Transferability of LLC membership interest on which a party holds a security interest

Author: LegalEase Solutions

Research Findings

1. Question Presented:
Can Swiftships sell any of the membership interests to a third party?

Short Answer: Pursuant to La. R.S. 12:1330 (2011), a membership interest may be assigned to another party unless there is some restriction in the LLC articles of organization or operating agreement.

Discussion:

“A. Unless otherwise provided in the articles of organization or an operating agreement, a membership interest shall be assignable in whole or in part. An assignment of a membership interest shall not entitle the assignee to become or to exercise any rights or powers of a member until such time as he is admitted in accordance with the provisions of this Chapter. An assignment shall entitle the assignee only to receive such distribution or distributions, to share in such profits and losses, and to receive such allocation of income, gain, loss, deduction, credit, or similar item to which the assignor was entitled to the extent assigned. B. Unless otherwise provided in the articles of organization or an operating agreement, the pledge of or granting of a security interest, lien, or other encumbrance in or against any or all of the membership interest of a member shall not cause the member to cease to be a member or to have the power to exercise any rights or powers of a member. C. Unless otherwise provided in a written operating agreement and except to the extent assigned by agreement, until an assignee of a membership interest becomes a member, the assignee shall have no liability as a member solely as a result of such assignment.”
La. R.S. 12:1330 (2011).

“On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the membership interest of the member with payment of the unsatisfied amount of judgment with interest. To the extent so charged, the judgment creditor shall have only the rights of an assignee of the membership interest. This Chapter shall not deprive any member of the benefit of any exemption laws applicable to his membership interest.”
La. R.S. 12:1331 (2011).

Unless the secured party as a condition for their security required a modification of the articles of incorporation or operating agreement or these documents originally contain certain restrictions on assignment of interests, there does not seem to be anything preventing Swiftships from selling membership interests to a third party.

2. Question Presented:
If so, can Spurgeon invalidate the transfer?

Short Answer: If doesn’t appear that the transfer can be invalidated.

Discussion:

§ 10:9-401. Alienability of debtor’s rights. “(a) Other law governs alienability; exceptions. –Except as otherwise provided in subsection (b) and R.S. 10:9-406, 9-407, 9-408, and 9-409, whether a debtor’s rights in collateral may be voluntarily or involuntarily transferred is governed by law other than this Chapter.
(b) Agreement does not prevent transfer. –An agreement between the debtor and secured party which prohibits a transfer of the debtor’s rights in collateral or makes the transfer a default does not prevent the transfer from taking effect.”
La. R.S. 10:9-401.

Pursuant to Chapter 9 of the Louisiana UCC statute, even if the agreement prohibited Swiftship from transferring rights in membership interest, this would not prevent the transfer from taking effect.

3. Question Presented:
If the transfer were to occur to a third party, does the third party take the membership interests subject to the security interest?

Short Answer: Depending on whether the secured party took the necessary steps to protect their interest pursuant to the applicable UCC Article, which could either be Chapter 9 (Secured Transactions) or Chapter 8 (Securities), the third party may take the membership interest subject to the security interest.

Discussion:

“A security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors”. La. R.S. 10:9-201(a).

Ҥ 10:9-205. Use or disposition of collateral permissible.
(a) When security interest not invalid or fraudulent. –A security interest is not invalid or fraudulent against creditors solely because:
(1) the debtor has the right or ability to:
(A) use, commingle, or dispose of all or part of the collateral, including returned or repossessed goods;
(B) collect, compromise, enforce, or otherwise deal with collateral;
(C) accept the return of collateral or make repossessions; or
(D) use, commingle, or dispose of proceeds; or
(2) the secured party fails to require the debtor to account for proceeds or replace collateral.
(b) Requirements of possession not relaxed. –This section does not relax the requirements of possession if attachment, perfection, or enforcement of a security interest depends upon possession of the collateral by the secured party.”
La. R.S. 10:9-205 (2011).

“La. R.S. 10:9-203: Attachment and enforceability of security interest; proceeds; supporting obligations; formal requisites.
(a) Attachment. –A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.
(b) Enforceability. –Except as otherwise provided in Subsections (c) through (i) of this Section, a security interest is enforceable against the debtor and third parties with respect to the collateral only if:
(1) value has been given;
(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and
(3) one of the following conditions is met:
(A) the debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers a life insurance policy, the condition specified in R.S. 10:9-107.1(b) is met, and, if the security interest covers timber to be cut, a description of the land concerned;
(B) the collateral is not a certificated security and is in the possession of the secured party under R.S. 10:9-313 pursuant to the debtor’s security agreement;
(C) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under R.S. 10:8-301 pursuant to the debtor’s security agreement; or
(D) the collateral is deposit accounts, electronic chattel paper, investment property, letter-of-credit rights, electronic documents, or a life insurance policy, and the secured party has control under R.S. 10:7-106, 9-104, 9-105, 9-106, 9-107, or 9-107.1 pursuant to the debtor’s security agreement.”

“La. R.S. 10:9-609: Secured party’s right to take possession after default.
(a) Possession. –After default, a secured party may take possession of the collateral only:
(1) after the debtor’s abandonment, or the debtor’s surrender to the secured party, of the collateral;
(2) with the debtor’s consent given after or in contemplation of default;
(3) pursuant to judicial process; or
(4) in those cases expressly provided by law other than this Chapter.”

Pursuant to La. R.S. 10:9-203(d), “a person becomes bound as debtor by a security agreement entered into by another person if, by operation of law other than this Chapter or by contract:
(1) the security agreement becomes effective to create a security interest in the person’s property; or
(2) the person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person.

“Effect of new debtor becoming bound. –If a new debtor becomes bound as debtor by a security agreement entered into by another person:
(1) the agreement satisfies subsection (b)(3) with respect to existing or after-acquired property of the new debtor to the extent the property is described in the agreement; and
(2) another agreement is not necessary to make a security interest in the property enforceable. La. R.S. 10:9-203(e).

To make a security interest effective as against third-parties, it must be validly attached and thereafter perfected. Peoples State Bank v. GE Capital Corp. (In re Ark-La-Tex Timber Co.), 482 F.3d 319, 327 (5th Cir. 2007)