“These are the suggested steps a lender should take to ensure compliance with Articles 8 and 9: • review the terms of the governing documents to confirm that the interest can be pledged; • require the issuer to “opt-in” to Article 8; • determine whether the interest to be pledged is certificated or uncertificated and, if possible, require that certificates be issued so as to avoid further complications in the event of default; • if the interest is certificated, have an endorsement in blank made over to the secured party, like a stock power; • so as to prevent the issuer from “opting-out” of Article 8 at some later date, have the issuer and its members enter into an agreement with the lender to this effect as part of the loan closing and which agreement requires that the lender consent to this step; • take possession of the certificated security or receive an acknowledgement from the issuer as to the security interests held by the secured party if the security is uncertificated (but see concerns as to this approval noted above); • confirm that your security agreement contains language that specifically references the right of the lender to receive all proceeds of the described collateral including the right to distributions from the issuer of any sort, type, form, or classification; and • as a backup, file a financing statement referencing the security interest in the partnership or limited liability company interest as well as the lender’s rights to all proceeds.” 12
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the registered owner or borrower.14 Quite naturally, the question arises, how does one “deliver” an uncertificated security? Comment 3 to § 8-106 says that delivery of the uncertificated security occurs in one of two ways. The first method is when the issuer acknowledges that the purchaser (second party) is now the registered holder of the interest and is thereby entitled to exercise all rights of ownership under § 8-107. The second way in which control is established over an uncertificated security is if the uncertificated security is delivered to the purchaser or the issuer agrees to comply with instructions of the purchaser even though the owner remains listed as the registered owner.15 While the issuer’s cooperation is necessary to achieve control and thereby perfection over an uncertificated security, the issuer is not required to enter into such an agreement. The secured party must make sure it has the issuer’s consent, which will require a thorough review of the issuer’s governing documents to determine what constitutes approval to the issuer. Can this be accomplished through a manager or should the other partners or members consent to it? Also, what other actions must be taken before the issuer’s action can be deemed to be binding on the issuer?16 Finally, to further protect itself against the possibility that issuer might “opt-out” of Article 8 at some later date, an agreement among the issuer, all of its members/partners, and the lender is recommended which requires the lender’s consent before the Article 8 “opt-in” language can be changed or amended in any way. There is another important reason why a lender may require an issuer to provide certificates to evidence the ownership interest and not uncertificated securities. If governing documents of the entity provide for uncertificated securities, the lender will need the cooperation of the issuer in order to transfer its ownership interest to the lender or a purchaser at a foreclosure sale. If the issuer is controlled (or even influenced) by the defaulting borrower, the transfer process may prove difficult. Certificates endorsed in blank may be conveyed at a foreclosure sale without the necessity of cooperation from the issuing entity.17 There is little case law in Arkansas dealing with the interplay of Articles 8 or 9. J.M. Products, Inc. v. Arkansas Capital Corporation,18 involved a dispute over corporate stock between the secured creditor, Arkansas Capital Corporation (“ACC”), and the is-
suer, J.M. Products, Inc. (“JPI”). ACC’s borrower was a minority shareholder in JPI and pledged his corporate security certificate in JPI. JPI claimed that ACC had notice of an issuer’s lien or prior claim against the security pledged. The Court was asked to consider, among other things, whether ACC had notice of JPI’s lien and what constitutes notice of such a lien to another creditor. The Court held that ACC was neither on notice as to JPI’s alleged lien nor could any form of constructive knowledge of such lien be imputed to it. While interesting, the case is not particularly instructive for purposes of this discussion. Even with the issuer’s consent and cooperation, the secured party must resolve at least two other issues. First, the terms of the certificated security must be carefully reviewed, including any references on the face of the security to other, extraneous documents, instruments, or indentures or to any constitution, statute, rule, regulation, order, or the like.19 The secured party’s review of the extraneous sources or materials may result in a finding that such a transfer, pledge, or hypothecation of the ownership interest is restricted or prohibited. The case of ALH Properties Ten, Inc., v. 306-100 Street Owners Corp.,20 analyzed the validity of a lien on corporate shares and certain restrictions imposed on the transfer of those shares contained in other documents. Not surprisingly, the ALH court concluded that when the corporate security pledged to secure a loan which references restrictions to transfer in the corporation’s bylaws, the lender is obliged to consult them and is bound by the terms of those extraneous documents. In keeping with this holding, the Official Comments to the 2000 amendments to the UCC offer some guidance. Comment 1 to § 8-202 recognizes that an issuer is estopped from denying representations made in the text of a security as to its transferability.21 On the other hand, Comment 2 to § 8-202 states that a purchaser or second party who obtains a certificate is entitled to assume that all of the qualifying and conditional terms of the security have been noted or referred to on the certificate.22 No doubt many of you find this discussion interesting, but irrelevant. At the end of the day, the lender and its counsel want the right to receive distributions from the issuer should the Pledge continued on page 39