The loan documents outrank your operating agreement

You negotiated the operating agreement carefully. Who controls the company, who gets paid and in what order, when members can transfer their interests, how the agreement itself can be amended. Then you signed a loan, and the loan quietly became the senior document. Not by saying so in a headline, but by covenant after covenant that overrides the operating agreement’s terms whenever the two disagree. On the day it matters, the loan wins, and the operating agreement distributes, transfers, and governs only what the loan permits.

The operating agreement governs the company until a loan covenant says otherwise. On the points that matter to the lender, the loan is the senior operating agreement.

The operating agreement is not the top of the stack

Members treat the operating agreement as the constitution of the company, and among the members it is. But it is a contract, and the company signs another contract when it borrows, and that second contract is written by a party with more leverage and a security interest in the collateral. Where the loan and the operating agreement address the same subject, the loan’s covenants control in practice, because breaching them is a default that lets the lender accelerate, sweep cash, or foreclose. The operating agreement can permit something the loan forbids, and the members will still not do it, because doing it triggers the loan.

Where the override actually bites

Four places, and they are the four the members thought they controlled.

Distributions. The operating agreement’s waterfall says who gets paid first. The loan’s cash-management and reserve provisions decide whether there is any distributable cash to run through that waterfall at all, and on a trigger the lender intercepts the property’s cash upstream of the members entirely. The reserves and cash-management terms own that mechanism in detail; the point here is that the waterfall is contingent on the loan letting cash reach the company.

Transfers. The operating agreement sets the rules for admitting and removing members and transferring interests. The loan restricts transfers far more tightly, often barring any change in ownership or control above a small threshold without lender consent, because a change in who controls the borrower is a change in the lender’s counterparty. A transfer the operating agreement blesses can be a loan default.

Major decisions and management. The operating agreement vests decisions in the members or the manager. The loan conditions many of those same decisions, additional debt, leasing, capital expenditures, changing the property manager, on the lender’s approval, so the manager’s authority is real only within the box the loan draws.

Amendment. The operating agreement says how the members can amend it. The loan often forbids amending it at all in specified respects without lender consent, which means the members cannot change their own governing document freely while the loan is outstanding. The Article 8 opt-in is usually locked this way: opted in, and not permitted to opt back out until the loan is repaid.

Reading the two as one document

The practical discipline is to stop reading the operating agreement as if it were the final word on the company’s governance. It is the final word only on the points the loan does not reach, and the loan reaches most of the points that matter under stress. Before you rely on any operating-agreement provision, check whether a loan covenant overrides it, because the moment you need the provision, distributions in a downturn, a transfer to solve a partner problem, an amendment to fix a structural flaw, is exactly the moment the loan is most likely to have taken it away. The members drafted a constitution. The lender drafted the amendments that outrank it. Both are in the file, and only one of them wins the day it counts.