Perfection and Priority of Security Interests in Limited Liability Company Interests

It is imperative that a secured party or its representative perform appropriate due diligence when a debtor will grant to the secured party a security interest in the debtor’s limited liability company interests.  In most cases, the express terms of the limited liability company interests dictate how the secured party is able to perfect its security interest and establish priority over subsequent (and sometimes even prior) secured parties.  Obviously, the failure to validly perfect a security interest and the failure to obtain priority could have disastrous consequences.

Under Article 8, Section 103, of the Uniform Commercial Code (UCC) as enacted in the State of Minnesota, an interest in a limited liability company is a security and not a general intangible in three scenarios: (1) “it is dealt in or traded on a securities exchange or in a securities market,” (2) “its terms expressly provide that it is a security governed by this article,” or (3) “it is an investment company security.”  Minn. Stat. § 336.8-103(c).  More often than not, secured parties will be dealing with interests that are not traded on a securities market and are not investment company securities. 

So, the essential question is whether the terms of the limited liability company interest expressly provide that it is a security governed by Article 8 of the UCC.  For a limited liability company organized after August 1, 2015, under Minnesota Statutes, Chapter 322C, this means the secured party or its representative should examine the articles of organization and operating agreement of the issuer for such express language (in addition to any other restrictions or prohibitions on grating security interests), as well as any certificates representing the limited liability company interest.

If the terms of the limited liability company interest do not expressly provide that it is a security governed by Article 8 of the UCC, it is a general intangible.  Accordingly, there is one method for a secured party to perfect its interest: file a UCC-1 financing statement.  Minn. Stat. § 336.9-310. 

If the terms of the limited liability company interest expressly provide that it is a security governed by Article 8 of the UCC, then there are three general methods to perfect: control, delivery and filing.  In that event, and as summarized in the below table, there are some differences depending on whether the security is represented by a certificate or not.

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The above methods of perfection rank in order of priority from left to right: (1) control, (2) delivery, and (3) filing.  Minn. Stat. § 336.9-328(1) & (5).  This means that if a secured party only files a UCC-1 financing statement with respect to limited liability company interests that expressly provide they are governed by Article 8 of the UCC, which would perfect its security interest, it would still be junior to a different party who perfected its security interest in the same collateral through delivery or control.  This would be true even if the latter secured party acquired and perfected its security interest at a later time.

For more information or for assistance with perfecting and establishing priority for security interests, please  contact Joshua R. Ward at 952.653.2621 or jward@wklawfirm.com.

Minnesota’s New LLC Act: From Corporate-Based to Partnership-Based

Minnesota’s current limited liability company act, Minnesota Statutes, Chapter 322B (the “Old Act”), is a rarity among the limited liability statutes around the United States.  However, beginning August 1, 2015 the Old Act will be superseded by Minnesota Statutes, Chapter 322C (the “New Act”).  Any LLC formed after August 1, 2015 will automatically be governed by the New Act, and all LLCs in Minnesota—including LLCs formed before August 1, 2015—will be governed by the New Act beginning January 1, 2018. If your company is organized as an LLC, this law change will impact you.

The Old Act is considered an outlier in the United States because it is a hybrid between both corporate and partnership law. Many of the longstanding corporate principals familiar to business owners and practitioners alike were adopted and incorporated into the Old Act.  This model gave Minnesota owners and practitioners familiarity with LLCs when they were first adopted in Minnesota in 1993, but the true nature of an LLC was somewhat lost. Traditionally, LLCs are designed to operate more like partnerships than corporations. The New Act embraces a partnership-centered model and brings Minnesota LLCs into the mainstream.

Below are several of the changes encompassed within the New Act:

• Governing Documents: The Old Act breaks out governing provisions of a company between the articles of organization, the bylaws or operating agreement and the member control agreement. The New Act keeps the articles of organization (in a more limited fashion), but otherwise combines the company’s remaining governing documents into a single operating agreement. Therefore, the operating agreement will be the most important company document for new LLCs. Interestingly, the New Act allows for an Operating Agreement to be an informal oral agreement among the members. Accordingly, it may be more important than ever for members of an LLC to clearly memorialize their agreements in writing to avoid the ambiguity, confusion and inevitable litigation costs that commonly spawn from informal oral agreements.
• Three Management Structures: The Old Act defaults to a Board of Governors to manage the affairs of a company, similar to a Board of Directors for a corporation. The New Act defaults to a member-managed structure, which is more in line with a partnership model. Although management through a board is still possible under the New Act, it is no longer the default. In addition, the New Act authorizes a third management structure, manager-managed. With the option of either member-managed, manager-managed or board-managed, new companies will need to make sure their operating agreements reflect their intent.
• Statements of Authority: Similar to Minnesota’s Uniform Partnership Act (Minnesota Statutes, Chapter 323A), the New Act allows for a company to file statements of authority. These statements affect the power of a person to bind the LLC. Common statements of authority detail a partner’s ability to bind an LLC for certain transactions, including buying or selling real estate, but statements may also contain authority for a wide range of options. The statements of authority are filed with the Minnesota Secretary of State, and can be cancelled with a similar filing.
• Distribution of Profits and Losses: The difference between the Old Act and the New Act with regard to the distribution of profits and losses is also representative of the Old Act’s origin in corporate law and the New Act’s foundation in partnership law. Under the default of the Old Act, profits and losses were allocated in proportion to capital contributions. For example, if one member of a two member LLC put in 75% of the capital contributions, that owner would be entitled to 75% of the allocations of profits or losses. Under the default of the New Act, distributions are allocated on a per capita basis. Therefore, under the example above, the default rule would allocate distributions equally to the members, even though one member put in 75% of the capital contributions. The per capita basis of the New Act embraces the idea of a partnership, where absent an agreement stating otherwise, the partners are equal partners.  This further highlights the importance of having an operating agreement that reflects the company’s intent.

In addition to the above, the New Act also impacts the right to transfer ownership interests, the duties and obligations of members to the company and each other, indemnification and exculpation provisions, shelf LLCs, judicial remedies for intervention, and dissolution and/or oppressive conduct, among other changes.

Although the change in law will alter the structure of LLCs in Minnesota, and remove the familiarity of the Old Act, the adoption of a partnership-based model should be a welcome change. Minnesota’s hybrid construction of LLCs often gave practitioners from other states pause, and created some incentives for Minnesota practitioners to form LLCs in other jurisdictions. Moving more in line with national trends, Minnesota’s New Act allows business owners to truly utilize the flexibility of a partnership model with the protections of a limited liability company.

For more information and for assistance in forming a limited liability company, or bringing your company into compliance with the New Act, please contact Alex Kopplin at 952.653.2620 or akopplin@wklawfirm.com. 

Trademark Basics: Overview of Trademarks and Service Marks

A mark is a word, phrase, logo, design, sound or other manner of identifying and distinguishing the source of particular goods or services.  Popular examples of marks include the multi-colored Google logo, the Nike “swoosh” symbol and the McDonald’s golden arches.  It is apparent from these examples that marks can represent the most valuable assets of a business—its brand and goodwill.

Marks can be protected under both state and federal law.  In order to qualify for protection, they must be sufficiently distinct.  In making this determination, marks are categorized into the following levels of distinctiveness:

• Generic Marks: generic marks just restate the common term for the relevant goods or services (e.g. “Apple” for apples).  They are not protected under the law.
• Descriptive Marks: descriptive marks refer to some aspect of the relevant goods or services.  They must meet an additional hurdle (secondary meaning) in order to qualify for protection. 
• Suggestive Marks: suggestive marks imply some characteristic of the relevant goods or services (e.g. “Best Buy” for electronic and appliance retail services).  They qualify for protection. 
• Arbitrary/Fanciful Marks: arbitrary or fanciful marks are either made up or used in a manner that has nothing to do with the common meaning of the relevant goods or services (e.g. “Apple” for computers or “Starbucks” for coffee).  They qualify for protection.

Marks need not be registered in order to obtain protection, but with registration, especially at the federal level with the United States Patent and Trademark Office (USPTO), come expanded rights.  In order to qualify for USPTO registration, a mark must be used in interstate commerce, be sufficiently distinct and meet other USPTO requirements during the application process.  The advantages of registration on the USPTO’s principal register include the following:

• The mark is presumed to be valid (you do not have to establish validity in an infringement action prior to proceeding).
• The registrant is presumed to be the owner of the mark and the mark can become incontestable (i.e. most of the defenses to infringement would no longer be available to defendants).
• The registrant can pursue an infringement action in federal court (and potentially obtain attorney’s fees and statutory damages).
• The registrant could seek registration in foreign countries.
• The registrant has the ability to prevent importation of infringing products.

Two primary reasons applications are rejected by the USPTO are likelihood of confusion and mere descriptiveness.  In short, these rejections relate to the mark’s failure to be sufficiently distinct, either in light of other registered or applied-for marks or in light of the relevant goods or services.

First, the trademark examiner will refuse to register a new mark in the event that there would be a likelihood of confusion with a registered mark.  In making this determination, the examiner will look at certain factors such as similarity of the marks and similarity of the goods/services in order to determine whether there is potential for confusion as to the source of the particular goods or services.  The marks and the goods/services need not be identical.

Second, the examiner will refuse to register a mark if it is “merely descriptive” of the goods/services it represents (e.g. “Football Doctor” for a medical professional who specializes in football injuries) or primarily geographically descriptive of the origin of the applicable goods/services (e.g. “Minneapolis Glass” for glass manufactured in or around Minneapolis).  However, if a mark has acquired secondary meaning either by having been continuously used in commerce for a period of five years or more or meeting certain other qualifications, this would provide a presumption of acquired distinctiveness and thus weigh against a merely descriptive finding.

The above highlights the importance of due diligence and consultation during the branding process.  Identifying a conflicting mark early on can save a significant amount of time and resources on marketing and rebranding down the road.  This is further underlined by the fact that a federally-registered mark can essentially be protected in perpetuity as long as the applicable maintenance and renewal documents are timely filed with the USPTO and rights are not otherwise lost.  This type of longevity is incredibly beneficial and is not afforded to certain other intellectual property rights such as patents or copyrights.

For more information and for assistance in selecting or protecting your marks, please contact Joshua R. Ward at 952.653.2621 or jward@wklawfirm.com.