Equity interests in LLC and partnership interests are a common form of collateral in many secured finance transactions, particularly mezzanine financing. The security agreement and related documents are fundamental in establishing a security interest in an LLC or partnership interest.
Representations, warranties, and covenants in the pledge and security agreement are often different than standard provisions for other collateral. The agreement must also address the rights being pledged, including economic, voting, and management rights.
The UCC provides two distinct paths to perfect the lender’s security interest: filing a financing statement under Article 9 or taking possession or control of the interest under the opt-in provisions of Article 8. Counsel should understand the advantages and disadvantages of each.
Curtis Johnson joins an authoritative panel that outlines best practices for drafting security agreements and making corresponding amendments to the borrower’s operating agreement to maximize the lender’s protection. The panel discusses UCC Articles 9 and Article 8 requirements for the perfection and priority of a security interest in a member or partnership interest. The discussion includes amendments to UCC Sections 9-406 and 9-408 promulgated in 2018 by the American Law Institute and the Uniform Law Commission.