“As collateral for a loan, lenders sometimes take a security interest in the ownership interests of a borrower – which means, in many transactions, lenders take a security interest in the ownership interests of a limited liability company (LLC). When drafting a security agreement to grant such an interest, lenders and their counsel sometimes resort to terms like “membership interests” or “limited liability company interests” to describe their intended collateral, assuming that these terms will allow them, or a third-party purchaser, full economic
participation in the LLC (economic rights), as well as voting and managerial control in the LLC (management rights) upon foreclosure. However, while such terms may suffice in some states, they should be avoided when taking a security interest in the economic and management rights of an LLC as many states’ LLC statutes do not define “membership interests” or “limited liability company interests” to include these rights. As a result, lenders take a considerable risk when they describe their intended collateral in such a simplistic manner.”
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