Revised Draft 4/05//2017
[Version for ABA BLS Spring Meeting – New Orleans]
SECURITY AGREEMENT[1]
(LIMITED LIABILITY COMPANY INTERESTS)
THIS SECURITY AGREEMENT (this “Agreement”) is made on [ ], (the “Effective Date”) between [ ] (“Debtor”)[2] and [ ] (“Secured Party”).
RECITALS:
[Obligor] [Debtor] and Secured Party have entered into a [loan transaction/financing transaction/credit transaction] (the “Financing Transaction”) under the terms of that certain [loan agreement/financing agreement/credit agreement] dated [ ][as of the Effective Date](the “Financing Agreement”).
Debtor enters into this Agreement to grant Secured Party a security interest in Debtor’s LLC Interests to secure Debtor’s payment and performance of the Secured Obligations.
1.Defined Terms; Rules of Construction.
(a)Specifically Defined Terms. Capitalized terms used in this Agreement have the meanings set forth below:
“Acknowledgment and Consent” means the Issuing Entity and Co-Member Acknowledgment and Consent in substantially the form attached hereto as Exhibit A.
“Agreement” means this Security Agreement, as amended, modified, supplemented or restated from time to time.
“Collateral” is defined in Section 2.
“Debtor” is identified in the Preamble.
“Distributions” means any distribution or other transfer of cash or property, [whether or not] in respect of the LLC Interests by the Issuing Entity to the Debtor, however characterized.[3] For the avoidance of doubt, “Distributions” include so-called “tax neutral distributions” (i.e. amounts distributed to the Debtor in respect of its estimated federal, state and local tax liability calculated on the basis of its actual or anticipated allocation of the profits of the Issuing Entity).
“Event of Default” is defined in Section 8(a).
“Financing Agreement” is defined in the Recitals.
“Issuing Entity” means the limited liability company that issues[4] LLC Interests.
“Issuing Entity Governing Documents” means the certificate of formation[5] and operating agreement[6] of the Issuing Entity, together with all other agreements or understandings of any kind, nature or description relating to the governance and management of the Issuing Entity and the corresponding legal and economic relationships of the owners of the equity interests (however designated) in the Issuing Entity, including the LLC Interests.
“LLC Act” means the [______] Limited Liability Company Act. [7]
“LLC Interests” is defined in Section 2(a)(i).
“Obligor”[8] means [], the party obligated for repayment of the Secured Obligations.[Eliminate if defined in Financing Agreement].
“Secured Obligations” means all indebtedness or other obligations of Obligor to Secured Party of any nature or character.[9]
“Secured Party” is identified in the Preamble.
“UCC” means the Uniform Commercial Code-Secured Transactions (2010 Official Text with Comments) as adopted and in effect in the State of [Forum Jurisdiction].[10]
(b)Rules of Construction. The following rules of construction and interpretation apply to this Agreement:
(i)Paragraph headings are for convenience only and are not relevant to the construction or interpretation of any provision of this Security Agreement.
(ii)The terms "hereof", "herein", "hereby", "hereto" and derivative or similar words refer to either the entire Agreement or to specified clauses, as the context requires.
(iii)Pronouns include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs includes the plural and vice versa.
(iv)The word "including" is by way of example rather than limitation.
(v)Reference to any agreement, document or instrument, including this Agreement, means the agreement, document or instrument as amended or modified from time to time in accordance with the terms thereof and, if applicable, hereof.
(vi)The words “or”, “either”, “any” or “all” are not exclusive.
(vii)No presumption or burden of proof will arise in favor of or against Debtor or Secured Party by virtue of the authorship of any provision of this Agreement.
(c)Terms Defined in Financing Agreement. Capitalized terms used and not otherwise defined in this Agreement have the meanings assigned to them in the Financing Agreement.
(d)Terms Defined by Statute. Unless otherwise defined in this Agreement or the Financing Agreement and where plainly apparent by the context in which terms are used, [capitalized] terms used in this Agreement have the meanings assigned in the UCC (with respect to those matters governed by the UCC) or the LLC Act[11] (with respect to those matters governed by the LLC Act).
2.Grant and Continuation of Security Interest.
(a)Grant.[12] Debtor hereby grants to the Secured Party a security interest in and to all of Debtor’s right, title and interest in and to the following, wherever located, whether now owned or hereinafter acquired (collectively, the “Collateral”):
(i)all interests[13], no matter how characterized, in the Issuing Entity (the “LLC Interests”) including, without limitation, those identified on Schedule 1 annexed hereto[14];
(ii)any rights related to the Debtor’s capital account[15]within the Issuing Entity in respect of the LLC Interests;
(iii)any rights to acquire LLC Interests, including subscription rights, preemptive rights, conversion rights, options, warrants or analogous rights;
(iv)certificates[16], if any, evidencing or representing the LLC Interests or that may be issued from time to time as evidence of or otherwise with respect to the LLC Interests;
(iv)all Distributions and rights of Debtor to demand or receive Distributions[17] in respect of the LLC Interests[18];
(v)all equity interests, securities or other property received in connection with or as a result of exchange offers, recapitalizations of any type, contributions to capital, options or other rights relating to the LLC Interests, or issued or issuable in connection with or as a result of a split up, revision, reclassification, conversion or other like change of the LLC Interests or which otherwise are received in exchange for or in substitution of the LLC Interests;
(vi)all rights, privileges, authority and power arising from the Debtor’s ownership of the LLC Interests or its membership in the Issuing Entity, including all of the Debtor’s rights under any Issuing Entity Governing Documents, the LLC Act, the UCC or otherwise to exercise and enforce every right, power, remedy, authority, option and privilege, or to give or receive any notice, consent, amendment, waiver or approval, on behalf of the Debtor relating to the LLC Interests or governance of the Issuing Entity[19];
(vii)books and records, documents and other information (tangible or electronic) evidencing or relating to any of the foregoing; and
(viii)proceeds (including insurance proceeds) of any of the foregoing.
3.Perfection.
(a)Authorization of Financing Statement. Debtor authorizes Secured Party to file UCC-1 financing statements (including amendments and continuations) in any filing office(s), deemed necessary by Secured Party, naming Debtor as the debtor and the Secured Party as the secured party describing the Collateral generally or specifically and containing any other information Secured Party deems necessary to comply with the UCC or other applicable law for perfection of the security interest in the Collateral.
(b)Certificated Collateral. If any of the Collateral is now or in the future evidenced or represented by a certificate or certificates[20], Debtor shall immediately deliver all the certificates to the Secured Party, duly endorsed in a manner satisfactory to the Secured Party, or accompanied by LLC Interests transfer powers duly endorsed in blank, to be held as Collateral pursuant to this Agreement.
(c)Control. If any of the Collateral is now or in the future an uncertificated security, Debtor shall cause the Secured Party to have “control” (within the meaning of Section 8-106 of the UCC) over such Collateral[21].
(d)Cooperation; Further Assurances. At any time and from time to time, upon the written request of the Secured Party, and at the cost and expense of Debtor, Debtor shall promptly and duly give, execute, deliver, file and record any further instruments and documents and take any further actions that the Secured Party may reasonably request for the purpose of obtaining, creating, perfecting, enforcing, validating or preserving the full benefits of this Agreement and Secured Party’s security interest in the Collateral and the rights and powers granted to Secured Party in this Agreement. Without limiting the generality of the foregoing, Debtor shall obtain the written consent of the Issuing Entity and all other owners of equity interests in the Issuing Entity to the execution, delivery and performance of this Agreement by Debtor, and to the exercise by the Secured Party of all rights and remedies contained in this Agreement (which, for the avoidance of doubt, includes the rights of a secured party under the UCC).[22]
4.Representations and Warranties.[23] Debtor represents and warrants to Secured Party that:
(a)Power and Authority. Debtor has the requisite power and authority to enter into this Agreement and to perform its obligations hereunder.
(b)Authorization; No Breach or Default. Execution and delivery of this Agreement by Debtor and performance by Debtor of its obligations under this Agreement have been duly approved, consented to or authorized by all necessary action on the part of the [members/ stockholders/directors/managers] of Debtor[24], and does not and will not result in any violation of any agreement, indenture or other instrument, license, judgment, decree, order, law, statute, ordinance or other governmental rule or regulation applicable to Debtor.[25]
(c)Binding Obligation. This Agreement has been duly executed and delivered by Debtor andconstitutes the legal, valid and binding obligation of Debtor, and[, subject to the execution and delivery of the Acknowledgment and Consent[26], is] enforceable against Debtor in accordance with its terms.
(d)Issuing Entity Governing Documents. Performance by Debtor of its obligations under this Agreement does not conflict with, result in a breach of, or constitute a default under any provision of the Issuing Entity Governing Documents.[27]
(e)Perfection and Priority. Upon filing of the financing statement with the applicable filing office in the jurisdiction in which the Debtor is located (in accordance with Section 9-307 of the UCC), the security interest granted by Debtor to the Secured Party in this Agreement will constitute a valid, perfected first priority security interest in the Collateral, enforceable against Debtor, all other creditors of Debtor or any persons purporting to purchase the LLC Interests from Debtor.[28]
(f)Organizational Information; Information Regarding Debtor. Debtor’s jurisdiction of organization, exact legal name as it appears on file with the Secretary of State of the State of ______, and chief executive office and principal place of business, are as set forth on the signature page of this Agreement.
or
Debtor’s principal residence is ______, and Debtor’s name as set forth on Debtor’s driver’s license as issued by the jurisdiction in which the Debtor’s principal residence is located is ______.[29]
(g)Title to Collateral. Debtor is the sole, direct, legal owner of the Collateral, has good and marketable title to the Collateral[30], and no part of the Collateral is subject to any lien, option, restriction on sale, claim, encumbrance, voting agreement, proxy or voting trust, option, right of first refusal or first offer or right of others [except for those rights set forth in the Issuing Entity Governing Documents, all of which have been waived by the Issuing Entity and other parties, if any, in whose favor or for whose benefit those provisions exist] and no other Person has a beneficial interest in the Collateral.[31]
(h)Capital Contribution Obligations Debtor has made all capital contributions heretofore required to be made to the Issuing Entity in respect of the LLC Interests and no additional capital contributions are required to be made in respect of the LLC Interests.[32]
(i)Issuing Entity Governing Documents. Debtor has delivered to Secured Party true and correct copies of all Issuing Entity Governing Documents, and all other documents or agreements representing, governing, or otherwise relating to the LLC Interests, Debtor’s ownership of the LLC Interests or the exercise of Debtor’s rights with respect to the LLC Interests, and (i) all of the foregoing are in full force and effect in accordance with their written terms, (ii) there are no other agreements or understandings, written or oral, between or among Debtor, the Issuing Entity or any other person having an interest in the Issuing Entity relating to the LLC Interests or the rights of the Debtor with respect to or representing the LLC Interests, (iii) to the knowledge of Debtor, Debtor is not in breach or default of Debtor’s obligations under any of the foregoing, and (iv) no event has occurred that would now, or upon the lapse of time or giving of notice, or both, constitute a breach or default by Debtor under the Issuing Entity Governing Documents or that would otherwise result in the dissociation of Debtor from the Issuing Entity or the dissolution of the Issuing Entity under the Issuing Entity Governing Documents or otherwise.
(j)No Article 8 Opt-In. The Issuing Entity has not elected to treat the LLC Interests as Investment Property under Article 8 of the UCC.[33]
(k)Non-Certificated Interest. There are no certificates or other writings evidencing the LLC Interests.[34]
(l)No Governmental Filings or Consents. No consent, approval or authorization of, notice to or filing with, or other act by or in respect of, any governmental authority is required (i) for the execution, delivery and performance of this Agreement by the Debtor, (ii) for the grant of a security interest in the Collateral by the Debtor in accordance with this Agreement, or (iii) for the exercise by the Secured Party of the rights and remedies provided for in this Agreement, except those which have been obtained, made or taken and are in full force and effect or, with respect to any disposition of the LLC Interests, which apply to the offer and sale of securities generally.[35]
(m)Identification of LLC Interests. Schedule [1] completely and accurately sets forth the LLC Interests now owned by Debtor.[36]
(n)LLC Interests Not Margin Stock. None of the LLC Interests constitutes margin stock[37] (as defined in Regulation U of the Board of Governors of the Federal Reserve System).
5.Covenants. Debtor covenants that, without the consent of the Secured Party, until the Secured Obligations are fully paid and satisfied:
(a)No Sale or Transfer. Debtor will not (i)sell, assign, transfer, hypothecate, exchange or otherwise dispose of, or grant any option with respect to, any direct or indirect interest in, the LLC Interests, or (ii)create, incur, authorize or permit to exist any lien, right of first refusal, option or other encumbrance affecting the LLC Interests in favor of, or any claim of any Person with respect to, the LLC Interests, except for (x) the security interest hereunder, or (y) rights of the Issuing Entity or other owners of equity interests in the Issuing Entity as set forth in Issuing Entity’s Governing Documents.[38]
(b)Payment of Taxes. Debtor shall promptly pay and discharge all taxes, assessments, and governmental charges or liens imposed on the Debtor or the LLC Interests before they become delinquent, including all stamp, excise, sales or other similar taxes, and shall save the Secured Party harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other similar taxes that may be payable or determined to be payable with respect to any of the LLC Interests or in connection with the transactions contemplated by this Agreement.[39]
(c)Changes to Issuing Entity Governing Documents. Debtor shall not consent to, or cause, any [material] amendment of the Issuing Entity Governing Documents, whether written, oral or otherwise. Debtor shall promptly notify the Secured Party, in writing, of any amendments to the Issuing Entity Governing Documents, whether completed with or without Debtor consent.[40]
(d)Changes to LLC Interests or Issuing Entity Transactions. Debtor shall not consent to or cause the issuance or grant by the Issuing Entity of any other right or interest in respect of, in addition to or in substitution for the LLC Interests, except to Debtor,[41] nor shall Debtor consent to, or cause, any merger, consolidation, share exchange, reorganization, or other business combination involving the Issuing Entity or to which the Issuing Entity is a party.[42]
(e)No Article 8 Opt-In. Debtor will not consent to or cause an election by the Issuing Entity or otherwise facilitate any action that would result in the classification of the LLC Interests as “investment property” under the UCC.[43]
(f)Payment of Expenses. In the event that the Secured Party exercises any rights or remedies under this Agreement, or in the event of the bankruptcy, insolvency, receivership, conservatorship, dissolution, liquidation, rehabilitation or other similar proceeding of the Debtor [or the Issuing Entity][44], or any assignment by the Debtor [or the Issuing Entity] for the benefit of creditors, Debtor and its successors and assigns shall pay all reasonable costs of collection and defense, including reasonable attorneys’ fees and costs, incurred by the Secured Party in connection therewith and in connection with any bankruptcy (including cash collateral, relief from stay, adequate protection, plan confirmation, and general case administration matters) appellate proceeding, or post-judgment action involved therein, together with all required service or use taxes.
(g)Comply with Agreement. Debtor (i)shall take, and (to the extent of its rights under the Issuing Entity Governing Documents or under applicable law) use commercially reasonable efforts to cause the Issuing Entity to take, any and all actions either necessary or reasonably requested by the Secured Party to ensure compliance in all material respects with the terms and provisions of this Agreement, and (ii)shall not take any actions that violate the terms and provisions of this Agreement, or the Issuing Entity Governing Documents to the extent consistent with the Debtor’s obligations under this Agreement.
(h)Defend Title. Debtor will defend, at Debtor’s sole cost and expense, any action or proceeding brought or claim or demand asserted by any person that affects or may affect Debtor’s or Secured Party’s rights or interests in the Collateral.[45]
(i)Name Changes. Debtor will not change its legal name, place of organization or jurisdiction and registration, or organizational type without giving Secured Party at least [thirty (30)][46] days’ prior advance notice.
(j)Notice. Debtor shall give prompt notice to Secured Party of any of the following:
(i)any suit or litigation that is filed naming the Debtor or the Issuing Entity;
(ii)any judgment (or any litigation that may result in a judgment) that might give rise to an attachment, charging order or other lien or enforcement action with respect to the Collateral[47];
(iii)an event or condition that constitutes an Event of Default or that, with the giving of any notice or the passage of time, or both, would be an Event of Default; and
(iv) any event or condition that would reasonably be expected to result in a material adverse effect on the value of the LLC Interests.
(k)Maintenance of Books and Records. Debtor shall maintain of itself[, and cause to be maintained, of the Issuing Entity,][48] proper books of record and account, in a manner to allow financial statements to be prepared in all material respects in conformity with US generally accepted accounting principles. Debtor shall permit the Secured Party to inspect the books and records, and any other books and records of the Issuing Entity to which Debtor has access, at the reasonable expense of the Debtor and at reasonable times during normal business hours upon reasonable advance written notice to the Debtor.[49]