V. How to Structure and Manage Secured Transactions under New Article 9.

Structuring and managing secured transactions is complicated and cannot be adequately addressed in this brief introduction to the revisions to Article 9. Needless to say, if you get involved in a complex commercial transaction, please make sure that you do not rely upon anything said herein as legal advice on the handling of these transactions. Included at the end of the material is a check list of items to consider when being involved in a secured transaction. Again, do not rely upon the check list as being a list of everything that you need to be concerned with.

This section will attempt to provide a primer on some of the more fundamental aspects of secured transactions. If the parties start talking about “Securitization Transactions,” “Asset Securitization,” “Asset-Backed Securities,” “Special Purpose Vehicles or SPVs,” or “Bankruptcy Remote Options,” nothing in this discussions will help you. You may want to consult with such articles as The Committee on Bankruptcy and Corporate Reorganization of the Association of the Bar of the City of New York, Structured Financing Techniques, 50 Bus. Law. 527, 528 (1995); Ellis, R., Securitization Vehicles, Fiduciary Duties, and Bondholder’s Rights, 24 J. Corp. L. 295 (1999); Lahny, P. Asset Securitization: a Discussion of the Traditional Bankruptcy Attacks and an Analysis of the Next Potential Attack, Substantive Consolidation, AMERICAN BANKRUPTCY INSTITUTE LAW REVIEW, Vol. 9, Number 2, (Winter 2001). Revised Article 9 was drafted with the desire to facilitate these advanced commercial transactions. Nevertheless, this discussion was drafted for the more mundane aspects of secured transactions.

To overly simplify the basic commercial transaction, the three documents necessary to create a secured transaction are: (1) the promissory note; (2) the security agreement and (3) the financing statement. The promissory note is the document that creates the obligation. The security agreement is the document that pledges the collateral. The financing statement is the document that puts the world on notice that the collateral has been pledged as collateral for the obligation.

To complicate things, the promissory note may not be a promissory note, but instead simply a writing or act that manifests one person’s obligation to pay another person. For example, the obligation may be an amount due on an open account, the amount due on an invoice, the obligation to pay rent, the obligation to pay on a credit card, or any other obligation in which one entity owes or may owe another the obligation to pay them money. To further complicate the discussion, the security agreement is not necessarily a separate document from the document manifesting the initial obligation. Most lending institutions combine the security agreement with the document creating the obligation. When signing the note for a car loan, a section of the note will include a pledge of collateral that will be filled in with the vehicle make, model and identification number. This section of the document is the security agreement in which the borrower pledges the car as collateral for the loan. In vehicle financing, the financing statement is actually performed through the certificate of title laws wherein the secured party’s lien is manifested on the car’s title. The title to the car puts the world on notice that the secured party has a lien on the car. In non-certificate of title situations, the financing statement filed with the Secretary of State’s Office serves this function.

To complicate matters even further, for some types of collateral, the secured lender does not need a security agreement. Instead, the secured lender’s control over or possession of the collateral takes the place of the security agreement. In addition, for some types of agreements, they are deemed to be a security agreement even though the parties may attempt to characterize them as something else, like a lease.

Thus, caution is advised when structuring and managing commercial transactions. Recently, In the Matter of Sean Bannon Zenner, Opinion Number 25418, Shearhouse Advance Sheet No. 5, p. 32 (February 24, 2002), an attorney became involved in the collection of uncollected debt purchased by one company from many other companies. The attorney was publicly reprimanded for his improper management of the collection efforts. Not only can an attorney be subject to personal liability for making mistakes in the structuring and managing of secured transactions, but his ability to practice law may be placed into question.

A. Tapping into New Types of Collateral

A comparison between the collateral under the old and Revised Article 9 is presented in the following chart, prepared and presented in Ahern, L. “Workouts” Under Revised Article 9: A Review of Changes and Proposal for Study, AMERICAN BANKRUPTCY INSTITUTE LAW REVIEW, p. 176-177, Volume 9, Number 1 Spring 2001.

Collateral

Former Article 9

Revised Article 9

Comment

Rights to payments for

- Property disposed of other than by sale, lease or license

-property licensed (e.g. fees & royalties from licenses of patents, copyrights, trademarks, software)

- non-goods sold or leased

- premium for issuance of insurance policy and surety bond premium

- manufacturer’s rebates

- lottery winnings

- provision of electricity

General Intangibles

Accounts

Purchasers of accounts must still file financing statements in order to defeat lien creditors and trustees in bankruptcy

credit card receivables

unclear

Payment stream under real estate contract

Health Care Insurance Receivable

non-Article 9

Account

Assignment to provider is automatically perfected

Payment Intangible (general intangible where obligation is money payment)

general intangible

new sub-categories

no UCC-1 must be filed by purchaser of payment intangibles or notes

promissory notes

instrument

software embedded in goods

unclear

goods

inventory, equipment or consumer

other software

unclear

general intangible

payments under letter of credit

proceeds of a letter of credit

letter of credit rights

perfect by control, not possession

deposit account

non-Article 9

new categories of collateral

only non-consumer as original collateral; perfect by control

commercial tort claims

must arise from debtor’s business, exist at time of security agreement and be specifically described

electronic chattel paper

perfect by “control” based on electronic identification method

supporting obligations (letters of credit, guaranties and other third-party enhancements)

unclear

automatically perfected by perfection of underlying security

rights under lease or license of collateral

unclear

new types of proceeds

no longer limited to proceeds of sale, exchange, collection or other disposition of collateral

claims arising out of defects in or damage to collateral

unclear

Thus, the secured creditor needs to correctly identify the item that it seeks to have as collateral. Further, while general descriptions are sufficient for financing statements, a more detailed description is going to be required of the collateral in the security agreement between the parties. See Section II.A.4. above.

It should be noted that some of the new types of collateral require that the security interest be perfected through control and some of the new types of collateral may allow the security interest to be perfected through the filing of a financing statement. Section 312 provides as follows:

Section 36-9-312 . Perfection of security interests in chattel paper, deposit accounts, documents, goods covered by documents, instruments, investment property, letter-of-credit rights, and money; perfection by permissive filing; temporary perfection without filing or transfer of possession.

(a) A security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing.

(b) Except as otherwise provided in Section 36-9-315(c) and (d) for proceeds:

(1) a security interest in a deposit account may be perfected only by control under Section 36-9-314;

(2) and except as otherwise provided in Section 36-9-308(d), a security interest in a letter-of-credit right may be perfected only by control under Section 36-9-314; and

(3) a security interest in money may be perfected only by the secured party's taking possession under Section 36-9-313.

(c) While goods are in the possession of a bailee that has issued a negotiable document covering the goods:

(1) a security interest in the goods may be perfected by perfecting a security interest in the document; and

(2) a security interest perfected in the document has priority over any security interest that becomes perfected in the goods by another method during that time.

Thus, money can only be perfected through possession.

For deposit accounts and letter of credit rights, a security interest is created through control. Control is not synonymous with possession. A secured creditor may obtain control over a deposit account in another institution’s possession. See Section 36-9-327 (control takes priority over the maintaining bank’s interest). Control over a deposit account is defined as:

Section 36-9-104. Control of deposit account.

(a) A secured party has control of a deposit account if:

(1) the secured party is the bank with which the deposit account is maintained;

(2) the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor; or

(3) the secured party becomes the bank's customer with respect to the deposit account.

(b) A secured party that has satisfied subsection (a) has control, even if the debtor retains the right to direct the disposition of funds from the deposit account.

Thus, the code bifurcates control and possession, allowing secured creditors with control to be ahead of creditors with possession.

Similarly, control over a letter of credit right is defined as:

Section 36-9-107. Control of letter-of-credit right.

A secured party has control of a letter-of-credit right to the extent of any right to payment or performance by the issuer or any nominated person if the issuer or nominated person has consented to an assignment of proceeds of the letter of credit under Section 36-5-114(c) or otherwise applicable law or practice.

Thus, by having the issuer consent to an assignment, a secured party can gain control over the letter-of-credit right. This private agreement, without notice to anyone other than the parties involved, becomes a perfected security interest. Of note, the South Carolina’s reporter’s comments remind us that at present the reference to Section 36-5-114(c) may confuse the application of this section. Specifically, the reporter comments:

For a secured party to obtain control of a beneficiary's letter-of-credit right, Section 36-9-107 requires the beneficiary to assign the proceeds of the letter of credit to the secured party and for the issuer or the nominated party to consent to the assignment. In stating these requirements section 36-9-107 refers to consent under Section 36- 5-114(c). This reference is misleading because it refers to a provision in the 1995 revision of Article 5 that has not been enacted in South Carolina. Section 5-114(c) of the 1995 revision states the requirements for an effective assignment of the proceeds of a letter of credit. Under that provision an assignment of the right to the proceeds of a letter of credit is not effective unless the issuer or nominated person consents to the assignment.

The failure of South Carolina to enact the 1995 revision of Article 5 raises a number of problems under Section 36-9-107. First, there is no section 36-5-114(c), the provision referenced in Section 36-9-107. The provision of the South Carolina Code addressing the assignment of proceeds of a letter of credit is Section 36-5-116. Second, and more significantly, Section 36-5-116 does not condition the effectiveness of an assignment of the proceeds of a letter of credit upon the issuer's or nominated party's consent to the assignment. These problems should not, however, affect the application of Section 36-9-107.

Perhaps in South Carolina, one can obtain a security interest in a letter-of-credit right without the consent of the entity extending the letter of credit.

For the following other types of collateral, the code creates a bifurcated system of perfection of security interests: chattel paper, negotiable documents, instruments or investment property. Previously, these types of negotiable documents could only be perfected through possession. Now, creditors can claim a security interest that defeats a bankruptcy trustee’s lien rights in these types of collateral by filing a financing statement. Thus, it is best to obtain control and possession over these types of collateral, however, having a financing statement will not hurt.

Generally, control takes priority over financing statements. For the requirements for control of deposit accounts, see Section 36-9-104. For the priority of security interests in deposit accounts, see Section 36-9-327. For the requirements for control of electronic chattel paper see Section 36-9-105. For the priority of purchases of chattel, see Section 36-9-330. For the requirements for control of investment property, see Sections 36-9-106 and 36-8-106. For the priority of security interests in investment property, see Section 36-9-328. For the requirements for control of letter-of-credit right, see Section 36-9-107. For the priority of security interests in letter-of-credit rights, see Section 36-9-329.

The secured party with control has priority over the secured party relying upon the filed financing statement. But, the secured party filing the financing statement has priority over the judgment lien creditor and the bankruptcy trustee.

As it relates to the filing of the financing statement, one wants to make sure that the collateral description included in the financing statement is sufficiently broad so as to encompass not just the particular collateral pledged but also the possible proceeds of the collateral pledged. For example and the most obvious example, if the collateral pledged is inventory, you want to describe the collateral as inventory and accounts. When inventory is sold, the proceeds of the inventory are accounts. While automatic perfection will allow for a temporary security interest in the accounts for a period of twenty days, on day 21, without this additional description, the security interest could be lost. Similarly, the security agreement should be specific enough to meet the requirements of a security agreement under the code and broad enough to include the types of collateral intended to be pledged.

As previously mentioned, Revised Article 9 allows for “all assets” as a description for financing statements. For security agreements, Revised Article 9 requires more detail. Specifically, the security agreement may provide for certain categories of collateral and it is suspected that most of the “all assets” security agreements will include a pledge of the following:

All assets of the debtor including but not limited to: accounts, agricultural liens, as-extracted collateral, chattel paper (including electronic chattel paper), commercial tort claims, deposit accounts, documents, general intangibles, goods (including consumer goods, fixtures, equipment, inventory, ), instruments (including promissory notes), investment property, letter of credit rights, manufactured homes and proceeds.

All of the types of collateral defined by the Revised Article 9 are included in this list. It is likely that some security agreements may even modify this list to delete the agricultural liens and manufactured homes in the appropriate settings. Specifically, as it relates to the description of the collateral, Section 36-9-108 provides for the sufficiency of the description:

Section 36-9-108. Sufficiency of description.

(a) Except as otherwise provided in subsections (c), (d), and (e), a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.

(b) Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by:

(1) specific listing;

(2) category;

(3) except as otherwise provided in subsection (e), a type of collateral defined in the Uniform Commercial Code;

(4) quantity;

(5) computational or allocational formula or procedure; or

(6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.

(c) A description of collateral as 'all the debtor's assets' or 'all the debtor's personal property' or using words of similar import does not reasonably identify the collateral.

(d) Except as otherwise provided in subsection (e), a description of a security entitlement, securities account, or commodity account is sufficient if it describes:

(1) the collateral by those terms or as investment property; or

(2) the underlying financial asset or commodity contract.

(e) A description only by type of collateral defined in the Uniform Commercial Code is an insufficient description of:

(1) a commercial tort claim; or

(2) in a consumer transaction, consumer goods, a security entitlement, a securities account, or a commodity account.

Thus, the general listing should be sufficient for everything except, as provided for in section (e): a security interest in commercial tort claims or a security interest in consumer transactions. In these instances, a greater description of the items involved is required. In an effort to clarify what might be sufficient in these circumstances, the Official comments states:

The reference to "only by type" in subsection (e) means that a description is sufficient if it satisfies subsection (a) and contains a descriptive component beyond the "type" alone. Moreover, if the collateral consists of a securities account or commodity account, a description of the account is sufficient to cover all existing and future security entitlements or commodity contracts carried in the account. See Section 9-203(h), (i).

Under Section 9-204, an after-acquired collateral clause in a security agreement will not reach future commercial tort claims. It follows that when an effective security agreement covering a commercial tort claim is entered into the claim already will exist. Subsection (e) does not require a description to be specific. For example, a description such as "all tort claims arising out of the explosion of debtor's factory" would suffice, even if the exact amount of the claim, the theory on which it may be based, and the identity of the tortfeasor(s) are not described. (Indeed, those facts may not be known at the time.)

Thus, you need to be careful if the collateral intended is one of these types of collateral.

B. Taking Advantage of new Perfection Procedures

Most jurisdictions have sites on the world wide web from which the practitioner can download the forms associated with the filing of financing statements. South Carolina’s Secretary of State can be found at www.scsos.com. The web-site looks like the figure to the left. Of course, the web-site is in color and the reproduction of this document is in black and white.

To access the forms portion of the web-site, you click on the forms section and the screen to the left will appear.

By paging down, you will see the following screen and then, by paging down again you will be able to see the next screen:

This screen contains a link to the forms associated with the Uniform Commercial Code in South Carolina.

By clicking on the UCC link, the following screen will appear

This screen gives you the option of choosing the particular form that you want to download.

All of the forms are in Adobe Acrobat reader. If you do not have this software on your computer you can click the section for more information and download a free version of this program so that you can use the forms.

By clicking on the UCC1 link, the following screen appears:

This screen asks if you want to save the form directly to you computer or simply open it. If you choose to open the document directly from the Secretary of State's web-site, Adobe should automatically open and provide you with the following screen:

This screen shows the UCC-1 form as approved for filing in the State of South Carolina. A copy of the form, along with the other forms available from the Secretary of State's office is provided in these materials at the end of this section.

Adobe will allow you to type the information onto the form and then print the form, with the information inserted.

At present, this author has not been able to figure out how to save the form with the information inserted. You can save the form, but not the form with the information in it. Thus, for changes on a financing statement, you have to type the information in over again.

As it relates to the information required by the form, Sections A and B, name of the contact person and place to send the acknowledgment are optional but should be included in the event that the Secretary of State's office has some follow up question. The debtor's full name, address, type of organization, jurisdiction of the organization and organization number, are required. As it relates to the organizational number, this requirement is new. In establishing this system, most states went through all of the organizations incorporated or listed at their secretary of state's offices and gave them a unique organizational number. Many of the secretary of state's allow you to access this information on the world wide web. In those states that did give numbers to their organizations, you must include this number or else your financing statement will be rejected.

In South Carolina, our Secretary of State did not give the organization a number. Thus, in South Carolina, you can file without a number and you must check the none box for the organization number. Nevertheless, in South Carolina, you are able to get the formal name of the organization by accessing the Secretary of State's web site. To do search for filings, one goes to the web-site and clicks on the “Business Filings” option on the left hand portion of the home page. As a result, the following screen will appear:

By selecting the Search the Business Filings Database, you are then guided to a search screen that allows you to enter the name of the corporation that you want to examine.

The screen to the left is the search screen. If you were to enter a common first name of a corporation, like Southern, the search engine will return all of the corporations, limited partnerships, etc., that have that common first word beginning.

Then by clicking on the link to the corporate information, the user is able to obtain the information about that particular corporation. If only one corporation is found, the system provides this information.

For example, by clicking on Southern Abstractors, Inc., the following information is obtained:

By paging down, the user is able to obtain additional information about the corporation including date of incorporation and registered agent for service of process.

In South Carolina, the importance of this information is that the user is able to verify the actual legal name of the corporation before filing the financing statement. Thereby eliminating any guess work on the correct corporation or the correct spelling of the name.

C. Preparing Security Agreements

Sometimes Revised Article 9 states the obvious. Section 36-9-201 states:

Section 36-9-201. General effectiveness of security agreement

(a) Except as otherwise provided in the Uniform Commercial Code, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.

Obviously, a security agreement is going to be effective according to its terms. So when preparing a security agreement, the attorney should attempt to fulfill his obligations of resolving as many uncertainties associated with the written agreement as possible so that it manifests the intent of the parties.

As it relates to security agreements in particular, Section 36-9-203 relates to the creation of security interests including the creation through security agreements. This section states:

Section 36-9-203. Attachment and enforceability of security interest; proceeds; supporting obligations; formal requisites.

(a) A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.

(b) Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if :

(1) value has been given;

(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and

(3) one of the following conditions is met:

(A) the debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned;

(B) the collateral is not a certificated security and is in the possession of the secured party under Section 36-9-313 pursuant to the debtor's security agreement;

(C) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under Section 36-8-301 pursuant to the debtor's security agreement; or

(D) the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control under Section 36-9-104, 36-9-105, 36-9-106, or 36-9-107 pursuant to the debtor's security agreement.

(c) Subsection (b) is subject to Section 36-4-208 on the security interest of a collecting bank, Section 36-5-118 on the security interest of a letter-of-credit issuer or nominated person, Section 36-9-110 on a security interest arising under Chapter 2 or 2A, and Section 36-9-206 on security interests in investment property.

(d) A person becomes bound as debtor by a security agreement entered into by another person if, by operation of law other than this chapter or by contract:

(1) the security agreement becomes effective to create a security interest in the person's property; or

(2) the person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person.

(e) If a new debtor becomes bound as debtor by a security agreement entered into by another person:

(1) the agreement satisfies subsection (b)(3) with respect to existing or after-acquired property of the new debtor to the extent the property is described in the agreement; and

(2) another agreement is not necessary to make a security interest in the property enforceable.

(f) The attachment of a security interest in collateral gives the secured party the rights to proceeds provided by Section 36-9-315 and is also attachment of a security interest in a supporting obligation for the collateral.

(g) The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien.

(h) The attachment of a security interest in a securities account is also attachment of a security interest in the security entitlements carried in the securities account.

(i) The attachment of a security interest in a commodity account is also attachment of a security interest in the commodity contracts carried in the commodity account.

Subsection (b) provides updates the former requirements that a security agreement be in writing, signed by the debtor that has been given value for an interest in collateral in which the debtor has rights. See Former Section 36-9-203. The Revised Article 9 changes the requirement that the security agreement be in writing for certain types of collateral where a security interest may be created through other means. See Section V.A. above. It also updates the requirement that the agreement be signed by the debtor so that the agreement need be authenticated by the debtor. In this way, electronic authentication is allowed. However, the requirement that value be given and the debtor having rights in the collateral is still maintained.

D. Conducting Due Diligence

Many states allow access to their secretary of state’s office’s computer records over the Internet (e.g. North Carolina). Some allow direct access to their records through a modem and direct dial connection (e.g. Virginia). In the South Carolina Secretary of State’s Office, they have a public computer that the public can use to conduct searches of the Uniform Commercial Code filings. In addition, South Carolina has a direct dial connection.

If the researcher does not have access to either the direct dial connection or the physical location of the Secretary of State’s Office, one can submit an information request to the Secretary of State’s Office and they will search their records and provide the researcher with the search results. Form 4, the old three part form has been replaced with Form UCC-11. This form can be accessed from the Secretary of State’s Office’s web-site and like the other forms is in adobe acrobat reader format. Again, the information can be typed directly onto the form, but these changes cannot be saved. A copy of Form UCC-11 is included at the end of these materials.

Caution should be taken and the researcher should remember that for the next five years, security interests could be filed in different locations: (1) where the collateral is located (pursuant to the old Article 9); (2) where the principal office of the debtor is located (pursuant to the Revised Article 9); (3) for individuals, where the debtor resides; (4) where the debtor is incorporated (pursuant to the Revised Article 9); or (5) where the debtor use to have its principal office. For a general discussion of the filing requirements and changes in those requirements, see section I.E. of the materials. In addition, in addition, if the collateral includes real property and/or fixtures, title searches of the property should be requested and conducted.

If the lender wants a first priority lien on the property, you need to make sure that no one is ahead of him in the records and depending on the collateral, you may need to instruct the lender to make sure that he has “control” or “possession” of the collateral.

E. Modifying Opinion Letters

The standard opinion letter requested by Lenders in advanced commercial transactions follows. The letter is indented twice and the standard text appears in italics. The comments to each section appear in regular print with a discussion of potential modifications.

Please understand most lenders that require opinion letters are quite sophisticated and modifications are usually not allowed. These sophisticated lenders are asking the borrower’s attorney to render an opinion to the lender as a condition precedent of making the loan. In essence, the lender is asking the borrower’s attorney to verify and guarantee that all of the documents associated with the transaction are proper. Further, the lender is making the opinion letter a condition precedent. If there is no opinion letter, the borrower does not get the loan.

This author does not like to execute opinion letters for the following reasons:

1. You represent the borrower and you are making representations to the lender for it to rely upon.

2. Some of the representations that you are making relate to transaction documents usually drafted by the lender and usually these documents are presented in a take it or leave it fashion. These documents are usually adhesion contracts written by lender’s attorneys to obtain every possible legal and commercial advantage over the borrower. On behalf of the borrower, you are verifying that the documents are enforceable.

3. One of the representations that they usually request is that the borrower’s attorney has review all the documents that he believes are necessary to render an opinion.

The opinion letter itself:

Lender

Re: File Name

Dear Lender:

We have acted as counsel for ________________ (the “Borrower” ) in connection with the acceptance of a deed from _____________ (the “Seller”) and execution and delivery of a Loan Agreement, dated as of _____________ (the “Loan Agreement”), between the Borrower and __________________ (the “Lender”). We have been requested and instructed by Borrower to render our opinion to you in satisfaction of a condition precedent in a letter from the Lender dated ______________ to Borrower. Except as otherwise defined herein, capitalized terms used herein have the respective meanings set forth or referred to in the Loan Agreement.

For the purposes of this opinion, we have examined the following documents, originals or copies, which, unless otherwise stated are dated the date hereof and are certified or otherwise identified to our satisfaction (the documents referred to in paragraphs (a) through (f) below being hereinafter referred to, except as otherwise stated, as the "Transaction Documents"):

This author likes this paragraph. This paragraph and the following list sets forth the documents actually reviewed by the attorney upon which the opinion is based. In addition, if possible, a modification of this paragraph to strengthen it is attempted. For example, including the sentence or phrase “this opinion is based solely upon the review of these documents” or something along those lines may be attempted.

(a) the Certificate of Limited Partnership or incorporation filed with the South Carolina Secretary of State on ___________________, with amendments.

(b) outstanding loan agreements and indentures of Borrower for loans, modifications or extensions of credit;

(c) the deed from Seller to the Borrower;

(d) the Loan Agreement, including the exhibits and schedules thereto;

(e) the UCC-1 and/or UCC-3 Financing Statements filed or to be filed with respect to the transaction in the offices of the Secretary of State for South Carolina;

(f) all other loan documents executed by Borrower prior to or contemporaneously with the Loan Agreement; and

(g) authorizations of Borrower relating to the execution and delivery of the Transaction Documents.

In addition, we have examined such other documents of Borrower and made such investigations of law and such inquiries of Borrower and Borrower's partners, as we have deemed necessary or advisable in connection with this opinion.

As indicated, this author does not like this paragraph.

Based on the foregoing and subject to the qualifications and assumptions set forth below, we are of the opinion that:

1. The Borrower is a limited partnership (or corporation), duly formed, validly existing and in good standing under the laws of the State of South Carolina. Borrower has all requisite power and authority to conduct its business, to own its properties, and to execute and deliver, and perform all of the obligations under the Transaction Documents.

Get a certificate of good standing from the Secretary of State’s office, the articles of incorporation, the by-laws and whatever else to back up this representation.

2. The execution, delivery and performance by Borrower of the Transaction Documents has been duly authorized by all necessary actions and does not (i) violate any provisions of the Certificate of Limited Partnership of Borrower, (ii) cause or result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Borrower is a party or by which Borrower's properties may be bound, (iii) violate any provision of any judicial or administrative law, rule or regulation or any order, writ, judgment, decree, determination or award by which Borrower of any of Borrower's property is bound, or (iv) cause, result in or require the creation or imposition in favor of anyone other than Lender of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature upon or with respect to any property now owned or hereafter acquired by Borrower. To our knowledge, Borrower is not in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or under any such indenture, agreement, lease or instrument.

Have a copy of the resolution signed by the appropriate entity in your files to back up this statement.

3. The Loan Agreement and the UCC Financing Statements once duly executed and delivered by Borrower shall constitute a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally.

The borrower’s attorney is verifying the ability of the lender to enforce its documents. At times, the lender will seek to have the borrower’s attorney verify that the obligations is a first priority lien on the collateral of the obligations. In these circumstances, you need to include in the documents reviewed the results of the search of the records and you need to include some statement or limitation relating to the results of that search. If you do not qualify the opinion, you are providing the lender with title insurance. If they want title insurance, they should pay for title insurance.

4. None of the provisions of the Loan Agreement and the UCC Financing Statements violate any laws of the State of South Carolina relating to interest or usury.

5. To the best of our knowledge, there are no actions, suits, investigations or proceedings pending or threatened against or affecting Borrower or the property of Borrower before any court or governmental department, commission, board, bureau, agency or instrumentality which would materially and adversely affect the property, business, prospects, profits or condition (financial or otherwise) of Borrower, including, without limitation, any action, suit, investigation or proceeding under any Environmental Law.

This author likes to attempt to modify this section by including what his knowledge is based upon: a review of the court house records, representations from the borrower, discussions with the auditors, etc.

6. Each of the Loan Agreement and the UCC Financing Statements contains the terms and provisions necessary to enable Lender, following a default under the Transaction Documents, to exercise the remedies that are customarily available to a real estate lien holder under the laws of South Carolina.

This author likes the limitation of enforceability to that “customarily available.” Some lenders want the borrower’s attorney to opine that the lender can enforce those remedies as set forth in the documents themselves. If the lender requests that form of the opinion letter, please be careful. Regardless of the desires of the lender, there are some remedies (the guillotine) that are not enforceable in South Carolina.

7. Neither the execution and delivery by the Borrower of the Transaction Documents to which it is a party, nor the consummation by the Borrower of the transactions contemplated thereby: (a) violates any law or regulation of South Carolina (including any applicable order or decree of any court or governmental instrumentality of South Carolina) applicable to the Borrower; or (b) requires the consent or approval of, or any filing or registration with, any Governmental Authority of South Carolina other than (i) the filing of the Financing Statements in the office of the Secretary of States, (ii) the filing of the Modification in the office of the Richland County Register of Deeds office (“Richland ROD office”); (iii) those which have been obtained, and (iv) any consents, approvals or filings required in connection with the exercise by Lender of certain remedies under the Transaction Documents to the extent required pursuant to the terms thereof.

8. Each of the Loan Agreement and the UCC Financing Statements is in proper form for recording and upon execution and due recordation of the Loan Agreement in the Richland ROD office, the Loan Agreement will constitute, as security for the Indebtedness (as defined in the Mortgage), a valid lien of record in favor of Lender, on all of Borrower’s right, title and interest in the Premises covered by the Mortgage. No other filing or recording, or re-filing or re-recording, is necessary or advisable in order to perfect, protect or preserve Lender's interest in the Premises created or purported to be created by the Mortgage, including, without limitation, to maintain the priority of the lien created by the Mortgage securing the Indebtedness incurred after recordation of the Mortgage.

9. Upon filing of the Financing Statements in the office of the Secretary of State, the security interests created under the Mortgage, in favor of Lender, as security for the Obligations, will be perfected in such of the collateral described therein as to which a security interest can be perfected by filing a financing statement under the Uniform Commercial Code as in effect in South Carolina.

The opinions set forth above are subject to the following qualifications and limitations:

The enforceability of the Modification may be subject to or limited by (i) bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent transfer or conveyance, or other similar laws relating to or affecting the rights of creditors generally, (ii) general principles of equity, whether enforceability is considered in a proceeding at law or in equity, and (iii) the qualification that certain remedies under the Loan Agreement may be unenforceable under or limited by the laws or court decisions of the State of South Carolina; however, such laws and court decisions do not, in our opinion, prevent the practical realization of the liens and security interests intended to be provided by the Modification Agreement.

Here, the borrower’s attorney should attempt to insert as many qualifications as possible. However, as previously discussed, most sophisticated lenders will not allow modifications to their form opinion letters.

We are qualified to practice law in the State of South Carolina, and do not express any opinion herein concerning the law of any jurisdiction other than the State of South Carolina.

This opinion may be relied upon by you and any participant in your loan to Borrower, but by no other person or entity.

Needless to say, opinion letters are fraught with potential for liability claims against the attorney that drafts them. Please be careful. Please make sure that the malpractice insurance premiums are paid and the policy is in full force and effect.

Serving the people and businesses of South Carolina for over forty years.