assignment of partnership interest as collateral

Business Law Today

January 2013

Using Limited Liability Company Interests and Limited Partnership Interests as Collateral

Tarik j haskins.

Jan 31, 2013

12 min read

With the increase in use of alternative entities, and in turn, growth in financing transactions secured with equity interests of LLCs, it is imperative that commercial finance attorneys understand the consequences these collateral arrangements can present.
The provisions of the UCC relating to the use of equity interests in alternative entities as collateral are different from those relating to the use of corporate stock as collateral, and the processes necessarily have marked differences.
Avoid common mistakes when using equity interests in alternative entities as collateral, by utilizing the statutory ability to build additional protections into the subject entity's governing documents, and not relying solely upon the terms set forth in the security documents.

In recent years, there has been an explosion in the use of alternative entities such as limited liability companies, limited partnerships, and general partnerships (collectively referred to herein as "alternative entities"). In addition, limited liability companies have become the preferred vehicle for creating bankruptcy remote entities in many financing transactions, which may also feature mezzanine financing arrangements in which the equity interests in the limited liability company is the mezzanine secured party's primary collateral. Therefore, it is imperative that commercial finance attorneys understand the consequences of using equity interests in alternative entities as collateral. Although practitioners may be inclined to treat equity interests in alternative entities the same as corporate stock, the provisions of the Uniform Commercial Code (UCC) relating to the use of equity interests in alternative entities as collateral are different from those relating to the use of corporate stock as collateral. Therefore, practitioners cannot approach the issue of perfecting a security interest in equity interests in alternative entities the same as he or she would approach perfection in corporate stock. This article will describe (1) the methods of perfecting a security interest in equity interests in alternative entities, (2) mistakes practitioners often make when using equity interests in alternative entities as collateral, and (3) a few helpful tips for practitioners to keep in mind when using equity interests in alternative entities as collateral. This article will primarily focus on the relevant UCC provisions related to using equity interests in alternative entities as collateral, but to the extent references are made to statutes governing alternative entities, it will refer to the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act. However, the concepts discussed will also have applicability in other jurisdictions, which might have similar statutes.

Basic Perfection Methods

In connection with any secured financing, the secured party's counsel should first determine what type of collateral he or she is dealing with in order to determine how to perfect its security interest in such collateral. Unlike corporate stock, equity interests in an alternative entity may not always be the same type of collateral for purposes of the UCC. Equity interests in limited liability companies and partnerships can be a "general intangible" or "investment property." UCC §§ 9-102(a)(49) and 9-102 (a)(42). Unless the alternative entity has taken affirmative steps to have its equity interests treated as "securities" for purposes of Article 8 of the UCC, such equity interests will probably be general intangibles. UCC § 8-103(c). Thus, a secured party must review the alternative entity's governing document and certificate of interest, if any, to determine whether the subject alternative entity has opted in to Article 8 to have its equity interests treated as securities, in which case, such interests will be investment property, not general intangibles.

Once the secured party's counsel has determined what type of collateral the equity interests are for UCC purposes, then he or she can determine how to perfect the secured party's security interest in the collateral. If the equity interests are general intangibles, the sole method of perfection is by filing. UCC § 9-310(a). Therefore, if the equity interests are general intangibles, for priority purposes, the familiar rules of first to file will govern multiple interests in the equity interests. UCC § 9-322(a). To the extent the equity interests are "securities," and therefore "investment property," then the secured party's counsel must determine whether such interests are "certificated securities" or "uncertificated securities." If the equity interests are "certificated securities," the secured party can perfect its interest by filing, control or possession. UCC §§ 9-312(a), 9-313(a), and 9-314(a). If the equity interests are uncertificated securities, a secured party can perfect by control or filing. UCC §§ 9-312(a) and 9-314(a). For purposes of priority, a security interest perfected by control has priority over a security interest held by a secured party that does not have control of the investment property. UCC § 9-328(l).

Common Mistakes

To recap briefly, equity interests in alternative entities can be "investment property" or "general intangibles" and the nature of the collateral will determine the permissible methods of perfection. This all seems relatively simple, but now let's briefly describe some of the mistakes that practitioners make in dealing with this type of collateral. As an overarching premise, it is imperative that the practitioner appreciate that he or she is not dealing with corporate stock and therefore what might apply to corporate stock will not apply in the world of alternative entities. Thus, it will not be sufficient to simply follow the same procedures that such practitioner has followed to perfect an interest in corporate stock. For example, under Delaware law, in contrast to corporate stock, an equity interest in a limited partnership or a limited liability company is made up of distinct economic rights and governance rights, and the two sets of rights are not bound together by statute. Ultimately, a secured party will want to have the right, upon default, to take control of the equity interests, and have the ability to receive, or transfer, the economic benefits of the equity interest as well as the governance rights. Thus, it is critical for the secured party to adequately describe the collateral to ensure that the collateral description is broad enough to create a security interest in the economic and governance rights.

A practitioner should be careful about simply using terms like "membership interests," "limited liability company interests," or "partnership interests," which may not be sufficient to encompass economic and governance rights. For example, under the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act, the terms "limited liability company interest" and "partnership interest" under the relevant act simply refers to a person's right to share in the entity's profits and losses and the right to receive distributions not governance rights. Delaware Limited Liability Company Act § 18-101(8) and Delaware Revised Uniform Limited Partnership Act § 17-101(13). Thus, a collateral description using the terms "limited liability company interest," "partnership interest," or "membership interest" to describe an equity interest in a Delaware entity would not be sufficient to include the governance rights in the secured party's collateral. Therefore, a secured party that used such a collateral description might find itself with a security interest in the economic rights of such entity only and no ability to cause a distribution of the entity's assets or to exercise any governance rights.

The second mistake we often see is a failure to perfect the security interest in a manner that provides the secured party with priority over other secured parties with a competing security interest in the collateral. The method of perfection depends on the type of collateral being perfected. Are the equity interests in the alternative entity "general intangibles" or "investment property"? If the equity interests are investment property, the secured party may perfect by filing, control, or possession, but a security interest perfected by control will have priority over a security interest held by a secured party that does not have control of the investment property. UCC § 9-328(l). Again, the mistake we often see here is a failure to realize that the collateral is "investment property" and the secured party's failure to perfect its security interest by control or possession.

Some of the great benefits of Revised Article 9 are the self-help remedies that enable a secured party to take a number of actions without judicial assistance to realize the value of its collateral in order to satisfy the obligations secured by the security interest. Those self-help remedies include, but are not limited to, strict foreclosure, and selling or otherwise disposing of the collateral to a third party. UCC §§ 9-620 and 9-610. Thus, one of the other mistakes we see is a failure by secured parties to take advantage of the contractual flexibility inherent in most alternative entity statutes to protect its security interest and facilitate such self-help remedies. Furthermore, such a mistake is often compounded by practitioners using corporate stock pledge agreements as precedent and substituting member for shareholder and membership interests for shares, which without more will probably be insufficient to protect fully the interests of the secured party. Also, if practitioners simply follow corporate precedent, he or she may fail to use the entity's governing document to enhance the secured party's protection and facilitate many of the self-help remedies available under the UCC.

Thus, as will be described below, the secured party will want to make sure that the security agreement and the entity's governing documents contain the necessary protections to allow the secured party to effectively, and efficiently, exercise the self-help remedies available to a secured party under the UCC.

Practical Tips

As a general matter, due to the contractual flexibility inherent in most alternative entity statutes, a secured party should take advantage of its ability to build additional protections into the subject entity's governing documents, and not simply rely upon the representations, warranties, and covenants set forth in the security documents. For example, the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act each contain features that enable creditors to obtain additional rights and protections. Each act specifically permits the governing document to provide rights to a person that is not a party to the governing document. Delaware Limited Liability Company Act § 18-101(7) and Delaware Revised Uniform Limited Partnership Act § 17-101(12). Thus, counsel for the secured party should take steps to marry the contractual flexibility afforded by the alternative entity statutes to the favorable self-help remedies available under the UCC to ensure that the secured party will be able to realize the value of it equity interest collateral upon a default.

First, provide an adequate description of the collateral in connection with the creation of the security interest. Many alternative entity statutes, including Delaware, disaggregate economic rights from the governance rights provided to a holder of equity interests in the alternative entity. Therefore, the description of the collateral set forth in the security agreement that creates the interest must be broad enough to give the secured party a security interest not only in the economic rights but also the governance rights; otherwise if the description is not broad enough a secured party may find itself holding an interest solely in the economic rights that a debtor has in the alternative entities, similar to a charging order. Thus, the collateral description should make clear that it refers to the debtor's governance rights under the governing document as well as the debtor's economic rights.

Second, it cannot be emphasized enough: know your collateral. As mentioned above, a secured party should have a good understanding of what type of collateral the equity interests in the alternative entity are for purposes of the UCC. Thus, is the collateral a general intangible or investment property, and if investment property, is it certificated or uncertificated. Each of the foregoing conclusions will influence how a secured party perfects its security interest. In the event that the collateral is a general intangible, a secured party may want to request that the subject alternative entity actually opt-in to Article 8 of the UCC and perfect its security interest therein by control. Not only does opting in have the benefit of providing the secured party with a superior method of perfecting its interest, by control, but because the equity interests will be governed by Article 8, the secured party may in certain cases receive the benefits of being a "protected purchaser" and therefore actually receive an interest in the subject collateral that is superior to the interest of the debtor in such collateral because the secured party may take free of any adverse claims. UCC § 8-303(b). Opting in to Article 8 can be accomplished by executing a short amendment to the subject governing document, which expressly provides that the alternative entity's equity interests will be governed by Article 8.

Related to knowing your collateral, it is also important that the secured party make sure that the subject collateral stays the same type of collateral after the security interest is perfected. Thus, in order to protect itself, the secured party should certainly build covenants into the security document, but also to the extent permitted by the applicable alternative entity statute, the secured party should hardwire protections into the alternative entity's governing documents. Hence, a provision should be added to the governing document to prohibit the entity from amending the governing document to opt-in or opt-out of Article 8, as the case may be. Furthermore, for an entity governed by Delaware law, such entity can expressly provide in its governing document that the secured party must consent to any amendment that would change an equity interest's status as a security or non-security.

Third, provide a mechanism in the documentation to permit the transfer of the equity interests and the admission by a transferee to the alternative entity. In order to fully take advantage of the self-help remedies available to a secured party under the UCC, a secured party should build a mechanism into the security agreement and the subject alternative entity's governing document to permit the secured party or a third-party transferee of such equity interest to acquire the equity interests and to be admitted to the entity upon an event of default. This is a common pitfall for secured parties seeking to exercise self-help remedies. Unless the secured party takes steps to facilitate a transfer and automatic admission following a default by the debtor, a secured party may find that it is only able to acquire the economic rights under the equity interest. For example, under Delaware law, unless otherwise provided in the governing documents, the secured party's admission to the alternative entity will require the cooperation of the debtor, and possibly the other equity holders, (Delaware Limited Liability Company Act § 18-301(b) and Delaware Revised Uniform Limited Partnership Act § 17-301(b)), and following a default, the debtor and the other equity holders may not be thrilled to assist the secured party with transferring the interest and admitting the transferee to the entity. Thus, in dealing with an alternative entity where admission is required to exercise governance rights, the parties may want to add a mechanism directly into the governing document whereby upon an event of default, the secured party will be automatically admitted to the entity, or alternatively, in some cases, a power of attorney can be granted to the secured party in order to facilitate such admission.

In addition, the secured party may require that the governing document contain language that structures the entity's interests more like corporate stock, whereby a transferee succeeds to the transferor's rights automatically upon transfer without further action on the part of the issuer or its equity holders. Under the Delaware statutes governing alternative entities, it is crucial to make sure that the admission issue is addressed if the entity only has one member or one limited partner because the transfer of the equity interest by the debtor to the secured party will cause the entity to dissolve because it has no members or limited partners. Delaware Limited Liability Company Act § 18-801(4) and Delaware Revised Uniform Limited Partnership Act § 17-801(4). That is the case because under the Delaware laws governing alternative entities, the debtor will cease to be a member or partner, as applicable, following the transfer of the interests and unless the governing document provides for an admission mechanism, the secured party or third-party transferee will not be admitted to the entity, which will cause the entity to lack the requisite partner or member needed to avoid dissolution.

Finally, due to the contractual nature of alternative entities, and particularly in Delaware, which expressly states that the policy of its alternative entity statutes is to give maximum effect to the principle of freedom of contract, the secured party should not merely rely upon the covenants and representations in the loan documents. Thus, instead of relying upon covenant defaults, protections may be added to the governing document that remove from the power and authority of the entity the ability to take certain actions that reduce, or might reduce, the secured party's protection. As previously mentioned, the governing document should limit the entity's ability to change the status of the collateral from a security to a non-security or vice versa, and it should prohibit amendments to the governing document that remove other secured party protections. In addition, the secured party may consider adding limitations on the power to issue additional equity interests or limit the authority to make distributions while obligations are outstanding. Thus, the secured parties should take advantage of the ability to enhance their protections in the alternative entity's governing documents.

As the use of alternative entities increases, it is incumbent upon commercial finance attorneys to understand the characteristics of such interests and to ensure that they understand how to perfect such collateral, and otherwise deal with such collateral. Due to the flexibility of many of the alternative entity statutes and the contractual freedom available to the parties thereunder, care should be taken to ensure that a secured party sufficiently protects its security interest by taking some of, or at least considering, the actions described above. As stated at the beginning, the most important step in this process is to recognize that equity interests in alternative entities are not exactly like corporate stock and the approach by a secured party to protect its security interest in such collateral should be markedly different.

Morris Nichols Arsht & Tunnell

Tarik J. Haskins, Partner, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE Tarik Haskins is a partner in the Commercial Law Counseling Group. His practice covers a range of commercial transactions including mergers...

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Collateral Assignment of an Entity Interest: Economic v. Governance Rights

Posted on September 26, 2012 by Bernstein-Burkley

Bernstein-Burkley, P.C.

In these difficult economic times, debtors have become more creative in proposing additional or substitute sources of collateral to secure a debt or obtain a forbearance or loan modification. As real estate values have plummeted, alternatives have become more attractive, including an assignment of the debtor’s interest in an operating entity with good cash flow.

However, the recent decision of the Pennsylvania Superior Court in Zokaites v. Pittsburgh Irish Pubs, LLC , 962 A.2d 1220 (Pa. Super. 2008), appeal denied 972 A.2d 523 (Pa. 2009), provides food for thought in terms of structuring and drafting a collateral assignment of an interest in a limited liability company or partnership. In Zokaites , a creditor was attempting to enforce its judgment lien by executing upon the debtor’s interest in two limited liability companies (“LLC”) that owned and operated several Pittsburgh area restaurants. The creditor sought a court order to compel the debtor to transfer its ownership interest in the LLCs so those interests could be sold at sheriff’s sale. After much procedural wrangling in both state and bankruptcy court, the case ended up in the Superior Court, which looked to Pennsylvania’s Limited Liability Company Law, 15 Pa.C.S. §8901 et seq . (“LLC Law”), for guidance.

The Superior Court focused on a provision in the LLC Law that prohibits a transferee of an LLC interest from becoming a member or participating in the company’s management without the approval of all other LLC members. The same provision, however, allows a transferee to receive the LLC member’s distributions or other return of capital contributions. Because of this protection of an LLC’s “close-knit structure,” the Superior Court decided that a judgment creditor can secure a debtor’s economic rights to distributions and return of contributions from the LLC, but cannot obtain the debtor’s governance rights to vote and participate in managing the LLC. The Superior Court equated this remedy of obtaining the economic rights in an LLC interest to the “charging order” that is permitted against a partnership interest under Pennsylvania’s Uniform Partnership and Limited Partnership Acts (“Partnership Acts”).

In light of the decision in Zokaites , lenders considering accepting a collateral assignment of an entity interest should keep a few things in mind for due diligence and drafting purposes. First, where a debtor has interests in multiple related entities, have the debtor provide an organizational chart. It is often easier to understand a complex organizational structure from a chart or “tree” than from a description. The chart should show the relationship among the entities and include the names of each entity and the percentage interest the debtor owns. For example, in a recent transaction where several guarantors were proposing to pledge their interests in a variety of LLCs and partnerships that in turn were the general and limited partners of other entities, an organizational chart prepared by the debtor was a crucial tool in pinpointing who owned what and in targeting the collateral.

Second, once you understand what entity interest(s) the debtor owns, it is essential to carefully review a copy of the organizational agreement and any amendments (the LLC Operating Agreement or the Partnership Agreement) for each entity. Key provisions include transfer or assignment rights or restrictions and default and dissolution provisions. If the organizational agreement expressly permits assignment, then the limitations under the LLC Law and the Partnership Acts do not apply 1 . Most likely, however, the LLC or partnership interest will not be assignable without the other members’ or partners’ consent. It is also important to understand whether an assignment will trigger an unwanted result such as a dissolution or default.

Third, once you know what is owned and can be pledged, draft the assignment to specifically identify the entity interest being pledged. Taking into account the ruling in Zokaites , where not all of the LLC members or partners are involved, a pledge of economic rights only is more likely to be enforceable than a collateral assignment that appears to transfer governance and other rights as well. In most instances, the cash flow from the right to receive distributions, profits, and return of capital is the true collateral anyway.

In describing complex or multiple entity interests or owners, consider attaching as exhibits the organizational chart and a table identifying each debtor, the entity, and the percentage interest owned. Include in the body of the assignment representations and warranties by the debtor confirming all of the information on the chart and table as true, complete and correct and that the debtor’s interest has not already been pledged or assigned.

Fourth, since the creditor will not have governance rights, the pledge agreement should also contain covenants to protect the creditor’s right to receive distributions. Such covenants would include prohibiting the debtor from voting to amend the Operating or Partnership Agreement or to dissolve the entity. Another useful provision would be the debtor’s authorization for the LLC or partnership and its officers to recognize and give effect to the collateral assignment by paying distributions directly to the creditor or lender upon demand. Finally, when the assignment is being made by a married individual, if possible have the spouse join in to waive any marital or spousal interest.

Assignment of a debtor’s interest in an LLC or partnership can be a valuable and useful form of collateral. But the creditor should follow the money and remain mindful of the Zokaites decision by taking a pledge of the economic rights and leaving the governance rights alone, unless all of the entity owners consent.

1. Similar to the LLC Law, the Partnership Acts contain provisions that, unless otherwise agreed, the assignee of a partner’s interest does not become a partner or share in partnership liability and cannot exercise a partner’s management, inspection of records, or accounting rights, but has the right to profits. 15 Pa.C.S. §8344(a) and 15 Pa.C.S. §8562(a)(2)and (c).

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assignment of partnership interest as collateral

LLC Membership Interests as Collateral

It is not uncommon for lenders to take a security interest in a business owner’s ownership interest in the corporation, LLC, limited partnership or other entity as collateral for a loan to the business. For the most part, the transactions are documented through a standard pledge or assignment (the “assignment agreement”) of the stock or other evidence of ownership. While such an approach may be acceptable when the interests of a corporation are pledged, when the collateral is an interest in an LLC, savvy lenders will make sure that they use an enhanced form of assignment agreement and perhaps obtain the consents (and necessary waivers) from the other LLC members.

An enhanced form of assignment agreement is called for because an LLC has one distinct advantage over other entity forms. Under Maryland law, a judgment against an LLC member can only be enforced by imposing a charging order against the member’s interest. This is a court order requiring the LLC to pay the creditor the debtor member’s share of LLC distributions. In this respect, a charging order is akin to a wage garnishment, except it is against the member’s distributions rather than against wages. The lender who simply obtains an assignment of a membership interest in an LLC gets no right to attach the member’s LLC interest or be admitted as a voting member . The lender cannot, therefore, participate in company management, force a sale of company assets or distribution of profits, or inspect company books.

In contrast, shares of a corporation’s stock are freely transferable absent contrary provisions in a shareholder agreement. Consequently, a lender with a security interest can typically exercise all of the associated rights of a stockholder. Upon obtaining the shares, the lender acquires the right to inspect corporate books and records and to vote on the election and removal of directors. If the shares represent a controlling interest, the lender could actually replace all the directors and officers and take over control of the corporation. Depending on the circumstances, the lender may also have the right to seek involuntary dissolution or place the corporation in receivership.

To optimize the collateral value of an LLC membership interest, lenders will want to be sure that they, as assignees, can be admitted, automatically, as full voting members of the company once they obtain ownership of the membership interest (a complex process in and of itself). Lenders will also want to scrutinize the LLC operating agreement to see if it contains provisions that either permit the company to acquire a member’s interest for a discounted value in the event of the member’s personal bankruptcy or that limit profit distributions either by making them discretionary rather than mandatory, or by restricting distributions to insolvent members. Finally, the operating agreement should be reviewed so that the lender understands any restrictions that may be placed upon the rights of an assignee who assumes a member’s interest. If such provisions are included in the operating agreement, they should be addressed in the assignment agreement as part of the negotiations over the assignment of the LLC membership interest so as to preserve the creditor’s rights and the value of charging orders.

Savvy lenders know that the LLC is the optimal form of entity for insulating company assets from owners’ personal creditors. Hence, they are the lenders that will carefully review the LLC organizational documents and only take LLC interests as collateral using an enhanced form of assignment agreement.

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LLCs/LPs: Assignment of LLC/LP Interests (Short Form) | Practical Law

LLCs/LPs: Assignment of LLC/LP Interests (Short Form)

Practical law standard document 7-521-6949 (approx. 8 pages).

Maintained • USA (National/Federal)

Assignment of Interest In LLC: Everything You Need to Know

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. 3 min read updated on February 01, 2023

Updated October 28, 2020:

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. The assignment is usually done as a means for members to provide collateral for personal loans, settle debts, or leave the LLC. The member (assignor) and the person assigned (assignee) sign a document called the Membership Assignment of Interest.

Why a Member May Want to Assign Interest

A member may choose to assign interest for a number of reasons.

The assignment of interest may happen as collateral to a loan to one of the members.
Some members can assign interest to settle debts. The assignment will be effective until the debt is cleared.
An assignment of interest can also' be done to a member's legal heirs , going into effect upon the death of a member.

The Rights and Limitations of the Assignee

The laws governing LLC membership interest assignments vary considerably from one state to another.

Most states prohibit the assignee from participating in the LLC's operations or decisions unless the Articles of Organization have this provision.
An assignee is protected from liability from the assignor until the assignee becomes a member in most states. However, the law in a few states, including California and Florida, states that the assignee does get the assignor's liability.
Should the assignee become a member after the assignment, he is only entitled to the rights and restrictions the assignor had.
The assignment usually gives the assignee the right to receive the assignor's share of the profits — but not necessarily the other rights.

The Rights and Limitations of the Assignor

In many states, all LLC members have the right to assign membership interest.
In most states, assigning interest does not necessarily lead to forfeiting of voting and management rights and can be temporary. Texas law, on the other hand, states that the assignor ceases to be a member of the LLC after the assignment.

The Rights and Limitations of Other Members

All members of the LLC have to be notified of any type of assignment.
Some states require the assignment of interest to be approved by all members.
The new person who has been assigned interest does not necessarily become a member even if the assigner has decided to leave the LLC. The other members can decide whether to admit the assignee as a member or not. Should a member assign interest without the input of other members, the interest is normally limited to financial benefits.
In a two-member LLC, one member can easily transfer the interest to the other.

The Membership Interest Assignment Document

The LLC's operating agreement should explain the rights of members on issues of transfer of interest, and the agreement should be followed during the assignment process. The Membership Interest Assignment acts as a record of the agreement, and the LLC normally keeps a copy of the document. The law in most states does not provide a formal template of the Membership Interest Assignment document but lists what should be included in the document. The document should have the following details:

Percentage of interest that will go to the assignee
Whether the assignee will have voting rights
The signatures of the assignor and the assignee

Assignment of Interest Versus Selling Ownership Stake

The assignment of interest is typically different from selling the ownership stake . Selling a member's ownership stake in the LLC requires unanimous approval by the other members. A departing member may also assign his membership to another member.

If a member is being paid to transfer interest, this is treated for tax purposes as a sale, and the selling member's gains might be liable to capital gains tax. Even if a departing member is not paid for his interest, if the departure results in the assignee getting the departing members' share of liability, the departure is seen as an exchange or sale.

Assignment of Interest Versus Abandoning an LLC

If a member wants to withdraw interest in an LLC, he/she can choose to simply legally abandon the LLC in most states. The abandoning member should give some kind of notice to the other members explaining that he is abandoning membership. Abandoning membership does not usually require the approval of other members.

Abandoning an LLC does not absolve the member of liability he/she may have incurred when still a member.

If you need help with the assignment of interest in LLCs, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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LLC Membership Interest Transfer Agreement
What Is the Definition of Assigns
Assignment of Interest
Assignment Law
Assignment of Interest Form
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Assignment of Rights and Obligations Under a Contract
Assignment Agreement Definition
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Structuring Pledge Agreements for Equity Interests in Partnerships and LLCs to Maximize Protection for Lenders

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.

The McCarter & English, LLP website is for informational purposes only. We do not provide legal advice on this website. We can provide legal advice only to our clients in specific inquiries that they address to us. If you are interested in becoming a client, please contact us, but do not send any information about your specific legal question. We cannot serve as your lawyers until we establish an attorney-client relationship, which can occur only after we follow procedures within our firm and after we agree to the terms of the representation.

Reed Smith LLP

7 December 2013 Lending Law Report

Delaware Limited Liability Company Interests as Collateral

Economic rights (i.e., LLC interests) are assignable in whole or in part except as provided in an LLC’s operating agreement (an “LLC Agreement”). §18-702(a).
The assignment of an LLC interest does not entitle the assignee to control rights except as provided in the LLC Agreement or upon the affirmative vote or written consent of all of the members of the LLC. §§18-702(a).
An assignee of an LLC interest may only become a member as provided in the LLC Agreement or upon the affirmative vote or written consent of all of the members of the LLC. §§18-702(b)(1), 18-704(a).
Notwithstanding any other provision of the LLC Agreement, a member may pledge all of its right, title and interest in the LLC, whether derived under the Certificate of Formation, the LLC Agreement, the DE LLC Act, or otherwise, and upon foreclosure, the secured party or other successful bidder will automatically succeed to all of such pledged right, title and interest, including without limitation: (i) its “limited liability company interest” (as such term is defined in section 18-101(8) of the DE LLC Act); (ii) its right to participate in the management of the business and affairs of the LLC; and (iii) its status as a “member” (as such term is defined in section 18-101(11) of the DE LLC Act).
Notwithstanding any other provision of the LLC Agreement, a secured party or other successful bidder at a foreclosure sale or other disposition will automatically be deemed admitted as a member of the LLC immediately before the debtor ceases to be a member.

“All of the Pledgor’s interest in XYZ, LLC, a Delaware limited liability company, including without limitation all of the Pledgor’s limited liability company interests in XYZ, LLC, all of the Pledgor’s right to participate in the management of the business and affairs of XYZ, LLC or otherwise control XYZ, LLC, and all of the Pledgor’s rights as a member of XYZ, LLC.”

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Taking a security interest in a closely held business

If a loan or extension of credit requires collateral, banks prefer collateral that is readily marketable rather than taking a security interest in a closely-held business. Occasionally, the only collateral that is available or that the borrower can offer is corporate stock that is not traded on a public market, an interest in a limited liability company ("LLC") or a partnership interest. It is common for closely-held business entities to prohibit an assignment of an owner's interest or require as a condition to an assignment the consent of the other owners of the entity.

This memorandum will discuss some of the concerns a lender should address in taking a security interest in collateral that limits or prohibits an assignment.

Assume that the stock of a closely-held corporation ("Company A") is offered to your bank as collateral for a loan. The stock certificate bears the following language on the reverse side:

The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired without a view to distribution and may not be offered, sold, transferred, pledged or hypothecated in the absence of an effective registration statement for the shares under the Act and under any applicable state securities laws, or an opinion of counsel to the corporation that such registration is not required as to such sale or offer.

In addition, the shareholders of Company A have entered into a Stock Restrictive Agreement ("SRA"), which states that unless the voting stock agrees to a pledge, the pledge shall be null and void and no security interest shall be transferred.

These issues were addressed in the United States Bankruptcy Court for the Western District of Arkansas in In re Garrison [1] .

There the lender made a loan secured by stock subject to both restrictions. In the bankruptcy proceedings the lender sought a declaratory judgment that it held a valid perfected security interest in the stock. After a thorough analysis of the lender's claims, the Court held that the first restriction, the one noted on the stock certificate, did not prohibit the lender from having a perfected security interest in the stock. After first noting that the validity of a restriction on a transfer of stock is determined by the law of the state of incorporation, the Court said in part, applying Oregon law:

The Court concludes that while the restriction may be valid and enforceable under Section 60.167, the applicable Oregon statute, by its terms it is not applicable to the transfer at issue. The statute authorizes the restriction to preserve the corporation's federal and state exemptions and that purpose is not furthered by prohibiting the pledge, which does not threaten the availability of those exceptions. The pledge, being a transfer that is neither a public distribution nor a transaction by an issuer, underwriter or dealer, does not violate the restriction. The restriction remains in effect as to the bank to the extent that any future transfer might necessitate the action of the stock transfer agent referred to in the legend. The record does not contain any evidence that the stock transfer agent was required to take action by the pledge at issue.

As to the second restriction, the one contained in the SRA, the Court ruled against the lender, stating in part:

Applying these rules regarding attachment and perfection, a Court finds that when the Debtors attempted to give the Bank a security interest in their stock, they had already voluntarily agreed to refrain from pledging the stock without unanimous consent of the other signatories to the agreement. The Debtors having conditionally relinquished their transfer rights, a security interest could not attach to those rights and without attachment, perfection could not be accomplished. Accordingly, the Bank's lien in the stock is unperfected unless the Bank's estoppel and apparent authority arguments have merit, issues to be subsequently discussed.

Colorado permits inclusion of restrictions on the transfer of shares of stock. [2] Subsection (2) of the Colorado statutes provides:

A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certificate or is contained in the information statement required by Section 7-106-207(ii). Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction.

The use of limited liability companies has grown exponentially during the last few years. Where an LLC is involved, the owner of an interest in the LLC may offer his or her interest as collateral for a loan. It is not unusual for an LLC's operating agreement to provide some restriction on the transfer of a member's interest. In In re West [3] the United States Bankruptcy Court dealt with the pledge of an LLC interest as security for a $91,800 loan from the Heartland Bank. The operating agreement provided that a member does not have the right to assign, pledge or hypothecate his interest "except as otherwise specifically provided herein." Both unanimous consent was required for the transfer of an interest and if no unanimous consent had been obtained, "no transfer shall be effective unless and until written notice has been provided to the company and the non-transferring members."

Because the funds borrowed by the member using his interest in the LLC as collateral benefitted the LLC, the Court held that the written notice requirement was waived. Heartland Bank's security interest was held to be valid.

Colorado permits the transfer of an interest in a LLC subject to the limitation set forth in the following statutory provision: [4]

The interest of each member in a limited liability company constitutes the personal property of the member and may be assigned or transferred. Unless the assignee or transferee is admitted as a member, the assignee or transferee shall only be entitled to receive the share of profits or other compensation by way of income and the return of contributions to which that member would otherwise be entitled and shall have no right to participate in the management of the business and the activities of the limited liability company or become a member. [5]

The cited bankruptcy cases are not binding on other courts, but they do teach two important lessons. First, any lender proposing to take a security interest in a closely-held entity, be it a corporation, LLC or partnership, should seek to determine whether there are any limitations or prohibitions on the transfer or pledge of the borrower's interest. Violation of such restriction may result in the lender not having a valid, enforceable security interest in the borrower's ownership interest.

Second, a limitation or restriction on the transfer or assignment of an ownership interest may not always negate a security interest granted to the lender. Understanding the scope and purpose of the restriction is as important as determining whether a restriction exists. Also, there may be instances where a statutory provision authorizing an assignment or pledge overrides a stated restriction. At times it may be advisable to get an opinion of counsel as to the scope and meaning of a transfer restriction or whether a statutory provision controls.

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Company & Commercial
Insolvency & Restructuring
Sherman & Howard LLC
Legal personality
Collateral (finance)
Limited liability company
Securities Act 1933 (USA)

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Using Limited Liability Company Interests and Limited Partnership Interests as Collateral

In recent years, there has been an explosion in the use of alternative entities such as limited liability companies, limited partnerships, and general partnerships (collectively referred to herein as “alternative entities”). In addition, limited liability companies have become the preferred vehicle for creating bankruptcy remote entities in many financing transactions, which may also feature mezzanine financing arrangements in which the equity interests in the limited liability company is the mezzanine secured party’s primary collateral. Therefore, it is imperative that commercial finance attorneys understand the consequences of using equity interests in alternative entities as collateral. Although practitioners may be inclined to treat equity interests in alternative entities the same as corporate stock, the provisions of the Uniform Commercial Code (UCC) relating to the use of equity interests in alternative entities as collateral are different from those relating to the use of corporate stock as collateral. Therefore, practitioners cannot approach the issue of perfecting a security interest in equity interests in alternative entities the same as he or she would approach perfection in corporate stock. This article will describe (1) the methods of perfecting a security interest in equity interests in alternative entities, (2) mistakes practitioners often make when using equity interests in alternative entities as collateral, and (3) a few helpful tips for practitioners to keep in mind when using equity interests in alternative entities as collateral. This article will primarily focus on the relevant UCC provisions related to using equity interests in alternative entities as collateral, but to the extent references are made to statutes governing alternative entities, it will refer to the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act. However, the concepts discussed will also have applicability in other jurisdictions, which might have similar statutes.

Basic Perfection Methods

In connection with any secured financing, the secured party’s counsel should first determine what type of collateral he or she is dealing with in order to determine how to perfect its security interest in such collateral. Unlike corporate stock, equity interests in an alternative entity may not always be the same type of collateral for purposes of the UCC. Equity interests in limited liability companies and partnerships can be a “general intangible” or “investment property.” UCC §§ 9-102(a)(49) and 9-102 (a)(42). Unless the alternative entity has taken affirmative steps to have its equity interests treated as “securities” for purposes of Article 8 of the UCC, such equity interests will probably be general intangibles. UCC § 8-103(c). Thus, a secured party must review the alternative entity’s governing document and certificate of interest, if any, to determine whether the subject alternative entity has opted in to Article 8 to have its equity interests treated as securities, in which case, such interests will be investment property, not general intangibles.

Once the secured party’s counsel has determined what type of collateral the equity interests are for UCC purposes, then he or she can determine how to perfect the secured party’s security interest in the collateral. If the equity interests are general intangibles, the sole method of perfection is by filing. UCC § 9-310(a). Therefore, if the equity interests are general intangibles, for priority purposes, the familiar rules of first to file will govern multiple interests in the equity interests. UCC § 9-322(a). To the extent the equity interests are “securities,” and therefore “investment property,” then the secured party’s counsel must determine whether such interests are “certificated securities” or “uncertificated securities.” If the equity interests are “certificated securities,” the secured party can perfect its interest by filing, control or possession. UCC §§ 9-312(a), 9-313(a), and 9-314(a). If the equity interests are uncertificated securities, a secured party can perfect by control or filing. UCC §§ 9-312(a) and 9-314(a). For purposes of priority, a security interest perfected by control has priority over a security interest held by a secured party that does not have control of the investment property. UCC § 9-328(l).

Common Mistakes

To recap briefly, equity interests in alternative entities can be “investment property” or “general intangibles” and the nature of the collateral will determine the permissible methods of perfection. This all seems relatively simple, but now let’s briefly describe some of the mistakes that practitioners make in dealing with this type of collateral. As an overarching premise, it is imperative that the practitioner appreciate that he or she is not dealing with corporate stock and therefore what might apply to corporate stock will not apply in the world of alternative entities. Thus, it will not be sufficient to simply follow the same procedures that such practitioner has followed to perfect an interest in corporate stock. For example, under Delaware law, in contrast to corporate stock, an equity interest in a limited partnership or a limited liability company is made up of distinct economic rights and governance rights, and the two sets of rights are not bound together by statute. Ultimately, a secured party will want to have the right, upon default, to take control of the equity interests, and have the ability to receive, or transfer, the economic benefits of the equity interest as well as the governance rights. Thus, it is critical for the secured party to adequately describe the collateral to ensure that the collateral description is broad enough to create a security interest in the economic and governance rights.

A practitioner should be careful about simply using terms like “membership interests,” “limited liability company interests,” or “partnership interests,” which may not be sufficient to encompass economic and governance rights. For example, under the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act, the terms “limited liability company interest” and “partnership interest” under the relevant act simply refers to a person’s right to share in the entity’s profits and losses and the right to receive distributions not governance rights. Delaware Limited Liability Company Act § 18-101(8) and Delaware Revised Uniform Limited Partnership Act § 17-101(13). Thus, a collateral description using the terms “limited liability company interest,” “partnership interest,” or “membership interest” to describe an equity interest in a Delaware entity would not be sufficient to include the governance rights in the secured party’s collateral. Therefore, a secured party that used such a collateral description might find itself with a security interest in the economic rights of such entity only and no ability to cause a distribution of the entity’s assets or to exercise any governance rights.

The second mistake we often see is a failure to perfect the security interest in a manner that provides the secured party with priority over other secured parties with a competing security interest in the collateral. The method of perfection depends on the type of collateral being perfected. Are the equity interests in the alternative entity “general intangibles” or “investment property”? If the equity interests are investment property, the secured party may perfect by filing, control, or possession, but a security interest perfected by control will have priority over a security interest held by a secured party that does not have control of the investment property. UCC § 9-328(l). Again, the mistake we often see here is a failure to realize that the collateral is “investment property” and the secured party’s failure to perfect its security interest by control or possession.

Some of the great benefits of Revised Article 9 are the self-help remedies that enable a secured party to take a number of actions without judicial assistance to realize the value of its collateral in order to satisfy the obligations secured by the security interest. Those self-help remedies include, but are not limited to, strict foreclosure, and selling or otherwise disposing of the collateral to a third party. UCC §§ 9-620 and 9-610. Thus, one of the other mistakes we see is a failure by secured parties to take advantage of the contractual flexibility inherent in most alternative entity statutes to protect its security interest and facilitate such self-help remedies. Furthermore, such a mistake is often compounded by practitioners using corporate stock pledge agreements as precedent and substituting member for shareholder and membership interests for shares, which without more will probably be insufficient to protect fully the interests of the secured party. Also, if practitioners simply follow corporate precedent, he or she may fail to use the entity’s governing document to enhance the secured party’s protection and facilitate many of the self-help remedies available under the UCC.

Thus, as will be described below, the secured party will want to make sure that the security agreement and the entity’s governing documents contain the necessary protections to allow the secured party to effectively, and efficiently, exercise the self-help remedies available to a secured party under the UCC.

Practical Tips

As a general matter, due to the contractual flexibility inherent in most alternative entity statutes, a secured party should take advantage of its ability to build additional protections into the subject entity’s governing documents, and not simply rely upon the representations, warranties, and covenants set forth in the security documents. For example, the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act each contain features that enable creditors to obtain additional rights and protections. Each act specifically permits the governing document to provide rights to a person that is not a party to the governing document. Delaware Limited Liability Company Act § 18-101(7) and Delaware Revised Uniform Limited Partnership Act § 17-101(12). Thus, counsel for the secured party should take steps to marry the contractual flexibility afforded by the alternative entity statutes to the favorable self-help remedies available under the UCC to ensure that the secured party will be able to realize the value of it equity interest collateral upon a default.

First, provide an adequate description of the collateral in connection with the creation of the security interest. Many alternative entity statutes, including Delaware, disaggregate economic rights from the governance rights provided to a holder of equity interests in the alternative entity. Therefore, the description of the collateral set forth in the security agreement that creates the interest must be broad enough to give the secured party a security interest not only in the economic rights but also the governance rights; otherwise if the description is not broad enough a secured party may find itself holding an interest solely in the economic rights that a debtor has in the alternative entities, similar to a charging order. Thus, the collateral description should make clear that it refers to the debtor’s governance rights under the governing document as well as the debtor’s economic rights.

Second, it cannot be emphasized enough: know your collateral. As mentioned above, a secured party should have a good understanding of what type of collateral the equity interests in the alternative entity are for purposes of the UCC. Thus, is the collateral a general intangible or investment property, and if investment property, is it certificated or uncertificated. Each of the foregoing conclusions will influence how a secured party perfects its security interest. In the event that the collateral is a general intangible, a secured party may want to request that the subject alternative entity actually opt-in to Article 8 of the UCC and perfect its security interest therein by control. Not only does opting in have the benefit of providing the secured party with a superior method of perfecting its interest, by control, but because the equity interests will be governed by Article 8, the secured party may in certain cases receive the benefits of being a “protected purchaser” and therefore actually receive an interest in the subject collateral that is superior to the interest of the debtor in such collateral because the secured party may take free of any adverse claims. UCC § 8-303(b). Opting in to Article 8 can be accomplished by executing a short amendment to the subject governing document, which expressly provides that the alternative entity’s equity interests will be governed by Article 8.

Related to knowing your collateral, it is also important that the secured party make sure that the subject collateral stays the same type of collateral after the security interest is perfected. Thus, in order to protect itself, the secured party should certainly build covenants into the security document, but also to the extent permitted by the applicable alternative entity statute, the secured party should hardwire protections into the alternative entity’s governing documents. Hence, a provision should be added to the governing document to prohibit the entity from amending the governing document to opt-in or opt-out of Article 8, as the case may be. Furthermore, for an entity governed by Delaware law, such entity can expressly provide in its governing document that the secured party must consent to any amendment that would change an equity interest’s status as a security or non-security.

Third, provide a mechanism in the documentation to permit the transfer of the equity interests and the admission by a transferee to the alternative entity. In order to fully take advantage of the self-help remedies available to a secured party under the UCC, a secured party should build a mechanism into the security agreement and the subject alternative entity’s governing document to permit the secured party or a third-party transferee of such equity interest to acquire the equity interests and to be admitted to the entity upon an event of default. This is a common pitfall for secured parties seeking to exercise self-help remedies. Unless the secured party takes steps to facilitate a transfer and automatic admission following a default by the debtor, a secured party may find that it is only able to acquire the economic rights under the equity interest. For example, under Delaware law, unless otherwise provided in the governing documents, the secured party’s admission to the alternative entity will require the cooperation of the debtor, and possibly the other equity holders, (Delaware Limited Liability Company Act § 18-301(b) and Delaware Revised Uniform Limited Partnership Act § 17-301(b)), and following a default, the debtor and the other equity holders may not be thrilled to assist the secured party with transferring the interest and admitting the transferee to the entity. Thus, in dealing with an alternative entity where admission is required to exercise governance rights, the parties may want to add a mechanism directly into the governing document whereby upon an event of default, the secured party will be automatically admitted to the entity, or alternatively, in some cases, a power of attorney can be granted to the secured party in order to facilitate such admission.

In addition, the secured party may require that the governing document contain language that structures the entity’s interests more like corporate stock, whereby a transferee succeeds to the transferor’s rights automatically upon transfer without further action on the part of the issuer or its equity holders. Under the Delaware statutes governing alternative entities, it is crucial to make sure that the admission issue is addressed if the entity only has one member or one limited partner because the transfer of the equity interest by the debtor to the secured party will cause the entity to dissolve because it has no members or limited partners. Delaware Limited Liability Company Act § 18-801(4) and Delaware Revised Uniform Limited Partnership Act § 17-801(4). That is the case because under the Delaware laws governing alternative entities, the debtor will cease to be a member or partner, as applicable, following the transfer of the interests and unless the governing document provides for an admission mechanism, the secured party or third-party transferee will not be admitted to the entity, which will cause the entity to lack the requisite partner or member needed to avoid dissolution.

Finally, due to the contractual nature of alternative entities, and particularly in Delaware, which expressly states that the policy of its alternative entity statutes is to give maximum effect to the principle of freedom of contract, the secured party should not merely rely upon the covenants and representations in the loan documents. Thus, instead of relying upon covenant defaults, protections may be added to the governing document that remove from the power and authority of the entity the ability to take certain actions that reduce, or might reduce, the secured party’s protection. As previously mentioned, the governing document should limit the entity’s ability to change the status of the collateral from a security to a non-security or vice versa, and it should prohibit amendments to the governing document that remove other secured party protections. In addition, the secured party may consider adding limitations on the power to issue additional equity interests or limit the authority to make distributions while obligations are outstanding. Thus, the secured parties should take advantage of the ability to enhance their protections in the alternative entity’s governing documents.

Commercial Law
Commercial Law - Secured Transactions
Finance and Financing
Finance and Financing - Commercial Finance
Partnerships and LLCs

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Foreclosing a Perfected Security Interest in LLC Membership Units/Interests

In our most recent edition of The Advisor, we discussed the process for a lender to obtain and perfect a security interest in membership units/interests in a limited liability company (“LLC”), as collateral for a loan. In this edition, we will address the lender’s rights to foreclose its security interest upon the occurrence of an event of a default under the loan.

In the event of a default under the loan, the lender may elect to foreclose its security interest in the LLC membership units/interest. Should the lender make such an election, the lender must exercise its rights under the applicable pledge agreement and the Uniform Commercial Code (“UCC”).

The first step will be for the lender, or its legal counsel, to prepare any notice of default and demand required by the applicable loan documents, providing the pledgor and any other necessary party with lender’s demand for payment and notice of the party’s right to cure the default, if any such right is provided for in the loan documents.

Assuming there is no cure, the lender then must gain control of the pledged membership units/ interests. If the membership units/interests are uncertificated, there is no physical certificate to possess, so control is not an issue. If the membership units/interests are certificated, the lender will generally have obtained possession of the certificates during the loan origination, so control, again, should not be an issue.

Once the membership units/interests are in the lender’s control, the next step is liquidation. The lender will look to the pledge agreement and the LLC’s organizational documents to determine if there is an obligation to first offer the membership units/interests to the LLC or its other members before liquidating the membership units/interests. If there is such a requirement, the terms of the pledge agreement or the LLC’s organizational documents will dictate the process. If not, the lender may proceed to sell the membership units/interests to a third party. In doing so, the primary choice the lender will face is whether to dispose of the membership units/interests by private or public sale. Whether the disposition is public or private dictates the type of “Notice of Disposition” that must be provided prior to the disposition of the membership units/interests.

Prior to preparing a Notice of Disposition, the lender must determine who must be provided with such notice. The UCC requires the lender to provide a Notice of Disposition to the debtor/ pledgor, any secondary obligor (i.e. guarantors), and any party holding a security interest or other lien in the membership units/interests, perfected by the filing of a UCC financing statement (collectively, “Parties of Interest”). Thus, the lender will need to perform a current UCC search on the pledgor to determine if any other security interests or liens encumber the membership units/interests.

The lender then must determine how many days notice must be provided. The UCC provides that ten (10) days notice prior to the disposition is “commercially reasonable”. However, twenty-five (25) days notice prior to the disposition is required when a state or federal tax lien has been filed.

Once the applicable period of notice has elapsed, the lender may dispose of the membership units/interests and apply the net proceeds to the amounts due and owing under the loan. The lender may then look to other collateral, the borrower, or any guarantors for payment of any remaining amounts due under the loan.

Finally, there is an alternative to the lender’s disposition of the membership units/interests—retaining ownership—which is much less frequently utilized. Under this alternative, the lender may accept and retain the membership units/interests in full or partial satisfaction of the debt due and owing. However, the debtor/pledgor must provide consent to the lender after the default (in the event of a partial satisfaction of the debt) or fail to object to the lender’s acceptance of the membership units/interests, after being provided with notice of lender’s intent to do so (in the event of a full satisfaction of the debt). Given that the relationship with the debtor/pledgor is often strained after the occurrence of an event of default, and that lenders typically do not desire to retain ownership of foreclosed collateral, this alternative is rarely utilized.

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Assignment of Membership Interest: The Ultimate Guide for Your LLC

LegalGPS : May 9, 2024 at 12:00 PM

As a business owner, there may come a time when you need to transfer ownership of your company or acquire additional members. In these situations, an assignment of membership interest is a critical step in the process. This blog post aims to provide you with a comprehensive guide on everything you need to know about the assignment of membership interest and how to navigate the procedure efficiently. So, let's dive into the world of LLC membership interest transfers and learn how to secure your business!

Necessary approvals and consent, impact on ownership, voting, and profit rights, complete assignment, partial assignment.

Key elements to include

Step 1: Gather Relevant Information

Step 2: review the llc's operating agreement, step 3: obtain necessary approvals and consents, step 4: outline the membership interest being transferred, step 5: determine the effective date of the assignment, step 6: specify conditions and representations, step 7: address tax and liability issues, step 8: draft the entire agreement and governing law clauses, step 9: review and sign the assignment agreement.

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Frequently Asked Questions (FAQs) about Assignment of Membership Interest

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What is an Assignment of Membership Interest?

An assignment of membership interest is a document that allows a member of an LLC to transfer their ownership share in the company to another person or entity. This can be done in the form of a sale or gift, which are two different scenarios that generally require different types of paperwork. An assignment is typically signed by the parties involved and delivered to the Secretary of State's office for filing. However, this process can vary depending on where you live and whether your LLC has members other than yourself as well as additional documents required by state law.

Before initiating the assignment process, it's essential to review the operating agreement of your LLC, as it may contain specific guidelines on how to assign membership interests.

Often, these agreements require the express consent of the other LLC members before any assignment can take place. To avoid any potential disputes down the line, always seek the required approvals before moving forward with the assignment process.

It's essential to understand that assigning membership interests can affect various aspects of the LLC, including ownership, voting rights, and profit distribution. A complete assignment transfers all ownership rights and obligations to the new member, effectively removing the original member from the LLC. For example, if a member assigns his or her interest, the new member inherits all ownership rights and obligations associated with that interest. This includes any contractual obligations that may be attached to the membership interest (e.g., a mortgage). If there is no assignment of interests clause in your operating agreement, then you will need to get approval from all other members for an assignment to take place.

On the other hand, a partial assignment permits the original member to retain some ownership rights while transferring a portion of their interest to another party. To avoid unintended consequences, it's crucial to clearly define the rights and responsibilities of each party during the assignment process.

Types of Membership Interest Transfers

Membership interest transfers can be either complete or partial, depending on the desired outcome. Understanding the differences between these two types of transfers is crucial in making informed decisions about your LLC.

A complete assignment occurs when a member transfers their entire interest in the LLC to another party, effectively relinquishing all ownership rights and obligations. This type of transfer is often used when a member exits the business or when a new individual or entity acquires the LLC.

For example, a member may sell their interest to another party that is interested in purchasing their share of the business. Complete assignment is also used when an individual or entity wants to purchase all of the interests in an LLC. In this case, the seller must receive unanimous approval from the other members before they can transfer their entire interest.

Unlike a complete assignment, a partial assignment involves transferring only a portion of a member's interest to another party. This type of assignment enables the member to retain some ownership in the business, sharing rights, and responsibilities proportionately with the new assignee. Partial assignments are often used when adding new members to an LLC or when existing members need to redistribute their interests.

A common real-world example is when a member receives an offer from another company to purchase their interest in the LLC. They might want to keep some ownership so that they can continue to receive profits from the business, but they also may want out of some of the responsibilities. By transferring only a partial interest in their membership share, both parties can benefit: The seller receives a lump sum payment for their share of the LLC and is no longer liable for certain financial obligations or other tasks.

How to Draft an Assignment of Membership Interest Agreement

A well-drafted assignment of membership interest agreement can help ensure a smooth and legally compliant transfer process. Here is a breakdown of the key elements to include in your agreement, followed by a step-by-step guide on drafting the document.

Key elements to include:

The names of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name of your LLC and the state where it was formed

A description of the membership interest being transferred (percentage, rights, and obligations)

Any required approvals or consents from other LLC members

Effective date of the assignment

Signatures of all parties involved, including any relevant witnesses or notary public

Before you begin drafting the agreement, gather all pertinent data about the parties involved and the membership interest being transferred. You'll need information such as:

The names and contact information of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name and formation details of your LLC, including the state where it was registered

The percentage and value of the membership interest being transferred

Any specific rights and obligations associated with the membership interest

Examine your LLC's operating agreement to ensure you adhere to any predetermined guidelines on assigning membership interests. The operating agreement may outline specific procedures, required approvals, or additional documentation necessary to complete the assignment process.

If your LLC doesn't have an operating agreement or if it's silent on this matter, follow your state's default LLC rules and regulations.

Before drafting the assignment agreement, obtain any necessary approvals or consents from other LLC members as required by the operating agreement or state law. You may need to hold a members' meeting to discuss the proposed assignment and document members' consent in the form of a written resolution.

Detail the membership interest being transferred in the Assignment of Membership Interest Agreement. Specify whether the transfer is complete or partial, and include:

The percentage of ownership interest being assigned

Allocated profits and losses, if applicable

Voting rights associated with the transferred interest

The assignor's rights and obligations that are being transferred and retained

Any capital contribution requirements

Set an effective date for the assignment, which is when the rights and obligations associated with the membership interest will transfer from the assignor to the assignee.

This date is crucial for legal and tax purposes and helps both parties plan for the transition. If you don’t specify an effective date in the assignment agreement, your state's law may determine when the transfer takes effect.

In the agreement, outline any conditions that must be met before the assignment becomes effective. These could include obtaining certain regulatory approvals, fulfilling specific obligations, or making required capital contributions.

Additionally, you may include representations from the assignor attesting that they have the legal authority to execute the assignment. Doing this is important because it can prevent a third party from challenging the assignment on grounds of lack of authority. If the assignor is an LLC or corporation, be sure to specify that it must be in good standing with all necessary state and federal regulatory agencies.

Clearly state that the assignee will assume responsibility for any taxes, liabilities, and obligations attributable to the membership interest being transferred from the effective date of the assignment. You may also include indemnification provisions that protect each party from any potential claims arising from the other party's actions.

For example, you can include a provision that provides the assignor with protection against any claims arising from the transfer of membership interests. This is especially important if your LLC has been sued by a member, visitor, or third party while it was operating under its current management structure.

In the closing sections of the assignment agreement, include clauses stating that the agreement represents the entire understanding between the parties concerning the assignment and supersedes any previous agreements or negotiations. Specify that any modifications to the agreement must be made in writing and signed by both parties. Finally, identify the governing law that will apply to the agreement, which is generally the state law where your LLC is registered.

This would look like this:

Once you've drafted the Assignment of Membership Interest Agreement, ensure that all parties carefully review the document to verify its accuracy and completeness. Request a legal review by an attorney, if necessary. Gather the assignor, assignee, and any necessary witnesses or notary public to sign the agreement, making it legally binding.

Sometimes the assignor and assignee will sign the document at different times. If this is the case, then you should specify when each party must sign in your Assignment Agreement.

Importance of a Professionally-drafted Contract Template

To ensure a smooth and error-free assignment process, it's highly recommended to use a professionally-drafted contract template. While DIY options might seem tempting, utilizing an expertly-crafted template provides several distinct advantages.

Advantages of using a professionally-created template:

Accuracy and Compliance: Professionally-drafted templates are designed with state-specific regulations in mind, ensuring that your agreement complies with all necessary legal requirements.

Time and Cost Savings: With a pre-written template, you save valuable time and resources that can be better spent growing your business.

Reduced Legal Risk: Legal templates created by experienced professionals significantly reduce the likelihood of errors and omissions that could lead to disputes or litigations down the road.

How our contract templates stand out from the rest:

We understand the unique needs of entrepreneurs and business owners. Our contract templates are designed to provide a straightforward, user-friendly experience that empowers you with the knowledge and tools you need to navigate complex legal processes with ease. By choosing our Assignment of Membership Interest Agreement template, you can rest assured that your business is in safe hands. Click here to get started!

As you embark on the journey of assigning membership interest in your LLC, here are some frequently asked questions to help address any concerns you may have:

Is an assignment of membership interest the same as a sale of an LLC? No. While both processes involve transferring interests or assets, a sale of an LLC typically entails the sale of the entire business, whereas an assignment of membership interest relates to the transfer of some or all membership interests between parties.

Do I need an attorney to help draft my assignment of membership interest agreement? While not mandatory, seeking legal advice ensures that your agreement complies with all relevant regulations, minimizing potential legal risks. If you prefer a more cost-effective solution, consider using a professionally-drafted contract template like the ones we offer at [Your Company Name].

Can I assign my membership interest without the approval of other LLC members? This depends on your LLC's operating agreement and state laws. It's essential to review these regulations and obtain any necessary approvals or consents before proceeding with the assignment process.

The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes ( especially if you have multiple owners ). But often for single-owner businesses, you don't need a lawyer to start your business .

Many business owners instead use tools like Legal GPS for Business , which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.

We hope this guide provides valuable insight into the process of assigning membership interest in your LLC. By understanding the legal requirements, implications, and steps involved, you can navigate this essential task with confidence. Ready to secure your business with a professionally-drafted contract template? Visit our website to purchase the reliable and user-friendly Assignment of Membership Interest Agreement template that enables your business success.

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Treasury and IRS release guidance on partnership “basis shifting” transactions

Guidance documents related to certain “basis-shifting” transactions involving partnerships and related parties

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The U.S. Treasury Department and IRS today released three guidance documents related to certain “basis-shifting” transactions involving partnerships and related parties.

As explained in the related IRS release— FS-2024-21 (June 17, 2024)—the basis shifting transactions targeted in the new guidance generally fall into three groups:

Transfer of partnership interest to related party: In this transaction, a partner with a low share of the partnership’s “inside” tax basis and a high “outside” tax basis transfers the interest in a tax-free transaction to a related person or to a person who is related to other partners in the partnership. This related-party transfer generates a tax-free basis increase to the transferee partner’s share of “inside” basis.
Distribution of property to a related party: In this transaction, a partnership with related partners distributes a high-basis asset to one of the related partners that has a low outside basis. After this, the distributee partner reduces the basis of the distributed asset and the partnership increases the basis of its remaining assets. The related partners can arrange this transaction so that the reduced tax basis of the distributed asset will not adversely impact the related partners, while the basis increase to the partnership’s retained assets can produce tax savings for the related parties.
Liquidation of related partnership or partner: In this transaction, a partnership with related partners liquidates and distributes (1) a low-basis asset that is subject to accelerated cost recovery or for which the parties intend to sell to a partner with a high outside basis. and (2) a high-basis property that is subject to longer cost recovery (or no cost recovery at all) or for which the parties intend to hold to a partner with a low outside basis. Under the partnership liquidation rules, the first related partner increases the basis of the property with a shorter life or which is held for sale while the second related partner decreases the basis of the long-lived or non-depreciable property, with the result that the related parties generate or accelerate tax benefits.

The guidance generally only impacts partnerships when partners are related parties. For purposes of the guidance, partners and other persons would be considered as related if they have a relationship described in section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1) immediately before or immediately after a transaction. However, the guidance would impact certain transactions not involving related parties – including where a party is tax-exempt, foreign (in certain cases) or has a tax-attribute precluding the recognition of gain (in certain cases).

Notice 2024-54 announces forthcoming regulations

To address these transactions, the Treasury Department and IRS today released Notice 2024-54 announcing two sets of upcoming regulations:

The first set would require partnerships to treat basis adjustments arising from covered transactions in a way that would restrict them from deriving inappropriate tax benefits from the basis adjustments. The notice further announces that the covered transactions governed by these regulations would involve basis adjustments under sections 732, 734(b) and/or 743(b).
The second set would provide rules to ensure clear reflection of the taxable income and tax liability of a consolidated group of corporations when members of the group own interests in partnerships. According to the guidance, regulations would apply a single-entity approach to partnership interests held by various members of a consolidated group.

The notice states that the Treasury Department and IRS intend to propose that the first set of regulations apply to tax years ending on or after June 17, 2024. That is, once finalized, the regulations would govern the availability and amount of cost recovery deductions and gain or loss calculations for tax years ending on or after June 17, 2024, even if the relevant covered transaction was completed in a prior taxable year. The effective date for the second set of regulations will be proposed in the upcoming proposed regulations.

Proposed regulations identifying certain partnership basis shifting transactions as transactions of interest

In addition, the Treasury Department and IRS today released proposed regulations (REG-124593-23) that would identify certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest (TOI), a type of reportable transaction.

The TOIs generally involve positive basis adjustments of $5 million or more under section 732(b) or (d), 734(b), or 743(b), for which no corresponding tax is paid. The transactions would include either a distribution of partnership property to a partner that is related to one or more other partners in the partnership, or the transfer of a partnership interest in which the transferor is related to the transferee, or the transferee is related to one or more of the partners. In these transactions, the basis increase allows related parties an opportunity for decreasing their taxable income through increased cost recovery deductions or through decreasing their taxable gain (or increasing their taxable loss) on the subsequent transfer of the property in a transaction in which gain or loss is recognized in whole or in part.

The proposed regulations are proposed to apply as of the date of publication of final regulations in the Federal Register. However, taxpayers and their advisors should note that they may be required to report transactions that occurred prior to the date of publication of the final regulations.

Comments on the proposed regulations, as well as requests to speak and outlines for topics to be discussed at a public hearing (scheduled for September 17, 2024, at 10:00 AM ET), are due by August 19, 2024. If no outlines are received by that date, the public hearing will be cancelled.

Revenue Ruling 2024-14 clarifies application of economic substance doctrine to partnership basis-shifting transactions

Finally, the Treasury Department and IRS today released Rev. Rul. 2024-14 clarifying when the economic substance doctrine may apply to disallow tax benefits associated with basis-shifting transactions involving partnerships and related parties.

In particular, Rev. Rul. 2024-14 announces that the economic substance doctrine will be raised in cases when related parties:

Create inside/outside basis disparities through various methods, including the use of certain partnership allocations and distributions
Capitalize on the disparity by either transferring a partnership interest in a nonrecognition transaction or making a current or liquidating distribution of partnership property to a partner
Claim a basis adjustment under sections 732(b), 734(b), or 743(b) resulting from the nonrecognition transaction or distribution

Read another related IRS release— IR-2024-166 (June 17, 2024)

The purpose of this TaxNewsFlash is to provide a high-level summary of these guidance documents. Another TaxNewsFlash will be released shortly providing initial analysis and observations on the guidance.

The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 3712, 1801 K Street NW, Washington, DC 20006.

Collateral Assignment

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A collateral assignment involves granting a security interest in the asset or property to a lender. It is a lawful arrangement where the borrower promises an asset or property to the lender to guarantee the debt repayment or meet a financial obligation. Moreover, in a collateral assignment, the borrower maintains asset ownership, the lender holds the security interest, and the lender has the right to seize and sell the asset in event of default. This blog post will discuss a collateral assignment, its purpose, essential considerations, and more.

Key Purposes of a Collateral Assignment

Collateral assignment concerns allocating a property's ownership privileges, or a specific interest, to a lender as loan collateral. The lender retains a security interest in the asset until the borrower entirely settles the loan. If the borrower defaults on loan settlement, the lender can seize and market the collateral to recover the unpaid debt. Below are the key purposes of a collateral assignment.

Enhanced Lender Protection: The primary purpose of the collateral assignment is to provide lenders with an added layer of security and assurance. Also, by maintaining a claim on the borrower's properties, lenders lower their risk and improve the probability of loan settlement. In case of default, the lender can sell the collateral to recover the unpaid balance. This security authorizes lenders to offer loans with lower interest rates, as the threat associated with the loan is reduced.
Favorable Loan Terms: Collateral assignment allows borrowers to access financing on more favorable terms than unsecured loans . However, the terms of the loan will vary depending on the borrower’s creditworthiness and the value of the collateral. Generally, lenders are more willing to extend larger loan amounts and lower interest rates when they have collateral to fall back on. The presence of collateral reassures lenders that they have a viable means of recouping their investment, even in case of default. This increased confidence often leads to more competitive loan offers for borrowers.
Unlocking Asset Value: Collateral assignment enables borrowers to leverage the value of their assets, even if those assets are not readily convertible into cash. For instance, a business owner with valuable machinery can assign it as collateral to secure a business loan. This arrangement allows the borrower to continue utilizing the asset for operational purposes while accessing the necessary funds for expansion or working capital. Collateral assignment, thus, enables the efficient allocation of resources. However, the collateral will still be considered in determining the loan amount and terms.
Access to Higher Loan Amounts: When borrowers promise collateral against a loan, lenders can present greater loan amounts than for other unsecured loans. The worth of the collateral serves as a reassurance to lenders that they can recover their investment even if the borrower fails to settle the loan. Therefore, borrowers can obtain higher loans to finance important endeavors such as purchasing property, starting a business, or funding major projects.
Diversification of Collateral: Collateral assignment offers flexibility for borrowers by allowing them to diversify their collateral base. While real estate is commonly used as collateral, borrowers can utilize other valuable assets such as investment portfolios, life insurance policies, or valuable personal belongings. This diversification allows borrowers to access financing without limiting themselves to a single asset, thereby preserving their financial flexibility.

Steps to Execute a Collateral Assignment

A collateral assignment is a financial procedure that involves utilizing an asset as security for a loan or other responsibilities. Below are the essential steps involved in the collateral assignment process.

Assess the Need for Collateral Assignment. The initial step in collateral assignment is determining whether collateral is necessary. Lenders or creditors may require collateral to mitigate the risk of default or ensure repayment. Evaluating the value and marketability of the proposed collateral is crucial to ascertain if it meets the lender's requirements.
Select Appropriate Collateral. The next step involves choosing a suitable asset for collateral assignment. Common classifications of collateral comprise stocks, real estate, bonds, cash deposits, and other valuable assets. The collateral's value should be sufficient to cover the loan amount or the obligation being secured.
Understand Lawful and Regulatory Requirements. Before proceeding with collateral assignment, it is essential to comprehend the lawful and regulatory provisions specific to the jurisdiction where the transaction happens. Collateral assignment laws can vary, so seeking advice from legal professionals experienced in this area is advisable to ensure compliance.
Negotiate Provisions. Once the collateral is recognized, the collateral assignment provisions must be negotiated among the concerned parties. It includes specifying the loan amount, interest rates, repayment terms, and any further duties or limitations associated with the collateral assignment.
Prepare the Collateral Assignment Agreement. The collateral assignment agreement is a lawful document that typically includes details about the collateral, the loan or obligation being secured, and the rights and responsibilities of both parties. It is highly advised to engage the services of a legal specialist to prepare or review the contract.
Enforce the Collateral Assignment Agreement. After completing the collateral assignment agreement, it must be executed by all involved parties. This step ensures that all necessary signatures are obtained and copies of the agreement are distributed to each individual for record-keeping objectives.
Notify Relevant Parties. To ensure proper recognition and recording of the collateral assignment, it is important to notify all relevant parties. It may involve informing the lender or creditor, the custodian or holder of the collateral, and any other pertinent stakeholders. Sufficient documentation and communication will help prevent potential disputes or misunderstandings.
Record the Collateral Assignment. Depending on the nature of the collateral, it may be necessary to record the collateral assignment with the appropriate government authority or registry. This step provides public notice of the assignment and establishes priority rights in case of multiple claims on the same collateral. Seeking guidance from legal professionals or relevant authorities can determine if recording the collateral assignment is required.
Monitor and Maintain the Collateral. Throughout the collateral assignment term, it is crucial to monitor and maintain the value and condition of the collateral. This includes ensuring insurance coverage, property maintenance, and compliance with any ongoing obligations associated with the collateral. Regular communication between all parties involved is essential to address concerns or issues promptly.
Terminate the Collateral Assignment. Once the loan or obligation secured by the collateral is fully satisfied, the collateral assignment can be terminated. This involves releasing the collateral from the assignment, updating relevant records, and notifying all parties involved. It is important to follow proper procedures to ensure the appropriate handling of the legal and financial aspects of the termination.

Key Terms for Collateral Assignments

Security Interest: It is the legal right granted to a lender over the assigned collateral to protect their interests in case of borrower default.
Collateral Valuation: The process of determining the worth or market value of the assigned collateral to assess its adequacy in securing the loan.
Release of Collateral: The action taken by a lender to relinquish its claim over the assigned collateral after the borrower has fulfilled the loan obligations.
Subordination Agreement : A legal document that establishes the priority of multiple creditors' claims over the same collateral, typically in the case of refinancing or additional loans.
Lien : A legal claim or encumbrance on a property or asset, typically created through a collateral assignment, that allows a lender to seize and sell the collateral to recover the loan amount.

Final Thoughts on Collateral Assignments

A collateral assignment is a valuable instrument for borrowers and lenders in securing loans or obligations. It offers borrowers access to profitable terms and more extensive loan amounts while reducing the risk for lenders. Nevertheless, it is essential for borrowers to thoughtfully assess the terms and threats associated with collateral assignment before proceeding. Seeking professional guidance and understanding the contract can help ensure a successful and beneficial financial arrangement for all parties involved.

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IMAGES

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COMMENTS

PDF Expert Q&A on Current Issues with LLC/LP Interests as Collateral
interest, for example governance rights and economic rights. These same issues also apply to LP interests. If parties are not familiar with these state law issues, they should consult local counsel. Interests in LLCs and LPs are often important collateral for a secured party and this collateral raises additional issues for counsel compared to a ...
Using Limited Liability Company Interests and Limited Partnership
Unlike corporate stock, equity interests in an alternative entity may not always be the same type of collateral for purposes of the UCC. Equity interests in limited liability companies and partnerships can be a "general intangible" or "investment property." UCC §§ 9-102 (a) (49) and 9-102 (a) (42). Unless the alternative entity has taken ...
Collateral Assignment Of An Entity Interest
Assignment of a debtor's interest in an LLC or partnership can be a valuable and useful form of collateral. But the creditor should follow the money and remain mindful of the Zokaites decision by taking a pledge of the economic rights and leaving the governance rights alone, unless all of the entity owners consent. 1.
LLC Membership Interests as Collateral
LLC Membership Interests as Collateral. It is not uncommon for lenders to take a security interest in a business owner's ownership interest in the corporation, LLC, limited partnership or other entity as collateral for a loan to the business. For the most part, the transactions are documented through a standard pledge or assignment (the ...
Current Issues with LLC/LP Interests as Collateral
An expert Q&A on recent trends relating to pledges of limited liability company (LLC) or limited partnership (LP) ownership interests as collateral in connection with secured financings.
Collateral Assignment of Partnership Interests
2.1. Grant of Security Interest. The Assignor hereby pledges, grants a security interest in, mortgages, and collaterally assigns and transfers to the Assignee, as security for the payment and performance in full when due of all of the Obligations, all the right, title and interest of the Assignor in and to the Assignor's partnership interests in the Partnership, wherever located and whether ...
PDF Secured TranSacTionS Partnership, LLC Interests And Anti-Assignment Rules E
restrictions on assignment. A security interest in general intangibles consisting of LLC or partnership interests is perfected by filing.4 To perfect a lien on a security, a secured party can file a financing statement, obtain control of the security or take possession of a certificated security.5 A secured party can obtain control of a ...
PDF LLC/Partnerships Interests: Collateral, Pledges, and Security Interests
Delaware LLC Act. § 18-702(a) - economic rights are assignable in whole or in part except as provided in the LLC agreement. § 18-702(b)(1) - unless the LLC agreement provides otherwise an assignment of an LLC interest does not entitle the assignee to become or exercise any rights or powers of a member.
LLCs/LPs: Assignment of LLC/LP Interests (Short Form)
An assignment of limited liability company (LLC) interests or limited partnership (LP) interests operates in the same way as a stock power. If collateral in a loan transaction includes LLC interests or LP interests that are classified under the UCC as certificated securities, the secured party typically requires delivery of any certificates representing these interests together with signed and ...
Assignment of Interest In LLC: Everything You Need to Know
The assignment of interest may happen as collateral to a loan to one of the members. Some members can assign interest to settle debts. The assignment will be effective until the debt is cleared. An assignment of interest can also' be done to a member's legal heirs, going into effect upon the death of a member.
Structuring Pledge Agreements for Equity Interests in Partnerships and
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 ...
Delaware Limited Liability Company Interests as Collateral
Obviously, foreclosing on the LLC interests provides limited benefit to the lender if the control rights remain with the pledgor. Anti-Assignment Provisions As noted above, the DE LLC Act provides that an LLC Agreement can expressly restrict the assignability of the economic rights associated with LLC interests. In most jurisdictions, secured ...
Membership Interests in a Limited Liability Company as Collateral
A limited liability company ("LLC") is one of the most commonly chosen entity structures used by new businesses today. LLCs are owned by its members, who hold either membership units or membership interests. Membership units/interests consist of both financial and governance rights, although a particular member may have financial rights but ...
Taking Security Interests in Equity Collateral
Pursuant to applicable state law, a security interest attaches to collateral only when it becomes enforceable against a debtor; because the debtor did not have the power to transfer his rights in the companies under the operating agreements, the attempted assignment of interests was invalid. Weiss, 376 B.R. at 876-79.
Taking a security interest in a closely held business
It is common for closely-held business entities to prohibit an assignment of an owner's interest or require as a condition to an assignment the consent of the other owners of the entity. This ...
Using LLC Interests and Limited Partnership Interests as Collateral
Unlike corporate stock, equity interests in an alternative entity may not always be the same type of collateral for purposes of the UCC. Equity interests in limited liability companies and partnerships can be a "general intangible" or "investment property.". UCC §§ 9-102 (a) (49) and 9-102 (a) (42). Unless the alternative entity has ...
Foreclosing a Perfected Security Interest in LLC Membership Units
In the event of a default under the loan, the lender may elect to foreclose its security interest in the LLC membership units/interest. Should the lender make such an election, the lender must exercise its rights under the applicable pledge agreement and the Uniform Commercial Code ("UCC"). The first step will be for the lender, or its ...
Collateral Assignment of Limited Partnership Interests
1. Assignment for Security. This Assignment is made for collateral security purposes only. This Assignment is made to secure the Secured Obligations (hereinafter defined) and Assignor s obligations hereunder, and nothing herein shall constitute Bank a partner of. the Partnership or impose any liability whatsoever on Bank in connection with the ...
Assignment of Membership Interest: The Ultimate Guide for Your LLC
Step 4: Outline the Membership Interest Being Transferred. Step 5: Determine the Effective Date of the Assignment. Step 6: Specify Conditions and Representations. Step 7: Address Tax and Liability Issues. Step 8: Draft the Entire Agreement and Governing Law Clauses. Step 9: Review and Sign the Assignment Agreement.
EX-10.11
Exhibit 10.11 . COLLATERAL ASSIGNMENT OF INTERESTS . THIS COLLATERAL ASSIGNMENT OF INTERESTS (this "Assignment"), dated as of December 17, 2014, by CARTER VALIDUS OPERATING PARTNERSHIP II, LP, a Delaware limited partnership ("Assignor"), to KEYBANK NATIONAL ASSOCIATION ("KeyBank"), as the Agent for itself and other Lenders from time to time party to the Credit Agreement (as ...
Treasury and IRS release guidance on partnership "basis shifting
In addition, the Treasury Department and IRS today released proposed regulations (REG-124593-23) that would identify certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest (TOI), a type of reportable transaction.. The TOIs generally involve positive basis adjustments of $5 million or more under section 732(b) or (d ...
Collateral Assignment of Partnership Interests definition
Define Collateral Assignment of Partnership Interests. means, collectively (i) the Collateral Assignment of Partnership Interests dated as of the Closing Date between the Borrower, Lincare Inc. and the Agent and (ii) each Collateral Assignment of Partnership Interests substantially in the form of Exhibit L delivered to the Agent pursuant to Section 8.19 hereof as any of the foregoing may be ...
Converted by EDGARwiz
The Assignor understands and agrees that notwithstanding this assignment, its General Partnership Interest in the Limited Partnership and its rights under the Management Agreement and the Franchise Agreements are included in Collateral as that term is defined in the Development Line Agreement and are subject to the terms and conditions of the ...
Collateral Assignment: All You Need to Know
A collateral assignment involves granting a security interest in the asset or property to a lender. It is a lawful arrangement where the borrower promises an asset or property to the lender to guarantee the debt repayment or meet a financial obligation. Moreover, in a collateral assignment, the borrower maintains asset ownership, the lender ...

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Collateral Assignment

Key Purposes of a Collateral Assignment

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