Texas Supplement

This 1996 Texas Supplement Regarding Lawyers’ Opinion Letters in Mortgage Loan Transactions (hereinafter referred to as this "Texas Supplement") is presented by the State Bar of Texas Committee on Lawyers’ Opinion Letters in Mortgage Loan Transactions (hereinafter referred to as the "Committee" or "this Committee"), as a supplement to the Accord and the Report which are described below. It follows—and the Committee recommends that it should be deemed to supersede—the prior product of the Committee: Preliminary Draft of a Statement of Policy Regarding Lawyers’ Opinion Letters in Mortgage Loan Transactions, 23 State Bar Newsletter for Real Estate, Probate and Trust Laws, No. 2 (January 1985) (hereinafter referred to as the "1985 Preliminary Draft").

The Committee is pleased that its 1985 Preliminary Draft has contributed to the dialogue of lawyers throughout the country on the subject of opinion letters in mortgage loan transactions. In fact, excellent products have been published since 1985 by Bar Associations in more than twenty states. In addition, in an effort to achieve national uniformity, the Section of Business Law of the American Bar Association in 1991 completed its two-year project on business law opinion letters by publishing a work product which is comparable both in format and in objective to the 1985 Preliminary Draft. The Third-Party Legal Opinion Report of the Section of Business Law, 57 The Business Lawyer 167 (1991), republished at 29 Real Property, Probate and Trust Law Journal 487 (1994). That publication includes a Foreword, a Legal Opinion Accord (hereinafter referred to as the "Accord"), Commentary, an Illustrative Opinion Letter and Guidelines. The Accord will be the focus of this Texas Supplement; however, because the Accord expressly excludes certain legal opinion issues respecting liens on real property (see § 19(h) of the Accord), this Texas Supplement will consider the Accord as supplemented by the adaptation to mortgage loan transactions published by a Joint Drafting Committee of the Section of Real Property, Probate and Trust Law of the American Bar Association and the American College of Real Estate Lawyers. Report on Adaptation of the Legal Opinion Accord, 29 Real Property, Probate and Trust Law Journal 569 (1994) (hereinafter referred to as the "Report").

This Texas Supplement presents the overall consensus of the members of this Committee; however, it does not necessarily reflect the views of any particular member of the Committee, nor any law firm with which any Committee member is affiliated. This Texas Supplement, although approved by the Real Estate, Probate and Trust Law Section (the "Section") of the State Bar of Texas, has not been adopted or approved by the State Bar of Texas itself. None of the State Bar of Texas, the Section, this Committee or any member of this Committee warrants that the materials are completely free from error when published; therefore, readers are urged to verify all legal analysis which is included in this Texas Supplement. As emphasized in the Accord itself, this Texas Supplement does not replace careful, transaction-specific legal work as the basis for a third-party opinion.

As supplemented by the Report, the Accord offers lawyers an opportunity to prepare an opinion letter for a mortgage loan transaction with a nationally uniform format, thus contributing in a significant way to efficiency and cost effectiveness in the opinion process. In addition, the Committee believes that by incorporating the Accord and the Report, an Opinion Giver (the term used in the Accord for the opining lawyer) has a ready source for at least the basic elements of an opinion letter for a mortgage loan transaction which will be mutually acceptable in format to both the Opinion Giver and the Opinion Recipient (the term used in the Accord for the mortgagee). The Committee, therefore, recommends that lawyers in Texas adopt and incorporate the Accord and the Report into their opinion letters in mortgage loan transactions. In addition, although the Foreword, Commentary, Illustrative Opinion Letter and Guidelines (the complete title of the final item being "Certain Guidelines for the Negotiation and Preparation of Third-Party Legal Opinions") accompanying the Accord are not officially incorporated as part of the Accord itself, the Committee recommends that lawyers in Texas review the worthwhile work products represented by those accompanying materials.

3.1. Sample Opinion Letter back to Table of Contents

Attached as Appendix 1 to this Texas Supplement is a sample Opinion Letter incorporating the Accord and the Report. Also attached, as Appendix 2 to this Texas Supplement, is the same sample opinion but with the addition of all provisions which are incorporated by reference into an Opinion Letter when the Opinion Giver expressly incorporates the Accord and the Report. The Committee does not recommend the use of the Appendix 2 format in a transaction but instead is including it solely for reference and as an explanation of all incorporated definitions, assumptions, qualifications, limitations and exclusions (as well as various footnote references of additional Opinion Letter options referred to in the Accord and/or the Report).

3.2. Definitions back to Table of Contents

3.3. Incorporated Provisions back to Table of Contents

Essential to an understanding of the Accord and the Report is an awareness of one underlying goal of each work product: to eliminate unnecessary negotiations regarding the language of the basic provisions in an Opinion Letter. The Accord and the Report, therefore, permit the Opinion Giver to prepare and deliver a concise Opinion Letter which, through the incorporation of the Accord and the Report, includes various opinions, assumptions, qualifications, limitations and exclusions without the need for expressing them (and, accordingly, without making them the subject of extensive negotiations) in the Opinion Letter. Appendix 2 of this Texas Supplement demonstrates the full extent of the incorporated provisions; however, a few examples are mentioned below in this Section 3.3 with regard to the so-called "Remedies (or Enforceability) Opinion."

1. Incorporated Opinions. The remedies (or enforceability) opinion contained in the sample opinion attached as Appendix 1 to this Texas Supplement provides simply: "The Transaction Documents are enforceable against our Client." Section 10 of the Accord (and the Commentary interpreting that Section 10, and the Report) incorporates certain opinions into that sentence; therefore, the Opinion Giver’s one-sentence statement, as quoted above, is deemed to include all of the following opinions:

1. Incorporated Assumptions. Section 4 of the Accord, as supplemented by Section 4 of the Report, provides that an Opinion Giver may rely—without investigation and without mentioning such reliance in the Opinion Letter—upon various assumptions, including the following (a complete listing of all assumptions is incorporated into the expanded opinion letter included as Appendix 2 attached to this Texas Supplement):

1. Incorporated Qualifications and Limitations. The final sentence in Section 10 of the Accord provides as follows: "The Remedies Opinion is subject to the General Qualifications and to any additional exceptions, qualifications or limitations specified in the Opinion Letter." Section 11 of the Accord defines "General Qualifications" as follows: "the Bankruptcy and Insolvency Exception, the Equitable Principles Limitation and any Other Common Qualifications that apply to the particular opinion in question." The three named components of the "General Qualifications" are described in detail (i.e., with lists of specific qualifications and limitations) in Sections 12, 13 and 14 of the Accord, as supplemented by Sections 12 and 13 of the Report. Because the Bankruptcy and Insolvency Exception and the Equitable Principles Limitation are readily predictable by their respective titles, they will not be described and analyzed in this Section (complete lists are incorporated into the expanded Opinion Letter included as Appendix 2 attached to this Texas Supplement). A few examples—not all—of the Other Common Qualifications are quoted below from the Accord and the Report (with the examples quoted below having the same subsection references as are used in Section 14 of the Accord and Section 12 of the Report). These qualifications are explained in Section 14 of the Accord as being "generally applicable rules of Law" that:

1. Exclusions. Section 19 of the Accord, as supplemented by Section 17 of the Report, excludes various specific legal issues "unless the Opinion Giver has explicitly addressed the specific legal issue in the Opinion Letter." A few examples—not all—of the specific exclusions are quoted below from the Accord and the Report (with the examples quoted below having the same subsection references as are used in Section 19 of the Accord and Section 17 of the Report):

4.1. General Recommendation back to Table of Contents

As described above in Article 3 of this Texas Supplement, the Opinion Giver, by incorporating the Accord and the Report into an Opinion, automatically—i.e., without the need of stating so in the Opinion—qualifies and limits his or her so-called "Remedies (or Enforceability) Opinion" (§10 of the Accord). Nevertheless, for the same reasons as those discussed in Sections 11 and 11A of the Report, the Committee recommends that for any Opinion involving Real Property Collateral, a so-called "Generic Qualification" be added to such "General Qualifications" and exclusions. As set out in the subsection entitled "Generic Qualification" in Section 11A of the Report, a typical Generic Qualification provides as follows:

Section 11A of the Report also discusses why some form of "Assurance" should immediately follow a Generic Qualification. Absent an Assurance, the Generic Qualification by itself would likely cause the opinion to have no substance. In other words, if "certain provisions contained in the Transaction Documents may not be enforceable," the Opinion Letter is susceptible to the interpretation that no opinion is being rendered as to the enforceability of any provisions of the Transaction Documents. Accordingly, all published state and national reports agree with the general conclusion that an Assurance must follow the Generic Qualification; however, the various reports have reached diverse conclusions as to the appropriate form of Assurance that is to be given.

4.2. "Practical Realization": Revisited But Not Recommended back to Table of Contents

The 1985 Preliminary Draft selected the following form of Generic Qualification and Assurance (with the Assurance being printed here in italics for emphasis):

Often referred to as the "practical realization" form of Assurance, this form was the only form which the Committee deemed to be widely utilized at the time of the 1985 Preliminary Draft; and even subsequent to 1985, the "practical realization" form of Assurance appears still to be utilized more than any other form of Assurance following a Generic Qualification, both within the State of Texas and in most other states. Nevertheless, as discussed extensively in Section 11A of the Report, it is susceptible to criticism for the uncertainty inherent in the terms "practical realization" and "benefits." While the Opinion Recipient may believe that a particular provision in the Transaction Documents materially affects its "practical realization of the benefits [often sometimes qualified as "principal benefits"] expressed in the Loan Documents," the Opinion Giver may believe the same provision to be essentially irrelevant to the Opinion Recipient’s "practical realization" of such "benefits." To exacerbate the effect of the uncertainty, the two parties are not likely to understand that they have a difference of opinion until long after the Opinion has been delivered. The 1985 Preliminary Draft ameliorated the uncertainty inherent in the terms "practical realization" and "benefits" by engrafting an analysis and interpretation to the terms, but subsequent state reports have questioned whether the terms should perhaps be replaced altogether. Section 11A of the Report analyzes various Assurance alternatives, but comes to no conclusion as to a recommended preference.

4.3. The Form of Assurance Recommended by This Texas Supplement back to Table of Contents

The following form of Generic Qualification and Assurance is included in the recommended Opinion Letter form which is attached as Appendix 1 to this Texas Supplement:

This recommended form of Assurance has its basis in the form recommended by the American College of Real Estate Lawyers Statement of Policy (the "ACREL SOP"), which is discussed in the subsection entitled "American College of Real Estate Lawyers Statement of Policy" in Section 11A of the Report, at 29 Real Property, Probate and Trust Journal 569, 595-600 (1994). [Note: All subsequent citations to this published work shall be referenced "Report, supra."] Those readers who compare this recommended form of Assurance with the ACREL SOP, however, will note the following changes:

4.4. Interpretations of the Recommended Assurance back to Table of Contents

Despite some remaining uncertainty as a result of the reference to "material provision" in subparagraph (b) of the recommended Assurance (i.e., what is and what is not "material"), the Committee observes that, unlike the terms "practical realization" and "principal benefits," the term "material" is frequently used in legal practice. In addition, this Committee concludes, as did the Joint Drafting Committee in the Report, that the uncertainty has been substantially limited by restricting the Opinion Giver’s inquiry as to which provisions may be material to a determination of whether, after the breach of any such provision, the indebtedness could be accelerated. In other words, unlike the phrase "practical realization of benefits [or principal benefits]," it is clear that the portion of the Opinion in which the term "material" is used gives an assurance only as to the acceleration of the debt (and not, for example, as to the borrower’s purported waiver of its right to require a jury trial). In addition, as was also done in the Report, this Texas Supplement attempts to ameliorate the uncertainty further by including the following interpretations of the recommended Assurance:

Neither the Accord, the Report nor this Texas Supplement preclude the Opinion Giver from adding additional qualifications to those described above in this Texas Supplement. Although the Committee does not believe that additional qualifications should be necessary in the majority of mortgage loan transactions, Appendix 3 attached to this Supplement alerts Opinion Givers to potential additional qualifications, for possible addition as paragraph 6 of the Opinion Letter if the Opinion Giver and the Opinion Recipient agree that one or more of such additional qualifications are warranted.

Neither the Accord, the Report nor this Texas Supplement preclude the Opinion Recipient from requesting assurances or analyses in addition to the assurances discussed above. Although the Committee does not believe that any additional assurances should be necessary when the Opinion Recipient is represented by Texas counsel or is otherwise familiar with Texas law, the Committee recognizes that additional assurances may be appropriate if specific facts warrant them. The following additional opinions are included for possible addition in the Opinion Letter if the Opinion Recipient requires one or more of them and the Opinion Giver is willing to provide the requested assurances; however, the Committee does not intend, by the inclusion of the assurances set forth below, to suggest that an Opinion Recipient’s request for other assurances would be inappropriate if the facts so warranted.

6.1. Potential Addition to Paragraph 4 of the Opinion Letter back to Table of Contents

6.2. Potential Additions to Paragraph 5 of the Opinion Letter(e.g., Subparagraph 5(d) et seq.) back to Table of Contents

The above additional opinions are presented as so-called "reasoned" opinions (i.e., as opposed to unequivocal opinions) because the status of Texas law in each applicable area is not totally resolved. For "photograph-in-time" analyses of the current status of Texas law in these areas as of the date of preparation of this Supplement (i.e., subject to change after the date of this Texas Supplement), see Appendix 4 attached to this Texas Supplement.

7.1. Caution: Usury Opinion Implied back to Table of Contents

Acknowledging the importance of usury considerations in mortgage loan Opinions, the Committee believes it helpful to set out in this Texas Supplement the analysis of the Joint Drafting Committee in Section 16 of the Report (which analysis is automatically incorporated into each Opinion Letter that adopts the Accord and the Report):

7.2. Recommendation of an Express Usury Opinion back to Table of Contents

Notwithstanding the analysis in Section 7.1 immediately above which explains that a usury opinion is implied as part of the Remedies Opinion, Paragraph 3 of the Opinion Letter which is attached as Appendix 1 to this Texas Supplement contains an express opinion as to usury. This Committee acknowledges that the inclusion of an express usury opinion is contrary to the analysis in the Texas Business Law Report (cited in footnote 1 of this Texas Supplement), especially Supplement 1 thereto, which recommends that no express usury opinion be given since it is included in the Remedies (Enforceability) Opinion. "Accordingly, if an Opinion Giver is expressing a Remedies Opinion and Texas is the Opining Jurisdiction, an express usury opinion is superfluous." Texas Business Law Report, Supplement No. 1, page 3 (December 1994). This Committee agrees with the Texas Business Law Report that an express statement of the usury opinion is not absolutely necessary; however, this Committee does not believe that a usury opinion, separate and apart from the Remedies Opinion (i.e., as is shown in the form of Opinion Letter attached as Appendix 1 to this Texas Supplement), is totally superfluous inasmuch as a separate usury opinion is not subject to the General Qualifications which automatically apply to the Remedies Opinion. "If the General Qualifications are to apply to an opinion in addition to the Remedies Opinion, the Opinion Letter must specifically state that they apply to that opinion." Accord, § 11. And while such a distinction may not in itself be of sufficient substantive import to warrant a separate usury opinion, this Committee also concludes that in mortgage loan transactions it is customary for Opinion Givers to give, and Opinion Recipients prefer to receive, an express usury opinion.

7.3. Implied Usury Qualifications back to Table of Contents

The analysis at the conclusion of Section 7.2 immediately above points out that the General Qualifications do not apply to a usury opinion which is separate and apart from the Remedies Opinion. Nevertheless, as explained in the Report, certain qualifications do apply to a usury opinion. As explained in subparagraph (b) of Section 16 in the Report, the Opinion Giver may assume, without stating the assumption in the Opinion Letter, that no fees, charges, benefits, or other compensation will be paid, directly or indirectly, to or for the benefit of the Opinion Recipient, except as specified in the Transaction Documents. In addition, as confirmed by subparagraph (c) of Section 16 in the Report, the Opinion Giver gives an opinion only that the Transaction Documents, as executed, are not usurious as of the date of the Opinion. Accordingly, for example, if the Opinion Giver concludes that the Transaction Documents are not "usurious on their face" because they contain a so-called "savings clause" (Note: This Texas Supplement is not intended as an analysis of the law of the State of Texas as to when a "savings clause" assures that Transaction Documents are not "usurious on their face."), the Opinion Giver need not add any special qualification to the Opinion. The Committee also directs the readers’ attention to Section 4(1) of the Accord which permits, in most instances, an Opinion Giver to assume, without stating the assumption in the Opinion Letter, the following (which is sometimes expressly stated as a qualification in usury opinions): "The constitutionality or validity of a relevant statute, rule, regulation or agency action is not in issue unless a reported decision in the Opining Jurisdiction [i.e., the State of Texas] has specifically addressed but not resolved, or has established, its constitutionality or invalidity."

7.4. Potential Express Usury Qualifications back to Table of Contents

As the Committee did in the 1985 Preliminary Draft, this Texas Supplement sets out below the following express qualifications (i.e., to be included in a new paragraph 6 added to the Opinion Letter format attached as Appendix 1 to this Texas Supplement), which may on occasion be warranted in connection with the usury aspects of Opinion Letters.

Acknowledging that the following summary should not be considered to be a substitute for the full text of Sections 10(b), (c) and (d) of the Accord (with subsections (b) and (c) having themselves been explained and qualified by Sections 8 and 9 of the Report), the Committee sets out below a summary of such choice-of-law provisions in the Accord and the Report:

It is not a purpose of this Texas Supplement to analyze in depth all choice-of-law authority which should be reviewed by Texas attorneys in instances where the Transaction involves more than one jurisdiction and either the Opinion Recipient or the Opinion Giver requires that the Opinion Letter expressly address the choice-of-law legal issue. However, the Committee does believe that Section 35.51 of the Texas Business and Commerce Code, establishing standards for choice of law in certain qualified transactions, merits special mention. Deserving mention in connection with Section 35.51 of Texas Business and Commerce Code is Section 4(l) of the Accord, which authorizes the Opinion Giver to assume as follows, without stating such assumption in the Opinion Letter (unless, as explained in Section 5 of the Accord, the Opinion Giver has actual knowledge to the contrary):

With regard to opinions in the Opinion Letter regarding no breaches or violations of another agreement (§ 15 of the Accord), no violation of law (§ 16 of the Accord) and legal proceedings (§ 17 of the Accord), the Accord occasionally incorporates the term "Actual Knowledge," which is defined in Section 6-A of the Accord as follows: "the conscious awareness of facts or other information by the Primary Lawyer (defined in Section 6-B of the Accord) or the Primary Lawyer Group (also defined in Section 6-B of the Accord)." The concept of "Actual Knowledge", as well as other standards regarding these assurances regarding the Opinion Giver’s client, are applied in Sections 15-17 of the Accord, as supplemented by Sections 14 and 15 of the Report, to limit the respective opinions described in those Sections as follows:

9.1. No Breaches or Violations (§ 15) back to Table of Contents

In determining whether the specific terms of, and performance of agreements in, the Transaction Documents would cause a breach of or default under an Other Agreement or violate the express terms of a Constituent Document or a Court Order, the Opinion Giver need only take into account information furnished to him or her by others (see Section 3 of the Accord) and "other facts of which the Opinion Giver has Actual Knowledge."

9.2. No Violations of Law (§ 16) back to Table of Contents

In giving the opinion that the execution and delivery by the Client of, and performance by the Client of its payment obligations [the limitation to payment obligations is effected by Section 15 of the Report] in, the Transaction Documents neither is prohibited by, nor subjects the Client to a fine, penalty or other similar sanction under, any statute or regulation, the Opinion Giver need only determine whether any such prohibition would occur under or any such fine, penalty or similar sanction would arise from a statute or regulation of the Opining Jurisdiction that a lawyer in the Opining Jurisdiction "exercising customary professional diligence" would reasonably recognize as being directly applicable to the Client, the Transaction, or both. An Opinion Recipient’s request for an opinion concerning compliance with a specific law is appropriate only if the Opinion Giver can ascertain compliance without making factual or other assumptions that effectively render the opinion meaningless.

9.3 Legal Proceedings (§ 17) back to Table of Contents

In giving a confirmation regarding the existence of legal proceedings that are pending or threatened against the Client, an Opinion Giver relies only upon information provided by others (see Section 3 of Accord) and a review of the Opinion Giver’s litigation docket. The Opinion Giver need not review court or other public records or undertake any broader review of its own files.

The legal issue of whether an Opinion Recipient has a cause of action against an Opinion Giver for a negligently rendered Opinion was addressed in the 1985 Preliminary Draft and has been the subject of various analysis subsequent to the 1985 Preliminary Draft. This legal issue is not directly addressed in the Accord, although Section 7 of Accord, quoted below, may indirectly relate to this issue:

Acknowledging that Section 7 of the Accord may relate to this issue, the Report includes the following commentary clarifying that Section (quoted below from Section 6 of the Report):

The Committee concludes that Section 7 of the Accord, as supplemented by Section 6 of the Report, does not by implication change the law of the State of Texas as to whether third-party liability exists. Nevertheless, regardless of whether third-party liability exists (and if so, to what extent) in the State of Texas, the Committee recommends that each Opinion Letter be prepared with an understanding that the opinions therein may in fact be relied upon by the Opinion Recipient. Similarly, the Committee alerts Opinion Recipients to Section 4(i) of the Accord, by which an Opinion Giver may assume that the Opinion Recipient is not acting in bad faith by requiring the inclusion in the Opinion Letter of an opinion which the Opinion Recipient knows to be incorrect:

Section 4 of the Accord sets forth sixteen assumptions that are included by implication in any Opinion Letter which adopts the Accord, and Section 4 of the Report adds two additional assumptions applicable to Opinions in mortgage loan transactions (see Section 3.3(b) of this Texas Supplement for a listing of several of the assumptions included by incorporating the Accord and the Report). Although Texas lawyers may have other favorite assumptions which are not expressly listed in the Accord or the Report, this Committee concludes that, absent special considerations, no additional assumptions are necessary in an Opinion Letter which adopts the Accord and the Report. The conclusion of the Committee is substantiated below by a sampling of frequently used assumptions, with each such assumption being immediately followed by reasoning which supports the conclusion of the Committee that the assumption is not necessary in an Accord/Report Opinion. (Caution: under certain circumstances—for example, if additional opinions are required by "Private Ordering" as contemplated in Section 19 of the Accord—an Opinion Giver should consider whether one or more of the following assumptions might be necessary or advisable.)

(a) Assumption as to Other Parties:

(b) Assumption as to Prerequisites (Signatures, Etc.):

(c) Assumption as to Lender’s Intention:

(d) Assumption as to Plans:

(e) Assumption as to No Legal Disability:

(f) Assumption as to Funding:

(g) Assumption as to Commercial Reasonableness:

(h) Assumption as to Interest Calculation:

(i) Assumption as to No Points, Fees, Etc.:

(j) Assumption as to Stock, Warrant, Etc.:

(k) Assumption as to Usury Savings Clause:

(l) Assumption as to Yield Protection Provisions:

(m) Assumption as to Commitment Fees:

(n) Assumption as to No Fraud:

(o) Assumption as to No Waiver:

(p) Assumption as to Discretionary Actions:

James H. Wallenstein, Chair
Dallas

Mark R. Spradling, Vice-Chair
Houston

[LAW FIRM LETTERHEAD]

[date]

Re: [identification of the loan transaction]

Ladies and Gentlemen:

We have acted as counsel to _______________________, a ____________________ (our "Client") [and to ___________________________________________ (the "Guarantor")], in connection with that certain $____________ loan transaction (the "Transaction") evidenced by the documents described below. This Opinion Letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991), as modified by the Report of the ABA Section of Real Property, Probate and Trust Law and the American College of Real Estate Lawyers (1993) (the "Report") as to opinions pertaining to Real Estate Secured Transactions. As a consequence, it is subject to a number of definitions, assumptions, qualifications, limitations and exclusions, more particularly described in the Accord and the Report; and this Opinion Letter should be read in conjunction therewith. Terms which in this letter begin with initial capital letters and are not defined in this letter shall be deemed to have the same meanings herein as in the Accord and the Report. The law covered by the opinions expressed herein is limited to the Law of the State of Texas [and the federal Law of the United States].

We have relied upon factual representations made by our Client in [Sections (specify) of] the _________________________ [name the document].

1. Deed of Trust [use the exact document title] (the "Deed of Trust"), dated the same date as the Note, executed by our Client, securing payment of the Note, covering certain real and personal property (the "Collateral");

1. Assignment of Leases and Rents [use the exact document title] (the "Assignment of Leases"), dated the same date as the Note, executed by our Client, further securing payment of the Note;

1. Financing Statements executed by our Client;

1. ___________ Loan Agreement [use the exact document title] (the "Loan Agreement"), dated the same date as the Note, between our Client and your ___________ [e.g., company], relating to the Transaction;

1. [Guaranty Agreement [use the exact document title] (the "Guaranty"), dated the same date as the Note [or, if applicable, another date], executed by the Guarantor guaranteeing the payment of the Transaction;] and

1. _________________________ [other document(s)].

For purposes of this opinion, the Note, the Deed of Trust, the Assignment of Leases and the Loan Agreement are collectively referred to as the "Transaction Documents."

1. The execution and delivery by our Client of the Transaction Documents, and the performance by our Client of the payment obligations of the Transaction Documents, will not violate applicable provisions of statutory law or regulation.

1. There are no actions or proceedings against our Client, pending or overtly threatened in writing, before any court, governmental agency or arbitration which seek to affect the enforceability of the Transaction Documents.

[LAW FIRM LETTERHEAD]

[date]

Ladies and Gentlemen:

We have acted as [special] counsel to ________________, a ______________ (the "Client"), in connection with that certain $___________ loan transaction (the "Transaction") evidenced by the documents described below. This Opinion Letter is provided to you at the request of the Client pursuant to Section [ ] of the [Agreement] described below.

The law covered by the opinions expressed herein is limited to the Law of the State of Texas [and the General Corporation Law of the State of Delaware].

I. BACKGROUND

Notwithstanding any provision in this Opinion Letter to the contrary, the foregoing opinions are subject to the following additional qualifications:

We have no Actual Knowledge that the foregoing assumptions are false. We have no Actual Knowledge of facts that, under the circumstances, would make our reliance on the foregoing assumptions unreasonable.

(h)

Very truly yours,

GLOSSARY back to Table of Contents

As used in the Opinion Letter to which this Glossary is attached, except as otherwise defined in such Opinion Letter, the following terms (whether used in the singular or the plural) shall have the meanings indicated:

Actual Knowledge: with respect to the Opinion Giver, the conscious awareness of facts or other information by the Primary Lawyer or Primary Lawyer Group.

[Client: the party or parties to the Transaction (including predecessor entities where relevant) for which the Opinion Giver provides legal representation.]

[Collateral: collectively or individually, all Real Property described in the Security Documents and all Personal Property described in the Security Documents, in respect of which provision is made by the Security Documents for a lien or security interest, unless a different meaning is given in the Transaction Documents.]

Constituent Documents: the articles or certificate of incorporation, by-laws, partnership documentation or similar organization documents of the Client.

Court Orders: court and administrative orders, writs, judgments and decrees that name the Client and are specifically directed to it or its property.

Law: the statutes, the judicial and administrative decisions, and the rules and regulations of the governmental agencies of the Opining Jurisdiction, including its Local Law (but subject to any limitations on coverage of Local Law set forth in the Opinion Letter to which this Glossary is attached).

Local Law: the statutes and ordinances, the administrative decisions, and the rules and regulations of counties, towns, municipalities and special political subdivisions (whether created or enabled through legislative action at the Federal, state or regional level—e.g., water agencies, joint power districts, the Maine Turnpike Authority, The Southern California Rapid Transit District, the Port Authority of New York and New Jersey), and judicial decisions to the extent that they deal with any of the foregoing.

Opining Jurisdiction: a jurisdiction whose applicable Law is addressed by the Opinion Giver in the Opinion; if there is more than one such jurisdiction (e.g., the United States and a particular state), the term refers collectively to all.

Opinion Giver: the lawyer or legal organization rendering the Opinion.

Opinion Letter: the document setting forth the Opinion that is delivered to and accepted by the Opinion Recipient.

Opinion Recipient: the addressee or addressees of the Opinion Letter.

Other Agreements: contracts, other than the Transaction Documents, to which the Client is a party or by which it or its property is bound.

Other Counsel: a lawyer or legal organization (other than the Opinion Giver) providing a legal opinion pertaining to particular matters concerning the Client, the Transaction Documents or the Transaction (i) directly to the Opinion Recipient, or (ii) to the Opinion Giver in support of the Opinion.

Other Jurisdiction: the jurisdiction whose law a Transaction Document provides will govern that contract, if not the Opining Jurisdiction.

Personal Property: property or rights and interests in property treated under Law as personalty or otherwise not as Real Property.

Primary Lawyer:

Primary Lawyer Group: all of the Primary Lawyers when there are more than one.

Public Authority Documents: certificates issued by the Secretary of State or any other government official, office or agency concerning a person’s property or status, such as certificates of corporate or partnership good standing, certificates concerning tax status, certificates concerning Uniform Commercial Code filings or certificates concerning title registration or ownership.

Real Property: property or rights and interests in property treated under Law as real property, including fixtures.

[Security Documents: mortgages, deeds of trust, security agreements, assignments of leases, rents or both (regardless of whether stated as absolute or as a security assignment), or similar instruments which provide for the creation of a lien on or security interest in Collateral to secure the obligations of the Client under the Transaction Documents.]

[Transaction: the business exchange (e.g., loan, sale of securities, merger or acquisition) by the Client and the other parties.]

[Transaction Documents: the contract documents setting forth the principal terms of the Transaction addressed by the Opinion, including the Security Documents, and other contracts ancillary thereto that are explicitly addressed by the Opinion. Unless otherwise included by express statement in an Opinion Letter, contracts of persons other than the Client (such as guaranties and letters of credit) are not included in the term Transaction Documents.]

Appointment of receivers in Texas is governed by Section 64 of the Civil Practice and Remedies Code. This statute provides that a court may appoint a receiver: (1) in an action by a vendor to vacate a fraudulent purchase of property; (2) in an action by a creditor to subject any property or fund to his claim; (3) in an action between partners or others jointly owning or interested in any property or fund; (4) in an action by a mortgagee for the foreclosure of the mortgage and sale of the mortgaged property; (5) for a corporation that is insolvent, is in imminent danger of insolvency, has been dissolved, or has forfeited its corporate rights; or (6) in any other case in which a receiver may be appointed under the rules of equity. Tex. Civ. Prac. & Rem. Code Ann. §64.001(a) (Vernon 1986). In addition, in a judicial foreclosure, the mortgagee must show (1) it appears that the mortgaged property is in danger of being lost, removed, or materially injured; or (2) the condition of the mortgage has not been performed and the property is probably insufficient to discharge the mortgage debt. Tex. Civ. Prac. & Rem. Code Ann. §64.001(c) (Vernon 1986).

The remedy of appointment of a receiver is not available absent an ancillary, independent cause of action (such as a judicial foreclosure). See Pelton v. First National Bank of Angleton, 400 S.W.2d 398 (Tex. Civ. App.—Houston 1966, no writ) and the cases cited therein.

In the case of Riverside Properties v. Teachers Insurance and Annuity Association of America, 590 S.W.2d 736 (Tex. Civ. App.—Houston [14^th Dist.] 1979, no writ), in which a prior but very similar version of the statute above was in issue, the court concluded that the existence of a specific provision in a loan document providing for the consensual appointment of a receiver may eliminate the need, in the context of a mortgage foreclosure, to make the showing required by the provisions of Tex. Civ. Prac. Rem. Code §64.001©. It reasoned that a receiver could be appointed under such circumstances under the prior statute’s equivalent to subsection (6) of Tex. Civ. Prac. Rem. Code §64.001(a) rather than the prior statute’s equivalent to subsection (4). However, the court also pointed out that the existence of an agreement for the consensual appointment of a receiver is not binding on a court but is merely one of the equities to be considered.

A lender may not require a borrower to furnish evidence of insurance more than fifteen (15) days prior to the termination date of an existing policy. A borrower may recover civil damages from any lender who violates this statute in an amount equal to three (3) times the annual premium for the policy of insurance in force upon the mortgaged property.

Section 26.02 of the Texas Business and Commerce Code provides that a loan agreement with a financial institution that involves in excess of $50,000 is not enforceable unless the agreement is in writing and signed by the party to be bound or by the party’s authorized representative. The rights and obligations of the parties to such a loan transaction are to be determined solely from the written loan agreement, i.e., any prior or contemporaneous oral agreements between the parties are superseded by and merged into the loan agreement, but only if a required notice is included in the loan agreement or in a separate document signed by the debtor or obligor (and, according to the form of agreement included in the statute, also signed by the lender).

Chapter 83 of the Government Code provides that, except for (i) an attorney licensed in Texas; (ii) a real estate broker or salesman licensed in Texas; or (iii) a person performing acts relating to a transaction for the lease, sale, or transfer of any mineral or mining interest in real property, a person may not charge or receive, either directly or indirectly, any compensation for all or any part of the preparation of a legal instrument affecting title to real property, including a deed, deed of trust, note, mortgage, and transfer or release of lien. It is permissible for an attorney to pay secretarial, paralegal, or other ordinary and reasonable expenses necessarily and actually incurred by the attorney for the preparation of legal instruments. Also, this chapter does not prevent a person from completing lease or rental forms that: (i) have been prepared by an attorney licensed in this state and approved by the attorney for the particular kind of transaction involved; or (ii) have been prepared by the property owner or prepared by an attorney and required by the property owner. A person who pays a fee prohibited by this chapter may bring suit for and is entitled to: (i) recovery of the fee paid; (ii) damages equal to three times the fee paid; and (iii) court costs and reasonable and necessary attorney’s fees. A violation of this chapter constitutes the unauthorized practice of law and may be enjoined by a court of competent jurisdiction.

Because indemnification agreements and certain types of release agreements are frequently used to exculpate a party from the consequences of its own negligence, and because the Texas Supreme Court deems these types of agreements to effect extraordinary shifting of risk, the Texas Supreme Court has developed fair notice requirements that apply to these types of agreements. The fair notice requirements include the express negligence doctrine and the conspicuousness requirement.

In the case of Ethyl Corporation v. Daniel Construction Company, 725 S.W.2d 705 (Tex. 1987), the Texas Supreme Court adopted the "express negligence rule," holding that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms. In stating the rule, the Ethyl court overruled a number of older cases that had held that an indemnitee’s own negligence could be indemnified without the indemnity provision expressly so providing, but the court did not endorse any specific required wording.

In the case of Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993), the Texas Supreme Court expanded the application of the fair notice requirements to include release agreements (only those types of releases, however, that relieve a party in advance of liability for its own negligence) as well as indemnity agreements (which were the subject of the Ethyl case). The Supreme Court also adopted a standard for conspicuousness that shows how to present enforceable risk-shifting provisions. The Supreme Court adopted the Uniform Commercial Code standard for conspicuousness provided in Section 1.201(10) of the Texas Business and Commerce Code quoted below:

Although considerable variety exists with regard to the so-called "due-on" clauses in mortgage loan documents, the essence of such clauses is to give the lender a right to accelerate the loan (i.e., cause it to be due) upon one or more of the following categories of dispositions with regard to the mortgaged property: (i) a sale or other transfer of all or a portion of the mortgaged property; (ii) another mortgage being placed upon all or a portion of the mortgaged property; or (iii) the borrower’s leasing all or a portion of the mortgaged property. Although the primary purpose of most "due-on" clauses is to preserve and protect the lender’s collateral, lenders have frequently used such clauses—especially the "due-on-sale" clauses—to improve the lender’s yield on the loan, i.e., either by exacting either an interest rate increase or a transfer fee, or both.

The validity of "due-on" clauses was the source of extensive litigation through the 1970’s and early 1980’s. See, for example, Dunn and Nowinski, Enforcement of Due-on-Transfer Clauses: An Update, 16 ABA Real Property, Probate and Trust Journal 291 (1981); Annotation, Validity, Construction and Application of Provisions Entitling Mortgagee to Increase Interest Rate on Transfer of Mortgaged Property, 92 A.L.R.3d 892 (1979); Annotation, Validity, Construction, and Application of Clause Entitling Mortgagee to Acceleration of Balance Due in Case of Conveyance or Transfer of Mortgaged Property, 69 A.L.R.3d 713 (1976). See also, Comment, Restraints on Alienation: Placing a 13^th Century Doctrine in 21^st Century Perspective, 40 Baylor Law Review 413 (1988). In 1982, however, Congress passed the Garn-St. Germain Depository Institutions Act of 1982, Pub.L. No. 97-320, 96 Stat. 1469 (1982), as amended by Act of November 30, 1983, Pub.L. No. 98-181, Section 473, 97 Stat. 1237, codified as 12 U.S.C., § 1701j-3 (the "Garn Act"). The portion of the Act applicable to "due-on" provisions is Section 341, the essence of which Section is stated therein as follows:

As stated in the above-quoted provision, the Garn Act expressly preempts state laws and judicial decisions which restrict the enforcement of "due-on" clauses. Subsection © of the Garn Act establishes a "window period" of three years (from October 15, 1982 to October 15, 1985) during which time those states which had previously imposed restrictions on due-on-sale clauses could continue to impose those restrictions; however, Texas was not a "window period" state. See Sonny Arnold, Inc. v. Sentry Savings Association, 633 S.W.2d 811 (Tex. 1982). See also, Santos, Federal Preemption of State Due-on-Sale Laws, Real Estate Probate and Trust Law Reporter of the State Bar of Texas, Volume 22, No. 2, pp.18-29 (April 1984) (hereinafter referred to as "the Santos article") and Annotation, Validity and Enforceability of Due-on-Sale Real-Estate Mortgage Provisions, 61 A.L.R.4^th 1071 (1988). Despite the significant increase in certainty which was achieved by the Garn Act, a few comments are appropriate:

As explained in the Santos article:

The Santos article also questions whether the definition of "transfer" to include leases of three years or more might imply a restriction against lenders’ requiring that a lease for less than three years be a default or otherwise trigger as "due-on" provision. The Santos article, supra, p. 20. This Committee, however, has found no case since the enactment of the Garn Act that indicates the existence of such a limitation.

The Federal Home Loan Bank Board was abolished by Section 401 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA"); however, FIRREA transferred all functions of the Federal Home Loan Bank Board to the Office of Thrift Supervision ("OTS") of the Department of the Treasury. 12 U.S.C. §§ 1462a-1464. As of the date of this "Photograph-in-Time" Alert, the status of OTS interpretations can be obtained from the Office of the Chief Counsel, Regulations and Legislation (a/k/a "Regs and Legs"), 1700 G Street, N.W., Washington, D.C. 20552 (202/906-6251 or, for the person specifically in charge of federal administering preemption regulations, 202/906-7052).

Prepayment Fees (including Yield Maintenance provisions) are generally enforceable in Texas and not deemed interest on the debt or as contributing to the level of interest charged in the computation of usury. This is based on the common law rule of "perfect tender in time"; that the loan documents provide for repayment in installments over time and cannot be prepaid without lender consent. To permit prepayment without the lender’s consent (under this logic) alters the loan contract. The Prepayment Fee is, therefore, a fee charged the borrower for the right to prepay the loan (which would otherwise be prohibited under the perfect tender in time rule). Fees charged for a separate right or service granted by the lender are normally not deemed interest under Texas law; and this has been the general rule for Prepayment Fees since 1929 and consistently followed where the prepayment of the loan by the borrower is voluntary. See Vela v. Shacklett, 12 S.W.2d 1007 (Tex. Comm. App., 1929); Gulf Coast Investment Corp. v. Prichard, 438 S.W.2d 258 (Tex. Civ. App. - Dallas, 1969, writ ref.’d n.r.e.); Wagner v. Austin Saving and Loan Association, 525 S.W.2d 724 (Tex. Civ. App. - Beau. 1975, no writ); Boyd v. Life Insurance Co. of the Southwest, 546 S.W.2d 132 (Tex. Civ. App. - Houston [14^th Dist.], 1977, writ ref.’d); Ware v. Travelers Indemnity Co., 604 S.W.2d 400 (Tex. Civ. App. - San Antonio, 1980 writ ref.’d n.r.e.). This logic was also applied analogously in Gonzales County Savings and Loan Association v. Freeman, 534 S.W.2d 903 (Tex. 1976) ("Gonzales") to a loan initiation or commitment fee charged by the lender. The commitment fee, the Court said, is not interest nor contributing to usury and compared it to a Prepayment Fee. Id. at 906.

The Gonzales case, however, by implication places a significant limitation on the logic upholding the enforceability of Prepayment Fees in Texas. The fee cannot be excessive or an unreasonable penalty. The Texas Supreme Court held that the lender’s rights to collect fees and other service charges from borrowers are not without limits. It must be a bona-fide fee for real services rendered or real voluntary rights exercised. Id. at 906. The Court stated that the issue is one of the fee’s being a reasonable expense or penalty charged and not excessive for the right or service received by the borrower. Also, substance will control over form. The Court made it clear that the courts in general (and not the documents) will determine what is reasonable and not excessive. Id. at 907.

General Motors Acceptance Corp. v. Uresti, 553 S.W.2d 660 (Tex. Civ. App. - Tyler, 1977, writ ref. n.r.e) ("Uresti") provides a further qualification on the enforceability of Prepayment Fees. Absent clear and convincing language in the loan documents requiring payment of the Prepayment Fee upon acceleration of the loan, prepayment was stated to be payment before—not after—maturity of the loan. Once the maturity date is accelerated it is no longer possible to prepay and no fee is collectable. Id. at 663. Uresti does not involve a Real Estate Secured Transaction and deals with collection by the lender of unearned time-price differential in a consumer transaction, but its logic is equally applicable to all Prepayment Fees. Indeed, the conclusion reached in Uresti was also reached in Texas Air Finance Corp. v. Lesikar, 777 S.W.2d 559, 563 (Tex. App.—Houston [14^th Dist.] 1989, no writ) ("Lesikar"), which dealt directly with collection of a Prepayment Fee upon loan acceleration. However, neither Uresti or Lesikar appear to prohibit collection of a Prepayment Fee upon loan acceleration where the loan documents expressly provide for the borrower to make such payment. Uresti does not deal with authorized collection of a Prepayment Fee upon acceleration [but rather with the lender’s right to demand unearned time-price differential under the Consumer Credit Code after acceleration of the note]. Lesikar holds that a Prepayment Fee cannot be collected after note acceleration but does not quote the applicable prepayment language and does not say if the note expressly permitted collection of the fee. However, it seems reasonable that the language of the note in Lesikar did not expressly provide for collection of the Prepayment Fee upon acceleration. Otherwise, Lesikar is in conflict with prior and subsequent case law in Meisler, infra. at 885 (decided one year before Lesikar) and with Affiliated, infra. at 525, and Parker Plaza West Partners v. Unum Pension & Ins., 941 F.2d 349 (5^th Cir. 1991) ("Unum"), each of which permit collection of the Prepayment Fee after acceleration where expressly permitted under the language of the note. Moreover, it does not seem likely that Lesikar would expressly conflict with or overrule Meisler without comment, since the same Court of Appeals in Houston and the same judge rendered both opinions just one year apart. Unum at 354. In Unum the Fifth Circuit carefully considers all Texas case law to date and concludes that so long as the loan documents expressly provide for payment of the Prepayment Fee upon loan acceleration, it is enforceable and collectable under Texas law. Id. at 355. In 1992 the Austin Court of Appeals came to the same conclusion in Affiliated, one year following the Unum decision.

Notwithstanding the holdings in Affiliated, Meisler and Unum that a Prepayment Fee can be collected after acceleration where clearly and expressly provided in the note, under Texas law a Prepayment Fee may be limited as to its enforceability when combined with a due-on-transfer or similar restriction in a loan. Where the borrower is prohibited from transferring the loan security without the lender’s consent, but is required by the loan documents to pay a Prepayment Fee upon the acceleration of the loan for any breach of the due-on-transfer clause, such combination may in some circumstances constitute an unreasonable restraint on alienation under Texas law. In Sonny Arnold, Inc. v. Sentry Savings Association, 633 S.W.2d 811 (Tex. 1982) ("Arnold"), the Texas Supreme Court analyzed the principles embodied in restraints on alienation in the context of due-on-transfer clauses. The Court split 5 to 4 in a majority and concurring opinion. The majority held: (1) that to be a restraint on alienation of the property, the due-on-transfer clause needed to both prohibit transfer of the property ("the property must not be sold or conveyed") and impose a monetary or contractual liability upon violation of the prohibition; and (2) due to the harsh nature of the acceleration remedy, to be effective, contractual provisions calling for acceleration must be clear and unequivocal as written in the loan documents. The applicable clause in the Arnold case did not prohibit transfer; rather it provided for acceleration, at the lender’s option, upon transfer, and expressly authorized the lender to charge an interest rate increase as the basis for consenting to transfer of the property.

In the concurring opinion (in Arnold), authored by Justice Spears, four justices concurred in the result but not the logic of the majority. Justice Spears felt the majority opinion stressed form over substance, and language over content. The minority stressed that there is no substantive difference between loan acceleration over a default from language prohibiting transfer of the property and loan acceleration over language permitting acceleration (at the lender’s option) upon transfer of the property. In both cases, absent lender consent, either no transfer occurs or borrower financial liability occurs upon loan acceleration and shortened loan maturity. The minority in Arnold would hold every due-on-transfer clause to be a restraint on alienation, particularly when the contract also contains a Prepayment Fee (Id., at 818), and would determine enforceability of the clause based on its reasonableness, determined by considering the following four criteria: (1) are all rights being exercised by the lender specifically stated in the loan documents; (2) are the lender’s actions based on a justifiable business interest; (3) is the lender’s exercise of the restraint arbitrary or oppressive; and (4) is there a legitimate-lender concern over security impairment.

In Arnold, each of the four criteria for reasonable exercise of the restraint were met and, in the minority’s view, the clause in Arnold was enforceable.

The enforceability of due-on-transfer clauses in certain loan documents was removed from state law and made enforceable under federal law by the Garn-St. Germain Depository Institutions Act of 1982 (the "Garn Act"). However, the Garn Act does not deal with Prepayment Fees. Presumably, Prepayment Fees (in concert with a due-on-transfer clause) which would constitute a restraint on alienation under Texas law (based on Arnold), are still governed by Texas law and when unreasonable are unenforceable. See Danley, Richard and Santos, Ralph G., Due On Sale Clauses And Prepayment Penalties: Can They Coexist In Texas?, Real Estate Probate And Trust Law Reporter of the State Bar of Texas (July, 1989), 20 at 23-24 ("Danley/Santos").

The only Texas cases to date to address directly the enforceability of a Prepayment Fee with a due-on-transfer clause in the context of default and loan acceleration are Meisler, infra. and Abramoff, infra. Nevertheless, based on Arnold and Meisler and the other Texas cases discussed hereafter, enforceability of a Prepayment Fee under Texas law (involving due-on-transfer clauses and restraints on alienation) appears to depend on:

See Danley/Santos at 23-24 and Roberts, Kent, Prepayment Penalties in Texas: The Triumph of Logic and the Need of Legislative Reform, 45 Baylor Law Review 585 (1993) ("Roberts").

The loan documents should state clearly when a Prepayment Fee is payable and the specific requirements upon which the lender may condition its approval of any transfer under the due-on-transfer clause; or in the alternative, the documents may state the absence of the Prepayment Fee being assessed when the due-on-transfer clause is exercised and the loan involuntarily accelerated by the lender following a prohibited-property transfer. See Arnold at pages 815 and 818. Unum at pp. 354-355. Casey v. Business Men’s Assurance Company of America, 706 F.2d 559 (5^th Cir. 1983). Metropolitan Savings & Loan Association v. Nabours, 652 S.W.2d 820 (Tex. App. - Tyler, 1983, writ dism’d) ("Metropolitan"). North Point Patio Offices Venture v. United Benefit Life Insurance Company, 672 S.W.2d 35 (Tex. App. - Houston [14^th Dist.] 1984, writ ref.’d n.r.e.) ("North Point"). Meisler v. Republic of Texas Savings Association, 758 S.W.2d 878 (Tex. App. - Houston [14^th Dist.] 1988, no writ) ("Meisler"). Danley/Santos, at p. 36.

North Point emphasizes the importance of the lender’s due-on-transfer rights being expressly and clearly set forth in the loan documents for the Court to find them reasonable and enforceable. Id. at 38.

The Metropolitan Court found great dissatisfaction where loan documents trap and compel the borrower to pay a Prepayment Fee upon acceleration of the loan, while prohibiting transfers and permitting loan acceleration upon unauthorized transfers. Id. at 822-823. The lack of limitations on what the lender can extract as the price for its consent to a transfer of the property and the borrower’s subjection to acceleration and payment of a Prepayment Fee was held in Metropolitan to be an unreasonable restraint on the borrower’s alienation of its property. Id. at 823. The combined effect of the due-on-transfer and Prepayment Fee with the lack of loan document limitations (on the lender’s ability to make demands) in the view of the Metropolitan Court made the restraint unreasonable and unenforceable. Id. at 823. [In this regard, however, note the logic of Metropolitan presupposes that the Prepayment Fee is enforceable upon loan acceleration under Texas law where expressly authorized by the documents].

Meisler holds that a Prepayment Fee is enforceable and may properly be charged by the lender upon transfer of the property, even where the loan is involuntarily accelerated for default, when (i) the loan documents authorize payment of the Prepayment Fee upon loan acceleration, (ii) the lender’s demands for consent to the transfer are limited to an interest rate increase expressly authorized in the loan documents (as authorized under Arnold), and (iii) lender’s powers to renegotiate other loan terms and conditions are specifically defined in the loan documents.

A caveat must be noted to the preceding conclusions under Meisler. In Abramoff v. Life Insurance Company of Georgia, 92 Bank 698 (Bankr. W.D. Tex. 1988) ("Abramoff"), a West Texas Bankruptcy Court stated in applying Texas law: (i) the mere presence of a due-on-transfer clause with a Prepayment Fee in the same loan documents (where the Prepayment Fee is always due upon involuntary loan acceleration) is void and unenforceable as an unreasonable restraint on alienation, (ii) the collection of the void Prepayment Fee by the lender upon any involuntary loan acceleration (i.e., not just acceleration for a prohibited property transfer under the due-on-transfer clause) is refundable to the borrower and deemed interest for purposes of determining if usury was charged or collected under the loan, and (iii) the applicable spreading period for determining if usury was charged is the period from loan funding to the date the loan is paid in full.

Many Texas attorneys view at least some portion of the Abramoff decision as being an inaccurate statement of Texas law. Danley/Santos at p. 22 and p. 36, and Roberts at p. 610 (footnote 96). However, a material segment of the Abramoff decision is likely correct. In Abramoff the court said that a Prepayment Fee collected upon involuntary loan acceleration is not a voluntary fee (paid by the borrower to exercise a right or obtain a service) and is therefore interest under the loan; as such it is not entitled to the protection of the previously cited cases (holding Prepayment Fees not to be interest, as a voluntary exercise of borrower rights). See Danley/Santos at p. 22 and p. 36. This conclusion in Abramoff is supported by subsequent case law. In Affiliated Capital Corp. v. Commercial Fed. Bk., 834 S.W.2d 521 (Tex. App.—Austin, 1992, no writ) ("Affiliated"), the Court found the Prepayment Fee is enforceable upon loan acceleration where the documents expressly provide for payment (Id. at 523); and that in such event the Prepayment Fee is a penalty on the accelerated amount of the note, interest on the loan and subject to the note’s usury savings clause and the spreading principles under Texas law. Id. at 524-526. Also, see Groseclose v. Rum, 860 S.W.2d 554, 557 (Tex. App.—Dallas 1993, no writ), finding that in determining the applicable interest and usury rate for a loan, the spreading principles of Tanner Dev. Co. v. Ferguson, 561 S.W.2d 777, 786 (Tex. 1977) would apply to the Prepayment Fee and all interest charged in connection with the loan after acceleration.

As previously noted, in the view of some commentators Abramoff goes much further than has any other court in Texas. In holding that the mere presence of the due-on-transfer clause and Prepayment Fee in the same loan documents (when the Prepayment Fee is payable upon involuntary loan acceleration) is void as an unreasonable restraint on alienation, the Abramoff Court fails to:

At least one commentator feels that Abramoff can be reconciled with Meisler by the rejection of one sentence from the Abramoff opinion (as dicta or an erroneous misstatement of Texas law) and then application of a "reasonableness" analysis to determine how the due-on-transfer clause and Prepayment Fee interact with one another and impact the parties. Roberts at p. 610 (footnote 96). Roberts would ask: is the lender limited or unlimited in scope as to what it can demand of the borrower as consideration for its consent under the due-on-transfer clause; and if limited in scope, does the limitation in scope render the restraint reasonable? This may be the appropriate way to reconcile these two cases, but to date no court has done so. To the extent that Abramoff stands for the position that the mere presence of the due-on-transfer clause and Prepayment Fee (when present in the same loan documents) automatically creates an unreasonable restraint on the alienation of the property, the Committee does not believe that this aspect of Abramoff is a correct statement of Texas law. Nevertheless, it does represent the published opinion of at least one court, and other courts might elect to follow it. Also, while the above conclusions represent the Committee’s opinion of current Texas law, the combined effect of due-on-transfer clauses and Prepayment Fees under Texas law remains unclear and imprecise. Prudently, the Opinion Giver should consider that the presence of a Prepayment Fee and due-on-transfer clause in the loan documents, particularly when exercised together or in concert, may act as a restraint on the borrower’s alienation rights, and see that the prepayment and transfer provisions:

Texas is a lien theory state. Prior to foreclosure, the lender holds only a lien on and the rents and leases are the property of the borrower. McGeorge v. Henrie, 94 S.W.2d 761, 762-763 (Tex. Civ. App. - Texarkana 1936, no writ) ("McGeorge"). Taylor, infra., p. 593. Except as provided in the decisions rendered in Simon, infra. and Taylor, the right to keep possession of the rents only vests under Texas law in the lender upon the lender’s taking actual peaceable possession of the real estate or the rents. McGeorge, p. 762. Such possession by the lender can be obtained by lawful foreclosure, by consent of the mortgagor (express or implied) or by other means, including invalid foreclosure, so long as done peaceably and in good faith. Jasper State Bank v. Braswell, 111 S.W.2d 1079, 1081 and 1084 (Comm. App., 1938). Possession of the rents can also be granted judicially through a receiver. McGeorge, pp.762-3. The Taylor court stated that an assignment of rents does not become operative (i.e., the lender does not have the right to collect the rents) until the lender obtains possession or secures the appointment of a receiver or takes some other action. Id. at 594. Simon emphasizes this point. The Simon court states that the assignment, unless acted upon by the parties, does not become effective until the lender actually takes possession of the property, or asserts the lender’s rights by securing the appointment of a receiver or impounding rents or profits pending foreclosure or taking some action equivalent thereto. Id. at 686. This traditional form of assignment is typically called a collateral assignment and conveys to the lender a lien but no other interest in the rents prior to the lender’s taking action and obtaining possession as described above.

The only cases granting the lender the right to keep the rents prior to possession are Simon et al v. State Mutual Life Assur. Co., 126 S.W.2d 682 (Tex. Civ. App. - Dallas 1939, writ ref.’d) ("Simon") and Taylor v. Brennan, 621 S.W.2d 592, 594 (Tex. 1981), ("Taylor"). In both Taylor and Simon, the court respectively confirms the lender’s right to keep the rents upon taking possession of the property. Simon, p. 686, Taylor, p. 594. How possession may be obtained is undefined in Taylor and Simon but presumably must occur without breach of the peace, consistent with prior case law or with the consent of the borrower. Simon and Taylor also recognize that the lender can take possession of the rents by judicial action in the appointment of a receiver or impounding the rents, and the Simon court recognized the ability of the lender to take action "equivalent thereto." Id. at 686. Such equivalent action has to date only been defined under the facts of Simon. Under those facts it is the voluntary relinquishment by the borrower of the rents (following suit by the lender to enjoin the tenant from paying rent to the borrower) to an independent third party [in Simon a bank] such that the rents are no longer in the borrower’s custody or control. Id. at 684 and 686.

The possibility under Texas law for the lender to take possession of the rents, prior to foreclosure, was expanded in Taylor. Under Taylor, the Texas Supreme Court stated that a lender could, as part of the loan documents, create an absolute assignment of the rents, giving the Lender title to the rents, with the effective date of the assignment deferred to and conditioned on a loan default. Id. at 594. Under a properly drafted absolute assignment, the rents become the lender’s property without actual possession from the date of the loan default, removing borrower’s right to the use and control of the rents. Id. at 594. In this context, the absolute assignment grants the lender the right to the rents from the moment of the default and removes any right to the rents from the borrower; the lender’s right is not dependent on possession. However, the Taylor court never discusses or tries to reconcile the concept of an absolute assignment of the rents with Texas-lien-theory principles.

Taylor is unclear on the form the absolute assignment would take, but does provide that an absolute assignment must:

There is a split among Texas attorneys as to whether the absolute assignment contemplated by Taylor can effectively be created as part of a standard mortgage transaction and given effect. See: (1) Forrester, Julia, A Uniform And More Rational Approach To Rents As Security For The Mortgage Loan, 46 Rutgers Law Review 349, 1993 ("Forrester"); (2) Danley, Richard E., Jr. and Jillson, Andrew E., Absolute Assignments Of Leases And Rents: Has the Unicorn Been Found Or Is It Still Myth? Texas State Bar Real Estate Probate and Trust Law Reporter, Volume 30, No. 3 (April, 1992), p. 28 at p. 29 ("Danley/Jillson"); and (3) Danley, Richard E., Jr., Enforceability Of Assignment Of Rents: The Post-Default Availability Of Rents To The Mortgagee Prior To Foreclosure (Taylor v. Brennan), Real Estate, Probate and Trust Law Reporter of the State Bar of Texas, Volume 21, No. 2 (January, 1983) at 22. Further evidencing this split in thinking, a state appellate court relying on Taylor declined to affirm summary judgment by a trial court that an assignment (declaring itself absolute) is absolute where lender behavior and the language of the deed of trust is susceptible of more than one meaning and thus ambiguous. Oryx Energy Company v. Union National Bank of Texas, 895 S.W.2d 409, 414-15 (Tex. App. — San Antonio 1995, writ denied) ("Oryx"). The Oryx case, however, quotes favorably from Taylor and states that parties to a mortgage may agree to an absolute assignment — but notes that Texas courts are reluctant to construe an assignment of rents as absolute. Id. 414. The Oryx court then follows the criteria established in Taylor to determine if the subject assignment is absolute, finds ambiguity and remands the issue for trial.

Only one reported case to date has applied Taylor and found and enforced an absolute assignment of the rents. It is FDIC v. International Property Management, 929 F.2d 1033 (5^th Cir. 191) ("International"). The International case is both thoughtful and rendered by a respected court. Nonetheless, it does not resolve the concerns of many Texas attorneys. The Fifth Circuit is not a Texas court and is applying Texas law in the context of a federal bankruptcy case. The Oryx case, which is subsequent to International, cites International, but only to confirm why the assignment in the Oryx case may be a collateral assignment. In addition, at least one prior bankruptcy case applied Texas law involving assignments of leases in a manner very inconsistent with International. See In re Fry Road Assoc., 64 B.R. 808 (Bankr. W.D. Tex. 1986) ("Fry Road"). Notwithstanding that the portions of Fry Road which are inconsistent with International are effectively overruled by International and cannot command the authority of a 5^th Circuit opinion, Fry Road evidenced the possibility for varied court opinions involving absolute assignments and Texas lien law until this area of Texas law is finally resolved in all respects by the Texas Supreme Court. Also, the logic in Fry Road raises potential usury issues over the pro tanto application of rents which is not dealt with in International. While the usury logic in Fry Road has been severely criticized (see Forrester, supra at p. 383 and Danley/Jillson, supra at p. 32), it further evidences the diversity of legal opinion involving the absolute assignment and its enforceability prior to foreclosure.

The issue of whether the assignment of leases and rents is absolute or collateral is immaterial following foreclosure (both forms of assignment if properly drafted pass title and possession to the rents following foreclosure). The distinction between assignment forms is also immaterial prior to foreclosure in the event of (1) court approved appointment of a receiver or impounding the rents or (2) if the rents are voluntarily transferred to the lender by the borrower (following the lender’s taking affirmative action for control of the rents) or (3) if the lender takes peaceable possession through an illegal or invalid foreclosure. The issue of whether an assignment of rents is absolute is only material prior to foreclosure, where the borrower is in default and (a) refuses to grant the lender voluntary possession of the rents, or (b) is in bankruptcy, or (c) otherwise resists the lender’s affirmative but peaceable acts to take possession of the rents. In these circumstances, Texas law appears to permit certain advantages to an absolute assignment of rents over the traditional lien or collateral assignment of rents. This is supported by Taylor and International. While International cannot be cited as definitive case law for Texas court decisions, it is the opinion of a respected court, is well reasoned and is definitive law in the application of Taylor in Federal Bankruptcy courts. Furthermore, Taylor to date has remained unchanged by the Texas Supreme Court, with no indication that the Taylor opinion is otherwise incorrect or requires revision or that Texas courts will not give effect to a properly drafted absolute assignment.