what is an assignment of security interest

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what is an assignment of security interest

Assignments and Security Interests Under UCC Article 9: A Worthy Decision

The March 2020 Commentary and its accompanying amendments to the Official Comments are critical steps in getting the commercial finance industry and, more importantly, courts aligned on how 9-406 and 9-607 work in concert.

December 16, 2022 at 10:30 AM

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The basic definitions of Article 9 align with this approach of applying to both an assignment of payment rights and a security interest in such assets. “[S]ecurity interest” in UCC Article 1, §1-201(b)(35) (General Definitions), includes “any interest of a … buyer of accounts, chattel paper, a payment intangible or a promissory note in a transaction that is subject to Article 9.” The definition of “secured party” in Article 9, §9-102(a)(73) (Definitions and Index of Definitions), includes a “person in whose favor a security interest is created or provided for under a security agreement,” as well as a “person to which accounts, chattel paper, payment intangibles or promissory notes have been sold.” Finally, the definition of “debtor” in Article 9, §9-102(a)(28), includes both a “person having an interest, other than a security interest or other lien, in the collateral” and a “seller of accounts, chattel paper, payment intangibles or promissory notes.”

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Part 3. Perfection and Priority

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[Subpart 1. Law Governing Perfection and Priority] [Table of Contents]

§ 9-312. PERFECTION OF SECURITY INTERESTS IN CHATTEL PAPER, DEPOSIT ACCOUNTS, DOCUMENTS, GOODS COVERED BY DOCUMENTS, INSTRUMENTS, INVESTMENT PROPERTY, LETTER-OF-CREDIT RIGHTS, AND MONEY; PERFECTION BY PERMISSIVE FILING; TEMPORARY PERFECTION WIT
§ 9-313. WHEN POSSESSION BY OR DELIVERY TO SECURED PARTY PERFECTS SECURITY INTEREST WITHOUT FILING.
§ 9-314. PERFECTION BY CONTROL.
§ 9-315. SECURED PARTY’S RIGHTS ON DISPOSITION OF COLLATERAL AND IN PROCEEDS.
§ 9-316. EFFECT OF CHANGE IN GOVERNING LAW.
§ 9-317. INTERESTS THAT TAKE PRIORITY OVER OR TAKE FREE OF SECURITY INTEREST OR AGRICULTURAL LIEN.
§ 9-318. NO INTEREST RETAINED IN RIGHT TO PAYMENT THAT IS SOLD; RIGHTS AND TITLE OF SELLER OF ACCOUNT OR CHATTEL PAPER WITH RESPECT TO CREDITORS AND PURCHASERS.
§ 9-319. RIGHTS AND TITLE OF CONSIGNEE WITH RESPECT TO CREDITORS AND PURCHASERS.
§ 9-320. BUYER OF GOODS.
§ 9-321. LICENSEE OF GENERAL INTANGIBLE AND LESSEE OF GOODS IN ORDINARY COURSE OF BUSINESS.
§ 9-322. PRIORITIES AMONG CONFLICTING SECURITY INTERESTS IN AND AGRICULTURAL LIENS ON SAME COLLATERAL.
§ 9-323. FUTURE ADVANCES.
§ 9-324. PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS.
§ 9-325. PRIORITY OF SECURITY INTERESTS IN TRANSFERRED COLLATERAL.
§ 9-326. PRIORITY OF SECURITY INTERESTS CREATED BY NEW DEBTOR.
§ 9-327. PRIORITY OF SECURITY INTERESTS IN DEPOSIT ACCOUNT.
§ 9-328. PRIORITY OF SECURITY INTERESTS IN INVESTMENT PROPERTY.
§ 9-329. PRIORITY OF SECURITY INTERESTS IN LETTER-OF-CREDIT RIGHT.
§ 9-330. PRIORITY OF PURCHASER OF CHATTEL PAPER OR INSTRUMENT.
§ 9-331. PRIORITY OF RIGHTS OF PURCHASERS OF INSTRUMENTS, DOCUMENTS, AND SECURITIES UNDER OTHER ARTICLES; PRIORITY OF INTERESTS IN FINANCIAL ASSETS AND SECURITY ENTITLEMENTS UNDER ARTICLE 8.
§ 9-332. TRANSFER OF MONEY; TRANSFER OF FUNDS FROM DEPOSIT ACCOUNT.
§ 9-333. PRIORITY OF CERTAIN LIENS ARISING BY OPERATION OF LAW.
§ 9-334. PRIORITY OF SECURITY INTERESTS IN FIXTURES AND CROPS.
§ 9-335. ACCESSIONS.
§ 9-336. COMMINGLED GOODS.
§ 9-337. PRIORITY OF SECURITY INTERESTS IN GOODS COVERED BY CERTIFICATE OF TITLE.
§ 9-338. PRIORITY OF SECURITY INTEREST OR AGRICULTURAL LIEN PERFECTED BY FILED FINANCING STATEMENT PROVIDING CERTAIN INCORRECT INFORMATION.
§ 9-339. PRIORITY SUBJECT TO SUBORDINATION.
§ 9-340. EFFECTIVENESS OF RIGHT OF RECOUPMENT OR SET-OFF AGAINST DEPOSIT ACCOUNT.
§ 9-341. BANK’S RIGHTS AND DUTIES WITH RESPECT TO DEPOSIT ACCOUNT.
§ 9-342. BANK’S RIGHT TO REFUSE TO ENTER INTO OR DISCLOSE EXISTENCE OF CONTROL AGREEMENT.
§ 9-301. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS.
§ 9-302. LAW GOVERNING PERFECTION AND PRIORITY OF AGRICULTURAL LIENS.
§ 9-303. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS IN GOODS COVERED BY A CERTIFICATE OF TITLE.
§ 9-304. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS IN DEPOSIT ACCOUNTS.
§ 9-305. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS IN INVESTMENT PROPERTY.
§ 9-306. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY INTERESTS IN LETTER-OF-CREDIT RIGHTS.
§ 9-307. LOCATION OF DEBTOR.
§ 9-308. WHEN SECURITY INTEREST OR AGRICULTURAL LIEN IS PERFECTED; CONTINUITY OF PERFECTION.
§ 9-309. SECURITY INTEREST PERFECTED UPON ATTACHMENT.
§ 9-310. WHEN FILING REQUIRED TO PERFECT SECURITY INTEREST OR AGRICULTURAL LIEN; SECURITY INTERESTS AND AGRICULTURAL LIENS TO WHICH FILING PROVISIONS DO NOT APPLY.
§ 9-311. PERFECTION OF SECURITY INTERESTS IN PROPERTY SUBJECT TO CERTAIN STATUTES, REGULATIONS, AND TREATIES.

UCC Article 9 and Personal Property Insurance Interests

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In last month’s digest, we focused on the fact that there are certain items and types of collateral for which an “all assets” UCC filing will not perfect a lien. This month, we will help you understand the ins- and-outs of perfection of insurance proceeds under UCC Article 9.

Article 9 governs perfection of a security interest in personal property interests as opposed to interests in real property and other types of special types of collateral. Security interests in certain types of personal property collateral may be perfected differently. Some interests are perfected by the filing of a financing statement with the appropriate filing office while some others are perfected through possession or control or notation on a document.

Though UCC Article 9 generally does not apply to a transfer of an interest or claim in or under a policy of insurance other than the assignment of a health care receivable, there are exceptions to the rule of which an astute lender should be aware. [1]

UCC Article 9-102 defines “Proceeds” to include the value of the collateral and to the extent payable to the borrower or secured party, any insurance payable by reason of loss or non-conformity of defects or infringement of rights in, or damage to, the collateral. The term “Proceeds” includes money, checks, deposit accounts and other “cash proceeds”. A secured party’s rights also attaches to identifiable proceeds of collateral pursuant to UCC Article 9-315.

Why Require A Borrower Insure?

Lenders generally insist that borrowers obtain insurance policies to protect a lender’s interest in the borrower’s personal property. The protection is both for the benefit of the borrower and the lender. By insuring and protecting the borrower’s interest in the borrower’s personal property, the property the borrower can offer as collateral is protected, thus providing more security to a lender and an increased possibility that the lender will lend under more favorable terms. Lenders, in turn, view this insurance as part of their collateral package that will assist them in the event of a casualty event or some other action.

If a piece of personal property is subject to a security interest, perfection occurs through listing the lender as a Loss Payee or Additional Insured as appropriate under the insurance policy. This is acknowledged by the insurance company by issuance of the policy binder. The interests as Loss Payee or Additional Insured are separate and distinct. If the only interest the lender has is in the collateral itself it is appropriate to only list the interest as being that of a Loss Payee. Once this is confirmed by the insurance company under the binder upon any catastrophic event, the proceeds of the policy will be paid directly to the lender up to the value of the personal property.

Pursuant to Article 9-315 the secured party is automatically perfected in proceeds within its security interest. However, it is prudent to note that the term “proceeds of any of the foregoing” should be included in any UCC financing statement in order to protect the lender if any payment is made other than directly to the lender. If the proceeds are not directly payable by the insurer to the secured party, once the funds go into a debtor’s accounts the secured party will likely have a problem tracking the proceeds as being identifiable to its interests as opposed to the interests of other parties.

Can An Insurance Policy Be Collateral?

Questions also arise as to whether an actual policy of insurance can be taken as collateral. In Illinois, courts have held that life insurance policies can be used as collateral through an assignment of the party’s rights and privileges under the policy.

And insurance policies vary between insurers. Therefore, a policy needs to be reviewed to determine whether it permits assignment and the method for doing so. In absence of any specific language to the contrary, courts have held that any language in the policy that demonstrates an ability to transfer some interest is sufficient to allow a transfer of the interests under the policy. The normal method of perfection on life insurance policies is through an assignment of a collateral interest in the policy which is signed both by the borrower and acknowledged by the insurance company. The policy should be specifically identified as opposed to language such as “any policy the insured has with the insured.” Also, the acknowledgment of the assignment by the insurance company should eliminate the possibility of any proceeds being paid to parties other than the secured party, and should avoid any commingling issues. _________________________________________________________

[1] There are other interests in insurance policies which are governed by UCC Article 2A. However, those are beyond the scope of this article.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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Out-Law Guide 10 min. read

Security in finance transactions

30 Aug 2011, 4:34 pm

When a borrower is granted a loan from a bank, the bank will often want security for the loan it makes.

Taking effective security over an asset means that the bank can, on the insolvency of the borrower, take possession of that asset, sell it and use the proceeds to repay the loan. This puts the bank in a stronger position than creditors who do not have security. Depending on the circumstances, the bank has the option of taking security over specific assets of the company or over all the assets of the company. If the bank chooses to do the latter a debenture will be used to create fixed and floating charges over all the property and assets of the company.

Under English law there are several types of security interest which are favoured by banks. This Guide will look at what these involve, along with their advantages and disadvantages.

Under a mortgage, ownership of an asset is transferred (by way of security for the loan) on the express or implied condition that it will be returned when the loan is repaid. What distinguishes a mortgage from an outright sale with a right of repurchase is that the transfer is only intended to secure the repayment of the debt. Transferring ownership enhances the lender's ability to sell the asset and receive cash in return if necessary, and prevents the borrower from disposing of the asset. A mortgage does not require the delivery of possession and so any kind of asset whether tangible (such as houses, ships or planes) or intangible (such as copyrights or patents) is capable of being mortgaged.

A mortgage can be legal or equitable. Under a legal mortgage, legal ownership of the property is transferred to the lender. An equitable mortgage is usually created where either a transaction does not meet the formal requirements of a legal mortgage but is recognised in equity (for example, a mortgage over property which the mortgagor does not yet own – a legal mortgage can only be created over property which exists at the time); or where the mortgage concerns property only recognised in equity (for example, an interest in a trust fund – a legal mortgage cannot be taken over property which is only recognised in equity).

Legal mortgage: This is the most secure and comprehensive form of security interest. As we have seen, it transfers ownership to the bank (the mortgagee) and so prevents the borrower (the mortgagor) from dealing with the mortgaged asset whilst it is subject to the mortgage. The formalities required for creating a legal mortgage depend on the type of property being secured, but include:

the creation of a legal mortgage over land, which must be done by deed;
a legal mortgage over debts or choses in action - rights under contracts – which is created by an absolute assignment, in writing, by the assignor which is not intended to be by way of charge. Written notice of this assignment must be given to the debtor, trustee or other person from whom the assignor would have been entitled to claim the debt or choses in action;
legal mortgages over chattels – personal property – which do not generally require any formalities to make them effective providing that there is a valid agreement and the intention to create a legal mortgage;
a legal mortgage over registered securities which is created by transferring those securities into the name of the mortgagee by novation – in essence, a new contract. The mortgagee should be registered as the new holder of those securities;
a legal mortgage of registrable intellectual property rights, which is created by entry of the details of the mortgage into the relevant register.

A legal mortgage transfers ownership of the asset to the mortgagee so it cannot be sold to a third party without the mortgage being released and ownership being transferred back to the mortgagor. Alternatively the purchaser can agree to acquire the property subject to the existing mortgage, which is unusual.

Equitable mortgage: An equitable mortgage only transfers a beneficial interest in the asset to the mortgagee, with full legal ownership remaining with the mortgagor. In general, an equitable mortgage will arise where one of the following applies:

the formalities necessary to create a legal mortgage have not been complied with;
the mortgagor's interest in the asset being mortgaged is an equitable interest;
the parties have merely entered into an agreement to create a legal mortgage in the future over the asset in question, rather than formally creating such a mortgage;
the property to be mortgaged is recognised only in equity - for example, an interest in a trust fund.

Equitable mortgages and charges can be taken in a number of ways, some of which offer very little protection against third parties obtaining an interest in the charged asset and can make enforcement over the charged asset very difficult. It is preferable to take a legal mortgage or charge wherever possible.

The term 'charge' is often used as a generic term for all types of security interest, but specifically it represents an agreement between a creditor and a debtor in which a particular asset or class of assets can be used to satisfy a debt. A charge creates an encumbrance or interest which attaches to the asset and travels with it into the hands of any third parties. The only exception to this is a genuine, arms-length purchaser of the full legal ownership for value and without notice, who will acquire the asset free of the charge.

A charge does not involve the transfer of ownership or possession of an asset. For practical reasons most lenders will not want to take possession of the borrower's assets and nor will the borrower want to lose control of them, especially if those assets are used in the day-to-day running of the business. Accordingly a lender (chargee) will instead want to take security by obtaining rights over specific assets of the borrower (chargor) as security for the loan. The chargee then has a right to resort to that asset to repay the debt.

Charges can either be fixed or floating. The nature of a charge (whether fixed or floating) is particularly important if the borrower becomes insolvent. Under a fixed charge an asset which is ascertained and definite, or capable of being ascertained and defined, can be used to satisfy a debt immediately or once the lender acquires an interest in it.

A floating charge, on the other hand, hangs over a class of assets or future assets and acts as a deferred right to use those assets to satisfy a debt. Until an event occurs which causes the floating charge to fix to those assets, the borrower is free to dispose of and add to the assets in the ordinary course of its business. When the event occurs and the floating charge becomes fixed, it attaches to the assets that make up that class at that point.

It should be noted that the label attached to the charge is not conclusive in determining whether it will be regarded by a court as fixed or floating. To be confident that a court will regard a charge over assets as fixed, the lender must demonstrate that it has exercised control over the charged assets to the extent that the charge does not 'float' over the assets but is fixed to them. In practice, this means implementing clear restrictions on the ability of the borrower to deal with the assets and enforcing those restrictions.

Fixed charges

Fixed charges attach immediately to the charged asset, providing that the asset is or is capable of being ascertained and definite. They can be granted by anyone including companies, limited liability partnerships (LLPs), traditional partnerships and individuals.

The key characteristic of a fixed charge is that it gives the lender control over the charged asset. This control is crucial to the nature of a fixed charge - without sufficient control, the charge will be deemed to be floating. Typically, a document which creates a fixed charge will give the lender the right to:

prevent the borrower from disposing of, or otherwise dealing with, the asset without the lender's consent;
sell the asset if the borrower defaults under the loan;
require the borrower to maintain the value of the asset while it remains in the borrower's possession; and
claim the proceeds of the sale of the charged asset in priority to other creditors.

The charge document should ensure that the charged assets are identified as precisely as possible.

Fixed charges have a number of important advantages over floating charges:

a floating charge given by an insolvent company within the 12 months before the onset of insolvency (two years if the chargee is a 'connected person' with an interest in the chargor) is void except to the extent that the insolvent company has acquired new assets since the security was granted;
a floating charge ranks behind the rights of preferential creditors if the company goes into administration, receivership or liquidation, while a fixed charge takes priority over all unsecured claims, preferential or otherwise;
the sale of, or any encumbrance or burden created over, an asset which is subject to a floating charge will as a general rule take effect free from that charge, while a fixed charge can only be defeated if the asset is sold to a genuine, arm's length purchaser of the legal title of that asset for value without notice;
many foreign legal systems, particularly civil law jurisdictions such as those in Europe, do not recognise floating charges;
all floating charges given by a company need to be registered at Companies House, otherwise they cannot be forced against the liquidator, administrator or any creditor of the company. A fixed charge is only registrable if taken over a class of asset specifically listed in the Companies Act.

Floating charges

Floating charges, as the name suggests, hover above a shifting pool of assets. While fixed charges can be created by anyone, floating charges can only be created by companies, LLPs and, under the Agricultural Credits Act, farmers. Individuals cannot grant floating charges over their assets.

A floating charge has the following characteristics:

it is a charge on a class of assets, present and future, of a company;
that class is one which, in the ordinary course of the company's business, would change from time to time;
it is understood that, until some future step is taken by or on behalf of the chargee, the company may carry on its day to day business as far as it concerns that particular class of assets.

Unlike assets secured by a fixed charge, the assets secured by a floating charge are described in very general terms – for example, the borrower's 'trading stock' or its 'undertaking and assets'. This group of assets may fluctuate from time to time either through the borrower disposing of them in its ordinary course of business or by it acquiring further assets in that class after the floating charge was created. This flexibility is the great advantage of a floating charge, but the freedom to deal with assets presents the lender with the problem of how to stop the borrower from disposing of all of those assets. For this reason, lenders prefer to take fixed charges over specific assets where possible. Lenders do have limited ability to control floating charge assets in some circumstances – a floating asset will fasten onto the charged assets which are in existence when a certain event occurs, either by operation of law or by agreement of the parties, which fixes the charge. At that point, the floating charge stops hovering over the pool of assets and instead becomes fixed to those assets which exist at that time.

Despite the inherent weaknesses of a floating charge, it is usually important for a lender to take a floating charge wherever possible. A floating charge has three important advantages:

it allows the bank to take security without unduly restricting or affecting the borrower's ability to carry on its business, including the buying and selling of assets;
providing the charge is a 'qualifying floating charge' for the purposes of the Insolvency Act, the holder will be able to appoint an administrator without applying to court for an order;
it acts as a catch-all, sweeping up intangible assets which cannot be specifically charged or assets which the lender is unaware of.

Banks will usually get the best of both worlds by using a combination of fixed and floating charges in one document, known as a debenture. This document usually creates fixed charges over certain assets of the company – land, plant and machinery, goodwill, uncalled capital, intellectual property rights, book debts, non-trading account bank balances – and a floating charge over all the other assets. By using this combination a bank can obtain adequate security for its loan, safe in the knowledge that all the borrower's key assets apart from stock in trade are subject to fixed charges. At the same time the company is free to carry on its business in a relatively unhindered manner, and can sell its stock in trade in the ordinary course of business without having to obtain the bank's consent for every sale.

Assignment by way of security

A borrower's rights against third parties, such as the right to receive payment for debts on its own books, can be assigned to a third party as a way of selling those rights – this is an absolute, or direct, assignment. It is also possible to carry out an assignment by way of security over a borrower's choses in action – rights the borrower is entitled to under contracts – as security for that borrower's debts. As with any assignment, an assignment by way of security can be either legal or equitable. An assignment will be legal if it is:

in writing and executed by the borrower (the assignor);
absolute - that is, unconditional and for the whole amount; and
notified in writing to the person against whom the assignor could enforce those assigned rights, usually the debtor of the borrower company.

As a result, a legal assignment should be expressed as an absolute assignment with a provision that those rights will be reassigned once the relevant debt is satisfied. If, however, an assignment is made 'by way of charge' rather than by way of security then it will take effect in equity only.

A legal assignment can only assign debts which already exist. Only an equitable assignment can assign rights under future contracts.

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Personal Finance

What Is Security Interest? Definition and Legal Requirements

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

What Is a Security Interest?

Security interest is an enforceable legal claim or lien on collateral that has been pledged, usually to obtain a loan. The borrower provides the lender with a security interest in certain assets, which gives the lender the right to repossess all or part of the property if the borrower stops making loan payments. The lender can then sell the repossessed collateral to pay off the loan.

Key Takeaways

A security interest on a loan is a legal claim on collateral that the borrower provides that allows the lender to repossess the collateral and sell it if the loan goes bad.
A security interest lowers the risk for a lender, allowing it to charge lower interest on the loan.
Lower interest means that the borrower’s cost of capital will also be reduced.

Understanding a Security Interest

Securing interest on a loan lowers the risk for the lender and, in turn, allows the lender to charge lower interest, thereby lowering the cost of capital for the borrower. A transaction in which a security interest is granted is called a “secured transaction.”

Granting a security interest is the norm for loans such as auto loans, business loans, and mortgages, collectively called secured loans . Credit cards, however, are classified as unsecured loans . The credit card company will not repossess the clothes, groceries, or vacation you purchased with the card on which you default. Signature loans are another example of unsecured loans. The main difference between these two types of loans is the absence or presence of collateral.

The Uniform Commercial Code (UCC) specifies three requirements for a security interest to be legally valid, a process known as “attachment.”

The security interest is given a value.
The borrower owns the collateral.
The borrower has signed a security agreement .

Further, the collateral must be specifically described in the security agreement. For example, the security listed in the loan agreement might specify the borrower’s 2013 Honda Accord, not “all of the borrower’s vehicles.”

The lender must also “perfect” its security interest to make sure no other lender has rights to the same collateral. A perfected security interest is any secure interest in an asset that cannot be claimed by any other party. The interest is perfected by registering it with the appropriate statutory authority, so that it is made legally enforceable and any subsequent claim on that asset is given a junior status . As a note, a deed of reconveyance proves that a bank no longer has a security interest over a property.

A perfected security interest is a secure interest in an asset owned solely by the borrower and must be registered with the appropriate statutory authority.

Examples of Security Interests

Let’s say Sheila borrowed $20,000 to buy a car and stopped making payments when her loan balance was $10,000 because she lost her job. The lender repossesses her car and sells it at auction for $10,000, which satisfies Sheila’s loan balance. Sheila no longer has her car, but she also no longer owes the lender any money. The lender no longer has a bad loan on its books.

Another situation in which a lender might require the borrower to grant a security interest in assets before it will issue the loan is when a business wants to borrow money to purchase machinery and equipment. The business would grant the bank a security interest in the machinery and, if the business is unable to make its loan payments, the bank would repossess the machinery and sell it to recoup the money it had lent. If the business stopped paying its loan due to bankruptcy, its secured lenders would have precedence over its unsecured lenders in making claims on its assets.

Uniform Law Commission. " Uniform Commercial Code Revised Article 9. Secured Transactions; Sales of Accounts and Chattel Paper ," Page 56. Accessed April 7, 2021.

Uniform Law Commission. " Uniform Commercial Code Revised Article 9. Secured Transactions; Sales of Accounts and Chattel Paper ," Page 2. Accessed April 7, 2021.

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Assignment of Interest In LLC: Everything You Need to Know

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. 3 min read updated on October 28, 2020

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. The assignment is usually done as a means for members to provide collateral for personal loans, settle debts, or leave the LLC. The member (assignor) and the person assigned (assignee) sign a document called the Membership Assignment of Interest.

Why a Member May Want to Assign Interest

A member may choose to assign interest for a number of reasons.

The assignment of interest may happen as collateral to a loan to one of the members.
Some members can assign interest to settle debts. The assignment will be effective until the debt is cleared.
An assignment of interest can also' be done to a member's legal heirs , going into effect upon the death of a member.

The Rights and Limitations of the Assignee

The laws governing LLC membership interest assignments vary considerably from one state to another.

Most states prohibit the assignee from participating in the LLC's operations or decisions unless the Articles of Organization have this provision.
An assignee is protected from liability from the assignor until the assignee becomes a member in most states. However, the law in a few states, including California and Florida, states that the assignee does get the assignor's liability.
Should the assignee become a member after the assignment, he is only entitled to the rights and restrictions the assignor had.
The assignment usually gives the assignee the right to receive the assignor's share of the profits — but not necessarily the other rights.

The Rights and Limitations of the Assignor

In many states, all LLC members have the right to assign membership interest.
In most states, assigning interest does not necessarily lead to forfeiting of voting and management rights and can be temporary. Texas law, on the other hand, states that the assignor ceases to be a member of the LLC after the assignment.

The Rights and Limitations of Other Members

All members of the LLC have to be notified of any type of assignment.
Some states require the assignment of interest to be approved by all members.
The new person who has been assigned interest does not necessarily become a member even if the assigner has decided to leave the LLC. The other members can decide whether to admit the assignee as a member or not. Should a member assign interest without the input of other members, the interest is normally limited to financial benefits.
In a two-member LLC, one member can easily transfer the interest to the other.

The Membership Interest Assignment Document

The LLC's operating agreement should explain the rights of members on issues of transfer of interest, and the agreement should be followed during the assignment process. The Membership Interest Assignment acts as a record of the agreement, and the LLC normally keeps a copy of the document. The law in most states does not provide a formal template of the Membership Interest Assignment document but lists what should be included in the document. The document should have the following details:

Percentage of interest that will go to the assignee
Whether the assignee will have voting rights
The signatures of the assignor and the assignee

Assignment of Interest Versus Selling Ownership Stake

The assignment of interest is typically different from selling the ownership stake . Selling a member's ownership stake in the LLC requires unanimous approval by the other members. A departing member may also assign his membership to another member.

If a member is being paid to transfer interest, this is treated for tax purposes as a sale, and the selling member's gains might be liable to capital gains tax. Even if a departing member is not paid for his interest, if the departure results in the assignee getting the departing members' share of liability, the departure is seen as an exchange or sale.

Assignment of Interest Versus Abandoning an LLC

If a member wants to withdraw interest in an LLC, he/she can choose to simply legally abandon the LLC in most states. The abandoning member should give some kind of notice to the other members explaining that he is abandoning membership. Abandoning membership does not usually require the approval of other members.

Abandoning an LLC does not absolve the member of liability he/she may have incurred when still a member.

If you need help with the assignment of interest in LLCs, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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01 Jun Securing an Interest: Federal Crop Insurance Proceeds

Categorized Crop Insurance , Finance and Credit , Micah Brown , Secured Transactions , Underserved Communities, BIPOC , Uniform Commercial Code

In agricultural finance, it is common for creditors to obtain an interest in a farmer’s crop insurance payments to secure a loan. This article discusses the availability of federal crop insurance proceeds to creditors and the laws that govern interests in these proceeds. Basically, there are two separate sets of laws that apply to creditor’s interests in crop insurance proceeds: Article 9 of the UCC, and the Federal Crop Insurance Act.

Many agricultural producers borrow money to successfully run their operations. Typically, the lender requires the borrower to give a security interest in personal property such as livestock, crops, or equipment before supplying the funds. A security interest is an interest held by a lender in property, referred to as collateral , that has been pledged by a debtor. This interest allows the lender to take possession or sell the collateralized property if the debt is not paid. In these situations, the producer-debtor and lender-creditor have entered into a secured transaction , which is primarily governed by Article 9 of the Uniform Commercial Code (“UCC”).

The UCC is a collection of rules affecting commercial transactions, and every state has chosen to enact some version of the rules within it, including Article 9. Specifically, Article 9 contains rules and requirements that creditors must satisfy to obtain an enforceable security interest in certain collateral. In general, Article 9 requires that the creditor satisfy two steps to obtain an enforceable interest. The first of those steps is attachment of the security interest, which is typically accomplished by executing a security agreement. The second step is perfection, which is typically satisfied by filing a UCC-1 financing statement. Once a creditor satisfies these two steps, they hold an enforceable security interest in the collateral. Thus, a secured creditor can enforce its interest to gain possession of the collateralized property, sell the property and use the funds to satisfy the debtor’s loan debt.

Creditors who satisfy these steps usually hold an Article 9 security interest in collateral, but there are some instances where Article 9 rules do not entirely govern a creditor’s interest. Sometimes state Article 9 laws are replaced by federal laws depending on the property serving as collateral for a creditor’s security interest. In agricultural secured transactions, this occurs when federal crop insurance proceeds are serving as collateral to secure a loan. Specifically, the Federal Crop Insurance Act (“FCIA”) replaces some Article 9 rules when a creditor seeks to enforce their interest in a producer’s insurance proceeds.

Although creditors can gain an Article 9 security interest in federal crop insurance proceeds, these interests are not always enforceable because the FCIA governs interests in these proceeds. The FCIA is a federal law, passed by Congress, and it applies to the entire United States and preempts or supersedes laws such as certain UCC provisions passed by state legislatures. The FCIA contains a statutory provision that directly preempts Article 9 security interest in insurance proceeds. Specifically, this provision explains the extent of the FCIA’s preemptive effect of Article 9 rules.

Under Section 1509 of the FCIA, “claims for indemnities…shall not be liable to attachment, levy garnishment, or any other legal process before payment to the insured….” Congress enacted this statutory provision with the intent of limiting a creditor’s ability to enforce an Article 9 security interest against federal crop insurance proceeds. The statute expressly prohibits creditors from enforcing an Article 9 security interest against a producer’s insurance proceeds. However, Congress did not intend the FCIA to completely preempt Article 9 security interests.

In general, the FCIA prohibits creditors from enforcing an Article 9 security interest in insurance proceeds, but only “before payment to the insured….” Under §1509, Congress clearly mandates that a producer’s insurance proceeds are not subject to a creditor’s security interest when proceeds have not yet been issued by a producer’s insurance provider. In other words, a creditor holding an Article 9 security interest can enforce that interest once insurance proceeds are issued to a producer-debtor. Thus, both the FCIA and Article 9 rules govern interests in crop insurance proceeds, but at separate periods of time.

Overall, whether the FCIA preempts an Article 9 security interest in crop insurance proceeds depends primarily upon timing. If the producer-debtor has yet to receive an insurance payment from the insurance provider, §1509 of the FCIA governs. Thus, the creditor’s security interest in the insurance proceeds is not recognized and cannot be enforced. However, if the producer receives an insurance payment, state law applies and the creditor can enforce their Article 9 security interest against the producer to recover the insurance proceeds. Accordingly, whether the producer-debtor receives insurance proceeds controls whether the FCIA or Article 9 governs the creditor’s interest in proceeds.

Because the FCIA preempts Article 9 security interests before insurance proceeds paid to a producer, a creditor cannot enforce their interest against undistributed insurance funds. However, the FCIA offers creditors the ability to gain an interest in a producer’s insurance proceeds before an insurance payment is issued to a producer. Unlike creditors holding only a security interest, creditors may seek to gain an interest under the FCIA because it provides them the ability to receive insurance proceeds directly from an insurance provider. For creditors to obtain an interest in undistributed crop insurance proceeds, they must obtain an assignment of a producer’s insurance payment rights.

Assignment of Indemnity

The FCIA not only established the federal crop insurance program, but it also created the Federal Crop Insurance Corporation (“FCIC”). The FCIC manages the federal crop insurance program and implements regulations to carry out the purpose of the FCIA. A regulation implemented by the FCIC, entitled “Assignment of Indemnity”, provides creditors the ability to obtain an interest in a producer’s insurance proceeds. This regulatory provision permits a producer to transfer their insurance policy rights to a creditor. A creditor who obtains an assignment has an interest in insurance proceeds that have not yet been issued. When an insurance payment is warranted, the creditor-assignee has the right to collect insurance proceeds directly from the insurance provider issuing the payment.

For a creditor to receive an assignment, a producer must properly execute an “Assignment of Indemnity” form. This from is provided by the producer’s crop insurance provider, and once the producer completes the form, they must submit it to their insurance provider for approval. If the insurance provider approves the assignment, the creditor is named as an assignee under the producer’s insurance policy and holds an interest in insurance proceeds that may be issued by the insurance provider. In situations when a claim on the insurance is approved, the insurance provider will send the insurance payment directly to the creditor-assignee on the policy.

Assignments vs. Security Interests

Both the FCIA regulations and Article 9 rules provide a method for creditors to obtain an interest in a producer’s crop insurance proceeds; however, these interests operate differently. For instance, assignments and security interests provide creditors separate methods of collecting insurance proceeds. Additionally, creditors who obtain an assignment become eligible to submit a claim under the insurance policy, but creditors holding only a security interest do not have that privilege. Creditor-assignees probably avoid more financial risk then creditors holding only a security interest because assignments provide creditors a greater opportunity to receive insurance proceeds, which increases the likelihood of being repaid the money loaned to a producer. Therefore, many creditors may seek to obtain an assignment because assignments likely provide creditors a superior interest in a producer’s crop insurance proceeds over Article 9 security interests.

Claims on Insurance Policy

Assignments most likely provide creditors a superior interest in proceeds for three reasons. First, the FCIA provides creditor-assignees the ability to submit an insurance claim under the policy directly to an insurance provider. Creditor-assignees can make a claim on an insurance policy when their producer-debtor fails to do so. This provides creditor-assignees extra protection because they do not have to rely on a producer to make an insurance claim to receive an insurance payment. For example, if a producer fails to make a claim, and their creditor-assignee submits a claim that is then approved, the creditor is now able to collect insurance funds that would not have otherwise been paid had they not submitted the claim.

In situations where a producer does not make a claim for insurance proceeds—even if the reason for crop-loss is covered under the insurance policy—creditors holding only a security interest cannot make an insurance claim on behalf of the producer. Although a creditor has a security interest in proceeds, they are not entitled to any benefit under the insurance policy. Making a claim to receive insurance proceeds is a benefit under the policy, so security interest creditors may not make a policy claim. This means security interest creditors cannot collect insurance proceeds when their producer-debtor does not make a claim on their insurance policy. Therefore, assignments provide creditors a greater opportunity to collect insurance proceeds because they do not have to rely on a producer to make a claim on the policy.

Collecting Insurance Proceeds

The second advantage assignments offer creditors is the ability to collect insurance proceeds directly. Typically, a producer may never receive insurance proceeds when they have assigned their indemnity rights to a creditor because a creditor-assignee collects an insurance payment. For example, when a producer (or a creditor-assignee) makes an insurance claim that is later approved by an insurance provider, the insurance provider sends the insurance payment check directly to the creditor-assignee. Once the creditor-assignee receives this payment, they can apply the funds to satisfy the producer’s loan debt.

Unlike creditor-assignees, creditors holding only a security interest cannot collect insurance proceeds directly from a producer’s insurance provider because Article 9 security interests are not recognized until proceeds are issued to a producer. Once an insurance provider issues a payment to a producer, a security interest creditor must file an action in a court to enforce their interest against the insurance proceeds. Meanwhile, the producer may use the insurance funds for other expenses while the creditor is in the process of enforcing their interest to collect the proceeds. When this occurs, the security interest creditor risks never collecting the entire amount of insurance proceeds to satisfy the producer’s loan debt. Thus, creditor-assignees are in a greater position to receive repayment for a producer’s loan because creditor-assignees collect insurance payments directly from insurance providers.

Lastly, assignments provide creditors a superior interest because it likely provides priority to insurance proceeds over creditors who hold only a security interest. Priority is the order in which creditors receive money to satisfy a debtor’s loan debt. This means the creditor with higher priority will receive payment before a creditor with lower priority. When two or more creditors have an interest in the same insurance proceeds, the creditor with first priority is the first to receive the proceeds. Therefore, the first priority creditor has their loan repaid before all other creditors.

Currently, there is no court case that directly rules on the issue of priority between a creditor-assignee and a security interest creditor who held competing interests in undistributed insurance proceeds. However, if this issue were to be litigated, it is likely a court will find that a creditor-assignee has first priority over a security interest creditor. Creditor-assignees likely have priority in insurance proceeds because the FCIA may continuously preempt Article 9 when creditor-assignees and security interest creditors are in a priority dispute.

The FCIA preempts Article 9 security interests before a producer receives insurance proceeds. Importantly, a producer may never receive insurance proceeds when they assign their payment rights to a creditor because the creditor-assignee will receive an insurance payment directly from an insurance provider. When insurance proceeds are paid directly to the creditor-assignee, they use the funds to satisfy the producer’s loan debt, which means the producer will likely not receive any of the insurance funds. In this situation, there is likely no “payment to the insured,” and the FCIA continues to preempt Article 9. In other words, the security interest creditor will likely hold an unenforceable interest and is unable to recover the insurance proceeds issued to the creditor-assignee. Thus, the creditor-assignee most likely has priority to the insurance proceeds and can use the insurance funds to satisfy the producer’s loan debt.

Many creditors providing loans to agricultural producers take an interest in the producer’s federal crop insurance proceeds, which is governed by the FCIA. While Article 9 usually governs a creditor’s security interest in collateral, the FCIA preempts some Article 9 rules. However, the FCIA only preempts Article 9 to a certain extent. In general, whether the FCIA preempts an Article 9 security interest in crop insurance proceeds depends primarily upon timing. If a producer-debtor has not received an insurance payment, the FCIA governs and only assignments are enforceable. If a producer receives an insurance payment, state law applies, and the creditor can enforce their Article 9 security interest against the producer to recover the proceeds.

Although the FCIA and Article 9 provide creditors the ability to gain an interest in crop insurance proceeds, a creditor with an assignment likely holds a more stable interest over a creditor holding only a security interest. Creditor-assignees likely have superior interests for three reasons. First, the FCIA regulations permit the creditor to make a claim on an insurance policy when their producer fails to do so. Second, most creditor-assignees have direct access to insurance proceeds because insurers will send insurance payments directly to the creditor, not the producer. Last, and most important, creditor-assignees likely have priority to the insurance funds over security interest creditors because the FCIA may continue to preempt Article 9 when insurance proceeds are issued directly to creditor-assignees. Accordingly, creditors may consider obtaining an assignment in order to better protect themselves from the risk of not receiving insurance proceeds to satisfy a producer’s loan debt.

To read more articles discussing secured transactions, click here .

For more National Agricultural Law Center information on Secured Transactions, click here .

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Section 313

313 Recording of Licenses, Security Interests, and Documents Other Than Assignments [R-07.2015]

In addition to assignments and documents required to be recorded by Executive Order 9424, upon request, assignments of applications, patents, and registrations, and other documents relating to interests in patent applications and patents will be recorded in the Office. See 35 U.S.C. 261 and 37 CFR 3.11 . Other documents affecting title to applications, patents, and registrations will be recorded as provided in 37 CFR Part 3 or at the discretion of the Director. 37 CFR 3.11(a) .

In addition to documents that constitute a transfer or change of title, other documents relating to interests in patents or applications will generally be recorded. Typical of these documents which are accepted for recording are license agreements and agreements which convey a security interest. Such documents are recorded in the public interest in order to give third parties notification of equitable interests or other matters relevant to the ownership of a patent or application. Documents that are not accepted for recording include attorney's liens against patents or patent applications. See In re Refusal of Assignment Branch to Record Attorney's Lien, 8 USPQ2d 1446 (Comm'r Pat. 1988).

Any document returned unrecorded, which the sender nevertheless believes represents an unusual case which justifies recordation, may be submitted to the Office of Petitions with a petition under 37 CFR 1.181 requesting recordation of the document.

The recordation of a document is not a determination of the effect of the document on the chain of title. The determination of what, if any, effect a document has on title will be made by the Office at such times as ownership must be established to permit action to be taken by the purported assignee in connection with a patent or an application. See MPEP § 324 and § 325 .

301.01-Accessibility of Assignment Records
302.01-Assignment Document Must Be Copy for Recording
302.02-Translation of Assignment Document
302.03-Identifying Patent or Application
302.04-Foreign Assignee May Designate Domestic Representative
302.05-Address of Assignee
302.06-Fee for Recording
302.07-Assignment Document Must Be Accompanied by a Cover Sheet
302.08-Mailing Address for Submitting Assignment Documents
302.09-Facsimile Submission of Assignment Documents
302.10-Electronic Submission of Assignment Documents
303-Assignment Documents Not Endorsed on Pending Applications
304‑305-[Reserved]
306.01-Assignment of an Application Claiming the Benefits of a Provisional Application
307-Issue to Non-Applicant Assignee
308-Issue to Applicant
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310-Government License Rights to Contractor-Owned Inventions Made Under Federally Sponsored Research and Development
311-Filing of Notice of Arbitration Awards
312-[Reserved]
313-Recording of Licenses, Security Interests, and Documents Other Than Assignments
314-Certificates of Change of Name or of Merger
315-Indexing Against a Recorded Certificate
316-[Reserved]
317.01-Recording Date
317.02-Correction of Unrecorded Returned Documents and Cover Sheets
317.03-Effect of Recording
318-Documents Not to be Placed in Files
319-[Reserved]
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321‑322-[Reserved]
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323.01(c)-Assignment or Change of Name Improperly Filed and Recorded by Another Person Against Owner’s Application or Patent
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Granting or Recording a Security Interest in a Patent at the USPTO Does Not Deprive the Patent Owner of the Ability to Enforce the Patent

October 6, 2020

LES Insights

By John C. Paul ; D. Brian Kacedon ; Anthony D. Del Monaco; Umber Aggarwal

A patentee did not lose the ability to bring a patent infringement lawsuit when it entered into a security interest agreement covering all of its intellectual property and the agreement was recorded at the USPTO

Raffel, a manufacturer of electronic controls for the seating, bedding and industrial marketplaces, entered into an “Intellectual Property Security Agreement” with two different banks granting the banks a security interest in all of its intellectual property. The banks filed notices of their security interests with the USPTO. Shortly thereafter, Raffel sued Man Wah for patent infringement and other causes of actions. In response, Man Wah moved to dismiss Raffel’s patent infringement claims arguing that Raffel lacked the right to sue for infringement because the security agreements transferred title of Raffel’s intellectual property to the banks.

Trial Court’s Decision

Lenders take security interests in a debtor’s intellectual property and other assets to protect themselves if the debtor defaults on a loan. In some instances, the lender demands that the security agreement transfer the ownership in the intellectual property until the loan is repaid.

The trial court found the act of granting a security interest in intellectual property and recording that security interest at the USPTO did not transfer title of the patents from Raffel to the banks, and, therefore, Raffel retained the right to enforce the patents.

To have the ability or “standing” to sue for patent infringement, an entity must satisfy the requirements of the U.S. constitution as well as the patent statute. To have constitutional standing, a plaintiff must possess exclusionary rights in the patent such as the right to prevent others from making, using, selling, or offering to sell the patented invention. Statutory standing further requires that the plaintiff have “all substantial rights” to the asserted patents through being the original patentee, an assignee, or an exclusive licensee of all such rights. If an entity has “exclusionary rights” in the patent but lacks “all substantial rights,” it typically must join the owner of the patent in any infringement suit.

Man Wah argued that Raffel’s grant of a security interest and the subsequent recording of that security interest transferred title to the banks and thus, deprived Raffel of “standing” to sue. In support, Man Wah relied on a Supreme Court case from 1891, Waterman v. Mackenzie , which supported the principle that recording a security interest in patents was equivalent to transferring title. The court noted, however, that Waterman was decided prior to the enactment of the Uniform Commercial Code (“UCC”) in 1952, which fundamentally changed the way a security interest is perfected. After the enactment of the UCC in 1952, transfer of title was unnecessary to perfect a security interest.

Man Wah asserted that state UCC laws provide only one way for a party to perfect security interests and are preempted by the Patent Act and Waterman when they conflict. Specifically, Man Wah argued that, under the Patent Act and Waterman , a security interest is created through transfer of the patent when it is recorded at the USPTO. Man Wah asserted that this preempts perfecting a security interest through the UCC which does not transfer title. The court rejected the preemption argument citing numerous cases showing the Patent Act does not address perfection in security interests, but only assignments of title, and, thus, does not preempt state regulation of security interests in patents.

In looking at the actual agreements with the banks, the court confirmed that “[n]othing in the Intellectual Property Security Agreements states that Raffel is assigning title of the patents to the banks; rather, the agreements specifically state that Raffel is granting a ‘security interest’ in its intellectual property.” Thus, Raffel never transferred title and maintained standing. The court, therefore, denied the motion to dismiss.

Strategy and Conclusion

A party receiving a security interest in a patent may record the security agreement with the USPTO to protect itself against and give notice to subsequent bona fide purchasers or mortgagees. Standard security agreements that do not include language assigning title of the patents, however, will not prevent a patentee from bringing a patent infringement lawsuit. This case demonstrates the value of drafting the security agreement in a way that does not transfer ownership of intellectual property to the lender while the loan is pending.

The Raffel decision can be found here .

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Taking a security interest in a closely held business

If a loan or extension of credit requires collateral, banks prefer collateral that is readily marketable rather than taking a security interest in a closely-held business. Occasionally, the only collateral that is available or that the borrower can offer is corporate stock that is not traded on a public market, an interest in a limited liability company ("LLC") or a partnership interest. It is common for closely-held business entities to prohibit an assignment of an owner's interest or require as a condition to an assignment the consent of the other owners of the entity.

This memorandum will discuss some of the concerns a lender should address in taking a security interest in collateral that limits or prohibits an assignment.

Assume that the stock of a closely-held corporation ("Company A") is offered to your bank as collateral for a loan. The stock certificate bears the following language on the reverse side:

The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired without a view to distribution and may not be offered, sold, transferred, pledged or hypothecated in the absence of an effective registration statement for the shares under the Act and under any applicable state securities laws, or an opinion of counsel to the corporation that such registration is not required as to such sale or offer.

In addition, the shareholders of Company A have entered into a Stock Restrictive Agreement ("SRA"), which states that unless the voting stock agrees to a pledge, the pledge shall be null and void and no security interest shall be transferred.

These issues were addressed in the United States Bankruptcy Court for the Western District of Arkansas in In re Garrison [1] .

There the lender made a loan secured by stock subject to both restrictions. In the bankruptcy proceedings the lender sought a declaratory judgment that it held a valid perfected security interest in the stock. After a thorough analysis of the lender's claims, the Court held that the first restriction, the one noted on the stock certificate, did not prohibit the lender from having a perfected security interest in the stock. After first noting that the validity of a restriction on a transfer of stock is determined by the law of the state of incorporation, the Court said in part, applying Oregon law:

The Court concludes that while the restriction may be valid and enforceable under Section 60.167, the applicable Oregon statute, by its terms it is not applicable to the transfer at issue. The statute authorizes the restriction to preserve the corporation's federal and state exemptions and that purpose is not furthered by prohibiting the pledge, which does not threaten the availability of those exceptions. The pledge, being a transfer that is neither a public distribution nor a transaction by an issuer, underwriter or dealer, does not violate the restriction. The restriction remains in effect as to the bank to the extent that any future transfer might necessitate the action of the stock transfer agent referred to in the legend. The record does not contain any evidence that the stock transfer agent was required to take action by the pledge at issue.

As to the second restriction, the one contained in the SRA, the Court ruled against the lender, stating in part:

Applying these rules regarding attachment and perfection, a Court finds that when the Debtors attempted to give the Bank a security interest in their stock, they had already voluntarily agreed to refrain from pledging the stock without unanimous consent of the other signatories to the agreement. The Debtors having conditionally relinquished their transfer rights, a security interest could not attach to those rights and without attachment, perfection could not be accomplished. Accordingly, the Bank's lien in the stock is unperfected unless the Bank's estoppel and apparent authority arguments have merit, issues to be subsequently discussed.

Colorado permits inclusion of restrictions on the transfer of shares of stock. [2] Subsection (2) of the Colorado statutes provides:

A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized by this section and its existence is noted conspicuously on the front or back of the certificate or is contained in the information statement required by Section 7-106-207(ii). Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction.

The use of limited liability companies has grown exponentially during the last few years. Where an LLC is involved, the owner of an interest in the LLC may offer his or her interest as collateral for a loan. It is not unusual for an LLC's operating agreement to provide some restriction on the transfer of a member's interest. In In re West [3] the United States Bankruptcy Court dealt with the pledge of an LLC interest as security for a $91,800 loan from the Heartland Bank. The operating agreement provided that a member does not have the right to assign, pledge or hypothecate his interest "except as otherwise specifically provided herein." Both unanimous consent was required for the transfer of an interest and if no unanimous consent had been obtained, "no transfer shall be effective unless and until written notice has been provided to the company and the non-transferring members."

Because the funds borrowed by the member using his interest in the LLC as collateral benefitted the LLC, the Court held that the written notice requirement was waived. Heartland Bank's security interest was held to be valid.

Colorado permits the transfer of an interest in a LLC subject to the limitation set forth in the following statutory provision: [4]

The interest of each member in a limited liability company constitutes the personal property of the member and may be assigned or transferred. Unless the assignee or transferee is admitted as a member, the assignee or transferee shall only be entitled to receive the share of profits or other compensation by way of income and the return of contributions to which that member would otherwise be entitled and shall have no right to participate in the management of the business and the activities of the limited liability company or become a member. [5]

The cited bankruptcy cases are not binding on other courts, but they do teach two important lessons. First, any lender proposing to take a security interest in a closely-held entity, be it a corporation, LLC or partnership, should seek to determine whether there are any limitations or prohibitions on the transfer or pledge of the borrower's interest. Violation of such restriction may result in the lender not having a valid, enforceable security interest in the borrower's ownership interest.

Second, a limitation or restriction on the transfer or assignment of an ownership interest may not always negate a security interest granted to the lender. Understanding the scope and purpose of the restriction is as important as determining whether a restriction exists. Also, there may be instances where a statutory provision authorizing an assignment or pledge overrides a stated restriction. At times it may be advisable to get an opinion of counsel as to the scope and meaning of a transfer restriction or whether a statutory provision controls.

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Assignment of security interest

Assignment of security interest clause samples

SECTION 5.04. Assignment of Security Interest. If at any time any Grantor shall take a security interest in any property of an Account Debtor or any other Person to secure payment and performance of an Account in an amount in excess of $250,000, such Grantor shall promptly assign such security interest to the Collateral Agent for the benefit of the Secured Parties. Such assignment need not be filed of public record unless necessary to continue the first priority and perfected status of the Security Interest of the Collateral Agent against creditors of and transferees from the Account Debtor or other Person granting the security interest.

05/15/2019 (Nxt-ID, Inc.)

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What Is an Assignment for the Benefit of Creditors and How Does It Differ From a Bankruptcy? - Creditor’s Rights Toolkit

An assignment for the benefit of creditors (ABC) is a process by which a financially distressed company (referred to as the assignor) transfers its assets to a third-party fiduciary (referred to as the assignee). The assignee is responsible for liquidating those assets and distributing the proceeds to the assignor's creditors, pursuant to the priorities established under applicable law.

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IMAGES

ASSIGNMENT OF SECURITY INTEREST
Fillable Online Assignment and Grant of Security Interest Sample
Creating Perfect Security Interests A Premir
Security Interest Agreement Form
Assignment of security interest
Pennsylvania Assignment of a Purchase Money Security interest along

COMMENTS

Assignments and Security Interests Under UCC Article 9: A Worthy
The basic definitions of Article 9 align with this approach of applying to both an assignment of payment rights and a security interest in such assets. " [S]ecurity interest" in UCC Article 1 ...
How to Attach and Perfect a Security Interest Under the UCC
Attachment of a security interest. Under the UCC, in order for a creditor to become a secured party—that is, a party with a legal right to take possession of the collateral if the debtor fails to pay—the creditor must take special steps (discussed below). These steps are known as "attachment of a security interest."
§ 9-514. Assignment of Powers of Secured Party of Record
An assignment of record of a security interest in a fixture covered by a record of a mortgage which is effective as a financing statement filed as a fixture filing under Section 9-502(c) may be made only by an assignment of record of the mortgage in the manner provided by law of this State other than [the Uniform Commercial Code].
PDF Creation and Perfection of Security Interests
Generally. There are at least four methods of perfecting security interests in. assets under the Code: (1) filing financing statements; (2) by possession; (3) by control; and (4) by other methods under state and federal law, which involves the filing of certificates of title or. other legal compliance (e.g., motor vehicles, airplane and boats).
PDF Understanding The Terms Of Security Agreements
describes the collateral (§9-203(b)(2)). "Secured party" is defined as the person in whose favor the security interest is granted (§9-102(a)(72)(A)). "Debtor" is defined as (A) a person having an interest, other than a se-curity interest or other lien, in the collateral, whether or not the person is an obligor; (B) a seller of accounts,
PDF The Assignee of an Article 9 Security Interest: Two Sets of Drafting
Article 9 treats assignments of security interests: (i) a security interest can be assigned; (ii) if the security interest is perfected by filing, the assignee can, but does not have to, become the secured party of record by having the fact of the assignment made part of the financing statement;3 (iii) whether or not the assignee of a security ...
Letters of Credit Under Revised UCC Article 9
This is defined in the 1998 amendment as "a secondary obligation or letter-of-credit right that supports the payment or performance of an account, chattel paper, general intangible, document, healthcare insurance receivable, instrument, or investment property.''. The general principle under revised Article 9 is that a security interest in an ...
§ 9-309. Security Interest Perfected Upon Attachment
The following security interests are perfected when they attach: (1) a purchase-money security interest in consumer goods, except as otherwise provided in Section 9-311(b) with respect to consumer goods that are subject to a statute or treaty described in Section 9-311(a); (2) an assignment of accounts or payment intangibles which does not by itself or in conjunction with other assignments to ...
Part 3. Perfection and Priority
§ 9-309. security interest perfected upon attachment. § 9-310. when filing required to perfect security interest or agricultural lien; security interests and agricultural liens to which filing provisions do not apply. § 9-311. perfection of security interests in property subject to certain statutes, regulations, and treaties.
Understanding Security Interests in UCC Article 9 Accounts, Chattel
A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. ... Assignment of accounts, chattel paper, payment intangibles, or promissory notes for the purpose of collection only (Cal. U. Com. Code, § 9109, subd.
UCC Article 9
Article 9 governs perfection of a security interest in personal property interests as opposed to interests in real property and other types of special types of collateral. Security interests in certain types of personal property collateral may be perfected differently. Some interests are perfected by the filing of a financing statement with the ...
Security in finance transactions
The term 'charge' is often used as a generic term for all types of security interest, but specifically it represents an agreement between a creditor and a debtor in which a particular asset or class of assets can be used to satisfy a debt. ... Assignment by way of security. A borrower's rights against third parties, such as the right to receive ...
Security assignments
Lenders commonly take security over "choses in action" (such as debts or rights under contracts) by way of assignment. An assignment involves the transfer of either legal ownership (legal ...
What Is Security Interest? Definition and Legal Requirements
Security Interest: A legal claim on collateral that has been pledged, usually to obtain a loan. The borrower provides the lender with a security interest in certain assets that can be repossessed ...
Assignment of Security Interest Definition
Examples of Assignment of Security Interest in a sentence. The recordation of the Assignment of Security Interest in U.S. Patents and Trademarks in the form attached to the Security Agreement in the United States Patent and Trademark Office together with filings on Form UCC-1 made pursuant to the Security Agreement will be effective, under applicable law, to perfect the security interest ...
Assignment of Interest In LLC: Everything You Need to Know
A member may choose to assign interest for a number of reasons. The assignment of interest may happen as collateral to a loan to one of the members. Some members can assign interest to settle debts. The assignment will be effective until the debt is cleared. An assignment of interest can also' be done to a member's legal heirs, going into ...
Securing an Interest: Federal Crop Insurance Proceeds
Assignments vs. Security Interests. Both the FCIA regulations and Article 9 rules provide a method for creditors to obtain an interest in a producer's crop insurance proceeds; however, these interests operate differently. For instance, assignments and security interests provide creditors separate methods of collecting insurance proceeds.
To assign or not to assign that's a real question
There are two types of assignment: legal and equitable. Legal assignments by way of security involve a transfer of legal ownership, with a proviso for re-assignment on satisfaction of the secured liabilities. A legal assignment is only possible in relation to assets which already exist (this excludes future assets). A sum becoming due
313-Recording of Licenses, Security Interests, and Documents Other Than
313 Recording of Licenses, Security Interests, and Documents Other Than Assignments [R-07.2015] In addition to assignments and documents required to be recorded by Executive Order 9424, upon request, assignments of applications, patents, and registrations, and other documents relating to interests in patent applications and patents will be recorded in the Office.
Granting or Recording a Security Interest in a Patent at the ...
A party receiving a security interest in a patent may record the security agreement with the USPTO to protect itself against and give notice to subsequent bona fide purchasers or mortgagees. Standard security agreements that do not include language assigning title of the patents, however, will not prevent a patentee from bringing a patent ...
Taking a security interest in a closely held business
It is common for closely-held business entities to prohibit an assignment of an owner's interest or require as a condition to an assignment the consent of the other owners of the entity. This ...
Assignment of security interest clause samples
SECTION 5.04. Assignment of Security Interest. If at any time any Grantor shall take a security interest in any property of an Account Debtor or any other Person to secure payment and performance of an Account in an amount in excess of $250,000, such Grantor shall promptly assign such security interest to the Collateral Agent for the benefit of the Secured Parties.
PDF Creation of Security Interests
security interest in his trademark or marks in order to obtain the necessary money. In most cases, in order to give a lender a security interest, the borrower will sign a ... jurisdictions that favor the "collateral assignment" version of security interests in trademarks. The concept of collateral assignments involves the transfer of record ...
What Is an Assignment for the Benefit of Creditors and How Does It
An assignment for the benefit of creditors (ABC) is a process by which a financially distressed company (referred to as the assignor) transfers its assets to a third-party fiduciary (referred to ...