llc and partnership transfer restrictions and ucc article 9...

LLC and Partnership Transfer Restrictions and

UCC Article 9 Overrides: Resolving the Conflict

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

THURSDAY, JANUARY 9, 2020

Presenting a 90-minute encore presentation featuring live Q&A

Professor Carl S. Bjerre, Kaapcke Professor of Business Law, University of Oregon, Eugene, Ore.

Daniel S. Kleinberger, Professor of Law Emeritus, Mitchell Hamline School of Law, St. Paul, Minn.

Edwin E. Smith, Partner, Morgan, Lewis & Bockius, New York and Boston

Steven O. Weise, Partner, Proskauer Rose, Los Angeles

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-877-447-0294 and enter your Conference ID and PIN when prompted.

Otherwise, please send us a chat or e-mail [email protected] immediately

so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the ‘Full Screen’ symbol located on the bottom

right of the slides. To exit full screen, press the Esc button.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the link to the PDF of the slides for today’s program, which is located

to the right of the slides, just above the Q&A box.

• The PDF will open a separate tab/window. Print the slides by clicking on the

printer icon.

FOR LIVE EVENT ONLY

Intersection of UCC and LLC Law

LLC and Partnership Transfer Restrictions and UCC Article 9 Overrides: Resolving the Conflict

Carl S. BjerreUniversity of Oregon School of Law

Daniel S. Kleinberger

Mitchell Hamline School of Law

Edwin E. Smith

Morgan, Lewis & Bockius LLP

Steven O. Weise

Proskauer Rose LLP


Overview

•Overall goals of organic entity law versus UCC Article 9

•Anti-assignment overrides as currently on the books

•Opting in to Article 8 status

•2018 amendments to UCC overrides

2


I. Background

•LLC and partnership law

o “Pick your partner” principle

•UCC Article 9

o Enable financing based on personal property

•Possibility of clashes between the two

3


Entity law’s bifurcation of rights

•Governance rights

o Voting

o Consents

o Information

•Economic (financial) rights

o Distributions

•Most ownership interests include both

4


Typical statutory default rules

•Restriction on transfer of governance rights. E.g.:o ULLCA § 401(c)o Delaware act § 18-702(b)(1)

•Enabling of transfer of economic rights. E.g.:o ULLCA § 502(a)(1)o Delaware act § 18-702(a)

5


Possibility of alteration in organic documents

•Transfer of governance rights may be enabled

•Transfer of economic rights may be restricted

o E.g., to ensure those with governance rights also have an economic stake

6


Scope of Article 9 and hence its overrides

•Transfers as ordinary security interests

o All personal property

•Outright sales

o Only certain property

▪ Generally, subtypes of receivables

7


Article 9 property “types”

•Most not germane here

o Goods (incl. inventory, etc.); chattel paper; accounts; deposit accounts; etc.

•Focus here is on general intangibles, incl. payment intangibles

•Also investment property (Part III below)

8


Caution regarding non-UCC terminology

•Delaware LLC Act defines “limited liability company interest” as covering economic rights only

•New York LLC Act defines “membership interest” as covering both economic and governance rights

•Informal terms “interests,” “units,” etc.

9


Important formulation concerning economic rights

•ULLCA definition of “transferable interest”•“the right, as initially owned by a person in

the person’s capacity as a member, to receive distributions from a limited liability company, whether or not the person remains a member or continues to own any part of the right. The term applies to any fraction of the interest, by whomever owned.”o ULLCA § 102(24)

10


General intangibles and payment intangibles

•Article 9’s catch-all or residual type

o § 9-102(a)(42)

•Important subtype of the catch-all: “payment intangible”

o “principal obligation” of the “account debtor” is “a monetary obligation.” § 9-102(a)(62)

11


Further on “payment intangibles”

• Definition of “account debtor,” § 9-102(a)(3)o obligated on the general intangibleo the LLC or partnership itself o not generally its members or partners

• Is the account debtor’s “principal obligation” “monetary”?o Are there any substantial governance rights?o Complete ownership interest will generally

not be payment intangible

12


Article 9’s relevant scope

•“security interest in personal property,” § 9-109(a)(1)

•“sale of . . . payment intangibles,” § 9-109(a)(3)

o Not other general intangibles

•See also § 1-201(b)(35) (security interest includes interest of a buyer of a payment intangible)

13


First look at scope of overrides

• Restrictions on “assignment or transfer” of general intangibles, including payment intangibles, are overriddeno Ordinary security interests in:

▪ payment intangibles▪ other general intangibles

o Sales of payment intangibleso Not sales of other general intangibles,

implicitly• Ignoring other receivables here

14


“assignment or transfer”

•§ 9-102 cmt. 26: “assignment” generally refers to transfers of payment rights, among other property

•“Depending on the context,” term may refer to “outright ownership interest” or “limited interest, such as a security interest”

15


“assignment or transfer” cont’d

• Durham Capital Corp. v. Ocwen Loan Servicing, LLC, 777 Fed.Appx. 952 (11th Cir. 2019) seems to misconstrue “assignee”o Ordinary secured lender to law firm instructed

client to pay lender rather than law firm. See UCC §9-406(a).

o Client nonetheless continued to pay law firm. o Held, lender has no cause of action against client,

apparently based at least in part on definition of “assignee”

• Possibility of P.E.B. Commentary highlighting existing analysis in § 9-102 cmt. 26

16


II. Closer look at the overrides

•§ 9-406: narrow although strong

•§ 9-408: broader but weaker

•Difficult because:

o Dense content

o Similarity of formulations

o Intricate coordination with each other

o Important difference in consequences

17


Central text of § 9-406 override

•Subsection (d) invalidates any “term in an agreement between an account debtor and an assignor” . . .

•to the extent that the term “prohibits, restricts, or requires the consent of . . . the account debtor” . . .

•to “the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in . . . the payment intangible.”

18


Narrowness of § 9-406

•Applies only to payment intangibles

•Applies only to ordinary security interests in them

o Subsection (e) specifies generally inapplicable to sales

•Applies only to restrictions in agreements, not statutes (except on types of collateral not relevant here)

19


Narrowness of § 9-406, cont’d

•Agreements covered are only those with “the account debtor"

o Not agreements with other equity owners

o Is the LLC or partnership even a party to its own organizational agreement?

20


Narrowness of § 9-406, cont’d

•Summing up:

o No override for outright transfers of complete ownership interests

o No override of requirements of consent from transferor’s fellow owners

•But N.B. its strength: “enforcement”

21


Central text of § 9-408 override

•Subsection (a) invalidates any “term in an agreement between an account debtor and a debtor which relates to . . . a general intangible” . . .

•that “prohibits, restricts, or requires the consent of . . . the account debtor” . . .

•to “the assignment or transfer of, or creation, attachment, or perfection of a security interest in . . . the . . . general intangible.”

22


Central text of § 9-408 override, cont’d

•Subsection (c) invalidates any “provision of a statute or other rule of law” . . .

• that similarly “prohibits, restricts, or requires the consent of . . . [an] account debtor” . . .

•to “the assignment or transfer of, or creation of a security interest in, a . . . general intangible.”

23


Breadth of § 9-408

• Applies to general intangibleso Including but not limited to payment

intangibleso Applies to security interests in general

intangibles that are not payment intangibleso Applies to outright sales of payment

intangibleso Overrides restrictions whether in agreements

(again provided they are with the account debtor) or in statutes

24


Important issue affecting both of the overrides

• Suppose LLC is manager-managedo Also suppose the operating agreement

allocates approvals of transfers to the manager on behalf of LLC

• Manager is agent of LLC• LLC may be party to operating agreement

o Or deemed by statute to be a party• Possible result: LLC would be the account

debtor, and the Article 9 overrides would apply

25


Breadth of § 9-408 (concl.)

•Summing up:o Does apply to outright transfers of

complete ownership interests

▪ Even those otherwise barred by statute, as is nearly universal

o Also applies to ordinary security interests in complete ownership interests

o As well as to outright sales of economic rights

26


Relative weakness of § 9-408

• In all of the above applications, applies to “attachment, creation, or perfection” of the interest

• Not to “enforcement” thereof• Subsection (d) makes explicit that a security

interest that is subject to an otherwise enforceable restriction is o “not enforceable” against the “account

debtor,” and “does not entitle the secured party to enforce the security interest.”

27


Relative weakness of § 9-408, cont’d

•Transaction goes forward as between the parties

•Relationship between transferee and LLC or partnership is separate matter

•Transferee’s property rights remain valuable, e.g.:o If proceeds take different form o If later consent of required parties

28


More on enforcement

•2010 amendments to Article 9 clarify that § 9-406(d)’s inapplicability to a sale of a payment intangible does not preclude a secured party from conducting a foreclosure sale (§ 9-610) or accepting the collateral in satisfaction of debt (9-620).

29


Foreclosure strategy and trap

Owner

Guaranty +

security interest in

equity in Borrower

Ownership

Borrower

Security

interest

Secured

party

Payment

obligation

Loan

30


Foreclosure strategy and trap (cont’d)

Owner

Foreclose on

ownership interest

Ownership

Borrower

Security

interest

Secured

party

Payment

obligation

Subrogated to

security interest

Subrogated to

payment obligation

31


Foreclosure strategy and trap (cont’d)

Owner

Ownership

BorrowerSecurity

interest

Secured

party

Payment

obligation

32


III. Opting in to Article 8 status

•The overrides are inapplicable to securities or other investment property

o Defined by reference to UCC Article 8

•Transferee is also eligible for protected purchaser status

o Take free of adverse claims

•Re enforceability of restrictions on transfer of securities, see e.g. § 8-204

33


Is the LLC or partnership interest a security?

• § 8-103(c): not “unlesso it is dealt in or traded on securities exchanges or in

securities markets,o its terms expressly provide that it is a security

governed by this Article, or o it is an investment company security.”

• Issuer opt-in is the process by which the terms can expressly so provide

• Federal law characterization is immaterial except at the margins of foreclosure by public sale

34


Opt-in mechanics

•Language should appear in operating agreement or partnership agreement

•Interests can be certificated (reified) or uncertificated (book-entries of issuer)

o Mere existence of piece of paper not determinative

•Safeguards to protect against opting back out without consent

35


Take-free consequences of Article 8 treatment

•Transferee of security may be “protected purchaser” (§ 8-303)

o Value

o Without notice of any adverse claim (§ 8-105, not § 1-202)

o Obtains control (§ 8-106)

36


Take-free consequences of Article 8 treatment (cont’d)

• Analogous protections in the indirect holding system, if value and no noticeo § 8-502: credit to transferee’s securities accounto § 8-510(a): purchase of interest in security

entitlement• No question that LLC or partnership interest is

financial asset if held by intermediary. E.g., § 8-103(c).o Regardless of whether the LLC or partnership

interest is itself a security

37


IV. Non-uniformity and eventual uniformity

•Several states (including Delaware) exclude application of UCC anti-assignment overrides to LLC and partnership interests

o May appear in state’s enactment of UCC; organic law; or both

38


2018 amendments to §§ 9-406 and 9-408: black letter

•New subsections 9-406(k) and 9-408(f):

•Overrides do not apply to “a security interest in an ownership interest in a general partnership, limited partnership, or limited liability company.”

39


2018 amendments to §§ 9-406 and 9-408: Official Comments

• “This section does not apply to an ownership interest in a limited liability company, limited partnership, or general partnership, regardless of the name of the interest and whether the interest:

• (i) pertains to economic rights, governance rights, or both;• (ii) arises under: (a) an operating agreement, the applicable

limited liability company act, or both; or (b) a partnership agreement, the applicable partnership act, or both; or

• (iii) is owned by: (a) a member of a company or transferee or assignee of a member; or (b) a partner or a transferee or assignee of a partner; or

• (iv) comprises contractual, property, other rights, or some combination thereof.”

40


2018 amendments to §§ 9-406 and 9-408 (cont’d)

•Approval process completed:

o P.E.B. for the UCC

o Joint Editorial Board on Uniform Unincorporated Organization Acts

o American Law Institute and Uniform Law Commission

•Separate processes for enactments by each state

41


Conflict of laws

•Where override provisions differ, a court should probably apply the override of the jurisdiction in which the entity is organized

o Cf. internal affairs doctrine

•Inapplicability of UCC § § 9-301 to 9-307

o Not “perfection,” “effect of perfection or nonperfection,” or “priority”

42


Conflict of laws (cont’d)

•Choice-of-law clause in security agreement or other transfer agreement is inapplicable to third-party effects of an override

o See § 9-301 comment 3

•Wide enactment of 2018 amendments is desirable

43


Thank you

Carl S. BjerreUniversity of Oregon School of [email protected]

Daniel S. KleinbergerMitchell Hamline School of [email protected]

Edwin E. SmithMorgan, Lewis & Bockius [email protected]

Steven O. WeiseProskauer Rose [email protected]

44

llc and partnership transfer restrictions and ucc article 9...

Documents