This docum ent does not reflect the intent or official position of the bill sponsor or House of Representatives.
STORAGE NAME: h0519e.JDC
DATE: 1/26/2022
HOUSE OF REPRESENTATIVES STAFF ANALYSIS
BILL #: CS/HB 519 Rights of Third Parties Under the Uniform Commercial Code
SPONSOR(S): Civil Justice & Property Rights Subcommittee, Leek
TIED BILLS: IDEN./SIM. BILLS: CS/SB 336
REFERENCE ACTION ANALYST STAFF DIRECTOR or
BUDGET/POLICY CHIEF
1) Civil Justice & Property Rights Subcommittee 16 Y, 0 N, As CS Mawn Jones
2) Regulatory Reform Subcommittee 17 Y, 0 N Wright Anstead
3) Judiciary Committee 20 Y, 0 N Mawn Kramer
SUMMARY ANALYSIS
The Uniform Commercial Code (“UCC”) is a set of laws, adopted by all fifty states, governing and providing
uniformity in commercial transactions in the United States. Florida’s UCC provisions are codified in chs. 670–
680, Florida Statutes.
Article 9 of the UCC (codified in ch. 679, F.S.) governs secured transactions, meaning transactions involving
the granting of credit secured by personal property (“collateral”), where the creditor may take possession of the
collateral if the debtor defaults on the loan. In 2001, to promote the free assignability of personal property,
including intangible property rights, the UCC was amended to include a general restriction on contract
provisions which prohibit or restrict the creation of a security interest in certain types of collateral (“Article 9
override”), including:
General intangibles, meaning any personal property, including things in action other than certain
defined collateral types (codified in s. 9-408 of the UCC and s. 679.4081, F.S.); and
Payment intangibles, meaning general intangibles under which the account debtor’s principal obligation
is a monetary obligation (codified in s. 9-406 of the UCC and s. 679.4061, F.S.).
The Article 9 override may apply where an owner in a partnership or a limited liability company (“LLC”) creates
a security interest in his or her ownership interest in the business, even where the business’s operating
agreement prohibits the owner from doing so, because such interest is generally classified as either a general
intangible or a payment intangible. However, applying the Article 9 override in such instances potentially
conflicts with the “pick your partner principle,” which recognizes that an owner in such a business has a
substantial stake in determining co-owners and should not generally be forced into doing business with
someone with whom the owner did not intend to do business.
In 2018, ss. 9-406 and 9-408 of the UCC were amended to eliminate the potential conflict with the “pick your
partner principle.” Specifically, the amendments provided that the Article 9 override does not apply to a security
interest in an ownership interest in a general or limited partnership or an LLC. To date, at least 10 states have
adopted some form of these amendments.
CS/HB 519 amends ss. 679.4061 and 679.4081, F.S., to incorporate the 2018 UCC amendments. Specifically,
the bill provides that the override provisions set out in those sections do not apply to a security interest in an
ownership interest in a general partnership, a limited partnership, or an LLC. This removes any potential
conflict between these sections and the “pick your partner principle” and promotes the freedom of the owners
in a partnership or LLC to contract.
The bill does not appear to have a fiscal impact on state or local governments.
The bill provides an effective date of January 1, 2023.
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DATE: 1/26/2022
FULL ANALYSIS
I. SUBSTANTIVE ANALYSIS
A. EFFECT OF PROPOSED CHANGES:
Background
The Uniform Commercial Code (“UCC”), a set of laws governing and providing uniformity in commercial
transactions in the United States, is a joint project between the Uniform Law Commission (“ULC”) and
the American Law Institute (“ALI”).
1
The UCC has been adopted by all fifty states.
2
The UCC includes
both general provisions and specific provisions governing sales, leases, negotiable instruments, bank
deposits and collections, letters of credit, documents of title, investment securities, secured
transactions, and leases.
3
Florida’s UCC provisions are codified in chs. 670–680, Florida Statutes.
Article 9’s Anti-Assignment Override
Article 9 of the UCC (codified in ch. 679, F.S.) governs secured transactions, which are transactions
involving the granting of credit secured by personal property (“collateral”), where the creditor may take
possession of the collateral if the debtor defaults on the loan.
4
In 2001, to promote the free assignability
of personal property, including intangible property rights, and the ability of a debtor to obtain credit, the
UCC was amended to include a general restriction against contract provisions prohibiting the creation
of a security interest in certain types of collateral (“Article 9 override”),
5
including:
General intangibles, meaning any personal property, including things in action other than certain
defined collateral types (codified in s. 9-408 of the UCC and s. 679.4081, F.S.);
6
and
Payment intangibles, meaning general intangibles under which the account debtor’s
7
principal
obligation is a monetary obligation (codified in s. 9-406 of the UCC and s. 679.4061, F.S.).
8
In other words, the Article 9 override renders ineffective restrictions between an account debtor and a
debtor preventing the assignment of general intangibles or payment intangibles as collateral for a debt.
The Article 9 override also applies to an ordinary security interest in a complete ownership interest or in
economic rights alone and to the outright sale of a payment intangible.
9
In the context of an ownership interest in a business, the “account debtor” is the business while the
“debtor” is the person holding the ownership interest. Thus, the Article 9 override would not apply to an
anti-assignment clause in a contract between a business’s owners themselves; it would only apply to
such a clause in a contract between a business’s owners and the business.
Potential Conflict with the “Pick Your Partner Principle”
1
Chs. 670-680, F.S.; Uniform Law Commission, Uniform Commercial Code, https://www.uniformlaws.org/acts/ucc (last visited Jan. 26,
2022).
2
Id.
3
Id.
4
Id.
5
Sara T. Toner and R. Parker Havis, Lessons From Delaware: Navigating the 2018 Amendments to Sections 9-406 and 9-408 of
Article 9 of the Uniform Commercial Code, https://cdn.ymaws.com/acrel.site-
ym.com/resource/resmgr/news_and_notes/february_2020/2020-02_toner_-_lessons_from.pdf (last visited Jan. 26, 2022); Florida Bar
Business Law Section, Exclusion of LLC and Partnership Interests from UCC Article 9 Override: Executive Summary,
http://www.flabizlaw.org/files/Summary%20and%20Materials%20-%20UCC%209-406%20and%209-
408%20Amendments%20%28v2%29.pdf (last visited Jan. 26, 2022).
6
General intangibles do not include 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. S. 9-102, UCC; S.
679.1021(1)(pp), F.S.
7
“Account debtor” means a person obligated on an account, chattel paper, or general intangible, but does not include a person
obligated to pay a negotiable instrument. S. 9-102, UCC; s. 679.1021(1)(c), F.S.
8
Article 9 does not apply to the outright sale of a complete ownership interest or of governance rights alone.
9
Carl S. Bjerre, Daniel S. Kleinberger, Edwin E. Smith, and Steven O. Weise, LLC and Partnership Transfer Restrictions Excluded from
UCC Article 9 Overrides, https://businesslawtoday.org/2019/02/llc-partnership-transfer-restrictions-excluded-ucc-article-9-overrides/
(last visited Jan. 26, 2022). STORAGE NAME: h0519e.JDC PAGE: 3
DATE: 1/26/2022
A partnership is an association of two or more persons carrying on as co-owners of a business for profit
formed under s. 620.8202, F.S., or another jurisdiction’s comparable law.
10
A limited liability company
(“LLC”) is a business formed or existing under ch. 605, F.S., or a business that becomes subject to that
chapter by operation of law, formed to protect its members from personal liability for the business’s
debts or other obligations.
11
An interest in a partnership or LLC is typically categorized as a general
intangible as the business owes the interested party rights associated with partnership or membership
rather than a defined debt.
12
However, an interest in a partnership or LLC involving economic rights
may be categorized as a payment intangible.
13
The Article 9 override may apply where an owner in a partnership or an LLC creates a security interest
in his or her ownership interest in the business, or some component thereof, even where the business’s
operating agreement prohibits the owner from doing so.
14
However, applying the Article 9 override in
such instances potentially conflicts with the “pick your partner principle” reflected in partnership and
LLC law, which generally recognizes that an owner in such a business has a substantial stake in
determining who the co-owners are and should not be forced into doing business with someone the
owner did not intend to do business with.
15
The Florida Bar’s Business Law Section illustrates the
conflict as follows:
Two individuals go into business together and form an LLC. Each owner is a 50/50
member in the LLC. Their operating agreement (like most operating agreements)
restricts the ability of one member to convey or encumber his or her membership
interest without the consent of the other member, in keeping with the “pick your
partner principle” engrained in LLC and partnership law. If one partner unilaterally
encumbered his or her 50% membership interest to secure a personal loan from a
bank (in violation of the operating agreement), then arguably, Section 9-406 and 9-
408 would “override” the restriction in the operating agreement. If the member
defaulted on the loan, the lender could foreclose on its security interest and take
ownership of the membership interest. The other member would now be saddled
with a bank as its new business partner, a result not contemplated or permitted by
the members’ contract (the operating agreement).
16
To avoid this conflict, some partnerships and LLCs may attempt to categorize an ownership interest in
the business as a security, classified by the UCC as “investment property” rather than a general
intangible or a payment intangible.
17
This allows the business to opt in to Article 8 of the UCC,
governing securities, and bypass Article 9 and its override altogether. However, by opting into Article 8,
the business faces the potential for increased transaction costs and the restructuring of its organization
documents.
18
2018 UCC Amendments
In 2018, the ULC and the ALI approved amendments to ss. 9-406 and 9-408 of the UCC to eliminate
the potential conflict with the “pick your partner principle” (“2018 UCC Amendments”).
19
Specifically, the
amendments provide that the Article 9 override does not apply to a security interest in an ownership
interest in a general or limited partnership or an LLC.
20
Several states have adopted these amendments
in their UCC codification statutes, amended their partnership and LLC statutes to achieve a similar
result, or employed a combination of the two, as follows:
21
10
S. 620.8101(7), F.S.
11
Ss. 605.0102(36) and 605.0304(1), F.S.
12
Toner and Havis, supra note 4; Florida Bar Business Law Section, supra note 4.
13
Id.
14
Bjerre, et al., supra note 8.
15
Id.; Florida Bar Business Law Section, supra note 4.
16
Florida Bar Business Law Section supra note 4.
17
Bjerre, et al., supra note 8; Florida Bar Business Law Section, supra note 4.
18
Id.
19
Florida Bar Business Law Section, supra note 4.
20
Id.
21
Id. STORAGE NAME: h0519e.JDC PAGE: 4
DATE: 1/26/2022
State Method Statutes
Alabama Amended its LLC and limited partnership
statutes.
§§ 10A-5A-1.06 and 10A-9-7.02, Ala.
Code
Colorado Amended all applicable statutes. §§ 4-9-406, 4-9-408, 7-90-104, Col. Rev.
Stat.
Delaware Amended all applicable statutes. Title 6, §§ 9-406, 9-408, 15-104, 17-1101,
and 18-1101, Del. Code Ann.
Kansas Amended its LLC statute. § 17-76, K.S.A.
Kentucky Amended its LLC and partnership statutes. §§ 275.255, 362.2-702, 32.1-503, Ky.
Rev. Stat.
Maine Amended its LLC statute. Title 31, § 1507, Maine Stat.
North
Carolina
Amended its UCC codification and LLC statutes. §§ 25-9-406, 25-9-408, 57D-10-02, N.C.
Gen. Stat. Ann.
Ohio Amended its partnership statute. § 1776.49, Ohio Rev. Code Ann.
Texas Amended all applicable statutes. §§ 9.406, 9.408, 101.106, and 154.001,
Tex. Bus. & Com. Code Ann.
Virginia Amended all applicable statutes. §§ 8.9A-406, 8.9A-408, 13.1-1001.1, 50-
73.84, Va. Code Ann.
Effect of Proposed Changes
CS/HB 519 amends ss. 679.4061 and 679.4081, F.S., to incorporate the 2018 UCC amendments.
Specifically, the bill provides that the anti-assignment override provisions set out in those sections do
not apply to a security interest in an ownership interest in a general partnership, a limited partnership,
or an LLC. This removes any potential conflict between these sections and the “pick your partner
principle” by allowing contract terms prohibiting the creation of such security interests to stand and
promotes the freedom of the owners in a partnership or LLC to contract.
The bill provides an effective date of January 1, 2023.
B. SECTION DIRECTORY:
Section 1: Amends s. 679.4061, F.S., relating to discharge of account debtor; notification of
assignment; identification and proof of assignment; restrictions on assignment of accounts,
chattel paper, payment intangibles, and promissory notes ineffective.
Section 2: Amends s. 679.4081, F.S., relating to restrictions on assignment of promissory notes,
health-care-insurance receivables, and certain general intangibles ineffective.
Section 3: Provides an effective date of January 1, 2023.
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DATE: 1/26/2022
II. FISCAL ANALYSIS & ECONOMIC IMPACT STATEMENT
A. FISCAL IMPACT ON STATE GOVERNMENT:
1. Revenues:
None.
2. Expenditures:
None.
B. FISCAL IMPACT ON LOCAL GOVERNMENTS:
1. Revenues:
None.
2. Expenditures:
None.
C. DIRECT ECONOMIC IMPACT ON PRIVATE SECTOR:
The bill will allow a contract among business partners or a controlling statute to limit the ability of an
owner in a partnership or LLC to create a security interest in his or her ownership interest in the
business. The bill:
Protects the investment of the owners in a partnership or LLC in a manner consistent with the
“pick your partner principle”;
May eliminate the need for a partnership or LLC to classify an ownership interest in the
business as a security, thereby reducing the business’s transaction costs; and
May reduce litigation costs related to disputes over the application of the override provisions to
ownership interests in a partnership or LLC.
D. FISCAL COMMENTS:
None.
III. COMMENTS
A. CONSTITUTIONAL ISSUES:
1. Applicability of Municipality/County Mandates Provision:
Not applicable. The bill does not appear to affect county or municipal governments.
2. Other:
None.
B. RULE-MAKING AUTHORITY:
Not applicable.
C. DRAFTING ISSUES OR OTHER COMMENTS:
None.
IV. AMENDMENTS/COMMITTEE SUBSTITUTE CHANGES
On January 13, 2022, the Civil Justice and Property Rights Subcommittee adopted one amendment and
reported the bill favorably as a committee substitute. The amendment changed the bill’s effective date from
July 1, 2022, to January 1, 2023. STORAGE NAME: h0519e.JDC PAGE: 6
DATE: 1/26/2022
This analysis is drafted to the committee substitute as passed by the Civil Justice and Property Rights
Subcommittee.