Agriculture Bankruptcy &
Marshalling of Assets

In Weiss, the court provided a chart showing the provisions from the operating agreements of eight different LLCs that restricted, and in some cases absolutely prohibited, the transfer of membership interest. The court also noted that the operating agreements required that the written consents be obtained “prior to” any transfer. 376 B.R. at 873. If the operating agreement contains an absolute prohibition, best practices dictate that the lender require that the agreement be amended to delete that prohibition or that all of the members affirmatively waive the prohibition.

      Third, it is equally imperative that the form of consent provide that the assignee, and any ultimate third party who acquires the interest once it is foreclosed on, be entitled to all of the economic and noneconomic (management) rights of the assignor. The Limited Liability Company Act, 805 ILCS 180/1-1, et seq., provides that a transferee of an interest in an LLC takes the interest “in accordance with authority described in the operating agreement or all other members consent.” 805 ILCS 180/30-10(a). See also Bobak Sausage Co. v. Bobak Orland Park, Inc., No. 06 C 4747, 2008 WL 4814693 (N.D.Ill. Nov. 3, 2008). Most operating agreements not only restrict assignments or pledges, but also limit the rights of any approved transferee to take only an economic distributional interest (i.e., the right to monetary profit distributions from the LLC). The lender must demand that the interests transferred include all voting and management rights in order for the membership interest to have any real market value.

      The consent must be clear that the lender, as the collateral assignee, is not restricted and is affirmatively authorized and permitted to subsequently transfer the entire membership interest to any third party. A right of first refusal of any bona fide offer can be included in the consent. It is insufficient, however, for the remaining members to consent merely to the pledge or transfer of the interest to the lender without the right of subsequent transfer. No lending institution will want to bid at a UCC foreclosure sale to hold a membership interest as an investment. Instead, lenders will seek to transfer the membership interest once acquired to a third party to make a recovery on the loan.

      Provisions in an operating agreement purporting to place limitations or restrictions on a membership’s interest as a result of the member filing bankruptcy are unenforceable. LaHood v. Covey (In re LaHood), 437 B.R. 330, 336 (C.D.Ill. 2010).

      In conclusion, whether there is a security interest in the assets of the LLC or a collateral assignment of the membership interest in an LLC, a lender must exercise care to determine whether the security interest taken is valid and enforceable.