Security Interests In Partnership or LLC Interests
If you have a security interest in a partnership or LLC interest, you probably perfected that security interest by filing a UCC financing statement against the debtor. And if you were the first to file against most partnership or LLC interests, you had first priority upon filing. However, you would probably be shocked to find out that a party who subsequently obtains a security interest can jump your priority.
In broad terms, this problem arises if the interest in the partnership or LLC becomes a "certificated security" under Article 8 of the UCC and a third party gains control of that certificated security. While the explanation of this process is complicated (and will not be attempted here), the means by which a partnership or LLC can cause its interests to become a certificated security is quite easy. The bottom line is that anyone seeking to obtain a security interest in a partnership or LLC interest should be aware of this risk and consider to what extent it wants to take steps to protect himself or herself against this possibility. A simple contractual restriction can be imposed at the outset to provide a secured party with some protection. In a large transaction, actually requiring that the LLC or partnership become certificated and requiring delivery of the certificates is the safest means of protecting your priority.
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