Security Interests in Uncommon Collateral, Part 2

In order to maximize collateralization of loans, lenders may look to infrequently utilized forms of security. This article focuses on security interests in limited partnership (“LP”) and limited liability company (“LLC”) interests. As stated previously, it is imperative that lenders understand the steps to take to protect interests in such collateral.

LP and LLC Equity Interests

Under the Uniform Commercial Code (“UCC”), LP and LLC interests can be classified either as securities or as general intangibles. The analysis of whether the interest is a security or general intangible is a fact specific analysis and needs to be carefully undertaken in each lending situation. 

An LP or LLC interest can be a “security” under Article 8 of the UCC[1] only if (1) it is dealt in or traded on securities exchanges or securities markets; (2) the LP/LLC agreement expressly provides that its equity interests are governed by Article 8 of the UCC; or (3) it is an investment company security.[2] Additionally, if the LP/LLC interest is held in a securities account, it will be governed by Article 8 of the UCC. If none of the definitions of “security” apply, the interest is a “general intangible” governed by Article 9, which is defined as “any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software."[3]


Under Article 9 of the UCC, general intangibles can only be perfected by filing a financing statement in the appropriate filing office. In contrast, securities can be perfected by: (1) filing a financing statement in the appropriate filing office (VA Code § 8.9A-312(a)); (2) possession (VA Code § 8.9A-313(a)); or (3) control (VA Code §8.8A-106).[4]


“Possession” under Virginia Code Section 8.9A-313(a) means taking “delivery” of the certificated securities under Virginia Code Section 8.8A-301. If the security is represented by a certificate, then a creditor taking physical possession of the certificate can take “delivery” (1) by acquiring physical possession of the certificate; (2) through a third person (that is not a securities intermediary) taking possession of the certificate, so long as the third person is actually acting on behalf of the creditor or acknowledges that it is holding the certificate on behalf of the creditor; or (3) by delivery of security certificates in registered form to a securities intermediary, which is treated as delivery to the creditor.[5]

If the security is uncertificated, then a creditor can take delivery (1) when the creditor becomes the registered owner of an uncertificated security, either upon original issue or registration of transfer to the creditor; or (2) through a third person as described above.[6]


A creditor obtains “control” of a certificated security in bearer form under Virginia Code Section 8.8A-106 upon delivery of the certificated security to the creditor.

A creditor obtains “control” of a certificated security in registered form under Virginia Code Section 8.8A-106 upon delivery of the certificated security to the creditor, and (1) the certificate is endorsed to the creditor or in blank by an effective endorsement; or (2) the certificate is registered in the name of the creditor, upon original issue or registration of transfer by the issuer.

A creditor can obtain control of an uncertificated security under Virginia Code Section 8.8A-106 if (1) the uncertificated security is delivered to the creditor; or (2) the issuer has agreed that it will comply with instructions originated by the creditor without further consent by the registered owner.

In other words, “obtaining ‘control’ means that the creditor has taken whatever steps are necessary, given the manner in which the securities are held, to place itself in a position where it can have the securities sold, without any further action by the owner."[7] This is typically done through endorsement of a certificated security to either the lender or bearer or through the use of a control agreement signed by the debtor and a securities intermediary. 


Perfection through possession of a security prevails over filing a financing statement.[8] Control prevails over both possession and filing a financing statement. Another benefit of perfection through possession or control, as opposed to filing, includes protection against a loss of perfection due to a lender’s inadvertent failure to continue a financing statement filing upon the expiration of 5 years. 

The distinction between securities versus general intangibles is important for another reason. There is a risk that an LP/LLC interest that is classified as a “security” due to an Article 8 opt in clause in the LP/LLC Agreement, could become a “general intangible” if a borrower opts out of Article 8 through an amendment to the LP/LLC Agreement. In the event perfection was obtained through control or possession, there is a risk that the collateral is no longer perfected, because perfection of a general intangible can only be obtained through filing.

As a safeguard, a lender should always review a LP/LLC agreement for relevant opt in language and to the extent possible, draft covenants which provide that without lender’s consent the borrower cannot opt out of Article 8 nor amend Article 8 opt in provisions. Further, it is strongly advised that a lender include both general intangibles and investment property in its security agreements. Finally, always file a financing statement as a fall-back in the event your collateral converts to a general intangible, which can only be perfected by filing.


Maximizing loan security is always essential. In addition to the above forms of collateral, as well as intellectual property and insurance policies discussed previously, there are other forms of uncommon collateral, including planes and watercraft, which involve special rules to perfect a lender’s interest in such collateral. Navigating and understanding these rules is therefore imperative for lenders. Obtaining the advice of the bank’s counsel is recommended if and when questions arise as to the uncommon forms of collateral. 

[1] Under Article 8, the broader definition of “security” states: “except as otherwise provided in § 8.8A-103, [security] means an obligation of an issuer or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer: (i) which is represented by a security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer; (ii) which is one of a class or series or by its terms is divisible into a class shares, participations, interests, or obligations; and (iii) which: (A) is, or is of a type, dealt in or traded on securities exchanges or securities markets; or (B) is a medium for investment and by its terms expressly provides that it is a security governed by this title.” VA Code § 8.8A-102(15).
[2] “An interest in a partnership or limited liability company is not a security unless it is dealt in or traded on securities exchanges or in securities markets, its terms expressly provide that it is a security governed by this title, or it is an investment company security. However, an interest in a partnership or limited liability company is a financial asset if it is held in a securities account.” VA Code § 8.8A-103
[3] VA Code § 8.9A-102(42).
[4] See article below for an analysis of priority depending upon the manner of perfection of the interest in a security.
[5] See VA Code 8.8A-301, Official Comment 2.
[6] See VA Code 8.8A-301, Official Comment 3.
[7] VA Code § 8.8A.106, Official Comment 1.
[8] Remember that if it is not a security, but rather a general intangible, perfection can only be obtained by filing a financing statement.

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.