Delaware LLC and LP Opinions
A large part of our legal practice is the delivery of legal opinions in connection with loans being made to Delaware LLC’s and LP’s. Generally the underlying transaction involves the financing or re-financing of real estate owned by the LLC or LP, however some opinions are delivered in connection with business transactions not involving real estate. Lenders insist that the borrowing entity be a single member LLC or a LP with only one limited partner. The LLC or LP agreement for the borrower will contain “SPE” or “Special Purpose Entity” language which limits the powers of the borrower to the operation and protection of the property and provides specific language in the case of a bankruptcy filing. Each lender has its own SPE language which they require to be included in the Operating Agreement or LP Agreement of the borrower. The operating agreement of the Manager of the borrower or its General Partner will contain SPE language and an obligation on the part of the the Manager or General Partner to ensure the observation of the borrower to these limitations. Most lender language is similar, but not exactly the same. Most transactions are divided into three entity levels. The first level is the borrower, the second level is the member or limited partner of the borrower and the third level is the manager of the LLC or the general partner of the LP. The single member and the limited partner are generally LLC’s. The single member’s operating agreement or the limited partner’s operating agreement are generally the entity agreement which contains the investors and the agreement contains the business deal among the investors and the promoter. Most rating agencies and lenders prefer for the borrower and any manager or general partner to be Delaware entities. The preference is pragmatic. Both they and their counsel understand the rights of the lender under both the Delaware LLC and Limited Partnership acts. They do not have to learn or understand the laws of an additional state. Additionally, as both Delaware acts specifically provide that a third party which is not a member or partner may be given rights under the agreement, the agreement typically provide rights to the lender such that the agreement may not be amended without the consent of the lender which the loan is outstanding.
There are three types of opinions which we deliver, based upon the type of financing. Fannie Mae and Freddie Mac have their own forms of opinion which they insist to be used. While each permit some minor deviation from the form in the provisions and assumptions, other than the actual opinions, they permit few deviations in the actual opinion paragraphs.
The third type of opinion is given in connection with loans which will be sold into CMBS pools. While there is not a CMBS opinion form, per se, Delaware attorneys have by consensus adopted somewhat of a standard form of opinion for such loans.
While the three opinions differ in their format all three opinions will contain a recitation of the organizational documents which were reviewed as well as the loan documents which were reviewed and sets forth certain limitations and assumptions. The first opinion opines that the borrower is “duly formed” and that it validly exists in good standing under the laws of the State of Delaware. The second opinion general is that the LLC or LP agreement is a valid and binding obligation of the member or partners and that the agreement is enforceable against the member or the partners. The opinion also opines as to the power and authority of the borrower to operate and conduct its business; that the execution and delivery of the loan documents have been authorized by all necessary company action; that a valid and enforceable security interest has been created by the UCC-1 financing statement; that the company is a separate legal entity; that the bankruptcy or dissolution of the member or partner will not cause the borrower to dissolve; and that upon the occurrence of an event which causes the last remaining member or partner to cease to be a member or partner, that the springing member will automatically be admitted and that the company will not dissolve. An additional opinion that is included relates to charging orders. The opinion provides that the sole remedy of the creditor is the charging order and that the judgment creditor may not satisfy its claim against the assets of the Company.
In addition to the three opinions discussed above, with some larger loans the lender will seek an opinion that in the event that the company file a petition in bankruptcy, that the Federal Bankruptcy Court would recognize the terms of the operating agreement or LP agreement in determining who has authority to file bankruptcy on behalf of the company. In these loans the lender will require that the company has one or two “special members”, sometimes called “independent managers” or “independent directors” depending upon the structure of the company. In each case the operating agreement or the LP agreement will contain extensive language limiting the actions which the company may take. One of these limitation is who has the authority to file a petition and the process upon which the action may be approved. These companies are referred to as special purpose entities or SPE’s. Each lender has a variation of the language. The language dealing with bankruptcy generally looks like the following:
Special Member
As long as any Obligation is outstanding, the Member shall cause the Company at all times to have at least [**one/two**] Special Member[**s**] who will be appointed by the Member. To the fullest extent permitted by law, including Section 18‑1101(c) of the Act, each Special Member shall consider only the interests of the Company, including its respective creditors, in acting or otherwise voting on a Bankruptcy Action. No resignation or removal of a Special Member, and no appointment of a successor Special Member, shall be effective until such successor shall have executed a counterpart to this Agreement. In the event of a vacancy in the position of Special Member, the Member shall, as soon as practicable, appoint a successor Special Member. All right, power and authority of each Special Member shall be limited to the extent necessary to exercise those rights and perform those duties specifically set forth in this Agreement and no Special Member shall have any authority to bind the Company. Except as provided in the second sentence of this Section __, in exercising their rights and performing their duties under this Agreement, any Special Member shall have a fiduciary duty of loyalty and care similar to that of a director of a business corporation organized under the General Corporation Law of the State of Delaware. No Special Member shall at any time serve as trustee in bankruptcy for any Affiliate of the Company. The Special Member is a “manager” within the meaning of the Act.
While I have not been involved in a loan where the SPE language prohibits the filing of bankruptcy, I understand that some lender have included such language. The general wisdom is that such language would be considered to be against public policy and unenforceable as the right to file bankruptcy is a constitutional right.
The question presented in the opinion is:
You have requested our opinion as to whether a federal bankruptcy court would hold that Delaware law, and not federal law, would govern the determination of what persons or entities have authority to file a voluntary bankruptcy petition on behalf of the Borrower.
The opinion itself is a 13-14 page reasoned opinion, as no appellate court has ruled on the question. The opinion given is:
Based upon the foregoing, and upon our examination of such questions of law and statutes as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that a federal bankruptcy court would hold that Delaware law, and not federal law, governs the determination of what persons or entities have authority to file a voluntary bankruptcy petition on behalf of the Borrower. Our opinion is based on the assumption that in any case in which this question is considered, the question will be competently briefed and argued. Our opinion is reasoned and also presumes that any decision rendered will be based on existing legal precedents, including those discussed below.
In connection with the delivery of any of the opinions, a careful review of the operating agreement of LP agreement is necessary so as to determine whether the agreement supports the opinions which are to be delivered. We require that the company delivers to us a general certificate setting out certain factual matters upon which we will rely, additionally the general certificate set out matters required under the USA Patriot Act.
We can be reached at sgoldberg@stevendgoldberg.com. our telephone number is 302.351.4490
