. at 943.
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A lesson one might draw from the WPPSS cases is that courts have a fairly high tolerance for errors in due authority opinions.75 If so, one might infer that, to courts, the due authority opinion performs only a modest informational function—if the opinions really mattered, lawyers getting it wrong would be held liable. That, however, is not the way in which the lawyers interviewed for this project viewed them. Rather, lawyers overwhelmingly characterized this opinion as adding informational value. As one attorney explained:
I think that maybe the value of [the] legal opinion is that it forces the attorney to go through the process of verifying power and authority . . . . [I]f you weren’t issuing a legal opinion, would you really sit down with the corporation’s minute book and make sure the directors have been properly elected and the officers properly elected and authorized by the board? I don’t know if you would do that, if you weren’t issuing an opinion.76 It would seem that the due authority opinion frequently satisfies the value
framework set forth above. In the case of a loan, it is critical to the reasonable expectations of the lender that the borrower has the authority to borrow (and repay) the loan, an essentially legal determination. As the same attorney noted, questions of authority are likely beyond the expertise of nonlawyer clients; they will not know whether they in fact have authority, and their representations alone cannot be dispositive.77 Finally, the lawyer that typically gives the opinion will be Company counsel and will be the least-cost producer of this information. Even if Company counsel was not the regular outside counsel, he or she will have developed a familiarity with the borrower that recipient’s counsel could not have developed.78 As one attorney explained:
The theory, at least on the authorization . . . opinions, is that the seller or the borrower’s counsel or someone like that is in the best position to make sure [that] the bylaws were reviewed and [that] the Board met, all those sorts of things. You can get a warranty from the company, but that’s not worth anything if the company has financial problems. It just forces somebody to make sure that it’s been done right and in an authorization . . . opinion, it’s really not convenient for the other side to sort of dig into those sorts of things.79 In short, there is support for the claim that producing this information
through the closing opinion process responds to reasonable expectations by efficiently reducing an important, legal information asymmetry.
75. As discussed in Part III.C.1, infra, courts would appear to be less tolerant of errors in the due authority opinion when it is accompanied by evidence of greater wrongdoing (e.g., “bad faith”) by the client.
76. Interview with Attorney D-1 (May 13, 2004), transcript at 3. 77. Id. (“When a party gives a representation and warranty that it has power and authority, they
don’t know what that means.”). 78. See, e.g., Interview with Attorney C-2 (May 11, 2004), transcript at 5-6 (“We don’t go through
all the minute books and stuff like that [when representing lenders]. We just rely on the resolutions and the opinion . . . .”).
79. Interview with Attorney W-2, supra note 56, transcript at 3.
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2. No Violation/No Litigation
A second standard set of opinions will assure the recipient that certain factual representations of the Company are accurate (or, in a classic legal-double-negative, not inaccurate). Among other things, the lawyer may be asked to opine that the transaction will not violate or breach: (1) the Company’s organizational documents (the “no-violation (organization) opinion”);80 (2) laws that apply to the transaction (the “no-violation (applicable laws) opinion”);81 or (3) other agreements or undertakings of the Company (the “no-violations (other obligations) opinion”).82 More controversially, the lawyer may also be asked to opine that the Company is not in violation of laws that generally apply to the Company (the “no-violation (other laws) opinion”),83 and/or that it is not party to any pending or threatened litigation that would adversely affect the transaction or the Company itself (the “no litigation opinion”).84
Using the framework set forth above, certain of these opinions would appear more likely to add value than others. The no-violation (other obligations) opinion would appear to be especially important, and not terribly controversial, as opinion recipients legitimately want to know that they are not unwittingly investing in a lawsuit.85 Moreover, although the existence of contracts, lawsuits, etc., is factual (and could thus be disclosed by the parties), legal expertise is required to assess the terms and materiality of these undertakings or litigations. And, as with the authority opinion, Company counsel—not recipient’s counsel—will be the least-cost producer of this information.
Unlike counsel for the lender, for example, Company counsel can review this information without exposing the Company to a claim that it has breached confidentiality. Unlike the Company itself (or, more accurately, its officers and
80. See, e.g., GLAZER, OPINIONS, supra note 2, § 16.2, at 490. 81. Id. § 16.3, at 492. 82. TriBar 1998 Report, supra note 6, app. A-2, at 670. The TriBar 1998 Report indicates that the
no-violations (other obligations) opinion should be given by in-house, rather than outside, counsel. This has a certain intuitive appeal, as in-house lawyers will (or should) know more about these matters than would outside counsel. See Committee on Legal Opinions, ABA Section of Business Law, Closing Opinions of Inside Counsel, 58 BUS. LAW. 1127 (2003) (“In appropriate circumstances, delivery of an opinion of inside counsel may reduce cost and avoid delay by eliminating the need for outside counsel to familiarize itself with matters already known to inside counsel or to duplicate work performed by inside counsel in the course of employment.”). That said, if, as some lawyers indicate, the value of the opinion lies in the “independent” evaluation of the Company by an outsider, it is not clear how much one can rely on the opinion of in-house counsel.
83. GLAZER, OPINIONS, supra note 2, § 16.5, at 512-13. 84. Id. § 17.1, at 515. 85. See Interview with Attorney K-3 (June 1, 2004), transcript at 3 (“[A] no-violation [opinion] is
the most important opinion that a recipient gets because it does save on the due diligence. It means that the recipient of that opinion does not have to worry about whether or not there is a breach of the other party to some other agreement that they may or may not be aware of.”).
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employees), Company counsel will likely have legal expertise that gives it an advantage in reviewing and interpreting these contracts and other undertakings. Being “independent” of the Company in some important sense, the opining lawyer will also have a degree of objectivity in assessing the real potential for conflict presented by the agreement, litigation, etc.86 And, in the event Company counsel determines that the proposed transaction will result in a violation, the lawyer is often in the best position to advise the Company about the steps that it should take to head the problem off, whether by disclosing the problem to the lender (with client permission, of course) or by modifying the other undertakings, and so forth. One lawyer summarized the value of the due authority and no-violations opinions as follows:
I mean, if the company is really not a company, that’s not very good, because I don’t know what it means if I have contracted with a company that doesn’t really exist . . . . If there is litigation out there, I really would like to know. . . . I want to know if there are contracts, particularly material contracts, out there that are going to be violated. [R]epresentations and warranties don’t necessarily get us to the I-really-want-to-know question. They do a good job of making sure that risk is allocated and how you’re going to deal with indemnities, but they don’t do quite such a good job of those things that you really, really think would be fundamentally a problem with respect to this [transaction].87 But the further one’s opinion goes from the transaction at hand, the more
problematic it would appear to be. Thus, lawyers noted that the cost-effectiveness of the no-violations (other laws) opinion depends on its scope. This variant on the no-violations opinion asks the lawyer for the Company to state that the Company is in compliance with all (or all important) laws affecting the Company. One lawyer observed that in its broad form, this opinion was unrealistic and not terribly valuable. This opinion asks the lawyer to say that the client:
has never violated any health law or something. Well, how are you going to give that? When you’re talking about some manufacturer, some restaurant around the country, you [can’t say] they’ve never been out of compliance . . . with any health code and have all permits, let’s say food.88 Problems with no-violations opinions may stem at least in part from the
factual nature of the opinion. Unlike the due authority opinion, which is often
86. One in-house attorney suggested that in-house counsel may, under the right circumstances, be in the best position of all to provide a no-violations opinion about the “client” (i.e., the lawyer’s employer). Although this is an opinion that “really requires you to be on your toes,” this attorney also observed that it “is actually one opinion that in-house counsel [is] better situated to give [because] I have to run around and make sure that I am still comfortable that the insurance is signed and lines up with what I know our material agreements are.” Interview with Attorney M-2 (Aug. 25, 2005), transcript at 7.
87. See Interview with Attorney S-1 (May 7, 2004), transcript at 4. 88. Interview with Attorney V-1 (May 25, 2005), transcript at 13. As noted above, the ABA 2002
Guidelines indicate that such an opinion would be inappropriate. ABA 2002 Guidelines, supra note 11, § 4.3, at 880 (“[A]n opinion giver should not be asked for an opinion that its client is not in violation of any applicable laws or regulations or that its client is not in default under any of the client’s contractual obligations.”).
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based on the attorney’s first-hand knowledge of corporate governance actions leading to the transaction, the no-violations opinion might require the lawyer to investigate other transactions, other laws, or general states of affairs with which she has no direct experience. Moreover, there can be legitimate disagreement over the extent to which these opinions respond to the reasonable expectations of the parties. These opinions would appear to be frequent sources of friction between lawyers.
A special subcategory here is the no-litigation opinion, which in many respects is not a legal opinion at all.89 Rather, as Glazer observes, “[w]hether or not a company has been sued or threatened with a lawsuit is a factual, not a legal, matter.”90 To the extent these opinions relate to the transaction itself, they would certainly appear to add value. For example, one attorney told the story of a transaction in which counsel to the borrower provided a “clean” no-litigation opinion (stating, in substance, that there was no litigation threatened or pending against the borrower).91 At closing, borrower’s counsel informed the attorney that there had been a written claim threatening to commence an action for injunctive relief that would seriously jeopardize the financing.
When lender’s counsel stated that the threatened suit had to be noted in the opinion, counsel for the borrower objected. “‘We really don’t want to put that in the opinion,’ the borrower’s counsel said. ‘[W]e’ve told you about it, isn’t that enough?’ The lender’s counsel said, ‘[W]ell . . . I know about it, [and] I’ve got to tell my client about it.’” But because this attorney’s client was the agent for a number of lenders, and was also under an obligation to tell these lenders of the threatened suit, borrower’s counsel had to “put it in the opinion.” When asked if he thought this important piece of information would otherwise have come out in the course of diligence, this attorney simply said, “I don’t know. I don’t think so.”92
As the no-litigation opinion broadens—to cover the Company’s litigation status generally, for example—questions arise as to whether the opinion itself adds value, especially where the opining attorney has no particular reason to know much about the litigation.93 Nevertheless, even if litigation has no relationship to the transaction at hand, courts are not especially tolerant of errors in these opinions, especially when the lawyer (or firm) that rendered the opinion knew (or had reason to know) of the litigation. In National Bank of Canada v. Hale & Dorr, for example, the Massachusetts Superior Court denied
89. GLAZER, OPINIONS, supra note 2, § 17.1, at 516 (the no-litigation opinion “calls for little, if any, legal analysis”).
90. Id. § 17.1, at 516-17. 91. Interview with Attorney C-1, supra note 58, at 14-15. 92. Id. at 15. 93. See GLAZER, OPINIONS, supra note 2, § 17.1, at 517 (General no-litigation opinions are “not
appropriate when the opinion giver is only one of many firms retained by the company.”).
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the defendant law firm’s summary judgment motion on plaintiff’s misrepresentation claim.94 Here, the firm had issued an opinion stating, among other things, that there was no litigation against its client that “could have a material adverse effect on the business” of the client, except as specified on a schedule attached to the loan agreement entered into with the plaintiffs, a group of banks.95 It turned out that potentially significant litigation against the borrower was not disclosed, but for unrelated reasons the borrower became insolvent.
Nevertheless, the banks sued the firm for “misrepresentation,” a cause of action which required the banks to show “a false statement of a material fact made to induce the plaintiff to act, together with reliance on the false statement by the plaintiff.”96 The Massachusetts Superior Court denied the firm’s motion for summary judgment because, among other reasons, the firm “represented to the Banks that ‘it possesse[d] superior knowledge concerning the subject matter to which the misrepresentations relate[d]’ and that it made its statements with certainty.”97 It is not surprising that this troubled the court, since the firm was also counsel to the borrower in that litigation.98
One way to test the informational value of closing opinions—and especially the no-violations/no-litigation opinions—is to determine whether their disclosures have altered or ended transactions. Most of the lawyers interviewed for this project indicated that they had seen transactions change or even fall apart due to information produced in the process of negotiation and opinion drafting, and this was especially true of the no-violations opinion. Yet, while flushing out material information appears to be an important function of the due authority and no-violations opinions, it is not always clear that the information will be considered (at least directly) by the recipient-client. “God forbid if one of my bank clients ever reads the damn opinion,” one attorney explained.99
94. See Nat’l Bank of Canada v. Hale & Dorr, No. 2000000296, 2004 WL 1049072, at *4-7 (Mass. Super. Ct. Apr. 28, 2004).
95. Id. at *2. 96. Id. at *4 (quoting Zimmerman v. Kent, 31 Mass. App. Ct. 72, 77 (1991)). 97. Id. at *10 (citing Stolzoff v. Waste Sys. Int’l, Inc., 58 Mass. App. Ct. 747, 760 (2003)). An
irony here is, as discussed above, that the firm had attempted to limit its liability by disclaiming or limiting the knowledge its opinion purported to represent.
98. A similar result obtained under similar circumstances in the unreported decision in Dean Foods Co. v. Pappathanasi, 18 Mass. L. Rptr. 598 (Mass. Super. Ct. 2004), Memorandum and Order on Cross-Motions for Summary Judgment, Civ. Act. No. 01-2595 (BLS) (Mar. 8 2004), where deal counsel provided a no-litigation opinion even though it was also defending related entities in criminal investigations. See also ABA Section of Business Law Committee on Legal Opinions, Legal Opinion Newsletter 4, at 2-3 (June 2005) (reprinting and discussing Dean Foods decision).
99. Interview with Attorney C-1, supra note 58, at 8. Not all lawyers had this experience. One attorney indicated that she discusses closing opinions with her clients (who are often money-center banks) “on every deal because it is from the closing checklist.” Interview with Attorney S-2 (July 26, 2005), transcript at 19. In one transaction in which a lawyer on the other side was being difficult in the opinion process, this attorney observed that she “was surprised at the extent to which all the business people on the deal understand that something unreasonable was being asked for in the opinion context.” Id.
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Nor is the Company (that is, the party that is the subject of the opinion) likely to learn much from the closing opinion process. Rather, opinion-giving lawyers say that their own clients (that is, the Company that is the subject of the opinion) often view the opinion process as a burden, a part of the “checklist” engineered by the lender (or other party in a position to demand the opinion as a closing condition).100 “I do not think they give a good gosh darn about [closing opinions],” one former general counsel observed.101 “All that mattered to [the CEO of her company] was that he wanted that new financing because we were getting a better rate.”102 Another lawyer put it succinctly: “Clients have no patience with . . . discussions [about closing opinions].”103
This does not, of course, mean that the information has no relevance to the client. Rather, it would appear that clients—whether recipients or subjects—rely, wittingly or not, on their attorneys to know that the opinion has produced the appropriate information in the appropriate ways. Clients may not read the opinions, but they may well care that their lawyers do.104
Clients may care little about the content because one view of the closing opinion is that it is a mechanism to discipline or structure the lawyers, the parties, and indeed, the transaction itself. According to one New York lawyer who frequently represents lenders, “without a legal opinion, it would be easy for people not to focus on [the details of a transaction], not out of malice or
100. See Interview with Attorney C-2, supra note 78, at 3. 101. Interview with Attorney W-4 (May 24, 2005), transcript at 8. 102. Id. (“I think . . . the way a lot of business people look upon it [is] you are such a pain in the
ass.”). Another attorney put it more colorfully, indicating that in his experience clients do not “giv[e] a shit about opinions really. All they wanted to do is get the transaction done.” Interview with Attorney K-1 (June 10, 2005), transcript at 17.
103. Interview with Attorney G-1 (June 3, 2004), transcript at 26. As another attorney explained: [F]rom time to time, of course, [you] get into a dispute between the lawyers over what the opinion should say and shouldn’t say. And you can’t really appeal to the clients to resolve it, because they don’t care. As far as they’re concerned, that’s something for the lawyers to fuss about and if you tell your own client, you know, “There is a big problem in this opinion, it’s going to hold up the deal. . . [t]hey don’t say, “Okay, I’ll talk to the other side.” They just say, “Well, that’s unacceptable. You just have to resolve it so we can move on.”
Interview with Attorney K-1, supra note 102, transcript at 4-5. The Report of the Washington State Bar Association aptly describes this phenomenon:
Even quite sophisticated clients often view opinions as so much legal boilerplate and have no sympathy for lawyers locked in dispute over arcane issues, particularly in the last hours before an important closing. And all too often, the client has a point: the lawyers have either created a problem by leaving resolution of an issue to the last minute, or have let ego, inflexibility or an “unbusinesslike” degree of concern over personal liability take the place of judgment and thoughtfulness.
Washington State Report, supra note 6, at 7. 104. It may also depend on who the client is. A lawyer who frequently represents large institutional
lenders indicated that she discusses closing opinions with clients “on every deal because it is from the closing checklist, it is something they know about.” See Interview with Attorney S-2, supra note 99, at 19. “Even if they don’t actually read the full opinion or understand it,” she said, “I actually think in the lending markets a legal opinion is important . . . the lenders do want to see that the thought process has been undertaken and concluded.” Id. at 10.
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laziness, but just because there is so much going on.”105 The closing opinion “imposes discipline,” she said, because it is evidence that “somebody ha[d] to think through the issues and check in their own mind and . . . go through the steps . . . .”106 As another attorney (in-house counsel to a large public company) puts it, closing opinions help to assure that lawyers (and perhaps their clients) “do not outrun [their] headlights.”107
B. Signaling Remote Parties (the “Market”)
The disciplining explanation of closing opinions overlaps with another economically oriented theory, namely that the closing opinion is a signal to the market in general of the quality of the deal. Closing opinions, on this view, act as a sort of “good housekeeping seal of approval” not just for the parties to the transaction, but also for third parties who take a direct or indirect interest in the transaction.
Closing opinions have long interacted with broader markets in complex and subtle ways. As discussed above, there is a view that third-party closing opinion practice began with the advent of the municipal bond market in the latter half of the nineteenth century.108 Certainly the securities laws enacted during the Depression—the 1933 and 1934 Acts, in particular—appear to have linked the requirement of an opinion to access to the public capital markets.109 Often, when lawyers get into trouble for having given a closing opinion, it is because they are accused of a securities-related offense.110
Lawyers appear keenly aware of the market-signaling function of closing opinions. “[S]ince most loans are syndicated,” one attorney explained, the existence and scope of opinions will in part be “a question of what kind of
105. Id. at 9. This lawyer told the following story in support of her view that closing opinions perform a disciplining function:
I actually worked on a deal recently where we were refinancing an old deal, and they had added collateral later in the deal and so there was an amendment to allow for that additional collateral. There was a list of items that needed to be satisfied before the amendment would become effective, and a borrower satisfied that test and took on additional collateral, but because one of the items did not include a legal opinion, no legal opinion was given, and nobody made sure that the borrower had perfected [an interest] in that additional property that it acquired. So, then all the banks thought that we were going to allow them to make this acquisition and that [the interest in] those assets acquired in connection to that acquisition would be perfected. . . . Everything was done that the lawyers felt had to be done, and then by that time the acquisition was consummated, nobody thought about the last point because there was probably a first or second year lawyer just checking the box . . . .
Id. 106. Id. at 9, 25. 107. Interview with Attorney M-2, supra note 86, at 5. 108. See discussion supra note 68. 109. As noted above, legal opinions are important in establishing certain defenses under the
Securities Act of 1933. See discussion supra Part II.A. 110. See, e.g., SEC v. Nat’l Student Mktg. Corp., Civil Action No. 225-72 (D.D.C. filed Feb. 3,
1972). This case is discussed in greater detail beginning at note 124, infra.
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expectation is in the marketplace.”111 Another attorney explained as follows: [T]he opinion is not only for the counter-party to a particular document, but for a third-party who may not even be a party to that agreement . . . . There are many types of project finance and securitization type transactions where a third-party is actually making a credit decision based on the assumption of enforceability of a contract that is a very crucial element of that financing, whether it’s a project finance—you may have a power purchase contract where the obligor agrees to buy the power—the lender who is lending to the seller of the power is relying on that buyer’s obligation to buy, yet it’s not a party to that power purchase agreement. But it sure wants to be sure that . . . that power purchase contract is enforceable.112 In other words, some of the value of the opinion letter may derive not from
its informational effects on the initial recipient, but rather on the more limited signal its mere existence may provide to later market participants. If third-party closing opinions perform this sort of signaling function, it would further support Gilson’s theory about the reputational bonding that occurs when lawyers assist clients in business transactions. The verification benefits would inure not simply to the immediate parties to the transaction, but to those later in the chain who might succeed to the position of, for example, the initial lender. To the extent that access to wider markets has value, third-party closing opinions may add value by increasing this access.
The signaling view of closing opinion practice would find theoretical support in the observation that laws (and perhaps legal opinions, themselves) are “products,” commodities that, when properly sourced and used, promote efficient market exchange.113 Professor Romano, for example, has argued that Delaware came to dominate the market for corporate charters because its default rules developed a centripetal force that made it cheaper and more valuable for lawyers—and not just clients—to use.114 Delaware law became a “product,” Romano reasoned, because incorporating in Delaware gave clients (and lawyers) immediate access to “Delaware’s well-developed case law, which provides a pool of handy precedents.”115 One virtue of this body of precedent was, according to Romano, the ability to “obtain[] almost instantaneously a legal opinion on any issue of Delaware law.”116 Professor
111. Interview with Attorney B-1 (May 7, 2004), transcript at 4. 112. Interview with Attorney K-3, supra note 85, at 7-8. 113. See Roberta Romano, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L.
ECON. & ORG. 225 (1985). 114. Id. at 274-75. Chartering in Delaware became advantageous not only to clients, but also to
lawyers, because the “reduc[ed] cost of specialization . . . decrease[s] the cost of furnishing legal advice to corporate clients.” Id. It is more efficient for lawyers to have their clients incorporate in Delaware because “when all their transactions can be governed by one state code,” they can “expand their services to include clients in several states without having to keep up with the intricacies of different codes and case law.” Id. at 275.
115. Id. at 274. 116. See id. This is likely correct with respect to corporate governance (i.e., due authority) opinions
for corporations organized under Delaware law. There is consensus that competent business lawyers in any U.S. jurisdiction can provide such opinions. As noted in Part III.A, infra, however, there is growing
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Klausner has expanded this analysis, to observe that the market for contract terms—including those implicated by chartering in Delaware—presents a network effect.117 This network effect—created in part by standardized forms of closing opinions—promotes increasingly efficient market signaling.118
The signaling explanation has its limits, however. First, there is the question of to whom the opinion is addressed, and whether others (not the addressees) may be permitted to rely on the opinion. The typical third-party closing opinion will be addressed to the party seeking the opinion (e.g., the lender in a loan) and their successors or permitted assignees.119 Yet, lawyers are typically careful to circumscribe the universe of those who may “rely” on the opinion.120 For example, lawyers would appear inclined to restrict reliance by non-addressees or by addressees outside the context of the given transaction.121 In a similar vein, lawyers may be inclined to restrict the assignability of their opinions in general.122 In theory, this means that only the addressee or permitted assignees can sue on the opinion if it is in error, an attempt to capture the privity defense that was historically available to lawyers sued for errors in their opinions.123 Yet the limits on reliance or assignability do not, apparently, prevent the recipient from disclosing the existence of the opinion to later third parties. While the inability to sue on the opinion may affect its value, it would
concern about the ability of non-Delaware lawyers to issue governance opinions as to unincorporated entities, such as limited liability companies, whose affairs may be governed by an operating agreement that involves issues of Delaware contract (or property or tort or agency) law. Non-Delaware lawyers may not be sufficiently familiar with these other aspects of Delaware law to provide an opinion on these matters. See infra Part III.A. To the extent that Delaware law is only valuable to (because practiced only by) Delaware lawyers, one may expect to see non-Delaware lawyers balk. See TriBar Remedies Report, supra note 6, at 1487 n.25.
117. See Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 VA. L. REV. 757, 764-65 (1995).
118. See id. at 767 (“Because they have incentives to obtain the highest value for their firm’s shares, managers attempt to offer terms that maximize share values by minimizing agency costs and signaling to investors valuable information about the firm. Those terms might define shareholder voting rights, managers’ duties of care and loyalty, shareholders’ rights to dividends, or other aspects of the relationships among shareholders and managers.”).
119. See GLAZER, OPINIONS, supra note 2, § 2.3.1, at 40-41. 120. The TriBar form, for example, provides that “This opinion letter is being delivered to you in
connection with the above described transaction and may not be relied on by you for any other purpose. This opinion letter may not be relied on by or furnished to any other Person without our prior consent.” TriBar 1998 Report, supra note 6, at 668.
121. GLAZER, OPINIONS, supra note 2, § 2.3.2, at 43-44. 122. In a recent survey conducted by the ABA Section of Business Law Committee on Legal
Opinions, forty-seven of the forty-eight responding attorneys indicated that they include a limitation on the assignability of third-party closing opinions. See Opinion Practices, supra note 9.
123. See, e.g., Savs. Bank v. Ward, 100 U.S. 195 (1879); United Bank of Kuwait v. Eventure Energy Enhanced Oil Recovery Assoc., 763 F. Supp. 729 (S.D.N.Y. 1990); Prudential Ins. Co. of Am. v. Dewey, Ballantine, Bushby, Palmer & Wood, 605 N.E.2d 318, 320 (N.Y. 1992) (reasoning that “before a party may recover in tort for pecuniary loss sustained as a result of another’s negligent misrepresentations there must be a showing that there was either actual privity of contract between the parties or a relationship so close as to approach that of privity”). The privity rules are discussed further below.
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appear unlikely to negate its signaling function. More troubling is the fact that closing opinions can sometimes send the
wrong signals. In the infamous National Student Marketing Corp. case, for example, closing opinions were alleged to have aided and abetted securities fraud.124 There, the prestigious firm of White & Case (among others) was sued by (among others) the Securities and Exchange Commission, for a variety of alleged transgressions in connection with its client’s fraud.125 Although errors in third-party closing opinions were only one part of the problem, the case nevertheless set off the first of many rounds of public deliberation about the nature and role of opinion practice.126
And then there is Enron. According to the Final Report of Neal Batson, the Court-Appointed Examiner of Enron, Vinson & Elkins (V&E), and Andrews & Kurth (A&K), Enron’s principal outside firms, delivered dozens of closing opinions on the “true sale” of assets or the “true issuance” of securities in complex and questionable transactions.127 According to the Examiner, in certain cases these opinions may have been inappropriate.128 These firms issued these opinions despite the fact that they were “concerned about several terms in
124. SEC v. Nat’l Student Mktg. Corp., Civil Action No. 225-72 (D.D.C., filed Feb. 3, 1972). 125. In SEC v. National Student Marketing Corp., the SEC alleged that the directors and officers of
National Student Marketing Corporation (NSMC) and their lawyers had violated the anti-fraud provisions of the federal securities laws by concealing the true financial condition of NSMC and its counterpart in a merger. 457 F. Supp. 682, 686-87 (D.D.C. 1978). The financial problems stemmed in part from sham transactions into which NSMC had entered several months earlier. See 402 F. Supp. 641 (D.D.C. 1975). The financial problems were discovered shortly before closing of the merger, which meant that the proxy statements used to solicit the target’s shareholders’ approval of the merger had been materially misleading. 457 F. Supp. at 689, 695. Because the lawyers (including White & Case) permitted the merger to go forward, without disclosing to the buyers the material changes in NSMC's financial statements, they were found to have aided and abetted violations of § 10(b) of the 1934 Securities Exchange Act and § 17(a) of the 1933 Securities Act. Id. at 712. Although not the sole basis of the claims, the White & Case attorneys allegedly contributed to the fraud by issuing opinion letters at the closing of the merger. Id. at 712-13. The firm settled prior to trial. The White & Case partner involved agreed to suspend his practice for 180 days. SEC v. Nat’l Student Mktg. Corp., Fed. Sec. L. Rep. (CCH) ¶ 96,027 (1977). The White & Case opinion was apparently based in part on an opinion issued by counsel for the alleged purchaser in the sham transactions that preceded the merger. 402 F. Supp. at 645-46. These opinions claimed that certain money-losing assets of NSMC had been transferred to the purchasers prior to the end of NSMC’s fiscal year. Id. at 645. The court in earlier proceedings held that the lawyer who issued these opinions “knowingly aided and abetted a violation of the federal securities laws” by issuing these opinions. See id. at 646. The case was later the subject of a novel. See ARTHUR R.G. SOLMSSEN, THE COMFORT LETTER (1975); see also Richard W. Painter, Irrationality and Cognitive Bias at a Closing in Arthur Solmssen’s The Comfort Letter, 69 FORDHAM L. REV. 1111, 1128 (2000) (discussing the NSMC case and its novelization). Today, while lawyers may well have concerns about liability, cases such as Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), significantly limit lawyers’ aiding and abetting liability under U.S. securities laws.
126. Within a year of the NSMC scandal, two major doctrinal articles on closing opinions appeared. See John P. Freeman, Opinion Letters and Professionalism, 1973 DUKE L.J. 371; James J. Fuld, Legal Opinions in Business Transactions—An Attempt to Bring Some Order out of Some Chaos, 28 BUS. LAW. 915 (1973) [hereinafter Fuld, Chaos]. As discussed in Part IV, infra, this scandal also spurred the bar associations to become involved in this practice.
127. Enron Final Report, supra note 15, at 50. 128. Id. at 49-50.
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these transactions that created questions about whether a sale had occurred.”129 Based on these concerns, the Examiner concluded that a fact-finder could determine that the law firms committed malpractice under Texas law, and aided and abetted breaches of fiduciary duties by Enron officers.130
Strictly speaking, these were often not “third-party” closing opinions. Rather, they were addressed to Enron itself or affiliates engaged in these transactions. To this extent, one might then argue that no erroneous signaling could have occurred, even if the opinions were improper. Not being issued to third parties, no one other than Enron could have or should have relied on the opinions, and so no misleading signal could have been sent, at least by the opinions themselves. But this would ignore the larger context in which these opinions were given. According to the Examiner, even if “third parties” did not rely on these opinions, it would appear that Enron’s accountants (Arthur Andersen) did when certifying erroneous financial information.131 Without these opinions, Andersen may not have been able to accord the subject transactions the accounting treatment Enron wanted—accounting treatment that, in the final analysis, may have misled investors.132
It would appear that, whatever else may be true of Enron, closing opinions issued in certain of its transactions failed to perform their informational functions. They may have formed links in informational chains. But, at a minimum, the inferences drawn from this information appear to have been wrong.
Whether Enron’s lawyers should be culpable for these errors has not yet been determined.133 The problem, as one lawyer noted, may be that “Enron was represented by firms like Vinson & Elkins and Andrews & Kurth, which are
129. Id. at 50. 130. Id. at 48-49. 131. Compare Enron Final Report, supra note 15, at 48 (V&E’s work “included rendering legal
opinions . . . [which] were required by [auditor Arthur] Andersen to allow Enron to obtain the accounting treatment that it sought for these transactions.”), with Schwarcz, supra note 5, at 30 (Enron’s “information failure . . . is not the result of inaccurate information provided by the lawyers”). See also Nathan Koppel, Wearing Blinders, 26 AM. LAW. 75, 164 (July 2004) (discussing informational effects of V&E opinions); Susan P. Koniak, When the Hurlyburly’s Done: The Bar’s Struggle with the SEC, 103 COLUM. L. REV. 1236, 1242-43 (2003) (discussing use of structured finance opinions).
132. In fact, according to the Examiner’s Report, V&E engaged in a considerable amount of hand wringing about whether it could or should issue many of these opinions. “Vinson & Elkins attorneys testified that they repeatedly told both Enron and Andersen, that Andersen had asked for the wrong opinion when it requested a true issuance opinion. This was potentially significant because Vinson & Elkins did not believe that it could provide a true sale opinion in some of those transactions as structured.” Enron Final Report, supra note 15, at 31. For interesting speculation on what Enron’s lawyers might have thought and done in the face of pressure to give these opinions, see Milton C. Regan, Teaching Enron, 74 FORDHAM L. REV. 1139 (2005).
133. Professor Schwarcz would appear to blame investors for drawing these erroneous conclusions, not those who produced the information. See Schwarcz, supra note 5, at 7 n.33 (“I argue . . . that these [information] failures are primarily the fault of investors, and at most they are exacerbated by the dual-information problem—that legal-opinion information is accurately provided for one purpose, bankruptcy, but then used out of context for another purpose, accounting.”).
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very highly regarded firms, but [that] didn’t make Enron honest . . . . [T]he fact that you have a reputable lawyer representing the client is no evidence of the client’s honesty.”134 Thus, there are limits to the extent to which a lawyer can, through opinion practice, act as an effective reputational intermediary. The market signal of an opinion—indeed, the signal generally sent by the presence of prestigious counsel—can be misused.
Over-reliance on the verification function of business lawyering, especially as indicated by closing opinions, has been the basis of some criticism of Gilson’s model. In one of the few empirical studies that has touched on closing opinion practice, sociologists Mark Suchman and Mia Cahill, who studied lawyers in Silicon Valley, have argued, contra Gilson, that closing opinions have little informational value.135 In their view, opinion letters “merely restate the client’s pre-negotiated representations and warranties.”136 Because closing opinions (at least in Silicon Valley transactions) are “informationally superfluous,” Suchman and Cahill argue that opinion letters exist to help the parties manage the uncertainty inherent in the high-risk world of venture investing.137 They come to this conclusion based on the assumption that “a law firm is legally responsible for the veracity of its opinion letters.”138 Lawyers thus issue opinions, according to Suchman and Cahill, not because opinions produce or verify information, but because lawyers are, in certain contexts, co-venturers with their entrepreneurial clients.
It is not clear how broadly one can construe this criticism. First, as observed above, even the most basic opinion letters do go beyond a client’s representations. If, for example, the opinion letter states that the Company has authority to engage in the transaction, it is conveying something different than that same statement appearing solely in the operative documents. Coming from the lawyer, it has an authority (so to speak) that it would lack in the underlying contracts. One person’s repetition is another person’s verification.
Second, even if their observations were accurate, they applied to a limited context—that of high-tech, venture-capital-financed investing. As one attorney explained, “in the wild venture capital days . . . a lot of . . . people hired big law
134. Interview with Attorney B-1, supra note 111, at 4. Although a conclusion about the role that closing-opinions played in Enron will have to wait for another day, they may provide one part of the answer to Professor Langevoort’s question about Enron: “How was the market for such a widely followed stock so easily fooled, especially when (in hindsight, at least) warning signs about obscure accounting, risk-shifting, and self-dealing practices were visible?” Donald C. Langevoort, Taming the Animal Spirits of the Stock Markets: A Behavioral Approach to Securities Regulation, 97 NW. U. L. REV. 135 (2002).
135. Suchman & Cahill, supra note 5, at 694-95. 136. Id. at 695. 137. Id. 138. Id. (“[E]ven a simple reiteration of the client’s representations would place the law firm’s
resources on the line as a kind of insurance against deception.”).
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firms for the credibility that the law firm brought to the table.”139 Given the volatile nature of venture investing, “[t]he problem for the lawyers was these people could be gone tomorrow. But your opinion would still be here.”140 In other words, the function that Suchman and Cahill identify may be less plausible in less volatile areas of practice (e.g., lending, asset sales, etc.).
Third, even if the words within the four corners of the opinion letter are not news to the recipient—and in certain respects they could not be (if only because, as some lawyers observe, the recipient may not read it)—the process of producing the opinion also generates information that is important to the transaction, which may not otherwise be forthcoming, and upon which the recipient and the “market” may rely. Among other things, the opinion process may cause a lawyer with concerns to decline to offer a standard opinion. The most important opinion information may, therefore, come not from the opinion itself, but from the lacunae—the omitted standard term, which signals that there may be some problem precluding the opinion. This would lead the recipient to seek more information, which, as discussed above, might result in changes to (or termination of) the transaction. In short, opinion writing would appear to be about more than co-venturing with clients. Closing opinions are also independent assertions about the legal and factual context in which the transaction is being conducted.
III. PRICE PROBLEMS
While certain features of closing opinions may produce and verify valuable information under certain circumstances, the practice is not an unalloyed model of market efficiency. Closing opinions are not cheap under the best of circumstances. Several lawyers indicated that as a general matter, a third-party legal opinion would add at least $5,000 to the transaction and, depending on the type of transaction, substantially more.141 This is not necessarily a cost clients are happy to pay. As one lawyer explained, “[o]pinion practice is a fairly academic part of the practice[,] and clients view it as a transaction cost—something that they never want to have to hire a lawyer for, in my experience.”142
139. Interview with Attorney M-2, supra note 86, at 18. 140. Id. 141. See, e.g., Interview with Attorney W-2, supra note 56, at 14 (“[Y]ou can’t get an opinion out
the door, even the simplest authorization opinion, for under $5,000 . . . .”). 142. Interview with Attorney L-1 (May 6, 2004), transcript at 4. Of course, this may flow from
business clients’ general disdain for the formalities of business law practice. See Interview with Attorney G-2 (May 10, 2004), transcript at 3 (“[A] lot of business people think that all of the corporate formalities are just foolishness and a waste of time.”). Nevertheless, attorneys often cite stories about needless expense and delay caused by opinion-writing. “[I]n one case,” a lawyer said,
I was representing the borrower on a transaction and in this case, [a] Boston instead of New York lender, insisted on land use opinions for half a dozen projects—they were buying a manufacturing facility . . . that had a number of locations in very small towns, and I fought
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Lawyers interviewed for this project indicated three recurrent types of economic problems with closing opinion practice. First, there is the enforceability opinion, which lawyers frequently claim costs more than it is worth. Second, there are procedural and substantive limitations on opinion practice which call into question the informational value of the typical closing opinion. Third, and perhaps most controversially, there is the problem of lawyer liability, the externalization of the risk of deal failure onto lawyers.
A. Enforceability Opinions
Unlike the due authority and no-violations opinions discussed above, lawyers indicate that the enforceability opinion—the “dumbest of all . . . opinions,” according to one lawyer143—may systematically fail to reduce information asymmetries in a cost-effective way.
It sounds innocuous enough. The TriBar model provides that the lawyer will say that the operative documents are “valid and binding obligations of the Company enforceable against the Company in accordance with their terms.”144 Sometimes called the “remedies” opinion, this opinion “addresses the enforceability of each of the undertakings of [the Company],” including the affirmative and negative covenants in the operative documents, as well as the remedies specified therein.145
At least as articulated by the practitioner’s literature, the principal problem with the remedies opinion is economic in nature. A recent report of the Business Law Section of the California Bar Association, for example, observes that “[o]ften, lawyers and their clients request a remedies opinion from counsel for another party in the transaction without engaging in the recommended cost/benefit analysis.”146 While the literature is not terribly clear on what should factor into this calculation, the fact that “the market” demands the enforceability opinion is not, of itself, said to be sufficient.147
tooth and nail with the Boston firm saying this is a huge waste of money—it’s a very difficult opinion to give that you’re not going to get any benefit from but it’s going to cost my client a lot of time and money. We lost that, and the client said, “Go ahead and do it.” But as the example I gave, I said, “This isn’t like the Empire State Building or the Hancock Tower . . . . You’re in towns where these mills have been . . . for 120 years, and in one case, they do have a zoning ordinance, and nobody can find a copy of it, so the value of the legal opinion is kind of the tail wagging the dog here.”
Id. at 6. 143. Interview with Attorney G-1, supra note 103, at 5, 20. Another attorney observed that the
enforceability opinion “clearly was not something that people had carefully thought through.” See Interview with Attorney R-1 (May 12, 2004), transcript at 3. Even though “the wisdom of it is occasionally challenged, most people end up” giving the opinion because “at least in the U.S., you cannot swim upstream.” Id.
144. TriBar 1998 Report, supra note 6, § 3.1. 145. TriBar Remedies Report, supra note 6, at 1484. 146. California 2004 Report, supra note 1, app. 4, at 1 (footnote omitted). 147. See id; see also ABA 2002 Guidelines, supra note 11, ¶ 1.6 (“An assertion that a specific
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Lawyers suggest that the enforceability opinion may cost more than it is worth for either or both of two reasons. First, upon reflection, it is not entirely clear what the opinion means. Does it mean that the opining lawyer believes that “each and every” provision of the operative agreements would be enforceable? Or only that certain “essential” provisions would be?148 If the former, how seriously should we take the opinion? Is the lawyer opining on the accuracy of the client’s factual representations and warranties? If the latter, what is considered “essential,” and who decides? Lawyers observed that significant disputes arise over what the enforceability opinion means, and how broadly it should be construed.149 “Many of our fights,” one attorney observed, “are over the issue of enforceability, and it’s kind of silly.”150 These fights likely increase costs, but may not correspondingly improve the information in the deal.
Second, even greater efficiency problems crop up because of the division of labor. As with the other closing opinions, the enforceability opinion is often written by the lawyer (for example, for the borrower) who did not draft the underlying documents. While this lawyer may be in the best position to offer the authority and no-violations opinion—where she is offering information about her client—the enforceability opinion asks the lawyer to opine on something with which she may have comparatively little familiarity—documents written by opposing counsel.151 As one lawyer who typically represented lenders explained:
When it comes to enforceability, in most cases, you [e.g., the bank’s lawyer] drafted the document, so you’re asking me to tell you that a document which probably you have drafted, used in various variations a hundred times in the past, you’re asking
opinion is ‘market’—i.e., that lawyers are rendering it in other transactions—does not make it appropriate to request or render such an opinion if it is inconsistent with these Guidelines.”).
148. Compare TriBar 1998 Report, supra note 6, § 3.3.4, nn. 75, 77 & 78, § 3.5.1, with Accord, supra note 11, § 10(a), and California 1992 Report, supra note 58, at 5-8.
149. See, e.g., Interview with Attorney S-2, supra note 99, at 19-20. As discussed in note 116, supra, a current—and perhaps expanding—subcategory of remedies opinion disputes involves the extent to which non-Delaware lawyers can give enforceability opinions on transactions governed by Delaware law. There appears to be little quibble with the proposition that any competent business lawyer is qualified to give standard corporate governance (due authority) opinions for a Delaware corporation. This is presumably because Delaware corporate law is sufficiently well-known that admission to that state’s bar is not needed to develop the requisite level of expertise. It is, however, considerably less clear whether a lawyer not admitted to practice in Delaware would also be competent to opine on contracts themselves governed by Delaware law. Controversies apparently arise, for example, when a non-Delaware lawyer is asked to opine on the enforceability of an operating agreement that governs a Delaware limited liability company. An operating agreement may be a contract more complex, nuanced and subject to localized interpretation than the comparatively standardized Delaware corporation charter and bylaws. See id. (discussing disputes of this type).
150. Interview with Attorney S-1, supra note 87, at 15. 151. The enforceability opinion is “the toughest opinion to give and often the toughest one that I’ve
ever thought to justify . . . because in essence what you’re asking is for the lawyer for the borrower or the lawyer for the seller or whatever to say that the document prepared by the lender’s lawyer is or isn’t enforceable.” Id. at 5.
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me to tell you that it works. I’ve never understood the justification for that.152 Another attorney expressed the same point in dollars and cents: “[L]ook,
you’re paying your [recipient’s] lawyers [to draft the documents], . . . why do you need [Company counsel] to tell you they are enforceable?”153 Nor was this view confined to lawyers who represented borrowers. “[I]f I’m representing the lender,” one lawyer with a lending practice observed, “I’ve drafted the damn documents—they’re my documents. I’ve used them over and over again. I do know, or should know, whether or not they work.”154
It is obvious that the lawyer for the borrower would not usually be in an especially good position to provide an opinion on the enforceability of the loan agreement. The same will be true whenever a lawyer is asked to opine on the enforceability of a document she did not draft. Nevertheless, U.S. practice often requires this seemingly inefficient division of labor. Interestingly, it appears that this division of labor has not always been standard in U.S. practice.155 Several lawyers who began practice in the 1940s and 1950s indicated that lawyers for both the borrower and the lender would provide an opinion to the lender at closing.156 Indeed, according to one lawyer, one prominent U.S. bank made it a condition to closing that it receive an opinion on the Company’s authority and the enforceability of the transaction, not from the Company’s counsel, but from its own counsel.157 This practice may persist with respect to at least one “aberrant” U.S. bank.158 Another lawyer suggested that in the past, the enforceability opinion was given by counsel to both the Company and the lender.159
152. See Interview with Attorney H-1 (May 1, 2004), transcript at 6. He had greater enthusiasm for the due authority opinion:
I, as the lawyer for the borrower, am in a much better position to know, or at least to find out, if I hadn’t otherwise represented the company, whether the company was duly organized; whether the resolutions are right. I have much better access to that than you do as the lender. So I don’t think it’s inappropriate to ask me to give you an opinion about those things that relate to my client.
Id. 153. Interview with Attorney V-1, supra note 88, at 10. 154. Interview with Attorney C-1, supra note 58, at 8. 155. It is also interesting to note that opinion-giving duties are divided differently in England. See
Geoffrey Yeowart, Principles for Giving Opinion Letters on English Law in Financing Transactions, BUTTERWORTH’S J. INT’L BANKING & FIN. L. 164, 167 (May 2003); see also Interview with Attorney B-1, supra note 111, at 1 (“[M]y understanding is that the pattern in the London market or the custom in the London market is the reverse. That is, in the London market my understanding is that the norm is that Lender’s counsel gives the opinion and not borrower’s counsel.”); Interview with Attorney R-1, supra note 143, at 7 (“U.K. practice generally has been that the lender’s counsel does give the opinion.”).
156. See, e.g., Interview with Attorney H-1, supra note 152, at 3. 157. Interview with Attorney E-1 (Sept. 15, 2004), transcript at 6. 158. One prominent lending lawyer noted that he knew of at least one large bank that “actually
requires its counsel to give an enforceability opinion, as well as borrower’s counsel opinion.” Interview with Attorney B-1, supra note 111, at 1. He acknowledged, however, that “that is an aberration.” Id.
159. “[A]t one time, both lawyers, both sides gave the opinion . . . . It has withered away . . . I’m speculating, in part because [the lenders’ lawyers] decided ‘why would we take the risk, why should we
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Lawyers sometimes justify the dynamics of the giving of the enforceability opinion on the grounds that the lender’s lawyer (usually New York counsel) wants to make sure that the loan and other agreements would be enforceable as if the local law of the borrower (rather than the chosen law) applied.160 Because the Company’s counsel is (or is thought to be) familiar with the local law applicable to the Company, the Company’s counsel is said to be in the best position to provide the enforceability opinion as if their own state’s law applied.161
There are, however, at least two problems with this explanation. First, there is no particular reason to assume that Company counsel’s familiarity with local law will exceed, in value, bank counsel’s familiarity with its own form. Indeed, there is a good chance that the repeat-playing bank lawyer has already dealt with the choice-of-law question in that jurisdiction.162 Second, and more importantly, it is likely that the choice of New York law will be upheld, especially if (as is usually the case) at least one party (e.g., the bank) has some connection to New York.163 In other words, it is not clear that there is much value in anticipating what a court, acting under the borrower’s law, would do
give it when we’re not getting paid for it?’” Interview with Attorney G-1, supra note 103, at 8. 160. Interview with Attorney B-1, supra note 111, at 3 (“[W]hat I have done on occasion is gotten
the borrower’s counsel to give an opinion that would say something like, let’s say the company’s in Kansas, to say that if an action was brought on the agreement in the courts of Kansas, the courts of Kansas would respect the New York governing law provision and provided, however, that if the courts of Kansas, notwithstanding the New York governing law provision chose to apply Kansas law, the agreement would be legal, valid, binding and enforceable.”).
161. “[Y]ou want to know that in Maine, to have a deal [be] effective, you have to use blue paper or wide margins or have it signed with two witnesses or any of these kind of odd state law requirements.” Interview with Attorney G-2, supra note 142, at 3; see also GLAZER, OPINIONS, supra note 2, § 9.12.3, at 284 (recipients may seek “an opinion that the agreement would be enforceable . . . if [the Company’s] state’s law were to be applied instead of the law chosen by the parties.”). A lawyer for a number of New York banks has observed that lawyers in North Carolina—home of, among others, Bank of America—have recently become expert on New York law, or at least sufficiently expert to review and accept opinions on New York law, even though their practice is concentrated in North Carolina. “One of the things that has developed is that Charlotte, North Carolina has become a major banking center because two of the major banks in America have headquarters there, but the marketplace expects agreements to be governed by New York law and so the lawyers in North Carolina kind of have to practice New York law.” This attorney observes that these lawyers are typically licensed to practice in both New York and North Carolina. Interview with Attorney D-1, supra note 76, at 3.
162. “The notion that [Name Omitted] in New York who does bond financing over and over and over again gives me a 150 page bond document and I’m going to tell them whether it is or isn’t enforceable—it’s kind of silly to be honest with you—I don’t see it. Ask your own counsel.” Interview with Attorney S-1, supra note 87, at 15.
163. EUGENE F. SCHOLES ET AL., CONFLICT OF LAWS § 18.6, at 872 (3d ed. 2000) (permitting parties to choose New York law “afford[s] parties the opportunity to select a sophisticated body of commercial law and a judicial system with substantial experience . . . .”). One lawyer had the following observation about the choice-of-law rationale:
I think [the choice-of-law rationale] is even more of a stupid duel where you’ve got the credit agreements drafted by New York counsel imposing the choice of law on somebody in Pennsylvania or wherever and then trying to insist that they give blessing that there is nothing that they would challenge in that state. There is a logic to it [but] it’s a very annoying process.
Interview with Attorney T-1 (June 6, 2004), transcript at 17.
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because courts would not disregard the chosen law. A more common justification for the enforceability opinion is that it results
in a check on the drafter’s work, a “second set of eyes” reviewing the documents.164 But this explanation also presents problems. The inference is that in the absence of an opinion, the borrower’s counsel would not review the documents to determine enforceability. But that seems unlikely given the general level of professionalism required of all lawyers.165 Moreover, this explanation assumes that the borrower’s counsel would have sufficient expertise and independence to review the documents in a way that would in fact be helpful to the recipient. This does not appear terribly realistic, given the overarching duty that the borrower’s counsel has to her client.
Nor do courts appear inclined to impose liability for errors in an enforceability opinion where the mistake can fairly be traced to the recipient’s counsel. In the Prudential Insurance case,166 for example, the Prudential Insurance Company agreed to restructure $92 million in ship mortgages issued by United States Lines (“USL”). Unfortunately, a typographical error made by counsel to one of the lenders caused the mortgage to be recorded in the stated amount of around $92,000, not $92 million.167 After USL went into bankruptcy, the error was discovered and USL’s bankruptcy trustee challenged the mortgage under the “strong-arm” clause of the Bankruptcy Code.168 Although Prudential settled the matter with USL’s bankruptcy trustee, it did so at a loss of more than $11 million.169
Prudential sued both its counsel (Dewey Ballantine) and counsel to USL, Gilmartin, Poster & Shafto, which had provided a third-party closing opinion to
164. Interview with Attorney K-2, supra note 57, at 3. 165. This is, as discussed below, often characterized as a form of “professional pride.” See
discussion infra Part IV.B. 166. See Prudential Ins. Co. v. Dewey, Ballantine, Bushby, Palmer & Wood, 605 N.E.2d 318, 319
(N.Y. 1992), aff’g 573 N.Y.S.2d 981 (App. Div. 1991). 167. The error was apparently caused by the firm of Haight, Gardner, Poor & Havens (Haight),
counsel to one of the lenders (General Electric Capital Corporation (GECC)) and “special admiralty counsel” to Prudential. 573 N.Y.S.2d at 983. According to affidavits submitted in the lower court, Haight’s staff prepared the document containing the approximately $92 million error. Id. at 984 (Haight “admits that the ‘typographical error [occurred] on a word processor in [Haight’s] office.’” (citation omitted)). Ironically, after it was determined that the Prudential mortgage was improperly recorded (due to GECC’s counsel’s error), GECC—in a display of breathtaking gall—moved for a partial summary judgment declaring the mortgage to be invalid for anything over the stated amount of $92,885.00 (presumably to obtain a step up in priority). Needless to say, GECC was not successful. See Prudential Ins. Co. v. Am. Lancer, S.S., 686 F. Supp. 469 (S.D.N.Y. 1988), aff’d, 870 F.2d 867 (2d Cir. 1989).
168. 573 N.Y.S.2d at 984 (“While we find it clear from the record that [the parties] knew that the correct amount of Prudential’s mortgage . . . was $92,885,000 rather than $92,885, under the peculiarities of the bankruptcy and maritime law those parties could challenge the amount of that mortgage, even though they had actual knowledge of the facts.”).
169. Prudential gave up 17.5% of the net proceeds ($11,400,000) from a foreclosure sale of five of the ships to USL’s bankruptcy trustee. Prudential also sought attorneys’ fees from its defense of the mortgages and other damages. 605 N.E.2d at 319.
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Prudential.170 After concluding that Gilmartin had a sufficient relationship with Prudential to warrant imposition of a duty,171 the court then considered whether the firm breached it. The New York Court of Appeals concluded that—despite the error—it did not:
[T]he purpose of an opinion letter, as correctly spelled out by defendant, is to offer assurances to the creditor about the inner workings of the borrower’s business. . . . An examination of the opinion letter reveals that, although it did not make the specific assurance of a dollar amount of security, it did fulfill its purpose of assuring procedural regularity in forming the opinion . . . . [T]he letter simply stated that those documents represented “legal, valid and binding” obligations of U.S. Lines, which, once recorded, would be enforceable against it “in accordance with [their] respective terms,” whatever those terms might be. No specific dollar amount was assured.172 The result in Prudential is normatively appealing to opinion-giving
lawyers, but this passage suggests the court did not fully understand the nature of the opinion that was given. Closing opinions about the “inner workings” of a borrower’s business will be the due authority and perhaps the no-violations opinions discussed above, about which lawyers seem comparatively sanguine. However, the opinion in issue here—that the contacts were “legal, valid and binding”—went not solely to the status of the borrower, but also to the agreements into which it entered. While it is undoubtedly true that the opinion did not “assure” a “specific dollar amount,” it would appear equally true that the opinion failed to perform the informational function an economic analysis would suggest. It may be that in a narrow sense the opinion was “correct”—the mortgage was “enforceable” (albeit not in the amount the parties expected). But this seems somewhat formalistic. A more plausible explanation may be solicitude for lawyers placed in the unenviable position of having to provide an enforceability opinion on defective documents that they did not prepare.173
Lawyers suggest that, at least outside of the financing context, there is increasing willingness to waive the enforceability opinion. Several lawyers observed that parties with roughly equal bargaining power in an asset sale may dispense with the enforceability opinion. As one lawyer explained:
[I]f both sides are asked to give essentially the same opinion regarding [enforceability], . . . there is a view that, well, each one of us can do the due diligence and not necessarily rely on those client’s representations and warranties in the agreement and therefore neither of us will give the opinion because it would
170. The opinion letter apparently included standard enforceability language, for example, an assurance that the mortgage documents represented “legal, valid and binding” obligations of USL. “Moreover, according to Gilmartin's [opinion] letter, neither Federal nor State law would interfere ‘with the practical realization of the benefits of the security intended to be provided’ by those documents.” Id.
171. Id. at 322 (“[T]he bond between Gilmartin and Prudential was sufficiently close to establish a duty of care running from the former to the latter.”).
172. Id. at 322-23 (emphasis supplied). 173. The Gilmartin firm, itself, appears to have weathered the storm. See Gilmartin, Poster &
Shafto LLP, http://www.gpslaw.com/attorneys.jsp (last visited Sept. 15, 2005).
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typically be mutual.174 Another lawyer observed a similar phenomenon in the securities context,
noting that: [T]he underwriters used to include in their laundry list of everything they wanted an enforceability opinion. And I believe that over the years they finally realized that that was a really stupid thing to ask for because it caused people like me to have to take a bunch of exceptions and basically provide a road map for what might not be enforceable in the agreement. These days, I don’t think they ask for an enforceability opinion, which makes sense because after all, the underwriting agreement is drafted by the [underwriter].175 But enforceability opinions apparently remain important in novel or more
complex transactions. In securitizations and structured financings, for example, lawyers are frequently asked to offer a variant of the enforceability opinion, and state that the property transferred in the transaction will not become part of the bankruptcy estate of the Company should the Company declare bankruptcy. Although these “true sale” opinions are somewhat specialized, they are also controversial because, among other reasons, lawyers suggest that they add little informational value to the transaction. For example, one Boston lawyer had the following observations about the true sale opinion frequently sought in these transactions:
[T]he true sale opinions strike me as a sort of magnificent example of the silliness of opinions. Because what you’ve got is . . . a completely academic exercise. You lay out the law in the discussion— . . . and then you lay out the facts and the facts actually say pretty much the same thing in every opinion, with little wrinkles of course. And then you say, “Oh, there’s this thus and such factor which actually might cut the other way” and that’s just to show that you’re actually thinking about it. And then you get to the end and you say, “Well, of course we can’t absolutely say it for sure, but our best judgment is such and such is going to happen.” And everybody says, “Great,” and they stick it in a drawer. And it’s absolutely meaningless. I mean, if you really look at it carefully, it says nothing.176
A full discussion of the peculiar virtues and vices of true sale (and related) opinions is beyond the scope of this paper. Professor Schwarcz, a specialist in true sale opinions from his many years in practice, has offered an aggressive
174. Interview with Attorney K-3, supra note 85, at 2; see also discussion at note 141, supra, on the relationship between the dollar value of transactions and the opinion requirement.
175. Interview with Attorney W-4, supra note 101, at 3; see also GLAZER, OPINIONS, supra note 2, § 9.14.2, at 311 (“[T]he trend has been toward limiting the opinion on the underwriting agreement to an opinion that the agreement has been duly authorized, executed and delivered.”).
176. Interview with Attorney K-1, supra note 102, at 12. Historically, these opinions were required in these types of transactions by bond rating agencies, such as Moody’s and S&P. See, e.g., Standard & Poor’s, CMBS Legal and Structured Finance Criteria 99-101 (May 1, 2003). Apparently, rating agencies are placing less emphasis on these opinions. See William H. Widen, Lord of the Liens: Towards Greater Efficiency in Secured Syndicated Lending, 25 CARDOZO L. REV. 1577, 1577 n.3, 1577-78 (2004) (citing Dina Moskowitz, Revised Article 9 of the Uniform Commercial Code: New Standard & Poor’s Criteria, Standard & Poor’s, June 1, 2001). Although the transactions in issue in Enron were not traditional securitizations, the opinions appear to have been “true sale” or “true issuance” opinions, and not the simpler opinions on authority, etc. In re Enron Corp. Sec. Lit., 235 F. Supp. 2d 549, 704 (S.D. Tex. 2002); see also Enron Final Report, supra note 15, at 48-55, app. C, at 179-202, annex 1, at 25-31.
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defense of lawyers who issue these opinions, asserting that “there is nothing inherently deceptive or illegal about them or the structured-finance transactions on which they opine.”177 Professor Coffee has responded, observing that these “heavily qualified opinions . . . drone on endlessly like second-rate law review articles.”178 The lawyer quoted immediately above may lean towards Professor Coffee’s view of things. “[N]ot only [does the true sale opinion] say[] nothing,” this attorney observed, “it says the same nothing in every opinion, so why bother? If you really wanted to start getting rid of opinions, that would be a pretty good place to start.”179
B. Substantive and Procedural Limitations on Closing Opinion Practice
Other challenges to the value of closing opinions are presented by their own internal limitations, as well as the process by which they are rendered.
1. Qualifications
Third-party closing opinions are rarely offered without qualification. Rather, they are typically qualified or limited in sometimes significant and substantive ways. For example, the TriBar model limits the opinion giver’s statements of fact with qualifications on the source and verification of information contained in the opinion.180 It makes clear that the scope of the factual investigation undertaken by the opinion giver cannot be ascertained from the letter, itself. “For purposes of this opinion letter,” it provides, “we have reviewed such documents and made such other investigations as we have deemed appropriate.”181
177. See Schwarcz, supra note 5, at 6. The defense is aggressive—and curious—because there have been few credible claims that true sale opinions in themselves are misleading. Rather, most criticism of this sort has been limited to Enron and a few notable cases in which there have been claims of serious financial misconduct by companies engaged in structured finance transactions. See id. at 2 n.1 (collecting citations of criticisms of lawyers in Enron and Dynegy, among others). It is not, however, apparent that one can extrapolate from these criticisms of specific lawyers in arguably unusual circumstances to the general claim that all lawyers engaged in this practice are under attack.
178. John C. Coffee, Jr., Can Lawyers Wear Blinders?: Gatekeepers and Third-Party Opinions, 84 TEX. L. REV. 60, 66 (2005).
179. Interview with Attorney K-1, supra note 102, at 12. Professor Schwarcz would presumably defend by arguing that a true sale opinion does reduce information asymmetries. Despite the fact that “recipients of such opinions often have the same factual information as opining counsel,” Schwarcz argues, “opining counsel assesses certain legal consequences of that information for the opinion recipients.” Schwarcz, supra note 5, at 11 n.54. I note that this may be so, but does not address the question whether these opinions add value. One might think that they suffer the same flaws as the more general enforceability opinions discussed in this section. Since counsel for the recipient will usually have drafted the operative documents (e.g., the pooling and servicing agreement) and have as much, if not more, expertise in securitization, it is not clear why opining counsel’s assessment adds value.
180. See TriBar 1998 Report, supra note 6, app. A-1, at 667. 181. Id. As a matter of customary practice, opinion givers will typically review a standard set of
documents, including the documents that caused the Company to be formed, documents indicating the Company’s current existence, other material contracts, the operative agreements for the transaction in
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The opinion will also likely qualify the veracity of the information. “As to certain matters of fact material to the opinions expressed herein, we have relied on the representations made in the . . . Agreement and certificates of . . . officers of the Company . . . .”182 It is not clear how literally one should take this statement, since it is highly likely that the opining lawyer was, in fact, the drafter of both the representations in the operative agreement as well as the certificates signed by the Company’s officers.183 At least in theory, the opining lawyers will have reviewed these certificates with the Company’s officers in order to “satisfy themselves that the persons providing the factual information understand that the information provided is being relied on in an opinion letter and therefore must be based on knowledge, not surmise . . . .”184 While we cannot be certain, there is some reason to believe that in many cases something approaching this is done.185
It is presumably important to emphasize that the officer has been walked through the certificates because the model opinion then goes on to say that “[w]e have not independently established the facts so relied on.”186 This qualification is curious because it would seem to be untrue in many cases.187 If “independently establishing the facts” means learning firsthand or from others (besides the officers of the Company) that a certain state of affairs exists, it would seem likely that, notwithstanding the qualification, this happens frequently. Opining counsel may well take notice of such obvious facts as the existence of the physical plant in which the Company does business and that
question, and so on. But there is no way, from an opinion with this language, that one could know which documents were reviewed, or whether other documents might also have been important.
182. Id. 183. Id. § 2.1.3, at 609 (“Opinion preparers typically draft certificates that set forth with precision
various key facts.”) (internal footnote omitted). 184. Id. 185. It is not, however, clear that stating assumptions about facts made will necessarily protect a
lawyer from liability should the assumption prove incorrect. One lawyer had the following observation: In a syndicated loan transaction where an opinion is out in the marketplace, people hear about it. There are transactions that I know about that were litigated that people gave opinions on and the opinions turned out to be wrong and in some cases or in a couple of cases that I certainly know, it wasn’t the lawyer’s fault, it was because the assumptions, which were reasonable assumptions[,] turned out to be incorrect. The assumptions were assumptions which the opinion recipient accepted.
Interview with Attorney B-1, supra note 111, at 10-11. 186. See TriBar 1998 Report, supra note 6, app. A-1, at 667. 187. It nevertheless appears to be effective. In Prudential Insurance Co., discussed in Part III.A,
supra, a firm gave a third-party closing opinion as to the enforceability of a $92 million ship mortgage which—due to a typographical error—was recorded in the amount of $92,000. Although the New York Court of Appeals concluded that the opining firm owed a duty of care to the recipient lender, the duty was not breached because, among other reasons:
The opinion letter initially made clear that, in rendering its opinion, Gilmartin [the firm issuing the opinion] had relied in part upon certificates of certain public officials and corporate officers, and upon corporate documents and records, with respect to the accuracy of material factual matters which were not independently established.
605 N.E.2d 318, 323 (N.Y. 1992) (emphasis in original).
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the Company’s officers are who they purport to be. These facts will, in some sense, be “established independently” by the lawyer. Nevertheless, the qualification is not considered wrong because it “should be regarded as included solely as a matter of emphasis since that reliance [on information provided by the Company] is customary without any express statement.”188
Opinions are qualified not only as to fact, but also as to law, and in particular, law that may, in some important respect, impair or impede the transaction. Closing opinions are, by their terms, typically offered “subject to bankruptcy, insolvency and other similar laws affecting the rights and remedies of creditors generally and general principles of equity.”189 The exception “excludes from the opinion the effect of laws affecting the rights and remedies of creditors generally that might prevent the opinion recipient from enforcing its rights under the agreement if the company were to encounter financial difficulties.”190 It is not hard to see why this qualification is included. Commencement of a bankruptcy case for the Company may mean, among other things, that the lender-recipient is paid less than the full amount of the loan, or that a secured creditor will be delayed (and perhaps denied) in its attempts to foreclose on collateral.191
Qualifications and assumptions obviously exist to protect the opining lawyer, but they may not offer as much protection as lawyers would like. In Reich Family L.P. v. McDermott, Will & Emery, for example, a New York court held that the “equitable principles” qualification was ineffective to insulate a firm from liability, even though its opinion had been found in error in an equitable proceeding.192 The equitable principles limitation is a constraint on the enforceability opinion (or perhaps the entire opinion) to the effect that it is subject to “general principles of equity.”193
188. See TriBar 1998 Report, supra note 6, § 2.6, at 618. In a recent, and unhappy, twist of fate, one law firm’s attempt to limit its liability through an explicit knowledge qualifier appears to have backfired. In the National Bank of Canada case discussed above, the Massachusetts Superior Court denied the firm’s motion for summary judgment on claims by plaintiff banks that the firm had made “misrepresentations” in a third-party closing opinion which, among other things, contained an (apparently incorrect) opinion that “to our knowledge, there is no action, suit . . . [etc.] which, if adversely determined, could have a material adverse effect on the business, condition, affairs[,] or operations of [the firm’s client, the borrower].” See Nat’l Bank of Canada v. Hale & Dorr, 2004 WL 104972, at *2 (Mass. Super. Ct., Apr. 28, 2004). The opinion was apparently incorrect because there was, at the time, an ongoing patent infringement litigation against the borrower that sought hundreds of millions of dollars. One of the attorneys interviewed for this project noted that, while the result “comes out correctly,” it was nevertheless a “terribly reasoned opinion obviously written by a . . . trial court judge who was a litigator . . . .” Interview with Attorney K-2, supra note 57, at 4.
189. See TriBar 1998 Report, supra note 6, app. A-1, at 668. At least according to the practitioner’s literature, such an exception would apply even if not expressly stated in the opinion itself. See id. at 623.
190. GLAZER, OPINIONS, supra note 2, § 9.10.1, at 266. 191. See, e.g., 11 U.S.C. §§ 362(a)(3)-(5), 1129(b)(2)(A) (2005) (staying acts to enforce interests in
property of the debtor’s estate and to “cram down” secured claims). 192. Reich Family L.P. v. McDermott, Will & Emery, No. 101921-03, 230 N.Y.L.J. 20 (N.Y. Sup.
Ct. Oct. 29, 2003). 193. TriBar 1998 Report, supra note 6, § 3.3.1, at 623. Glazer indicates that the limitation
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In Reich, the firm of McDermott, Will & Emery was special counsel to a financially distressed company. An investor, Reich, demanded as a condition to an investment in the company that its founder, Adlerstein—who was the CEO, chairman of the board, and majority shareholder—be ousted. This was accomplished pursuant to a transaction which, McDermott, Will & Emery opined, had been duly authorized.194 Not surprisingly, Adlerstein, the CEO, sued the company and the other directors. He won on the grounds that he lacked notice of the meeting at which the investment and his ouster occurred.195
Reich thus lost his investment. He then sued McDermott, Will & Emery, claiming its due authority opinion was wrong. The New York Supreme Court agreed with Reich, despite the law firm’s defense based on the presence of an equitable limitations clause in the opinion.196 The equitable principles limitation did not protect McDermott, Will & Emery because, the court reasoned, it “applies by its terms to issues of good faith and fair dealings between the parties to the agreement, not to the [CEO’s] lawsuit seeking to invalidate the results of the July 9th meeting.”197
Though it is not clear what this means, the court got to the right result. According to the practitioner’s literature, this limitation would not appear to apply to inequitable conduct leading up to a closing. Rather, it applies to a post-closing determination by a court not to enforce (or otherwise to recognize) an element of a transaction on equitable grounds. It “relates to those principles courts apply when, in light of facts or events that occur after the effectiveness of an agreement, they decline in the interest of equity to give effect to particular provisions in the agreement.”198 Thus, while it is true that the equitable principles limitation should not have applied to Adlerstein’s lawsuit seeking to invalidate the improperly called board meeting, this was not because, as the court suggested, the limitation “applies by its terms to issues of good faith and fair dealings.”199 Rather, it was simply because the inequitable conduct there preceded—and thus precluded—a transaction that the legal opinion (incorrectly) claimed was authorized.
Qualifications and assumptions appear to have been especially important in Enron’s transactions. The Examiner’s Final Report indicates that certain of Vinson & Elkins’ “true issuance [opinions] . . . assumed . . . [that] a court would not recharacterize the entire transaction, when viewed in its entirety, as a
originally applied to the enforceability opinion. More recently, however, “a practice has developed among some lawyers of drafting the limitation to qualify all the opinions in their closing opinions rather than simply the enforceability opinion.” GLAZER, OPINIONS, supra note 2, § 9.9, at 261.
194. Adlerstein v. Wertheimer, No. CIV. A. 19101, 2002 WL 205684 (Del. Ch. Jan. 25, 2002). 195. See id. (discussing underlying litigation). 196. Reich Family, 230 N.Y.L.J. at 20. 197. Id. 198. See 1998 TriBar Report, supra note 6, § 3.3.4, at 625 (emphasis supplied). 199. Reich Family, 230 N.Y.L.J. at 20.
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loan.”200 David Keyes, a Vinson & Elkins attorney involved in many Enron transactions, claimed that this assumption was there to “‘put people on notice [that] we’re not giving a true sale opinion.’”201 This was important because it appears that Vinson & Elkins believed it could not give a true sale opinion—even though, according to the Examiner, that was the opinion that the transactions in question called for.202 Vinson & Elkins’ “‘no recharacterization’ assumption would,” according to the Examiner, “thus be assuming away the very issue that a true sale opinion purported to address—whether the transaction was really a sale or a loan.”203 Whatever else may be true of Enron and its lawyers, it would appear that qualifications and assumptions in closing opinions undercut their informational value.
2. Process Problems: Timing and Heterogeneous Expectations
Closing opinions are, to a significant extent, creatures of customary practice. Among other things, this means that opinions at a functional level are written and delivered in much the same way as other documents used in a large business transaction.204 In a typical modern transaction, the third-party closing opinion will be one of several exhibits to the “main” operative document (e.g., the loan agreement). In its initial form, it will usually be delivered by recipient’s counsel to the attorney expected to provide the opinion (i.e., counsel to the company).
Depending on the nature of the transaction, the parties may simultaneously be conducting legal due diligence and negotiating business aspects of the deal. When all goes well, the lawyers will negotiate the opinion as part of this process. Thus, if an important term in the contract changes, or due diligence produces surprising information, the lawyers with principal responsibility should take that into account in the opinion. As the designated closing date approaches, the paperwork, which includes the opinion itself, is finalized, and a
200. Enron Final Report, supra note 15, app. C, at 34-35. For example, in “Project Cornhusker”—a transaction which purportedly involved a “true issuance” of certain securities—Vinson & Elkins’ opinion “contained the assumptions that a court would not ‘(i) recharacterize the issuance of the Class B Membership Interest by NBIL . . . as a loan to NBIL supported by a security interest in [its] Class B Membership Interest, or (ii) recharacterize the [t]ransactions as a loan to Northern Plains supported by a security interest in the [financial assets].’” Id. at 35 n.99 (citation omitted).
201. Id. at 35 (quoting Sworn Statement of David Keyes, Vinson & Elkins, to Mary C. Gill, Alston & Bird, Oct. 1, 2003, at 85).
202. Id. at 34 n.98 (“Keyes . . . remarked to Arthur Andersen [Enron’s accountants] . . . that he believed that they were requesting the wrong opinions . . . . [Keyes] didn’t think what they [Andersen] were asking for was what his reading of the corporate rules required.” (quoting Sworn Statement of Ronald T. Astin, Vinson & Elkins, to Rebecca Lamberth, Alston & Bird, Aug. 12, 2003, at 36-37)).
203. Id. at 35 (citation omitted). 204. The discussion in this subsection is drawn from the interviews conducted and my own
experience as a corporate lawyer, as well as such useful sources as FREUND, supra note 23. A nice, brief discussion of certain aspects of the larger process of documenting complex business transactions is set forth in Claire A. Hill, Why Contracts Are Written in ‘Legalese,’ 77 CHI.-KENT L. REV. 59 (2001).
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location is designated as a repository for the documents. At closing, the parties typically confirm that there have been no material changes in the interim, and then execute and deliver the documents, including the third-party closing opinion, as it may have been refined and agreed to by the parties (or, more likely, the lawyers).
Of course, things do not always go well and the closing opinion is sometimes viewed as the culprit. Lawyers observe that closing opinions are not always negotiated or discussed during the development of the other aspects of the transaction. Rather, they are left to the end of the transaction. Sometimes, this may be because the recipient failed to provide the form it wanted early on; other times it may be because the opining lawyer has failed to focus on it. Either way, last-minute changes to the transaction may well affect the opinion.
Another source of delay may come from the way that the opinion-giving firm handles opinions. Some firms, for example, have policies that require all opinions (or opinions in transactions of a certain size or type) to be reviewed and approved by a standing opinion committee in the firm.205 Other firms require “second-partner” review. Here, the idea is that an attorney, who is not necessarily an expert on opinion writing, is apprised of the transaction and the opinion to be delivered.206 In either case, even if counsel began to discuss the opinion early on in the transaction, its resolution may be delayed until the last moment due to these institutional procedures.
Although the market-signaling view of closing opinion practice discussed above equates value with indicia of procedural regularity, this procedural regularity will be achieved in a cost-effective way only if the lawyers share expectations and a certain level of sophistication about the appropriate opinions to request and receive in the transaction. This is not always the case. Several lawyers from large firms, for example, indicated that they would be concerned when working with an attorney from a small firm or a firm with an unsophisticated practice who signed an opinion in exactly the form requested—without any challenge or negotiation:
I think everybody has done deals with [a] lawyer who basically, you give him a template of the opinion and he gives it back to you with the law firm’s name stamped at the top. It’s nice that I got what I asked for, but no thought went into this
205. As Attorney W-3 explained: We have a policy within our firm that when third-party opinions are given, the opinion has to be signed off on in a particular way by various people, including a member of the Opinion Committee, and we have a number of people in the firm who form that committee and are supposed to look at the opinion not really as a matter of the substance of the opinion—is it right or wrong—per se, so much as to make sure that it conforms to the types of things we will and won’t put in opinions—the way we try to say things. Also, to try to identify issues the person . . . writing may not be aware of.
Interview with Attorney W-3 (May 5, 2004), transcript at 7. 206. See Interview with Attorney B-1, supra note 111, at 12.
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. . . . [W]hat can I do [with this]?207 As another lawyer said, “If I get an opinion back that is verbatim [of] what
I asked for, . . . it invariably has an effect on [my view of] the quality of diligence.”208 An opinion signed in this way “would give me pause,” one lawyer said, because “you want to know that the opinion provider has thought through the opinion issues . . . . [I]f they are just signing a piece of paper so their client can get the loan, you might want to take additional steps to make sure you’re comfortable.”209 The effect will generally be to cause the lawyer to scrutinize the opinion-giver’s work more carefully. This would seem likely to increase cost, not reduce it.210
Even among sophisticated lawyers, differing expectations can lead to costly disputes over closing opinions. “[L]awyers who understand the parties’ expectations for opinions,” one lawyer observed, “are willing to step to the plate and go through the analysis that needs to be done to give the opinion.”211 Lawyers who do not, however, can create costly problems. As this same lawyer observed, “it is not good lawyers who make opinion practice difficult, it is bad lawyers.”212 “Bad” in this context means lawyers who fail to appreciate proper closing opinion decorum, who make last-minute changes or demands, or who fail to distinguish “big” from “small” issues.
And, just because a law firm has a large and sophisticated practice does not mean that any given lawyer has expertise in opinion writing, especially if the attorney is fairly junior. As one lawyer explained, “[a] lot of people simply aren’t aware of the niceties of opinion writing.”213 Another attorney (in-house counsel for a large public company) explained that when she would occasionally receive legal bills indicating what she believed to be an excessive amount of time devoted to closing opinions, she would call the firm to ask (facetiously): “What associate[s] were we training on this one? Were they doing well?”214 A partner in the New York office of a national firm told the following anecdote:
[W]e had a little fight [in one deal] just because there was a very junior lawyer who . . . kept saying you have to give all these opinions and some of them didn’t make sense. I don’t think PUHCA [the Public Utilities Holding Company Act] mattered or the Investment Company Act mattered very much, but they kind of said it did, and then finally, you know, we got somebody more senior . . . to say no, down boy,
207. See id. 208. See id. 209. Interview with Attorney S-2, supra note 99, at 18. 210. Interview with Attorney C-1, supra note 58, at 12. 211. Id. at 23. 212. Id. 213. Interview with Attorney W-3, supra note 205, at 7. 214. Interview with Attorney M-2, supra note 86, at 10. This attorney also noted that this occurred
infrequently (less than once per year, assuming that she did at least one deal per month), and that outside counsel would generally “work it out.” Id.
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you don’t really need those.215
C. Externalizing Costs onto Lawyers
Ordinarily, liability rules address lawyers’ professional errors, and this is as true of the closing opinion as any other facet of practice. It is tempting to imagine that the threat of lawyer liability adds value to closing opinions. After all, if lawyers were not concerned about liability for errors in their opinions, they most likely would care less about the quality of their opinions, which would in turn undermine their informational value. In fact, the link between liability and the informational function of closing opinion practice is elusive. Lawyers certainly express great concern about the risk of liability. It is not, however, clear that the value created by the risk of liability exceeds the costs it creates; nor is it clear that value is created in acceptable ways. As several lawyers observed, imposing liability on lawyers for opinion errors may simply externalize the risk of transaction failure onto the lawyers, imposing a cost for which they believe themselves inadequately compensated. “An opinion,” the 1998 TriBar Report explains “is not a guaranty of an outcome, but rather an expression of professional judgment.”216
1. Legal Liability
Historically, legal liability has been something of a puzzle in this area of practice. In 1989, Professor Freeman surveyed extant case law, and concluded that it “strongly suggest[s] that courts today are willing to go to considerable lengths to protect lawyers who assist their business clients, even where the lawyer’s assistance furthers client misconduct.”217 And, while there are certainly cases in which lawyers have been held liable for opinion errors, lawyers suggest that legal liability was historically a somewhat remote concern. Today, however, lawyers express increasing anxiety about liability for their opinion letters, and find support for this concern in recent decisions.218
Whatever doctrinal clarity there is in this field comes from the Restatement (Third) of the Law Governing Lawyers, which provides that the lawyer rendering the third-party closing opinion “must exercise the competence and diligence normally exercised by lawyers in similar circumstances.”219 A lawyer
215. Interview with Attorney S-2, supra note 99, at 16. 216. TriBar 1998 Report, supra note 6, at 596. 217. See John P. Freeman, Current Trends in Legal Opinion Liability, 1989 COLUM. BUS. L. REV.
235, 251. 218. See GLAZER, OPINIONS, supra note 2, § 1.6.3, at 26-27 (“At one time cases involving closing
opinions were rare . . . . That is no longer the case.”) (footnote omitted). 219. RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 52(1) (2000). Note that
determining what constitutes “similar circumstances” may be difficult. Does the customary practice of the lawyers in the opinion-giver’s community apply? Or must the opinion-giver live up (or down) to the customary practices of lawyers in the recipient’s community? The Restatement provides little guidance
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rendering an opinion is expected to possess “the skill and knowledge normally possessed by members of that profession . . . in good standing.”220 This does not require the lawyer to perform with a high or even an average level of skill, as this would “imply that the less skillful part of the profession would automatically be committing malpractice.” Rather, the duty “is one of reasonableness in the circumstances.”221
This general standard of care applies to all lawyer-client relationships. The Restatement also provides rules on the lawyer’s duty to nonclients, as in the rendering of third-party closing opinions. Restatement § 51(2) provides that a lawyer owes the foregoing duty of care “to a nonclient when and to the extent that: (a) the lawyer or (with the lawyer’s acquiescence) the lawyer’s client invites the nonclient to rely on the lawyer’s opinion . . . and the client so relies; and (b) the nonclient is not, under applicable tort law, too remote from the lawyer to be entitled to protection.”222
While courts have certainly held attorneys liable to third parties for negligent misrepresentations (or similar claims) in the third-party closing opinion letter,223 many other courts have not, even when an opinion letter apparently contained significant errors.224 At least historically, courts have used several doctrinal moves to protect lawyers from liability for errors in their opinions. Courts have, for example, exonerated lawyers on theories that the recipient should not have relied on the opinion,225 the absence of privity of contract,226 or simply that the error itself was not a breach of duty.227
on this point. “The professional community whose practices and standards are relevant in applying [the] duty of competence is ordinarily that of lawyers undertaking similar matters in the relevant jurisdiction (typically a state).” Id. § 52 cmt. The problem, however, is that the parties’ lawyers may be in different states. It would appear inconsistent with the Restatement to hold the opinion-giving lawyer to the standards applicable in the recipient’s lawyer’s jurisdiction. Yet, the difference in standards may be inconsistent with the recipient’s expectations. Perhaps the answer is, as suggested in the Restatement, that many practices which involve opinions are “national” in scope, and so a single standard would apply to all lawyers involved in the transaction. Id. Yet, this is unsatisfying because inconsistent with the experiences described by practitioners. As discussed below, while there is a trend toward nationalizing many types of practice, many small firms in remote locations are often involved in transactions with large firms in major cities. The differences in customary practice between them may well be large, even if the type of transaction in question is national in character or scope.
220. Id. § 52 cmt. b (citing RESTATEMENT (SECOND) OF TORTS § 299A). 221. Id. § 2 cmt. b. 222. Id. § 51(2). 223. See, e.g., Greycas, Inc. v. Proud, 826 F.2d 1560 (7th Cir. 1987), cert. denied, 484 U.S. 1043
(1988); Crossland Savs. FSB v. Rockwood Ins. Co., 700 F. Supp. 1274 (S.D.N.Y. 1988) (applying New York law); Vereins-Und Westbank, AG v. Carter, 691 F. Supp. 704 (S.D.N.Y. 1988).
224. The WPPSS and Prudential cases discussed in Parts II.A.1 and III.A, supra, respectively, are good examples of this. See also Council Commerce Corp. v. Schwartz, Sachs & Kamhi, 534 N.Y.S.2d 1 (N.Y. App. Div. 1988); United Bank of Kuwait v. Eventure Energy Enhanced Oil Recovery Assoc., 763 F. Supp. 729 (S.D.N.Y. 1990); Geaslen v. Berkson, Gorov & Levin, Ltd., 581 N.E.2d 138 (Ill. App. Ct. 1991).
225. See, e.g., Rubin v. Schottenstein, Zox & Dunn, 110 F.3d 1247 (6th Cir. 1997), rev'd en banc, 143 F.3d 263 (6th Cir. 1998).
226. See, e.g., discussion supra note 123. No discussion of privity is complete without mention of
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These moves led some to believe that lawyers were most likely to be held liable for errors in third-party closing opinions only if the errors were truly egregious or were part of a more damning set of facts, such as the NSMC scandal discussed above. Thus, the house organ for one of the legal malpractice insurers, the Attorneys’ Liability Assurance Society (ALAS), noted that “the liability danger usually does not lurk in the opinion itself.”228 Rather, client fraud or a conflict of interest by the attorney—what some refer to as an “x-factor”—were the more likely paths to lawyer liability.229 Given the fact-sensitive nature of these cases, it is not surprising that a pattern is difficult to discern.230
Many of the lawyers interviewed for this project acknowledged that they
Ultramares Corp. v. Touche, 174 N.E. 441 (1931). Here, accountants were sued for negligent misrepresentation and fraud by creditors of a company who allegedly relied on erroneous financial statements prepared by the accountants. Id. at 442. Justice Cardozo famously observed that the accountants had no duty of care to the creditors, because they merely constituted an “indeterminate class of persons who, presently or in the future, might deal with the [company] in reliance on the audit.” Id. at 446 (noting that holding the accountants liable to creditors, at least for negligent misrepresentation, would, among other things, create unacceptable risks for lawyers). Cardozo explained as follows:
Liability for negligence if adjudged in this case will extend to many callings other than an auditor’s. Lawyers who certify their opinion as to the validity of municipal or corporate bonds with knowledge that the opinion will be brought to the notice of the public, will become liable to the investors, if they have overlooked a statute or a decision, to the same extent as if the controversy were one between client and adviser.
Id. at 448. 227. See supra note 96 and accompanying text. 228. See William Freivogel, The Ethics and Lawyer Liability Issues Raised by Closing Opinions, 2
LOSS PREVENTION J. 2 (1998). Information about ALAS may be found at http://www.alas.com. 229. Id. at 4 (“Client fraud is one danger. Usually, the opinion will have no bearing on the case
except to support an argument that the author was, in fact, assisting the client in committing the fraud. The other real danger is conflicts of interest.”).
230. In the following cases, there appears to have been no “x-factor” (e.g., no fraud or conflict of interest by the lawyers) and no liability for an erroneous opinion: United Bank of Kuwait v. Enventure Energy Enhanced Oil Recovery Assoc., 763 F. Supp. 729 (S.D.N.Y. 1990); Vanguard Prod., Inc. v. Martin et al., 894 F.2d 375 (10th Cir. 1990); Alpert v. Shea Gould Climenko & Casey, 559 N.Y.S.2d 312 (N.Y. App. Div. 1990); Molecular Tech. Corp. v. Valentine, 925 F.2d 910 (6th Cir. 1991); Prudential Ins. Co. of America v. Dewey Ballantine, Bushby, Palmer & Wood, 605 N.E.2d 318, 320 (N.Y. 1992); Austin v. Bradley, Barry & Tarlow, P.C., 836 F. Supp. 36 (D. Mass. 1993); Wash. Elec. Coop., Inc. v. Mass. Mun. Wholesale Elec. Co., 894 F. Supp. 777 (D. Vt. 1995); Mark Twain Kan. City Bank v. Jackson et al., 912 S.W.2d 536 (Mo. Ct. App. 1995). In the following cases, there apparently was no “x-factor” but the lawyers nevertheless were held liable for opinion errors: Roberts v. Ball, Hunt, Hart, Brown & Baerwitz, 128 Cal. Rptr. 901 (Cal Ct. App. 1976); Cambridge Factors v. Sturges & Mathes, 1992 Conn. Super. LEXIS 2140 (July 15, 1992); Horizon Fin., F.A. v. Hansen, 791 F. Supp. 1561 (N.D. Ga. 1992); Mehaffy et al. v. Cent. Bank Denver, 892 P.2d 230 (Colo. 1995); Petrillo v. Bachenberg, 655 A.2d 1354 (N.J. 1995). In the following cases, lawyers were found liable (or potentially liable) where their opinions were erroneous in the presence of an x-factor: Terremar, Inc. et al. v. Ginsburg & Ginsberg et al., 1991 Conn. Super. LEXIS 747 (Apr. 4, 1991) (fraud); Superior Bank FSB v. Golding, 605 N.E.2d 514 (Ill. 1992) (forgery). White & Case’s experience in the National Student Marketing Corp. case, discussed, supra, would also appear to constitute loss due in part to an “x-factor.” See 457 F. Supp. 682 (D.D.C. 1978). Of course, we do not yet know what will happen in Enron. The Reich decision, discussed above and below, may also be an example of an “x-factor,” in that the board apparently failed to act in good faith. See Reich Family L.P. v. McDermott, Will & Emery, No. 101921-03, N.Y. Sup. Ct., 230 N.Y.L.J. 20 (Oct. 29, 2003).
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personally knew of no lawyers who had been sued for errors in a third-party closing opinion and held liable (or settled for more than nominal damages).231 As one attorney explained, “Empirically it hasn’t been significant in terms of the claims against and the ultimate hits on malpractice insurance policies. Opinion issues represent a very, very small number” of malpractice claims.232 Another attorney observed, “I know that establishing malpractice liability requires more than that the opinion be wrong, it has to be negligent.”233 Thus, he said, “We’ll tell [our clients] the lenders this [opinion] is not a guarantee of this, but these good lawyers have done a careful job in giving this opinion, and you can take a lot of comfort from that as far as your diligence in determining whether the proper steps have been taken to validate this contract.”234 Another attorney put it more bluntly (if optimistically): “I know that it is an opinion and when all is said and done, you are sort of entitled to be wrong.”235 According to several lawyers, historically, institutional clients (in particular, banks) had a similar view, as they did not generally treat opinions as liability-creating documents.236 If this were true, the threat of liability would add little value, because there would in fact be little threat.
Yet lawyers also express concern about increasing risk of liability for errors in their closing opinions. One attorney from a mid-sized West Coast firm observed:
[T]he fact that there aren’t a lot of cases to hold lawyers liable and there isn’t a lot of experience of lawyers being sued, doesn’t mean that people aren’t fearful of it nevertheless. It’s like fastening your seatbelt on an airplane. I don’t know anyone who’s been through a plane crash, much less someone who has been through a crash who would not have survived if they weren’t wearing their seatbelt. Nevertheless, I buckle my belt low and firm across the lap.237
Imposing legal liability for opinion errors would “allow[] the lender [in loans] to have recourse against another party if . . . it is unable to enforce the loan documents. . . . [P]resumably, if the lender has received an opinion from the borrower’s counsel, then [the lender] can turn to that counsel and say ‘okay, now make us whole for it.’”238 Courts in Massachusetts,239 New York,240 and
231. See, e.g., Interview with Attorney O-1 (May 11, 2004), transcript at 4 (“I don’t know whether that’s sort of the last vestiges of gentlemanly behavior among lawyers that we don’t tend to sue on them. I’ve never seen an opinion sued o[n in] my practice, although I certainly know there are cases, particularly in New York, the last 15 years where there was an opinion sued on . . . .”).
232. Interview with Attorney C-1, supra note 58, at 4. 233. Interview with Attorney B-1, supra note 111, at 5. 234. Id. This sentiment is echoed in the ABA’s Legal Opinions Principles, reprinted as an
Appendix to the ABA 2002 Guidelines, stating, “The opinions contained in an opinion letter are expressions of professional judgment regarding the legal matters addressed and not guarantees that a court will reach any particular result.” ABA 2002 Guidelines, supra note 11, § I.C., at 883.
235. Interview with Attorney O-1, supra note 231, at 4. 236. See, e.g., Interview with Attorney C-2, supra note 78, at 8. 237. Interview with Attorney L-1, supra note 142, at 4. 238. Id. at 2. 239. Nat’l Bank of Canada v. Hale & Dorr, No. 2000000296, 2004 WL 1049072 (Mass. Super. Ct.
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Pennsylvania241 have all recently indicated that this may be an appropriate result.
For example, in the Reich Family L.P. case discussed in Part III.B.1, above, the lawyers were held liable for errors in a due authority opinion because the underlying transaction was challenged on good faith grounds.242 In agreeing with the plaintiff, the New York Supreme Court explained:
The opinion letter stated that each of the transaction documents had been duly authorized by all necessary corporate action on the part of the Company. Yet, as a result of the decision of the Court of Chancery, the [underlying] transaction was invalidated on the basis that the corporation had not provided [CEO] with the required notice of the planned transaction.243 As noted above, closing opinions apparently also played a role in the Enron
scandal, and may expose Enron’s deal counsel to liability, although this is currently far from settled. On the one hand, the Examiner cited them as one of the grounds for determining that Vinson & Elkins (V&E) (and perhaps Andrews & Kurth (A&K)) could be held liable.244 They have been characterized as “crucial” to Enron’s ability to complete many of its questionable transactions.245 On other hand, it is not clear how many were truly
Apr. 28, 2004). 240. Reich Family L.P. v. McDermott, Will & Emery, No. 101921-03, 230 N.Y.L.J. 20, 20 col. 1
(N.Y. Sup. Ct. Oct. 29, 2003). 241. See Ruling by Pa. Court Could Set Precedent on Advice to Banks, 169 AM. BANKER 4 (2004),
2004 WL 55827749. This article discusses the recent unpublished decision in Republic First Bank v. Abrahams, Lowenstein and Bushman, No. 0409, March Term 2002 (Pa. C.P. Philadelphia July 2, 2004). There, lawyers for a bank—who had previously represented the borrower—concealed the fact that the borrower lacked the ability to grant a mortgage in a leasehold, because the landlord had withheld its consent. Nevertheless, the firm gave the bank an opinion on the enforceability of the mortgage against the borrower. In awarding over $4 million in compensatory and punitive damages, the judge indicated that “[t]he court is particularly disturbed over the opinion letter,” the issuance of which the court viewed as “an outrageous thing to do.” Id. It would appear the opinion here was technically a first party opinion, in that the firm that issued the opinion also represented the recipient-bank. Id.
242. Reich Family, 230 N.Y.L.J. at 20. 243. Id. Reading between the lines, two additional factors may have influenced the court. First, the
law firm was apparently involved in advising the directors about the action that led to the ouster of the CEO. If the directors were not acting in good faith, perhaps the lawyers were not, either. Second, some partners of the law firm owned interests in the company, which interests were not disclosed to Reich. Reich claimed that this amounted to fraud by the law firm. Although the New York court disagreed and dismissed that claim, the presence of either or both “x-factors” may have contributed to the court’s overall view of the firm’s behavior. Ironically, Reich himself was not the most sympathetic character. A former partner of the law firm of Wachtell, Lipton, Rosen & Katz, Reich was jailed and disbarred for participating in the 1980s insider-trading ring led by former Drexel Burnham banker Dennis Levine. He served eight months of a 366-day sentence, and was eventually reinstated to the New York bar before becoming a private investor. Id.
244. Neal Batson, one of the Enron Examiners, noted that opinions were in issue in three of the nine transactions discussed in the Report that indicated potential liability of V&E. Enron Final Report, supra note 15, at 48-49.
245. See Enron Final Report, supra note 15, app. C, at 27 (“An attorney’s willingness to provide certain legal opinions was, as a practical matter, crucial to Enron’s ability to complete” certain transactions); see also Rebecca M. Lamberth & Lynn A. Soukup, Summary of the Pertinent Legal Framework and Opinion-Related Conclusions of the Enron Examiner, SJ093 ALI-ABA 125, 136 (American Law Institute—American Bar Association Continuing Legal Education, 2004).
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third-party (as distinct from first-party) closing opinions246 or that by themselves they played a significant role in establishing the firm’s exposure. After all, if V&E (or A&K) did not issue opinions, it is possible that some other law firm would have, thereby costing these firms the work.
At least in the case of V&E, real exposure may derive from having issued the so-called “white-wash report,” in which it approved of these very transactions, despite its concerns, and despite its apparent conflict of interest in rendering such a report.247 Although other firms performed significant work for Enron, or Enron-related entities, only V&E issued this report, and of the law firms sued thus far, only V&E failed to get out of the case at the pleadings stage. Although Judge Harmon did not say so in her decision on the motion to dismiss the securities fraud complaint, it may be that other firms that also structured transactions and issued opinions were not liable for securities law violations because the documents they drafted were “for private transactions” between Enron and its related entities.248
It is probably too early to draw broad conclusions about closing-opinion liability from the Enron scandal.249 Nevertheless, it would appear that, like the NSMC scandal before it, Enron has generated a significant amount of anxiety about closing opinion practice. Surveying Enron and other recent decisions, one prominent attorney suggested that a sea-change may be in the works. He indicated that he expected to see more suits against lawyers for alleged errors in opinions because “otherwise respectable [transaction] participants are . . . now more willing to be plaintiffs . . . .”250 “[P]eople are trying all sorts of wild ways to pull lawyers into the transaction,” another lawyer observed,
246. At least some were. See In re Enron Corp. Sec. Lit., 235 F. Supp. 2d 549 (S.D. Tex. 2002) (discussing opinions issued to J.P. Morgan, among others); see also Susan P. Koniak, Corporate Fraud: See, Lawyers, 26 HARV. J.L. & PUB. POL’Y 195, 202 (2003) (“Citigroup personnel testified under oath . . . that they had two legal opinions, one from Milbank, Tweed, Hadley & McCloy, Citigroup's lawyers, and the other from Vinson & Elkins, Enron's lawyers, assuring Citigroup, in one way or the other, that its round-and-round deals with Enron were legitimate.”) (citing 2002 WL 1722723 (F.D.C.H.) (testimony of Richard Caplan, Managing Director & Co-Head, Credit Derivatives Group, Salomon Smith Barney/Citigroup)).
247. See In re Enron Sec. Lit., 235 F. Supp. 2d at 636 (“Vinson & Elkins issued a whitewash report dismissing these detailed complaints of fraud even though the law firm knew the allegations were true because it was involved in structuring many of the manipulative devices.”).
248. See id. at 706 (“Any opinion letters that [Kirkland & Ellis, another defendant law firm] wrote are not alleged to have reached the plaintiffs nor been drafted for the benefit of the plaintiffs.”).
249. Indeed, as John Coffee has observed, any lessons may be difficult to draw from the case: [T]he problem with viewing Enron as an indication of any systematic governance failure is that its core facts are maddeningly unique. Most obviously, Enron's governance structure was sui generis. Other public corporations simply have not authorized their chief financial officer to run an independent entity that enters into billions of dollars of risky and volatile trading transactions with them; nor have they allowed their senior officers to profit from such self-dealing transactions without broad supervision or even comprehension of the profits involved.
See John C. Coffee, Jr., Understanding Enron: "It's About the Gatekeepers, Stupid,” 57 BUS. LAW. 1403, 1404 (2002).
250. Interview with Attorney K-2, supra note 57, at 6.
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almost [as] aiders and abettors, if you will, of whatever bad thing has happened to them because you gave an opinion that says this was okay, and it turned out not to be okay, and therefore we were harmed and yes, the company said it was okay, and yes, it was the company that has no assets. . . . I . . . think there’s a much higher degree of potential litigation risk that surrounds being part of that opinion.251 Would increased exposure to legal liability result in better opinion practice?
Not necessarily, according to one lawyer. The apparent trend toward holding lawyers liable on opinions means, he said, that “we’ll end up with a lot more negotiations taking place as to what are proper, acceptable exceptions and what aren’t.”252 But the value of the opinion wouldn’t necessarily change because lawyers’ level of diligence and information production will not necessarily have changed. “It should,” he said “come out equal” to what it would have been in the absence of the increased risk of liability.253
The economic value of lawyer liability is ultimately difficult to assess. It is easy to imagine that the threat of liability keeps lawyers diligent, and that this diligence adds value. There are, however, two problems with this proposition. First, lawyers often adamantly insist that their care and handling of closing opinions is not governed in any significant way by the threat of liability. Rather, as one lawyer explained, reputational concerns “drive[] careful opinion practice more than potential exposure to liability.”254 At least according to this lawyer, the prospect of repeat play, not the risk of loss, may motivate good closing opinion practice.
Second, lawyers suggest that they are not adequately paid to take the risk of any significant loss resulting from opinion errors. As one lawyer explained, “our pricing doesn’t reflect [third-party opinion liability] as a risk.”255
[W]e’re not getting paid to take that risk, therefore, one shouldn’t have any risk, in theory. You should have risk to your own client, but that’s for true malpractice, for failure to do what you’re supposed to do. None of us bargain to have risk with a third-party. Why should we bear the risk to that third-party when it’s really the client who didn’t pay back the loan or whatever—that’s the cause of the loss? Why should it be shifted to our shoulders?256 Another attorney offered a slightly more sophisticated theory of
251. Id. That said, another attorney observed: If you have a crook for a client who is defrauding someone, it doesn’t make any difference how well you write the opinion, you’re still going to get nailed. And conflicts of interest—if you allow yourself to be identified with too many parties where they can claim they thought you were their lawyer and then the wheels come off the deal and people get disadvantaged—they’ll start looking around for people to sue, and they’ll sue the lawyer for having a conflict. You favored the other guy over me.
Interview with Attorney F-1 (May 20, 2004), transcript at 3. 252. Interview with Attorney K-2, supra note 57, at 7. 253. Id. 254. Id. at 13. 255. Interview with Attorney K-3, supra note 85, at 11. 256. Id. This attorney acknowledged that this was “a visceral reaction. I can’t say that it’s a very
studied analysis, but it is true. I think I share that same view that we . . . worr[y] about liability . . . but at the end of the day, we probably will never have any.” Id.
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externalization, suggesting that closing opinions may exhibit a form of “reverse tying.”257 According to this attorney, opinion practice is:
A reverse tying arrangement, in that the borrower does not have to buy something extra from the bank, but what the borrower does have to do is to run through this particular hoop. . . . [w]hich is not its own hoop. It’s someone else’s. Somebody else has to run through this hoop—not the borrower.258 If true, this would help to explain why clients themselves evince little
interest in improving opinion practice, but may be increasingly willing to sue lawyers after the fact. The opinion is not the client’s “problem” (hoop). While company managers may not want to pay the legal fees associated with the opinion, they are largely indifferent to the entire process because the manager “doesn’t understand the intricacies and has no patience with it.”259 “[I]f the people who are paying the bills don’t understand what is going on, . . . what you have is the mental patients running the institution.”260 The prospect of lawyer liability may encourage this indifference, since it gives the client an ex post source of recovery that may not have been fully priced in.
One response may be that lawyers are (or at least believe they are) getting paid to take the risk, because they continue to take the work in the face of the perception that lawyers will increasingly end up as defendants in a lawsuit arising from the transaction. Moreover, they adequately price for this risk, since they charge enough to cover malpractice premiums which, in turn, protects them against the real risk of (most) legal liability. This counter-argument would perhaps find support in the eyes of many clients, who pay significant and rising fees to lawyers.261
2. Reputational Costs
The case for legal liability in opinion practice is complicated, and it is not surprising, as discussed above, that courts have at least historically been reluctant to hold lawyers liable for mere errors in their opinions. But lawyers are not only concerned about legal liability. Perhaps an even greater concern (at least historically) has been reputational damage from providing an opinion that turns out, in hindsight, to have been inaccurate.
Reputational liability describes the shame that might attend the discovery of an error in a third-party closing opinion. “I think lawyers are always concerned about the reputational aspect of it,” one attorney explained.262 “I think that frankly drives careful opinion practice more than potential exposure to [legal]
257. Interview with Attorney G-1, supra note 103, at 26. 258. Id. 259. Id. 260. Id. 261. See id. at 8 (“I bet you since 1970 . . . the fee for a partner has gone up 10 times.”). 262. Interview with Attorney K-2, supra note 57, at 15.
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liability. At the end of the day, we sell our professional reputation.”263 As James Freund observed thirty years ago, “There is no aspect of an acquisition that lawyers are more sensitive about than the opinion they are asked to provide.”264
Being perceived as sloppy in opinion writing can have consequences both for the lawyer and the client. As to the lawyer, there is presumably the loss of repeat business. There may also be broader implications, if word leaks into the larger market for legal services, although it is difficult to see how sloppiness in opinions alone would have this effect. For clients, “[a] sloppy opinion process or wrong opinion process leads to questions of sophistication and understanding, which can influence how one approaches a transaction,”265 one attorney said. This attorney indicated that he had not seen transactions fall apart because of a lawyer’s sloppiness with respect to the opinion, but said it would nevertheless affect the nature and amount of work he did in the transaction, even though he was representing a different party (e.g., the recipient).266
Reputational liability is an admittedly complex social and psychological phenomenon. First, while lawyers express concern about the effect of errors in opinions on their reputations, it is not clear that errors in fact affect reputation in any significant way. After all, some of the nation’s more prestigious firms have encountered trouble with their opinions, including White & Case, Hale & Dorr,267 and Dewey Ballantine. These remain prestigious firms. A related and more subtle point (perhaps borne out by the infamous WPPSS and Prudential cases discussed above) is that there is a reputational tipping point whereby if enough people get it wrong, then no one’s reputation suffers.
Second, lawyers indicated that it is often very difficult to isolate the effect that the opinion has on an attorney’s overall reputation. In other words, a lawyer is unlikely to be sloppy only with respect to his or her opinion. Rather, the attorney that is careless in drafting the opinion will likely be careless elsewhere. Conversely, with the exception of several attorneys who have distinguished themselves as “gurus” of opinion practice, being good at this is not likely to enhance anyone’s reputation.
Whether it’s opinions that come up or the contracts themselves or whatever . . . people tend to form views [as to] who’s good at this and who’s not good at this. . . . [B]ut in terms of real reputations of who’s an opinion guru you have people like
263. Id. 264. FREUND, supra note 23, at 305 (“Most of us have been up against attorneys who were meek as
lambs in connection with those elements of the agreement that concerned their clients, but turned into veritable tigers when they came to the section on legal opinions.”).
265. Interview with Attorney C-1, supra note 58, at 12. 266. See id. (“[M]y reaction, if I get that, is that I’d better be more attentive myself because I have
less comfort that our inquiries made of the other side are going to be responded to fully—not because of any mal-intent, just inattention.”).
267. Hale & Dorr is now known as Wilmer Hale, following a merger with Wilmer, Cutler & Pickering. See http://www.wilmerhale.com/about/history/ (last visited Feb. 19, 2006).
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Don Glazer, who have written treatises, they obviously have a profile in the Bar but beyond that I couldn’t tell you who the good opinion writers of Sullivan & Cromwell are.268
In short, “no one becomes a rainmaker for writing opinions.”269 If the value of an opinion lies in the fact that it is evidence that a reputable
firm has represented the Company, one might also think that the most reputable firms could dispense with issuing opinions entirely. That is, they could—like investment bankers in the context of firm commitment public offerings—create value simply by their presence. The reputation of the firm alone would suffice as a signal of probity, diligence, etc. to the putative opinion recipient. Yet, this is not how it works out in practice. The fact that a firm already has a top-flight reputation does not exempt the firm from having to give opinions on behalf of its clients. As one practitioner observed, “[E]very firm that I know of—from Cravath on down—every firm that I have done deals with when they represent the borrower have given opinions . . . . [T]here is no firm of which I am aware that practices in the commercial area that will not give opinions.”270 Conversely, firms appear reluctant to “sell” their opinions on a transaction, at least so long as they do not also do the other work involved in the transaction.271
3. Emotional Costs
The prospect of legal and reputational liability has, not surprisingly, led some lawyers to fear and/or loathe writing third-party closing opinions. Rather than viewing this as an opportunity to serve a client (and earn fees), lawyers often characterize the opinion process as an “aggravation.”272 Many lawyers interviewed seemed to view this aggravation as taking a greater emotional toll than other aspects of business law practice (e.g., negotiating and drafting the underlying agreements). As one lawyer who moved in-house from a partnership at a large firm observed, “When I was outside . . . there [wa]s a fairly significant level of anxiety if you [were] working on an unusual opinion in a large transaction.”273 This may be because “it’s the lawyer’s own ox that’s being gored”274 or, as one attorney prosaically explained, “When a lawyer signs an opinion, of any sort, he feels or she feels like . . . she’s putting her ass on the line. In a way that it wasn’t on the line by just pushing paper and reading
268. Interview with Attorney W-3, supra note 205, at 12. 269. Interview with Attorney L-1, supra note 142, at 4; see also Interview with Attorney K-2,
supra note 57, at 14. 270. Interview with Attorney B-1, supra note 111, at 6. 271. As Attorney B-1 observes, “if they want to hire [our firm] because they want to be able to
deliver our opinion, then hire us to do the deal.” Id. 272. See, e.g., Interview with Attorney K-2, supra note 57, at 8. 273. Interview with Attorney M-2, supra note 86, at 17. 274. Interview with Attorney K-2, supra note 57, at 8.
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contracts—in drafting contracts.”275 A related source of anxiety may be that opinion practice has become
increasingly specialized and esoteric: Just as a general corporate lawyer or commercial lawyer wouldn’t try to draft an ERISA plan or a collective bargaining agreement. . . . [S]imilarly, I think that over the last several decades, opinion practice has become a highly specialized area of practice and has become recognized to an extent as an area of specialization and expertise. Most firms have their opinion gurus and people who spend a disproportionate amount of their time working on opinions, not only for their own deals. If you’ve got a hundred business lawyers in your group that do[es] a thousand transactions a year, you’re not going to have each one doing 10 opinions.276 Discomfort with closing opinion practice may arise from a lack of history
between lawyer and client. “You can really have some anxieties,” one lawyer explained, “when you know the client but you don’t really know the client . . . [w]here the client is a small individual company say, or a startup.”277 Although not “opinion shopping” in a traditional sense, it is nevertheless problematic because “these people could be gone tomorrow, but your opinion would still be here.”278
Closing opinion practice can be anxiety-producing even when the lawyer has a well-developed relationship with a client. One lawyer told a story of a long-time client that used a different firm for a complex transaction. Because the other firm did not have a long-standing relationship with the client, the other firm asked the client’s long-time outside counsel to provide a due authority opinion in the transaction. The lawyer from the long-time counsel agreed, grudgingly, to do so.
[W]e had literally not been involved in the transaction—and so I wasn’t really familiar with the documents, and I mean, it was a very peculiar situation to be giving an opinion. It was . . . as if I had dropped from the sky and given an opinion. And I felt very uncomfortable about it.”279 For some lawyers—especially those for whom closing opinions are a
significant portion of practice—the simpler closing opinions are less troublesome. A New York lawyer who frequently represents lenders indicated that closing opinion practice was not, itself, “that aggravating.”280 This is because, in her view, “there is just a better understanding of what’s
275. Interview with Attorney F-1, supra note 251, at 17. When asked about liability, another attorney who began practice with a “white shoe” New York firm in the 1950s indicated that liability “was the whole name of the game even when I was there. It’s not just something new . . . . You knew the firm could be sued if there were a mistake in a legal opinion. That was the end of your career if you got the firm sued because there was something in a legal opinion.” Interview with Attorney E-1, supra note 157, at 27-28.
276. Interview with Attorney L-1, supra note 142, at 5. 277. Interview with Attorney M-2, supra note 86, at 18. 278. Id. 279. Interview with Attorney K-1, supra note 102, at 17. 280. Interview with Attorney S-2, supra note 99, at 16.
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expected.”281 Another lawyer indicated that even with respect to more complex true sale opinions in certain types of securitizations, closing opinion practice is less fearsome than it once was because “the law has become fairly steady in that area. . . . [T]he industry has reached a level of maturity where it is pretty clear.”282
Although the evidence is qualitative, and thus subjective, it would appear that closing opinion practice is less likely to create value when it involves enforceability opinions, or when (as is often the case) lawyers excessively limit or qualify their opinions. Although lawyer liability may be a source of value in that it imposes discipline, it presents an uncertain case for value creation, both because lawyers have historically not usually been liable for opinion errors per se, and because the costs (economic and otherwise) imposed on lawyers may exceed the lawyers’ compensation, indicating an externalization of transaction failure risk.
IV. PATH AND PRIDE
If opinion practice exhibits inefficiencies, one might expect the market to be a source of innovative correction. Professor Gilson, for example, has argued that in the mergers and acquisitions context, innovation will occur in the marketplace so long as the cost of innovation is less than the resulting gains.283 Professor Klausner has similarly argued that the market for contract terms will recognize efficiency gains by standardizing certain terms.284 Yet, as discussed above, certain aspects of closing opinion practice appear to resist conventional market forces. Why might this be?
There are doubtless many answers to this question. Interviews with lawyers thus far suggest two. First, closing opinion practice is highly path dependent: Like technological changes, developments in closing opinion practice often come not from the market, but from standard-setting bodies, in this case, the bar associations. Second, certain features of this practice appear best explained by reference to the larger social context in which they are given, and in
281. Id. 282. Interview with Attorney M-2, supra note 86, at 11-12. Interestingly, this attorney viewed
Enron, or at least the Enron Examiner’s Report’s discussion of true sale issues, as having led to some of this stability. See id. at 11 (“[B]elieve it or not there is a great deal of guidance in the Enron reports.”). One lawyer explained that anxiety about closing opinions is exaggerated because “people like to worry themselves . . . . [They] read the Wall Street Journal and they see companies failing and opinions get mentioned and so it’s easy enough to worry.” Interview with Attorney W-2, supra note 56, at 15.
283. Gilson, supra note 5, at 253. 284. See, e.g., Klausner, supra note 117, at 761 (“When the use of a contract term becomes
widespread, its value may rise because of several phenomena. More judicial precedents can be expected, on average, to enhance the clarity of the term. Common business practices implementing the term may become established, further reducing uncertainty. Legal advice, opinion letters, and related documentation will be more readily available, more timely, less costly, and more certain. Finally, firms may find it easier to market their securities.”).
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particular the power dynamics found among participants in common transactions. The “pride” of lawyers—their investment in their professional status, as well as their (and their clients’) relative bargaining power—may have as much to do with closing opinion practice as market forces.
A. Path Dependence
Part of the story may simply be path dependence among both clients and their lawyers. Here, path dependence refers to the “lock-in” that may occur with respect to certain types of technologies or entitlements.285 Path dependence is an alternative to the market-adjusting standard economic model. “If such path dependence does occur,” Leibowitz and Margolis write, “it means that marginal adjustments of individual agents may not offer the assurance of optimization or the revision of suboptimal outcomes. In turn, this implies that markets fail.”286
1. Plus Ça Change . . .
Two types of change might occur in closing opinion practice. First, parties might agree to waive the opinion entirely if it is not cost-justified. This, however, apparently rarely happens (especially in financings) because “the people who are negotiating these transactions literally have a book in front of them [that] say[s] get this and they get that, and if you want to deviate from it[,] you are in fact forcing them above their pay level. They go to somebody else.”287 One lawyer explained:
[I]t may be that the biggest thing is that we[‘]re into a tradition[,] and it’s very, very difficult to ever imagine breaking that tradition because the very people who ask for opinions [and], by and large, get them are financial institutions and others for whom nobody is ever going to take the chance at saying, “Oh, I don’t want to get an opinion in this particular situation.” What bank loan officer is ever going to say, “Oh, I didn’t get the opinion from the other counsel.” . . . [I]n essence, [there] is sort of that always basic question that our clients and everybody else asks, and there is a piece of this that says “[be]cause.”288 As discussed in Part III.A above, there is some indication that parties of
equal bargaining power will waive the enforceability opinion outside the lending context. Yet, in the financing context, this is rare.289 As one attorney
285. See, e.g., S.J. Leibowitz & Stephen E. Margolis, Path Dependence, Lock-in, and History, 11 J. L. ECON. & ORG. 205, 206 (1995) (“[A] key finding of path dependence is a property of ‘lock-in by historical events’ . . . especially where those historical events are ‘insignificant.’”).
286. Id. 287. Interview with Attorney W-3, supra note 205, at 16. 288. Interview with Attorney S-1, supra note 87, at 1. “[T]he ultimate answer” to why lawyers
write third-party closing opinions, one lawyer observed, “is a little bit like Tevyah: It’s tradition. It’s the way it’s done.” Interview with Attorney W-3, supra note 205, at 16.
289. On whether clients have said to a lender that a borrower’s lawyer won’t offer an opinion, one attorney observed: “No. I think it is so well understood that it is a condition, an absolute customary
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explained: [T]here is a movement afoot among some lenders who say “well, we’re not going to put people to the expense of giving an enforceability opinion—that’s really the dumbest of all the opinions.” And there is some movement afoot along those lines. But it’s limited. The reason is that people with the gold have—you know, it’s the golden rule.290 One might also expect that changes in the credit market and loan pricing
would affect opinion practice. Thus, if banks are looking to place credit, or a potential borrower is an especially attractive customer, one might think that the opinion would be waived or modified. Lawyers, however, say this is not the case. Even when a lender has “so much money [they] don’t know what to do with it and their lending officers can’t shovel it out fast enough,” a closing opinion of borrower’s counsel is usually required. 291
Among the attorneys, the resistance to change is often equally strong: [U]ntil someone on high, says “this is the new form” then it’s hard for me to be the one to take it out. So why do I want to take it out when I know a smart client is going to look at it and go “gee, . . . every other law firm we use and every other document I see from everybody has this in it, how come we don’t have it?” . . . [Y]ou go down this whole pathway and you say “leave it in.”292 A second type of change might involve modifications to the language of the
opinion. Economic theory would predict that lawyers will agree over time to increasingly standardized terms in closing opinions, and in these incremental changes efficiencies would result. To be sure, the form and substance of closing opinions have changed over time. As discussed below, however, it would appear that the principal engines of this change have been the bar associations, and not the market.
2. The Bar Associations
To say that a practice is path dependent implies that the path started somewhere. In the case of closing opinions, that is a difficult point to locate. As discussed above, there is good reason to believe that closing opinion practice developed in connection with the municipal bond market in the late nineteenth century. But by its nature private, we have limited access to this history. At
condition, I don’t think I’ve ever had that issue.” Interview with Attorney B-2 (May 7, 2004), transcript at 3. Another attorney, however, had a different experience:
What usually happens is the lawyer on one side or the other says to that client, “You know, there is an opinion requirement here[,] and I know you’re concerned about the cost of this transaction and the opinion is going to add appreciatively to it.” And [on] that side of the table is a discussion about pros and cons and then the business people talk and they say, “Okay, let’s get rid of it.” And sometimes that doesn’t work because sometimes the lawyer on the other side says[,] “No, really got to have an opinion here.”
Interview with Attorney K-1, supra note 102, at 2. 290. Interview with Attorney G-1, supra note 103, at 5. As discussed in Part IV.B, infra, this may
also be evidence of “pride” in the form of a power imbalance between clients. 291. Interview with Attorney R-1, supra note 143, at 4. 292. Interview with Attorney G-2, supra note 142, at 2.
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least historically, and like much of the practice of law, opinion-writing appears to have developed by apprenticeship rather than through more formal mechanisms.293 “Office practice,” in Willard Hurst’s words, and not law schools—or bar associations—taught opinion writing.294 Thus, through the middle of the twentieth century, writing third-party closing opinions was just one of many functions of the business lawyer, and there was scant published discussion of the practice.295
This changed in the wake of the NSMC scandal, discussed in Part II.B, supra, where a prestigious firm (White & Case) was sanctioned for the inappropriate use of third-party closing opinions. In 1973, attorney James Fuld argued that cases like NSMC indicated that attorneys should rationalize opinion practice by establishing “general principles regarding legal opinions.”296 In Fuld’s view, such principles should consider:
(a) what legal opinions should ordinarily be requested and given; (b) what words should ordinarily be used in opinions and what those words should mean; (c) what assumptions may ordinarily be made without expressly listing them; and (d) what investigation or backup is ordinarily required before a particular opinion is given.297 Fuld’s call was answered by the bar associations and private
practitioners.298 In 1979, the TriBar Committee299 produced a “landmark”
293. See, e.g., Donald W. Glazer, It's Time to Streamline Opinion Letters: The Chair of the BLS Committee Speaks Out, BUS. L. TODAY, Nov.-Dec. 1999, at 32 (prior to 1970s, legal opinion practice was described as "more a matter of lore than of learned analysis.") [hereinafter Glazer, Streamline].
294. See JAMES WILLARD HURST, THE GROWTH OF AMERICAN LAW 303 (1950). Hurst has observed that first-party opinions—opinions rendered to one’s own client—became popular in the 1850s, when business clients sought advice from litigators about issues relevant to their business practices. More relevant may have been the “increasing effort to use law and lawyers preventively,” which Hurst indicates began after 1870. Id. at 302. How and why this occurred—and whether third-party closing opinions were a part of that story—will have to wait for another day.
295. In 1968, the Cleveland-Marshall Law Review published two brief pieces (one by a practitioner, one by a law student) on third-party closing opinions. See Gaspare A. Corso, Jr., Opinions of Counsel: Responsibilities and Liabilities, 17 CLEV.-MARSHALL L. REV. 375 (1968) (practitioner’s article); Linn J. Raney, Note, Drafting and Use of Opinion Letters of Counsel, 17 CLEV.-MARSHALL L. REV. 360 (1968). Despite this, in 1973, James Fuld, a prominent practitioner, observed that he could:
find hardly any cases considering the substance and form of legal opinions; there is virtually no printed word on the subject in the law books or articles; so far as I know, neither the law schools nor the institutes for practicing lawyers consider the subject; and, unlike the accountants, the lawyers do not have any generally accepted principles covering opinions.
See Fuld, Chaos, supra note 126, at 915. 296. Fuld, Chaos, supra note 126, at 919. 297. Id. 298. See, e.g., Scott FitzGibbon & Donald W. Glazer, Legal Opinions in Corporate Transactions:
The Opinion that Stock Is Duly Authorized, Validly Issued, Fully Paid and Nonassessable, 43 WASH. & LEE L. REV. 863 (1986); Scott FitzGibbon & Donald W. Glazer, Legal Opinions on Incorporation, Good Standing, and Qualification to Do Business, 41 BUS. LAW. 461 (1986); Donald W. Glazer & Scott FitzGibbon, Legal Opinions in Corporate Transactions: The Opinion on Agreements and Instruments, 12 J. CORP. L. 657 (1987); Scott FitzGibbon & Donald W. Glazer, Legal Opinions in Corporate Transactions: Opinions Relating to Security Interests in Personal Property, 44 BUS. LAW. 655 (1989).
299. As discussed in note 6, supra, the TriBar Committee was originally composed of members of the state, county, and city bar associations of New York. TriBar has thus been viewed (at least historically) as representative of interests of New York lawyers and, in particular, banks and other financial services businesses, which tend to be the largest consumers of these types of legal services.
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report on opinion practice.300 Not surprisingly, the TriBar Report tended to reflect the customs and preferences of the New York practitioners who wrote it.301 Because the rest of the nation did not necessarily share these customs or preferences, local bar associations began to develop their own reports on opinion practice.302 By the late 1980’s, practitioners were “flooded with ‘too many’ sources of guidance.”303 “[E]ven when dealing with the same time-honored opinion language,” an ABA report noted, “the opinion giver and the opinion recipient . . . may not have a common understanding of either what is intended by the opinion expressed . . . or what further legal or factual issues, if any, might be implicitly addressed by the language used.”304
In order to reign in this continuing sense of chaos in third-party closing opinion practice, the Business Law Section of the American Bar Association appointed a committee to develop a national consensus on legal opinion practice. The project ultimately involved eighty lawyers, “representing a broad spectrum of practice and geographical area.”305 This group met from May 31, to June 3, 1989 in Silverado, California to “hammer out ‘a national consensus’” on opinion issues.306 The product of these meetings was ultimately endorsed by the Business Law Section of the ABA, and came to be known as the “Accord.”307
The Accord did not create a standard, universal form of opinion, but rather sought to provide “a framework that is both sensible and fair. It has no official sanction and its use is voluntary.”308 The Accord created a “contractual mechanism” that would enable lawyers engaged in opinion practice to “bring[] themselves into accord on the meaning of standard opinion language and the work required to support it.”309 Specifically, the Accord provided “a detailed set of rules that defined for those who chose to adopt them how an opinion
The TriBar Committee has broadened its membership to include members of the Allegheny County (Pa.), Atlanta, Boston, Chicago, District of Columbia, and Ontario Bar Associations, and of the state bars of California, Delaware, Georgia, North Carolina, Pennsylvania, and Texas.
300. See Koley Jessen, P.C., Third-Party Legal Opinions: An Introduction to “Customary Practice,” 35 CREIGHTON L. REV. 153, 159 (2001) (citing TriBar 1979 Report, supra note 6).
301. Id. 302. Interestingly, Hawaii was among the first state bar organizations to do so. See Raymond
Iwamoto, Third-Party Opinion Letters, 7 HAW. B.J. 27 (Feb. 2003) (citing Borrower's Counsel's Opinions to Lenders, 20 HAW. B.J. 129 (1987)).
303. See Glazer, Streamline, supra note 293, at 33. 304. See Accord, supra note 11, at 169. 305. Koley Jessen, supra note 300, at 160 (quoting George W. Bermant, Third-Party Legal
Opinions, C533 ALI-ABA 1337, 1351-1352 (American Law Institute—American Bar Association Continuing Legal Education, 1990)).
306. See id. (quoting George W. Bermant, Third-Party Legal Opinions, C533 ALI-ABA 1337, 1352 (1990)).
307. See Accord, supra note 11. As discussed therein, the Accord also contained the ABA 1991 Guidelines.
308. See Accord, supra note 11, at 171. 309. See Glazer, Streamline, supra note 293, at 33.
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letter should be interpreted, the laws it should be understood to cover, the factual investigation the opinion giver was expected to conduct and the meaning of several standard opinion clauses.”310
Although one prominent practitioner viewed the Accord as having had a “profound effect on opinion practice,” it also “never caught on.”311 Part of the problem may have been the voluntary nature of the undertaking: if the parties’ lawyers did not expressly agree to adopt the Accord in full, it would not apply, or may not apply as it was intended to apply. Indeed, it may have produced the opposite of the result intended. Rather than streamlining negotiations about opinions, “opinion letters often became longer and negotiations . . . more difficult. The added complexity, however, rarely made opinion givers feel more comfortable.”312
A related, perhaps more instrumental, problem was that the Accord was viewed as favoring opinion-givers (e.g., borrower’s counsel).313 Since this conflicted with the pro-recipient (e.g., lender) orientation of the TriBar Committee, many underlying problems remained. The Accord was, according to one attorney interviewed, simply too “radical” for the financial institutions that dominated many of the bar association committees that might have been involved with it.314
[I]f you [were] creating the legal marketplace anew, it might make a lot of sense to have something like [the Accord]; and the lawyers who participated in that project, were a very high quality bunch of lawyers. I know most of them. They thought what they were doing made sense obviously, or else they wouldn’t have spent as much time as they did producing that product. But the financial institutions just said, “No. We want the language we’re used to, we may have to argue about what it means if we ever have to litigate but we’re not going to the Accord.”315 Real cohesion would not come to opinion practice until 1998, when the
TriBar Committee released its second major report. While “generally consistent” with its prior reports, the 1998 report also “reexamine[d] and replace[d]” its predecessor.316 At about the same time, the American Law Institute developed its Restatement (Third) of the Law Governing Lawyers,317 which was viewed as “generally compatible with the bar
310. Id. 311. Id. at 34. 312. See id. (noting that “[o]pinion preparers recognized all too well the impossibility of stating
everything and worried that the more they stated, the more difficult it would be to claim that something unstated was intended to apply anyway”).
313. See Koley Jessen, supra note 300, at 162 (noting “it is clear from our practice that counsel to opinion recipients felt the Accord favored opinion givers and, as a result, such counsel objected more often than not to its unfettered use”).
314. As one lawyer explained, “I think [the Accord] was such a radical departure from the kind of customary practice that the financial institutions just unanimously rejected it; probably without even focusing on . . . the specifics.” Interview with Attorney B-1, supra note 111, at 15.
315. Id. 316. TriBar 1998 Report, supra note 6, at 592. 317. RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 95 (2000).
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reports.”318 In addition, the ABA released its “Legal Opinion Principles,”319 which set forth fifteen statements intended to govern opinion practice, and to act as “a bridge between the Restatements’ description of applicable legal standards and the extended discussion of legal-opinion practice in the various bar-association reports.”320 The reconciliation between the TriBar Committee and the ABA was complete with the assertion in the Restatement that the TriBar Report and the ABA’s Legal Opinion Principles were “the two ‘leading’ bar-association reports” on closing-opinion practice.321
Although it is difficult to compare bar association influence in different practice areas, there is anecdotal evidence that opinion writing is unusually susceptible to reform and innovation through these quasi-regulatory bodies. Today, opinion practice appears to be the subject of intense and active bar association input. The Business Law Section of the American Bar Association, the TriBar Committee, and the Business Law Sections of several states, including Arizona, California, Pennsylvania, Texas, and Washington, have released many detailed reports on opinion practice.322 These committees are often populated with attorneys who have been recognized as experts in opinion writing, some of whom have authored important works on the subject.323 These committees then routinely assess and debate opinion practice—sometimes heatedly. Often, they issue reports and model opinion letters for use by “generalist” practitioners.
The bar associations play a complex part in closing opinion practice. They have become a focal point for the production and promulgation of standards that lawyers can meet in closing opinion practice. They exert what would appear to be a significant influence in the ways that lawyers conceive of closing opinion practice. And although the bar associations may not be the “market” in a traditional sense, they certainly influence market behavior in important ways.324 Of course, some paths may be so strong that the bar associations cannot change their course. The Accord, for example, apparently could not overcome the force of deeply ingrained New York opinion practice.
Moreover, it is important not to overstate the role that path dependence plays here. Any path dependence explanation risks missing the complex
318. Arthur Norman Field, Legal Opinions and the Restatement, The Law Governing Lawyers, 609 PLI/LIT 115, 117-18 (PLI Lit. & Admin. Prac. Course Handbook Series No. H0-003Q, 1999).
319. Committee on Legal Opinions, Legal Opinion Principles, 53 BUS. LAW. 831 (1998). 320. Glazer, Streamline, supra note 293, at 36. 321. Id. 322. Glazer lists over thirty-five different such reports in the current treatise. See GLAZER,
OPINIONS, supra note 2, at xxv–xxxiv, xxxix–xlvi. 323. Examples include Donald Glazer and Arthur Field, among others. 324. See, e.g., Interview with Attorney G-1, supra note 103, at 5. As noted above, there is a sense
among lawyers that certain of these groups—the TriBar Committee in particular—have been “captured” by market actors (e.g., banks) seeking to establish beneficial standards.
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interactions between lawyers and their clients that contribute to developments in closing opinion practice over time. As discussed in Parts II and III, supra, we know that in certain respects, and under certain circumstances, closing opinion practices will change.325 To read bar association and other professional literature, one might imagine that closing opinions are generated as responses to transactions presented by clients, that closing opinions are, if not an afterthought, then at least an exogenous statement about the transaction, authoritative because of their independence from the transaction. As discussed above, however, lawyers note that closing opinions are almost always negotiated, and that sometimes individual transactions will change due to information produced in the opinion process.
Moreover, and more generally, it would appear that closing opinion practice functions in a way that informs (and perhaps modifies) expectations over time. That is, closing opinion practice is not a static feature of transacting, but can shape transactions. Even though “encrusted”326 on the “checklist,” closing opinion practice is also a part of the “checks and balances” of complex transactions.327 According to one attorney,
[The closing opinion sets forth the] rules of the game. Here is the scorecard, fit the box. And if you’re not going to fit the box and you’re not going to be able to do it so it looks like it’s going to be checked, that box will start early to tell everyone that it [the transaction] doesn’t fit. So, you can fix it . . . [o]r you abandon it and do something else that will fit.328
B. Pride
If closing opinion practice follows a path created or maintained, at least in part, by the bar associations, what explains the bar associations? One explanation may be “pride.” Pride is an admittedly vague term that refers to the loose collection of social and emotional forces that appear to influence the way closing opinions are written and some of the purposes they serve.329 It reflects
325. There also appears to be a sort of market innovation in Europe. Several lawyers indicated that legal cultures that had previously viewed the U.S. division of labor with respect to closing opinions suspiciously are beginning to change their tune. One lawyer explained, “I asked the sophisticated German firms,” if they would provide enforceability opinions as to their clients. Interview with Attorney S-1, supra note 87, at 2.
[T]his guy told me it was unethical . . . but, guess what, none of our clients can borrow money from United States banks if they didn’t provide these. So we’ve just sort of gotten to the point that we kind of hold our nose and say we don’t think it’s that unethical and go forward.
Id. This may reflect the broader influence that many aspects of U.S. culture have abroad. As one lawyer explained, “U.S. legal practice has now pervaded other jurisdictions . . . sort of like McDonald’s hamburgers and Starbucks coffee.” Interview with Attorney C-2, supra note 78, at 3.
326. Interview with Attorney W-3, supra note 205, at 16. 327. Interview with Attorney M-2, supra note 86, at 13. 328. Id. 329. Theoretical discussions of this phenomenon can be found in, e.g., ROBERT MERTON, SOME
THOUGHTS ON THE PROFESSIONS IN AMERICAN SOCIETY 11 (1960) (explaining that professional organizations do not require members to “feel altruistic . . . it only requires them to act altruistically”);
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the assertion of self in a social setting even when doing so may produce no net economic gain for oneself or one’s client.
In the case of the bar associations, pride would describe the ambitions of the institutions, themselves, as well as their individual members. Although a full-blown discussion of the bar associations is beyond the scope of this paper, it would appear that they have had an important, if complex, role in the development of modern legal practice, generally. On the one hand, the bar associations appear to have diminishing power to regulate law practice.330 For example, bar associations no longer control attorney advertising or set minimum fee schedules.331 While bar associations may once have reflected an “iron law of oligarchy,”332 they today have a weakened grip on the macro-economics of law practice.
On the other hand, they have had increasing influence in the continuing professional education of lawyers.333 The bar associations have become “heavily involved in developing and interpreting standards of professional conduct for lawyers” and also have played “significant roles in enforcing the standards.”334 Establishing standards for closing opinion practice is an important part of this effort. Thus, lawyers craft opinions “in order to be thorough, accurate and follow guidance provided by various bar associations.”335 Lawyers interviewed for this project appear to have been heavily influenced by the efforts of the bar associations.336 It may be that education—including on the manners and morals of third-party closing opinions—has replaced monopoly control as the modus vivendi for the bar associations.337
ROBERT K. MERTON, SOCIAL THEORY AND SOCIAL STRUCTURE (rev. ed. 1968); TALCOTT PARSONS, ESSAYS IN SOCIOLOGICAL THEORY 34, 43-46 (rev. ed. 1964) (discussing roles that the desire for success, self-interest, and altruism play in professional institutional structure).
330. See ROBERT L. NELSON & DAVID M. TRUBEK, LAWYERS’ IDEALS/LAWYERS’ PRACTICES: TRANSFORMATIONS IN THE AMERICAN LEGAL PROFESSION 7 (Robert L. Nelson et al. eds., Cornell 1992) (“[T]he profession’s associations appear increasingly irrelevant to the actual organization of law practice.”).
331. Id. 332. ROBERT MICHELS, POLITICAL PARTIES 401 (Eden Paul et al. trans., 1949). 333. See, e.g., MICHAEL J. POWELL, FROM PATRICIAN TO PROFESSIONAL ELITE: THE
TRANSFORMATION OF THE NEW YORK CITY BAR ASSOCIATION (1988). 334. Quintin Johnstone, Bar Associations: Policies and Performance, 15 YALE L. & POL'Y REV.
193, 206, 212-13 (1996). 335. Koley Jessen, supra note 300, at 154. 336. Virtually every lawyer interviewed for this project was aware of the major TriBar and ABA
efforts in the closing opinions context, and many viewed these efforts positively. See, e.g., Interview with Attorney M-2, supra note 86, at 21 (“[T]he ABA guidelines . . . are very highly thought of and their corporate governance [principles are] very highly thought of.”).
337. Certainly, it would appear that the bar associations enable “entrepreneurial” lawyers to “produc[e] precedents, principles, doctrine [and] institutions” which enable lawyers to “reinforce their position in the market of trade services.” See Yves Dezalay, Putting Justice ‘into Play’ on the Global Market: Law, Lawyers, Accountants and the Competition for Financial Services 17 (unpublished manuscript presented at Law & Society Annual Meeting, Madison, WI, June 11, 1989) (quoted in
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One result of the increased presence of bar associations in the development of third-party closing opinions has been the “expertizing” of opinions. A comparatively small coterie of opinion “gurus” sits on these committees, both at the state and national level. They apparently know one another, either personally or by reputation, and often collaborate on opinion-related bar association projects.338 These gurus are not remunerated in any direct or significant way for the service they provide. While there are undoubtedly many reasons for volunteering in this way, one reason is likely to be a kind of pride, both civic and personal.339
We can also see this notion of self-expression at work more generally in closing opinion practice. A number of lawyers—especially those representing borrowers—asserted that there was a strong link between the leverage associated with being the financing (e.g., lending) party and the power to demand a third-party closing opinion from the other party’s (e.g., borrower’s) lawyer. This was sometimes simply chalked up to what several lawyers called the “golden rule.”340 As one lawyer explained, “[T]o the borrower, the money is essential. To the lender, sure he wants to do a deal and make some money, but if he doesn’t lend money to me, he can lend it to you. If I don’t get it from you, I may not be able to get it from anybody else.”341
One lawyer observed that leverage also plays a role in dividing the labor in opinion practice:
[I]f both sides are asked to give essentially the same opinion regarding either enforceability, the remedies opinion, or due authorization, etc.—there is a view that well, each one of us can do the due diligence and not necessarily rely on those client’s representations and warranties in the agreement and therefore neither of us will give the opinion because it would typically be mutual.342
Michael J. Powell, Professional Innovation: Corporate Lawyers and Private Lawmaking, 18 LAW & SOC. INQUIRY 423, 427 (1993)).
338. In describing the development of the Opinions Committee of the California Bar Association, one attorney explained that the Executive Committee of the Section of Business Law “decided that what California really ought to have [wa]s a standing opinions committee [with] TriBar people without term limits. People who would be on . . . [are] people who are well-versed in opinions.” See Interview with Attorney C-1, supra note 58, at 3.
339. One attorney explained as follows: The reason that I do the bar association work, and the reason I think most of us do it, is because, first, we like the intellectual stimulation of it, second because of the collegiality, working with good people, and third we’re producing something of value, but not necessarily in that order.
Interview with Attorney G-1 (Dec. 5, 2005), transcript at 1. 340. In fact, legal opinion practice reflects two distinct (perhaps contradictory) “golden rules.” One
is, as indicated, that the financing party may have and exert the leverage to obtain an opinion, even if it is not economically advantageous to do so. Second, there is the almost Mosaic golden rule which says that an opinion giving lawyer “should not be asked to render an opinion that counsel for the opinion recipient would not render . . .” but should not “refuse to render an opinion that lawyers experienced in the matters under consideration would commonly render in comparable situations. . . .” ABA 2002 Guidelines, supra note 11, § 3.1, at 878.
341. Interview with Attorney H-1, supra note 152, at 5. 342. Interview with Attorney K-3, supra note 85, at 2.
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Where the parties do not have equal power, however, the result may be different. For example, lawyers who give opinions, and those who counsel their recipients, were incredulous at the suggestion that the lawyer for the bank (or other financing party of any significance) would also provide an opinion. Even when it was pointed out that questions of the bank’s authority and enforceability should, in theory, matter to borrowers under a revolving credit agreement, it was simply inconceivable that the bank’s lawyers should provide a reciprocal opinion assuring the borrower that the bank would have the power and authority to make advances available in the future, as contemplated by the loan agreement. As one lawyer explained:
In the lending transaction, it’s never mutual. The borrower will never receive an opinion from lender’s counsel [on] the lender’s obligations [under] that agreement to lend in the future . . . . You never get that opinion and you just rely on the covenant of the lender to lend under the conditions set forth in the agreement. . . . There are lots of historic reasons, I’m sure, but I think leverage has a lot to do with it. The fact [is] that this is one of the conditions that the lender has put on it and that makes it a condition that the borrower will accede to to get the money.343 In short, there may be a kind of endowment effect that gives the liquid
parties—and their lawyers—the negotiating power to demand that borrowers or sellers provide closing opinions, even when it may not make economic sense.344 Having the money gives the financing party an entitlement with which it does not wish to part. This leverage in the deal may be reflected in the distribution of opinion-writing duties.
Leverage does not just run between parties. There is also a power dynamic between lawyer and client which may influence closing opinion practice. As discussed above, clients appear generally to have little patience with closing opinion problems. Yet, they do want their lawyers to issue closing opinions in order to see their deals consummated. One lawyer speculated that this may in part have explained how Enron’s law firms were induced to give closing opinions on questionable transactions:
[I]f you go back to 1999 and . . . your client Enron is widely regarded in every book that gets published as one of the most respected companies in America, its accountants Arthur Andersen are regarded as one of the most respected accounting firms in America, and if these people tell you you need to do something in order to comply with generally accepted accounting principles, and you review the law and determine that the source of the opinion is supported by the law, I [would] give that opinion, you know.345
343. Id. There are, to be sure, aberrant cases. In McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999), the Supreme Court of Texas held that counsel to a lender (a savings and loan association) could be liable for negligent misrepresentation for having incorrectly opined on the enforceability of an agreement settling a litigation with a borrower.
344. The “endowment effect” reflects the tendency for individuals to value items more when they own them than when they do not. See Richard Thaler, Toward a Positive Theory of Consumer Choice, 1 J. ECON. BEHAV. & ORG. 39, 44 (1980).
345. Interview with Attorney B-1, supra note 111, at 5.
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Finally, pride refers to the professional pride that lawyers frequently say they take in closing opinion practice. Several lawyers said that they took opinion writing seriously not because they were concerned about producing information or incurring liability, but because it is inherent in the professional nature of lawyering.346 “It’s not so much liability” that concerns lawyers, one explained, “it’s professional pride.”347
Another lawyer (from New York) had a similar, and similarly complex, view of the role that professional pride plays in closing opinion practice. “I think [closing opinion practice] imposes discipline because of liability,” she said:
but I do not think . . . that a lawsuit is common on an opinion. I think it goes to doing your job well, that is[,] you are representing a client and part of the representation is delivering a third-party opinion or receiving one and negotiating one. I think, though, it imposes discipline that way and I think on reputation, it is both the reputation of the firm and sort of delight in the work that we do . . . . I think a legal opinion is pure legal work and in a transactional world, some of what we do is more business oriented, or you might do a great job on the legal work and a covenant, but have to re-negotiate it in a way that is acceptable to all the parties, not just you. [B]ut a legal opinion is pure you, legal thought.348
V. CONCLUSION: FURTHER INQUIRY
Writing third-party closing opinions is not quite like other fields of business law practice. When a lawyer delivers a third-party closing opinion, she is placing herself in harm’s way to a greater extent than in perhaps any other aspect of business law practice. While courts have understandably developed doctrinal mechanisms to limit or disperse these risks, it nevertheless appears that opinion-practice creates legitimate concerns for lawyers in ways that other features of practice (e.g., negotiating and drafting documents) do not.
The preliminary research contained in this article suggests that there are both economic and non-economic explanations for this practice as it currently exists in the United States. As an economic matter, due authority opinions and certain subspecies of no-violations opinions appear to aid the due diligence process by compelling the best-positioned lawyer to provide this analysis. Closing opinion practice, with respect to these matters, distributes value-adding informational burdens in a way that no other transactional feature could.
There are, however, limits to the economic explanations. It appears that certain common features of opinion practice are often not cost-justified,
346. See Interview with Attorney G-1, supra note 103, at 14. This can border on the religious. “‘Duly incorporated,’ ‘duly authorized,’ ‘valid and binding,’ and the like,” one leading work observes, “are canonical phrases by which corporate lawyers consecrate financial transactions. Their delivery is a rite of closing.” See GLAZER, OPINIONS, supra note 2, § 1.4, at 14.
347. Interview with Attorney G-1, supra note 103. 348. Interview with Attorney S-2, supra note 99, at 10.
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whether in themselves or because of the costs they impose on lawyers. Moreover, the market appears to fail, in the sense that these features of opinion practice appear highly resistant to negotiated modification. And, of course, recent scandals remind us that the obligation to provide a third-party closing opinion is no assurance of the probity of the client or the lawyer. This Article has thus argued that price theory alone cannot explain this practice. The attorneys I have interviewed suggest that path dependence and a kind of “pride” are also at work.
Other theories may also be worth pursuing. There may, for example, be behavioral explanations of certain of the “irrational” features of closing opinion practice (i.e., the “pride” described above).349 Closing opinions may also serve “gatekeeping” functions, which, some argue, should apply more generally to lawyers.350 Indeed, virtually any theoretical approach to law may be enriched by application to closing opinion practice. Thus, this Article should be viewed not as the last, but as perhaps a first, word on third-party closing opinions.
For those who care about how and why lawyers do what they do, there is much more work to be done in this arena. First, there are a number of interesting empirical avenues to pursue. This study has relied to a large extent on interviews with lawyers who have identified themselves as having an interest (and perhaps expertise) in opinion writing. It may be equally (or more) interesting to ascertain the views of non-expert lawyers (to say nothing of clients). Another empirical inquiry would consider more deeply the influence of the bar associations in this process. Does the “average” practitioner know or care about the most recent TriBar or ABA developments? If so, how are those developments used?
Second, we have yet to develop a full and useful history of this practice. Given that history (or at least “tradition”) is so frequently cited as the basis for the existence and contours of the practice, it would be useful to have a better understanding of the past. It may be possible to work through older documents (especially from the municipal bond issuances of the late 19th century) and obtain a more thorough understanding of how the practice came to be.
Third, we have no particularly good theory of liability in this context. As discussed in Part III, above, courts have come to curious and inconsistent results in this context, which may reflect a desire to protect lawyers. If, however, we are experiencing a larger change in the role of lawyers and legal opinions, then associated liability rules may also change. If the proper role of opinions is to produce and verify information in a cost-effective manner, then perhaps the predominant question should focus on that, rather than technical
349. Professor Painter does a bit of this in his article about the NSMC scandal. See Painter, supra note 125.
350. See, e.g., Coffee, supra note 249.
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details or other potentially extraneous matters (for instance, the client’s misconduct). A related question would consider the role that insurance does (or should) play in this context. Why has the insurance policy not displaced the legal opinion?351
There is, in short, good reason to view this Article as merely a preliminary study. This Article has demonstrated that there is some reason to believe that closing opinions add economic value under certain circumstances, thereby bolstering traditional economic analysis. It has also shown that this analysis is incomplete, at least in this context. There is much more work to do here. While we may have begun to understand why this practice exists, we have only scratched the surface.
351. Indeed, we might see increasing use of such policies, e.g., in the secured lending context, where such products as “First American’s Eagle 9 UCC” insurance policy allegedly displace the role of closing opinions on the perfection and priority of personal property security interests. See Eagle 9 UCC Insurance Policy, Frequently Asked Questions, http://www.eagle9.com/faq.html (2005). First American explains that its product is better than a legal opinion because, among other reasons:
First of all, the opinion of borrower's counsel is usually directed only to perfection. Our insurance products cover priority. Further, usually the perfection opinion is little more tha[n] advice that the form of the financing statements meets the particular state's requirements as set forth in the CCH Secured Transactions Guide. Given the fact that lender's counsel prepares the financing statement, the opinion is being asked of the wrong lawyer and, getting over that issue, is generally useless.
Id.; see also Widen, supra note 176, at 1577, 1577 n.2.
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APPENDIX
A NOTE ON METHODOLOGY The empirical aspect of this project relied principally on interviews with
twenty-seven lawyers, supplemented by email exchanges or less formal conversations with several others. Most of those formally interviewed identified themselves as having an active interest in third-party closing opinion practice. Most were employed at large U.S. law firms in major metropolitan markets (e.g., New York, Los Angeles, Washington, D.C.), although several were employed with smaller regional or local firms (one from Maine, one from Phoenix, and one from Memphis). Roughly one-third of interviewees identified their practices principally as counsel to opinion recipients (e.g., banks, asset purchasers), one-third identified their practices principally as being the opining attorney, and one-third indicated a blended practice. Twenty were men; seven were women. All but one was Caucasian (the exception was Asian). One was not a business lawyer at all, but counsel to a large malpractice insurer.
Each interview lasted about an hour and was conducted from a script of questions I developed, which can be provided upon request. The interviews were all tape-recorded and transcribed. All interview participants were asked to—and did—sign consent forms in which, among other things, they agreed to be interviewed and indicated whether they would permit attribution of quotes. Despite the agreement to be interviewed and quoted, many asked that their quotes not be attributed to them. As noted in the introduction, in order to preserve their anonymity while also maintaining the integrity of the data, I have cited them by code, e.g., Interview with Attorney [A-1] (date), transcript at [].” Redacted transcripts of these interviews were provided to the Berkeley Business Law Journal. In addition to obtaining consents, I also (grudgingly) obtained institutional review board approvals and/or waivers from the academic institutions with which I was associated while conducting this research.
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