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

Description

LLCs and partnerships have always embraced the "pick-your-partner principle," under which a statute or agreement restricts transfers of a member's or partner's ownership interest. In recent years, the pick-your-partner principle has interacted in complicated ways with Article 9. UCC 9-406 and 9-408 have sometimes overridden a broad range of statutory and agreement-based anti-assignment provisions, subject to some complex exceptions.

Application of these overrides varies depending on whether a financial transaction is an outright sale of a general intangible that is not a payment intangible, an ordinary security interest in a general intangible that is not a payment intangible, an outright sale of a payment intangible, or an ordinary security interest in a payment intangible. Counsel should have a thorough understanding of the operation of Article 9 in each scenario.

One established way for transactional lawyers to avoid the overrides altogether is to have the organization "opt-in" to Article 8 by adopting appropriate provisions in its organic documents. Related measures include providing for the security to be certificated or uncertificated and preventing the organization from opting back out of Article 8 without the parties' consent.

Recent UCC amendments would eliminate conflicts with the pick-your-partner principle that can remain despite the exceptions in Sections 9-406 and 9-408, without the need for an Article 8 opt-in. But the amendments need to be enacted in each state, and a conflict-of-laws question may arise if a transaction involves elements from multiple jurisdictions that have not all enacted the amendments.

Listen as our authoritative panel analyzes the complexities of "pick-your-partner" vs. the UCC override and discusses drafting and structuring solutions to avoid the conflict.