Florida Banking November 2022

TRUST BANKING

“PICK YOUR PARTNER” —NEW FLORIDA AMENDMENTS TO UCC ARTICLE 9

BY MATTHEW HALE, SHAREHOLDER, STICHTER RIEDEL BLAIN & POSTLER, P.A.

W henever Article 9 of the Uniform Commercial Code (UCC) is amended, the banking community should always take notice. Not to fear, however—recent, narrow amendments to Florida’s version of UCC Article 9 should have little impact on day-to-day banking activities. But understanding these “pick your partner” amendments to the UCC Article 9 override provisions also provides a useful opportunity for banks to evaluate underwriting practices when taking security interests in limited liability company Senate Bill 336 and House Bill 519 passed Florida’s legislature in the spring 2022 session and were approved by Governor DeSantis on May 18, 2022. The amendments, which take effect on January 1, 2023, ensure that transferability restrictions in LLC operating agreements, partnership agreements, and limited partnership agreements are given effect, recognizing the “pick your partner” principle that is fundamental to these closely-held business organizations. In passing these amendments, Florida incorporates official amendments to the UCC, a national uniform model law governing commercial transactions. In 2018, the UCC’s two national sponsoring organizations, the American Law Institute and the Uniform Law Commission, approved amendments to UCC Sections 9-406 and 9-408, which are colloquially known as the Article 9 “override” provisions. These provisions earn that name because they operate to “override” terms in contracts (and sometimes other laws) that would otherwise restrict the ability of a debtor to pledge property as collateral. Under partnership and limited liability company law, however, the “pick your partner” principle has long recognized that partners and members in closely-held businesses have substantial interest in approving other co-owners’ right to participate in management of the business.This principle is usually embodied in partnership and operating agreements conferring on partners or members the right to approve the admission of new partners or members. Years ago, issues arose in some (LLC) or partnership ownership interests. Background of the amendments

states over whether the UCCArticle 9 override provisions could invalidate these “pick your partner” clauses in operating agreements or partnership agreements. The potential for conflict between the UCC Article 9 override provisions and the“pick your partner”principle caused several states, led by Delaware in the early 2000s, to adopt their own amendments to their versions of UCC 9-406 and 9-408 clarifying that the UCC Article 9 override provisions do not apply to ownership interests in LLCs and partnerships. Some states also amended their LLC, partnership, and/or limited partnership statutes to provide further clarification. The proliferation of non-uniform amendments on this issue resulted in the 2018 amendments to the UCC, which introduced a uniform fix. In adopting the 2018 amendments to the official UCC, Florida amended its version of the override provisions, Sections 679.4061 and 679.4081 of the Florida Statutes, to add a single clause to each of the sections, providing: “This section does not apply to a security interest in an ownership interest in a general partnership, limited partnership, or limited liability company.” How do the Article 9 override provisions work? In order to understand the effect of the amendments, let us first understand how the override provisions operate. To facilitate the free transferability of intangibles rights, Sections 9-406 and 9-408 of the UCC operate to override terms in agreements that would otherwise restrict the transfer of such rights, including the granting or enforcement of security interests. Although the general aim of each override statute is the same, the two statutes operate slightly differently and apply to different types of collateral. These UCC provisions are enacted in Florida as Sections 679.4061 and 679.4081 of the Florida Statutes. An example helps illustrate how the override statutes work in practice. Say a bank makes a loan to a business secured by a blanket lien on substantially all of its personal property, including accounts receivable. If the business has a contract with one of its customers, and the contract provides that that business’s account

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