Charging Orders and Mezzanine Loans Secured by LLC/LP Interests April 23, 2013

Transcription

1 Charging Orders and Mezzanine Loans Secured by LLC/LP Interests April 23, 2013 Presented by: Jay Adkisson, Riser Adkisson LLP Norman Powell, Young Conaway Stargatt & Taylor, LLC

2 MEZZANINE LOANS: EASIER TO CLOSE THAN TO FORECLOSE Norman Powell Young Conaway Stargatt & Taylor, LLC

3 WHAT S A MEZZANINE LOAN? The mezzanine loan is a form of junior debt. Subordinate in right to a senior debt (e.g., a first mortgage ). Senior in right to equity.

4 WHAT S A MEZZANINE LOAN (CONTD) The mezzanine loan is typically a loan to the owners of the primary borrowing entity. These primary borrowing entities are often Delaware LLCs, sometimes with certain bankruptcy-remoteness attributes. The owners pledge their interests in the entities as collateral for the mezzanine loan. Who manages the LLC to which your foreclosure relates? Will your foreclosure result in a change in management?

5 HOW IT WORKS UNDER THE UCC The term membership interest appears nowhere in the Delaware LLC Act. Lender and borrower often describe the intended security for the mezzanine loan as 100% of the membership interest in the limited liability company. They assume this is like 100% of the stock in a corporation» Total economic participation in profits, losses, and distributions (Economic Rights), and» Total voting and managerial control (Control Rights).

6 HOW IT WORKS UNDER UCC (CONTD) The term membership interest often appears in»the granting clauses of security agreements,»the collateral descriptions in related UCC1 financing statements, and

7 HOW IT WORKS UNDER UCC (CONTD) But the term membership interest does not appear anywhere in the Delaware LLC Act, which distinguishes:»economic Rights,»Control Rights, and The status of being a member (Member Status).

8 HOW IT WORKS UNDER UCC (CONTD) By definition, a limited liability company interest is a member's share of the profits and losses of a limited liability company and a member's right to receive distributions of the limited liability company's assets." Id (8).

9 HOW IT WORKS UNDER UCC (CONTD) Notably, it does not include managerial rights, rights to information and review of LLC books and records, or the right to compel dissolution. 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 limited liability company agreement and upon satisfaction of certain other conditions. Id (a). 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 powers of a member." Id (b)(1).

10 HOW IT WORKS UNDER UCC (CONTD) An assignee of a limited liability company interest may become a member as provided in a limited liability company agreement and upon:»the approval of all of the members of the limited liability company other than the member assigning limited liability company interest; or»compliance with any procedure provided for in the limited liability company agreement.

11 HOW IT WORKS UNDER UCC (CONTD) Thus, a secured party can enjoy Control Rights and achieve Member Status only to the extent provided in the limited liability company agreement or otherwise approved by the limited liability company s members. Unless the LLC agreement provides otherwise, the granting of a security interest in a member s limited liability company interest 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." Id (b)(3).

12 HOW IT WORKS UNDER UCC (CONTD) The granting a security interest in an LLC interest does not affect managerial rights. The foreclosure of such security interest does not of itself affect managerial rights.

13 HOW IT WORKS UNDER UCC (CONTD) "A limited liability company interest is assignable in whole or in part except as provided in a limited liability company agreement." Id (a). Its second sentence provides that: "The assignee of a member's limited liability company interest shall have no right to participate in the management of the business and affairs of a limited liability company except as provided in a limited liability company agreement and upon (1) the approval of all of the members of the limited liability company other than the member assigning the limited liability company interest; or (2) compliance with any procedure provided for in the limited liability company agreement."

14 HOW IT WORKS UNDER UCC (CONTD) The point is further made by Section (b)(1), which provides that unless the LLC agreement provides otherwise, "An assignment of a limited liability company interest does not entitle the assignee to become or to exercise any rights or powers of a member." Note as well that UCC 9-401(a) provides that "whether a debtor's rights in collateral may be voluntarily or involuntarily transferred is governed by law other than this article. This section includes exceptions for certain matters addressed in and 9-408, But non-uniform text in such sections as enacted in Delaware renders them inapplicable to "an interest in a... limited liability company."

15 HOW IT WORKS UNDER UCC (CONTD) Last, Section (a)(1) provides as follows: "An assignee of a limited liability company interest may become a member as provided in a limited liability company agreement and upon (1) the approval of all of the members of the limited liability company other than the member assigning limited liability company interest; or (2) compliance with any procedure provided for in the limited liability company agreement." Thus, the forward-looking secured party should satisfy itself that the LLC agreement facilitates the purchaser at a UCC RA-9 Part 6 sale becoming a member or otherwise obtaining managerial rights and that any procedures can be reasonably complied with.

16 IS THE SECURITY INTEREST REALLY PERFECTED? An interest in an LLC is generally understood to be a general intangible. But if so elected under UCC 8-103(c), the interest is a security. Securities are investment property UCC 9-102(a)(49).

17 IS THE SECURITY INTEREST REALLY PERFECTED? Many secured parties take possession of securities certificates to achieve perfection. But a certificate, absent an 8-103(c) optin, isn t a securities certificate. It s a general intangible, and perfection must occur by filing.

18 IS THE SECURITY INTEREST REALLY PERFECTED? But because a security interest in investment property can also be perfected by filing a financing statement (see UCC and Official Comment 4 thereto), the foreclosing secured party is obliged to perform searches and send notices under the relevant provisions of UCC 9 part 6.

19 IT S A SIMPLE RA-9 FORECLOSURE, RIGHT? All aspects of collateral disposition must be commercially reasonable. RA 9-610(b). What s reasonable depends upon the facts. You re selling the member s limited liability company interest.» Will the buyer have the right to become a member or otherwise manage the LLC?» In a sense you re really selling the LLC s underlying assets for example, its commercial real estate project.

20 IT S A SIMPLE RA-9 FORECLOSURE, RIGHT?»What s the appropriate universe of possible buyers to whom advertising should be made available?»investors who buy equity in entities?»investors who buy similar real estate projects? How should you advertise the sale? Should you use brokers?

21 IT S A SIMPLE RA-9 FORECLOSURE, RIGHT? What information about the underlying property should be made available? What information about the LLC interest, and the buyer s prospects for acquiring member status or other managerial power, should be made available? Is the foreclosing mezzanine lender constrained by provisions in any intercreditor agreement with the mortgage lender? Such agreements may limit potential qualified transferees. Such limitations may or may not be commercially reasonable.

22 IT S A SIMPLE RA-9 FORECLOSURE, RIGHT? Describe what the buyer is getting.

23 Questions? Please note that a recording of this presentation will be posted on the LLCs, Partnerships and Unincorporated Entities Committee website