Florida Banking November 2022

receivable with that customer cannot be assigned, the UCC override provision (9-406) would render that contractual anti-assignment provision unenforceable against the bank. That means the bank could take a security interest in the account receivable and could enforce its rights in the collateral as provided in Article 9, regardless of the contractual restriction. The concern addressed by the recent “pick your partner” amendments arises when these override provisions intersect with ownership interests in LLCs or partnerships. The overrides in Sections 9-406 and 9-408 apply to LLC membership interests and partnership interests because such interests are typically categorized by UCCArticle 9 as general intangibles, which fall under the purview of UCC Section 9-408. Additionally, an LLC member’s or partner’s economic rights — the right to receive distributions — are typically categorized as payment intangibles, which fall under the purview of UCC Section 9-406. Can the UCC Article 9 override provision invalidate a “pick your partner” clause in an LLC operating agreement, which would otherwise require the consent of other co-owners before a debtor can pledge his or her membership interest? The answer is not entirely clear, and the application of the UCC Article 9 overrides to LLC and partnership interests is complex, leaving substantial room for litigation. This debate is beyond the scope of this article, but suffice it to say that substantial disagreement exists on the issue. Given this uncertainty, the amendments may be appropriately viewed as a clarification of the law rather than a substantive shift. What are the amendments’ practical effects on lenders? Practically speaking, do lenders need to take any action in response to these amendments? For loans where a key component of the loan is the pledge of equity interests of the borrower or a subsidiary, such as mezzanine loan transactions, it is critical that a lender review the entity formation documents, such as articles of organization, and any operating agreements or partnership agreements for the entity. If the governance documents contain any restrictions on the owner’s ability to transfer or pledge the equity interests, or any restrictions on admission of new members or partners into the

LLC or partnership, it is incumbent on the lender to request appropriate consents from other members and/or amendments of the governance documents. The lender must also record a UCC-1 financing statement to perfect its security interest. For these types of loan transactions, lenders should already be performing this type of due diligence. Alternatively, a lender could require its borrower to amend its governance documents to “opt in” to Article 8 of the UCC. By opting into Article 8, the ownership interests in an LLC or partnership are treated as securities. The ownership interests in the LLC or partnership are typically reduced to physical certificates, then the lender takes physical possession of the certificates to perfect its lien. The governance documents also are amended to specifically permit the pledge of securities to the lender. Following the recent amendments to UCC Article 9, these same due diligence requirements would apply to blanket loan transactions if the lender intends to take a lien on the borrower’s ownership interest in an LLC or partnership. In the unlikely event that lenders were previously relying on the UCC Article 9 override provisions to obviate the need to obtain necessary consents or operating agreement amendments to deal with “pick your partner” transferability restrictions, lenders should no longer place any reliance on those provisions. Conclusion The recent amendments to Florida’s UCC Article 9 do not dramatically alter law but rather clarify that the Article 9 override provisions do not apply to LLC and partnership ownership interests, upholding the primacy of the “pick your partner” principle fundamental to LLC and partnership law. Lenders intending to take security interests in LLC or partnership ownership interests should, however, be even more careful when performing due diligence and obtaining necessary documentation. Matthew Hale is a shareholder at Stichter Riedel Blain & Postler, P.A., in Tampa, Florida. He represents creditors, debtors, and fiduciaries in bankruptcy and restructuring engagements, in addition to representing parties in commercial litigation matters in state and federal court. You can reach Hale at mhale@srbp.com.

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