By Fredrick P. Niemann, Esq., NJ LLC Attorney
How to perfect a security interest in an LLC membership interest depends on whether the membership interests are certificated (evidenced by certificates).
If the interests are certificated and the LLC has “opted in” to have UCC Article 8 apply to the membership interests in the operating agreement, then the best way for the secured party to perfect its interest is through “control” of the interest by taking possession of the certificate. The secured party can also perfect against certificated membership interests by filing a UCC financing statement (UCC-1) against the member with respect to the interest, but if another secured party acquires control of the interest by taking possession of the certificate, the secured party with possession of the certificate will have priority, even if the financing statement was filed before the other secured party acquired control. Many secured parties perfect a security interest in certificated membership interests by both methods, taking possession of the certificate and filing a financing statement. In many financings, the lender requires that the LLC membership interests be certificated and that the LLC opt in to Article 8.
If the interests are not certificated, they are usually treated as general intangibles, meaning that the secured party must perfect by filing a financing statement against the member with respect to the interest. Note that, if the membership interests are later certificated and the LLC opts in to Article 8, and another secured party perfects a security interest not certificated at the time the original secured party filed its financing statement. Therefore, you will want a covenant in your security agreement that the membership interests cannot become certificated (nor can the LLC opt in to Article 8) with the secured party’s consent.
For more information regarding Security Interests in a LLC, please contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or email him at fniemann@hnlawfirm.com/ for a low cost consultation. For further information, go to http://www.youtube.com/user/NJBusinessLaw#p/search/0/pKIalQAdprY to learn more.