by Robert S. Fisher
Every lawyer worries about
omitting a critical provision from a document being drafted or reviewed. The
practitioner structuring a loan transaction should be particularly cognizant
when making use of a standardized loan document, which may or may not contain
all the needed elements. Potential pitfalls are discussed in this article.
Every lawyer worries about
omitting a critical provision from a document being drafted or reviewed.
Sometimes the lawyer might have caused the omission by not realizing the need
for the provision or by using a pre-drafted form and overlooking the fact that
the needed provision had not been required in the transaction for which the
earlier form had been drafted. At other times, financial restraints imposed by
the client might limit the time available to review all the special conditions
of the transaction.
In the arena of the plain vanilla ("one size fits all") forms in
which printers and over-assertive regulators delight, such errors can also
occur, with unfortunate results, unless the uniformity carries with it
protection for the drafting lawyer. The uniform form often sounds safe because
the common understanding is that everyone uses it. A major unforeseen problem
can arise when a lender imposes the use of the form on independent loan
originators, creating paper to sell to the lender who may be accustomed to
having the eliminated clause in their documents and in related documents that
their assignee does not create for them.
The Uniformity Inducement - A Million Dollar Bond
One inducement to lenders and others using a given form to rely on the legal
work done by the printer's legal staff often appears in the form of a million
dollar bond. Many lenders conclude that this is enough protection for them.
However, there is a problem with reliance on such bonds: they often may require
that the form be used in only one state and if it is used elsewhere, the bond
does not apply. If a lender does business in 50 states, this may mean ordering
and using as many as 50 different versions of the form. Highly experienced
lenders will ask that a form be drafted so that all states where it may be used
are listed in a footnote on the form. This, if course, leads to a complex
annual review to make sure all of the listed states still accept all terms of
the uniform form or allow suitable hedging language. If state specific forms
are used, there could be a need for 50 individual reviews each year. As we have
seen from the recent rash of consumer and shareholder class actions and
government prosecutions, some errors can cost much more than million dollars
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S. Fisher has practiced extensively in the area of consumer financing of motor
vehicles, recreational vehicles, recreational yachts, general aviation
aircraft, and general commercial equipment leasing. He has represented banks,
finance, general leasing, and yacht chartering companies in setting up leasing
programs and in the purchase, sale, and securitization of vehicles and
He has lectured on recreational vessel matters before the Maritime Subcommittee
of the American Bar Association, where he is chair of the Boat Working Group of
the National Title Task Force, and at the Association of the Bar of the City of
New York, where he was a member for two terms of the Admiralty Committee. He
has also lectured for the Conference on Consumer Finance Law of Oklahoma City
University School of Law and written for the Consumer Financial Quarterly and
the Rutgers Law Review. Mr. Fisher writes frequently on maritime legal topics
for Yachting Magazine.