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 and/or taking possession or control of the interest using the opt-in provisions of Article 8. Counsel should understand the advantages and disadvantages of each.

Listen as our authoritative panel outlines best practices for drafting security agreements and making corresponding amendments to the borrower's operating agreement or partnership agreement to maximize the lender's protection. The panel will also discuss UCC Articles 8 and 9’s requirements for the perfection and priority of a security interest in a member or partnership interest. The discussion will include the amendments to UCC Sections 9-406 and 9-408 promulgated in 2018 by the American Law Institute and the Uniform Law Commission as well as planning opportunities in anticipation of the 2022 UCC amendments becoming effective.

1. Overview of UCC Articles 8 and 9 requirements
2. Drafting the security agreement
3. Recommended amendments to the LLC operating agreement or partnership agreement
4. Common pitfalls and strategies to best protect the lender

The panel will review these and other key issues:

• Why is the UCC Article 8 opt-in and perfection by possession or "control" preferable to perfection by filing a financing statement under Article 9?
• What steps should the lender take to ensure the borrower cannot opt out of Article 8?
• What are the key provisions to include in the borrower's operating agreement or partnership agreement to facilitate the realization of the collateral?
• To what extent may the lender use the operating or partnership agreement to prevent the borrower from commencing a bankruptcy case to block the lender's enforcement?