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,
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
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,
REVIEW, p. 176-177, Volume 9, Number 1 Spring 2001.
Former Article 9
Revised Article 9
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
Purchasers of accounts must still file financing statements in order to
defeat lien creditors and trustees in bankruptcy
credit card receivables
Payment stream under real estate contract
Health Care Insurance Receivable
Assignment to provider is automatically perfected
Payment Intangible (general intangible where obligation is money payment)
no UCC-1 must be filed by purchaser of payment intangibles or notes
software embedded in goods
inventory, equipment or consumer
payments under letter of credit
proceeds of a letter of credit
letter of credit rights
perfect by control, not possession
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
automatically perfected by perfection of underlying security
rights under lease or license of collateral
new types of proceeds
no longer limited to proceeds of sale, exchange, collection or other disposition
claims arising out of defects in or damage to collateral
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:
. 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:
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
(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:
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
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:
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;
(3) except as otherwise provided in subsection (e), a type of collateral
defined in the Uniform Commercial Code;
(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
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
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:
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:
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
(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
(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:
Re: File Name
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
(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
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
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
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
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.