Pledge Agreements for Equity Interests and LLCs
Transcript of Pledge Agreements for Equity Interests and LLCs
Presenting a live 90‐minute webinar with interactive Q&A
Pledge Agreements for Equity Interests Pledge Agreements for Equity Interests in Partnerships and LLCsDrafting Security and Operating Agreements to Maximize Protection for Lenders
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, APRIL 2, 2013
Today’s faculty features:
James D. Prendergast, SVP, Legal Counsel-UCC Division, First American Title Insurance Company, Santa Ana, Calif.
Grant Puleo, Partner, Procopio Cory Hargreaves & Savitch, Carlsbad, Calif.
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CLE Webinar
Pledge Agreements for Equity Interests as Collateral
April 2, 2013
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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FIRST AMERICANEAGLE 9® UCC Division
FIRST AMERICANTITLE INSURANCE COMPANY
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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EAGLE 9® UCC Division
UCC EAGLE 9®UCC EAGLE 9®
NEW PROGRAMS NEW SOLUTIONS!NEW PROGRAMS, NEW SOLUTIONS!
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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RESOURCESEAGLE 9® UCC Division
Domain Name (URL): www.eagle9.com E mail Address: eagle9 ucc@firstam com E-mail Address: [email protected] Toll Free Number: 800.700.1191 UCC Division Legal Team: UCC Division Legal Team: Randy Scott, President & Counsel Jim Prendergast, Senior Vice President and g
Associate General Counsel Brad Gibson, Vice President and General
CounselCounsel
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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MarketingEAGLE 9® UCC Division
Marketing
Jill Sharif, Vice President, National Sales Director, 703.480.9541
Gina Sanchez, National Marketing Coordinator 714 250 8640Coordinator, 714.250.8640
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Procopio Cory Hargreaves & Savitch LLPProcopio, Cory, Hargreaves & Savitch LLP
525 B Street525 B StreetSuite 2200San Diego, CA 92101g ,619.238.1900
1917 Palomar Oaks WaySuite 300Carlsbad, CA 92008760.931.9700 www.procopio.com
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Grant Puleo EsqGrant Puleo, Esq.PartnerProcopio, Cory, Hargreaves & Savitch LLP
1917 Palomar Oaks Way, Suite 300 Carlsbad, California 92008
Direct Phone: 760.496.0776 Email: [email protected] p @p p Bio: www.procopio.com/attorneys/grant-puleo
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Equity Collateral1. Secured Creditor status in equity collateral
2. Protected Purchaser status in equity collateral
3. Membership Interest issues
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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What is Mezzanine Lending?
“Mezzanine lending means lending to aMezzanine lending. . .means lending to a borrowing entity or group of entities that directly or indirectly owns a real property-owning entity,
hi h d bt i d b f t d fi twhich debt is secured by a perfected first security interest in the mezzanine borrower’s pledged ownership interests in the propertypledged ownership interests in the property owner”
(R t b M d ’ I t S i titl d “US CMBS d CRE CDO M d ’(Report by Moody’s Investors Service titled “US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate Mezzanine Loans,” the “Moody’s Report,” page 3)
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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What is Mezzanine L di ?Lending?
THEREFORE A PERSONALTHEREFORE A PERSONALPROPERTY SECURED
TRANSACTION!TRANSACTION!
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Mezzanine Lending
Real PropertyLender
Owner ofReal PropertyMortgage Loan p yg g
Equity Owners
MezzanineLender
AB
Equity Owners
Lender
Equity Secured Loans
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Mezzanine Lending
Property Owner ofPropertyLender Property
Mezzanine A B
Mortgage Loan
Equity Co-BLender #1
A BOwnersBorrowers
DC EMezzanineLender #2
F G HMezzanineLender #3
Mezzanine Loans
IMezzanineLender #4
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Law is the Same
PLEDGED EQUITY LENDING
L dLender BorrowerAsset Based
Loan
AEquity Secured
Equity Owners
A BEquity Secured Guarantees
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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A GUIDE TO THINKING ABOUT PERFECTIONABOUT PERFECTION
Step 1: Does Article 9 Apply? Step 2: Attachment Step 3: Categorize the Collateralp g Step 4: Perfection Step
Filing (§9-310)g (§ ) Perfection under non-Article 9 law (§9-311(a)) Possession (§9-313)
C t l (§§9 314 9 104 9 106 8 106) Control (§§9-314, 9-104, 9-106, 8-106)
Step 5: Priority Consequences
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Lien Perfection
Perfection of liens (security(security interests) in )equity interestinterest collateral.
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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US CMBS and CRE CDO: Moody’sUS CMBS and CRE CDO: Moody s Approach to Rating Commercial Real Estate Mezzanine LoansMezzanine Loans
Pledge of 100% of the equity Opt In to Article 8 Certificate the Equity File a Financing Statement Control the ability to Opt Out
– hardwire or proxy UCC Insurance
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Issues in Negotiating g gMezzanine Loan Documentation Pledge Agreement UCC Insurance/Title Insurance Borrower Organizational Documents Usury Usury Senior Encumbrances
di A Intercreditor Agreements Lender’s Remedies
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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A DIFFICULT MARKET CAN TESTCAN TEST
(AND IMPROVE) LOAN DOCUMENTS
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Knowing What Your Documents SayDocuments Say
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Further Refining LoanFurther Refining Loan Documents to Stop “Gaming”
by Defaulting Borrowers
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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NEED TO CONSIDER NOT ONLYNEED TO CONSIDER NOT ONLY
SECURED CREDITOR STATUS UNDER ARTICLE 9 OF THE UCC;BUT ALSO
PROTECTED PURCHASERSTATUS UNDER ARTICLE 8 OFSTATUS UNDER ARTICLE 8 OF THE UCC
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Protected Purchaser Status and Equity Ownership CoverageOwnership Coverage
Mezzanine Endorsement –Primary Obligor
LENDER’S POLICY
Primary Obligor
Pledged Equity EndorsementEndorsement –Secondary Obligor
BUYER’S POLICY Equity Ownership Endorsement
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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NEMO DAT QUOD NONQUOD NON HABET*HABET*
*“No man can give what he does not have”
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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have
EXCEPTIONS TO NEMO DAT:
o Negotiable Promissory Notes
o Negotiable Bills of Lading
o Securities under Article 8 – if a Protectedo Securities under Article 8 if a Protected Purchaser
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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“In addition to acquiring the rights of a purchaser, a Protected P rchasera Protected Purchaser also acquires its interest qin the security f f d l i ”free of any adverse claim.” §8-303(b)
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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§ ( )
FIRST STEP IS TO BE AFIRST STEP IS TO BE A SECURED CREDITOR BY CONTROL OF A SECURITY UNDER ARTICLE 8 andUNDER ARTICLE 8 and INVESTMENT PROPERTY UNDER ARTICLE 9UNDER ARTICLE 9
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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NOTE: If entity subsequently opts-in to be a security under Article 8 (no way to prevent), then Protected Purchaser has priority in security over first lien-holder who perfected by filing!
Is it a security under Art. 8? Perfection by Filing Perfection by Filing
Financing StatementFinancing Statement
WINS over
fili !under Art. 8? Financing StatementFinancing Statement
NO
filing!
Perfection by Perfection by P iP i
EntityEntityOwnership Ownership I t tI t t
NO
Certificated
Possession + Possession + Endorsement Endorsement
ControlControlInterestsInterests YES
Certificated
Uncertificated
Perfection by Perfection by Control Control
AA
Is it certificated or uncertificated ?
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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AgreementAgreementuncertificated ?
THEN BE A PROTECTEDTHEN BE A PROTECTED PURCHASER UNDER
ARTICLE 8
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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S ti 8303 f th U C C d fiSection 8303 of the U.C.C. defines a“Protected Purchaser” as a purchaser of a
it i t t hsecurity or an interest who:i. Gives value.ii. Does not have notice of any adverse claim to
the security.Obt i t l f th itiii. Obtains control of the security.
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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ARTICLE 8 d ARTICLE 9ARTICLE 8 and ARTICLE 9 -INTERRELATIONSHIP
ARTICLE 8 ARTICLE 9
Opt-In to Article 8 – LLC Investment Propertypor Partnership Interest
a Security
p y
yProtected Purchaser Perfection by Control
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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I WIN!!!!!!
A Case Study
Ultimate ParentStep #1
Equity Owner –
p
Equity Owner –California LLCFirst Mezzanine
Lender Loan Secured byPledge of Equity
Property Owner –Delaware LLC
Pledge of EquityIn Delaware SubLender Perfects Security
Interest in Pledged Equity by Filing UCC-1 with CA
The Property
by Filing UCC 1 with CASOS
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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p y
A Case Study
Ultimate ParentStep #2
Old Equity Owner –
First Mezzanine
NewEquity Owner-
SecondMezzanine
California LLCLenderq y
Delaware LLC1.3.
1 S ll E it O hi i S b
Lender2.
2 P id NProperty Owner – Delaware LLC
1. Sells Equity Ownership in Subto Sister Sub for $100,000,000
2. Provides New Mezzanine LoanSecured by EquityOwnership in Del.
The Property
Ownership in Del. Sub – Perfects by Control and Protected Purchaser
3. Pays Off First Mezzanine Lenderwith Proceeds of Mezz Loan fromSecond Mezzanine Lender
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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A Case Study
Ultimate ParentStep #3
Old Equity First M i
New SecondOwner –
California LLCMezzanine
LenderEquity Owner-Delaware LLC
MezzanineLender
First Mezzanine Lender Sues OldEquity Owner for Conversion BasedOn Fraudulent Conveyance Alleging
Property Owner – Delaware LLC
On Fraudulent Conveyance AllegingProperty Worth $400,000,000 andWants $2,000,000 kicker
The Property
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Mezzanine Loans :Th V i fThe Vagaries of
Membership Interest Collateral
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Discussion Question #1Discussion Question #1$30,000,000 mezz loan to DE LLCLender & lender’s counsel – CaliforniaDocumentation standard California loan docsDocumentation – standard California loan docsCollateral description – simple & clear:
“100% of my membership interest in XYZ, LLC, a Delaware limited liability company.”
Any problems?© 2013 First American Title Insurance Company and
Procopio, Cory, Hargreaves & Savitch LLP
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y p
“M b hi I t t” C ll t l“Membership Interest” Collateral
“Membership Interest” in the LLC Colloquialism describing intended collateral Assumed by many to consist of both economic
rights and control rights Can appear in
Granting clauses of security agreements Collateral descriptions in related UCC1 financing
statements Control agreements
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Control agreements
“M b hi I t t” C ll t l“Membership Interest” Collateral
But in Delaware? “Membership Interest” is fraught with ambiguity Term does not appear in the Delaware LLC Act Instead the Delaware LLC Act discusses
Economic Rights Control Rights Member Status
So why use the term “Membership Interest?”
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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St t ’ L Diff (!)States’ Laws Differ (!)
California’s LLC Act uses the term “a member’s right in the LLC, collectively,
including the member’s economic interest, any right to vote or participate in management, and any right to information concerning the businessany right to information concerning the business and affairs of the LLC”(California Limited Liability Company Act § 17001(z))(California Limited Liability Company Act § 17001(z))
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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St t ’ L Diff (!)States’ Laws Differ (!)
New York’s LLC Act uses the term “a member’s aggregate rights in an LLC,
including, without limitation, (i) the member’s right to a share of the profits and losses of the LLC (ii) the right to receive distributions fromLLC, (ii) the right to receive distributions from the LLC, and (iii) the member’s right to vote and participate in the management of the LLC”participate in the management of the LLC(New York Limited Liability Company Law § 102(r))
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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St t ’ L Diff (!)States’ Laws Differ (!)
Florida’s LLC Act uses the term “a member’s share of the profits and losses of the
LLC, the right to receive distributions of the LLC’s assets, voting rights, management rights, or any other rights under this chapter or theor any other rights under this chapter or the articles or organization or operating agreement”(Florida LLC Act § 608 402(23))(Florida LLC Act § 608.402(23))
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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St t ’ L Diff (!)States’ Laws Differ (!)
“Membership Interest” is defined fairly consistently in various states
But a great many mezzanine loans are intended to be secured by interests in a Delaware LLC
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Discussion Question #2
Membership interest.Limited liability company interest.Isn’t it obvious that we mean everything?Isn t it obvious that we mean everything?
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Dela are Disting ishes Economic RightsDelaware Distinguishes Economic Rights, Control Rights, and Member Status
A “limited liability company interest” is “a b ’ h f h fi d l fmember’s share of the profits and losses of an
LLC and a member’s right to receive distributions of the LLC’s assets”distributions of the LLC s assets
(Delaware LLC Act § 18-101(8))
LLC interest is merely economic LLC interest is merely economic – Herein, for clarity, “Economic Rights”
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Delaware Distinguishes Economic Rights, Control Rights, and Member Status
In Delaware an LLC interest is merely an E i Ri ht d d NOT i l dEconomic Right, and does NOT include Right to manage or control Right to information and review of LLC books
and recordsRi h l di l i Right to compel dissolution
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Delaware Distinguishes Economic Rights, Control Rights, and Member Statusg ,
In Delaware management of a single-member C i di il h l i i fLLC is ordinarily the exclusive province of
the sole member Herein, for clarity, “Control Rights” Unless otherwise provided, members hold
Control Rights in proportion to their Economic Rights
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Delaware Distinguishes Economic Rights,Delaware Distinguishes Economic Rights, Control Rights, and Member Status
In Delaware, Control Rights can be vested in “managers” who need not be members Managers can be further designated as officers,
directors, or otherwise The Delaware LLC Act provides few operational
requirements and procedures for exercising C t l Ri htControl Rights
Such matters should be addressed in the LLC Agreement
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Agreement
Delaware Distinguishes Economic Rights,Delaware Distinguishes Economic Rights, Control Rights, and Member Status
In Delaware, a “Member” is simply a person who is admitted to an LLC as a member
(Delaware LLC Act § 18-101) Herein, for clarity, “Member Status” Member Status bears little fixed correlation to
Economic Rights or Control Rights A Member need not have any Economic Rights
or Control Rights at all
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Di i Q ti #3Discussion Question #3
Revised collateral description:“100% of my membership interest in XYZ,
LLC, a Delaware limited liability company, including without limitation all of the economic i d h i h h i linterest and the right to vote or otherwise control the LLC.”
A bl ?Any problems?
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Economic Rights and theEconomic Rights and the Anti-Assignment Override
Delaware’s LLC Act explicitly incorporates the public policy to give “maximum effect to the principle of freedom of contract and to theprinciple of freedom of contract and to the enforceability” of LLC agreements Delaware LLC Act § 18 1101(b)) Delaware LLC Act § 18-1101(b))
Delaware permits and enforces restrictions on the alienability of rights and statuses relating to LLCs -alienability of rights and statuses relating to LLCs Economic Rights, Control Rights, and Member Status
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Economic Rights and theEconomic Rights and the Anti-Assignment Override
Economic Rights are assignable unless the LLC agreement provides otherwiseD l LLC A t § 18 702( )Delaware LLC Act § 18-702(a)
UCC Article 9 generally overrides restrictions on assignment of certain rights to receive paymentsassignment of certain rights to receive payments (§406 and 408)
Are anti-assignment provisions effective withAre anti assignment provisions effective with respect to Economic Rights?
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Economic Rights and theEconomic Rights and the Anti-Assignment Override
The Delaware LLC Act provides that UCC 9-406 and 408 do not apply to “any interest in an LLC” “including all rights, powers and interests arising under an
LLC t thi h t ”LLC agreement or this chapter.” “This provision prevails over §§ 9-406 and 9-408 of
[UCC Article 9]. [ ] For Delaware LLCs, there’s no override for Economic
Rights, Control Rights, or Member Status.
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Di i Q ti #4Discussion Question #4
Debtor & SP agreed the Security Agreement is governed by California law.
Don’t California’s UCC and California’s definition of “membership interest” control?
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Economic Rights and theEconomic Rights and the Anti-Assignment Override
"whether a debtor's rights in collateral may be voluntarily or involuntarily transferred is governed by law other than this article ”by law other than this article. UCC Article 9 Section 401(a)
“S b ti ( ) dd th ti h th “Subsection (a) addresses the question whether property necessarily is transferable by virtue of its inclusion within the scope of Article 9 It gives ainclusion . . . within the scope of Article 9. It gives a negative answer . . . .” Official Comment 4 to Section 401
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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E i Ri ht d thEconomic Rights and the Anti-Assignment Override
This result is harmonious with the internal affairs doctrine “a state should not regulate the internal operations g p
of a foreign corporation but leave such governance to the state of incorporation.” 18 Am. Jur. 2d Corporations § 15 (2d ed. 2008).
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Di i Q ti #5Discussion Question #5
Further revised collateral description:“100% of my membership interest in XYZ, LLC, a Delaware limited liability company, including without limitation all of the economic interest and the right to vote or otherwise control the LLC and all my rights as a member.”
Any problems?
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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The Further Challenge of Control Rights &The Further Challenge of Control Rights & Member Status
l h id h i Unless the LLC agreement provides otherwise, "[a]n assignment of a limited liability company interest does not entitle the assignee to become or to exercise any rights or g y gpowers of a member."
Section 18-702(b)(1) The assignee of a member's Economic Rights “shall have no
right to participate in the management of the business and affairs of a limited liability company except as provided in a y p y p plimited liability company agreement”. Delaware LLC Act § 18-702(a).
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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§ ( )
The Further Challenge of Control Rights &The Further Challenge of Control Rights & Member Status
Summary observations on Economic Rights Delaware law is clear and controlling Default rule - a secured party can freely enjoy
Economic Rights Exception - subject to compliance with any
restrictions in the LLC Agreement Assignment doesn’t affect Control Rights Assignment for security doesn’t affect Member
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Status
The Further Challenge of Control Rights &The Further Challenge of Control Rights & Member Status
Summary observations on Control Rights Delaware law is clear and controlling Default rule - a secured party has no Control
Rights Exception – a secured party has whatever rights
it’s given in the LLC Agreement Note: Control Rights are positively correlated
with Member Status unless otherwise providedi f C l Ri h i M
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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e.g. vesting of Control Rights in a Manager
The Further Challenge of Control Rights &The Further Challenge of Control Rights & Member Status
Summary observations on Member Status Delaware law is clear and controlling Default rule - a secured party has no right to
Member Status Exception – as provided in the LLC agreement
and upon Approval of all members, or Compliance with procedure in LLC Agreement
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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F l G Y Wh E l ?Foreclosure Gets You What, Exactly?
Under the Delaware default rules Secured party succeeds to all Economic Rights,
but to neither Control Rights nor Member Status Debtor Member (or Manager) retains Control Rights
D b M b i M b S Debtor Member retains Member Status
The party with incentive to “run” the LLC has no power to do sopower to do so
The party with power to “run” the LLC has no incentive to do so
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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incentive to do so
F l G Y Wh E l ?Foreclosure Gets You What, Exactly?
What if there’s a foreclosure? Under Article 9 the purchaser will succeed to all of the
i ht th d bt h l d d ll t lrights the debtor has pledged as collateral. Under the Delaware LLC Act a different result follows
(unless the parties contract otherwise)( p ) no one can possess Control Rights or achieve Member Status
absent approval of any remaining members or as provided in the LLC agreementLLC agreement.
Even the outright assignee of Economic Rights does not automatically or necessarily succeed to the Member Status lost by his assignor
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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by his assignor.
F l G Y Wh E l ?Foreclosure Gets You What, Exactly?
Granting of a security interest is a type of assignment
An assignee does not achieve Member Status or possess Control Rights absent facilitative language in the LLC agreement or consent by the other members
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Foreclosure Gets You What, Exactly?
If the debtor member loses Member Status and the secured party does not achieve Member Status, the LLC has no members It must commence dissolution and winding up
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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C l iConclusions
Always describe the collateral by use of words and phrases with antecedents in the Delaware LLC Act or the relevant LLC Agreement The term “membership interest” appears nowhere
in the Delaware LLC Act
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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C l iConclusions
The Delaware LLC Act is controlling with respect to prohibitions on and preconditions to the granting of a security interest, even those merely in Economic Rights Economic Rights can be pledged unless restricted Control Rights and Member Status cannot be
pledged absent facilitative language or action
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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C l iConclusions The Delaware LLC Act affords the contractual
flexibility necessary to facilitate a secured party’s succeeding to Economic Rights Control Rights andsucceeding to Economic Rights, Control Rights, and Member Status
LLC Agreements and Security Agreements need to LLC Agreements and Security Agreements need to be drafted with great care to facilitate that outcome
Audit or review of existing security interests and Audit or review of existing security interests, and corrective measures, may be warranted
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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S t d t t b dd d i i lSuggested concepts to be addressed in special section of LLC agreement
Supercedes all other provisions of LLC p pagreement
LLC agreement provides rights to and can be LLC agreement provides rights to and can be enforced by secured party (18-201(7))
Member may transfer or assign his LLC Member may transfer or assign his LLC interest to secured party
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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Suggested concepts to be addressed in specialSuggested concepts to be addressed in special section of LLC agreement (cont’d)
all of the Member’s right, title, and interest in the LLC, whether derived under the Certificate of Formation the LLC Agreement the LLC Act orFormation, the LLC Agreement, the LLC Act, or otherwise, including without limitation
its “limited liability company interest” (as such term is its limited liability company interest (as such term is defined in Section 18-101(8) of the Statute),
the Member’s status as a “member” (as such term is defined in Section 18-101(11) of the Statute), and
the Member’s right to participate in the management of the business and affairs of the LLC
© 2013 First American Title Insurance Company andProcopio, Cory, Hargreaves & Savitch LLP
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of the business and affairs of the LLC
Suggested concepts to be addressed in specialSuggested concepts to be addressed in special section of LLC agreement (cont’d)
the Lender or other successful bidder at a foreclosure sale or other disposition automatically succeeds to the debtor’s “limited liability company interest” (as such term
is defined in Section 18-101(8) of the Statute), status as a “member” (as such term is defined in
S i 18 101(11) f h S ) dSection 18-101(11) of the Statute), and right to participate in the management of the
b i d ff i f th LLC© 2013 First American Title Insurance Company and
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business and affairs of the LLC
Suggested concepts to be addressed in specialSuggested concepts to be addressed in special section of LLC agreement (cont’d)
the Lender or other successful bidder at a foreclosure sale or other disposition is deemed admitted as a member of the Company
immediately before the Member ceases to be a bmember,
has power and authority to remove managers, and has power and authority to amend & restate LLC
Agreement.
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Suggested concepts to be addressed in specialSuggested concepts to be addressed in special section of LLC agreement (cont’d)
if at any time the LLC would otherwise dissolve, such dissolution shall not occur if the Lender designates a successor member for
admission to the LLC (Section 18-801(a)(4)(b)), Such admission shall be consummated and
memorialized in any manner designated by the L d i it di tiLender in its discretion.
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