When Assignability Fails, Security Fails, June 2026 - NAV Collateral: The Assignability of Delaware Fund Interests

Why It Matters

Without clear assignability, a lender’s security interest fails to attach, leaving the loan unsecured and exposing the lender to significant loss in default or bankruptcy scenarios.

Key Takeaways

• Delaware law blocks UCC assignability override for LP/LLC interests
• Silent or permissive governing documents allow assignment of economic rights
• Explicit consent from general partner or manager needed for control rights
• Securities‑account structure bypasses assignability analysis entirely

Pulse Analysis

The enforceability of collateral in NAV‑based credit facilities hinges on a nuanced interplay between the Uniform Commercial Code and Delaware statutory carve‑outs. While Sections 9‑406 and 9‑408 of the UCC generally nullify contractual prohibitions on assigning accounts and general intangibles, Delaware’s 2002 amendments expressly exclude ownership interests in limited partnerships and limited liability companies. Consequently, the default rule reverts to the fund’s governing documents—limited partnership agreements (LPAs) or limited liability company agreements (LLCAs)—to determine whether an interest can be transferred. If the documents are silent, only the economic rights are assignable; any restriction on those rights blocks the creation of a security interest.

Practically, lenders must perform a three‑pronged diligence check. First, they review the governing documents for language that either permits assignment or remains silent, thereby allowing a pledge of economic rights. Second, when control rights are needed, they must secure explicit consent from the general partner, managing member, or the entity itself. Third, many market participants sidestep the assignability test by using a securities‑account workaround: a custodian registers the interest in its name, credits it to a securities account, and the borrower pledges the resulting security entitlement. This method enables perfection by control through a tri‑party agreement, eliminating the need to parse complex partnership clauses.

The strategic implications are significant for lenders and borrowers alike. In jurisdictions like New York, the UCC override still applies, offering broader assignability, but Delaware‑governed funds—common in private‑equity structures—remain subject to the stricter carve‑out. Ignoring these nuances can leave a loan unsecured, especially in bankruptcy where only a perfected interest attaches to proceeds. Therefore, robust document analysis, consent procurement, or the adoption of securities‑account structures are essential risk‑mitigation tools that protect lenders and maintain the integrity of NAV‑based financing arrangements.