## Facts

- A bank lent money to a borrower secured by “marketable securities” held in the borrower’s brokerage account at a securities firm.
- The bank notified the brokerage firm of its security interest and requested either delivery of certificates or confirmation the securities would remain in the account until the bank directed otherwise.
- The brokerage firm initially delivered certificates to the bank; the bank later returned them to the brokerage firm, stating it understood the borrower would keep the pledged securities’ principal value in the account.
- The bank later made a second secured loan and sent the brokerage firm a pledge agreement and an acknowledgment form that, if signed by the brokerage firm, would have given the bank exclusive authority to direct withdrawals (a three-party “control” arrangement).
- The brokerage firm never signed or returned the acknowledgment form.
- The borrower defaulted; when the bank attempted to liquidate the collateral, it learned the borrower had already withdrawn or liquidated the securities from the account.
- The bank sued the brokerage firm for negligence, breach of fiduciary duty, and fraud, asserting the brokerage firm had a duty to prevent dissipation of the pledged securities.

## Issues

1. Whether a secured lender’s unilateral notices and documents sent to a securities intermediary can constitute a control agreement under U.C.C. § 8-106, binding the intermediary to follow the lender’s entitlement orders without the debtor’s further consent.
2. Whether, absent a signed control agreement or similar undertaking, a securities intermediary owes a third-party secured lender a duty of care (negligence) or fiduciary duties regarding securities in the customer’s account.
3. Whether the bank stated a fraud claim where the intermediary did not sign the proposed acknowledgment and allegedly allowed the customer to dispose of the securities.

## Decision

- The court granted the brokerage firm’s Rule 12(b)(6) motion and dismissed all claims.
- The court held the bank’s communications did not create “control” under U.C.C. § 8-106 because the intermediary never agreed to comply with the bank’s entitlement orders without the customer’s further consent.
- Without a control agreement or comparable undertaking, the intermediary owed no fiduciary duty and no special tort duty to the bank regarding the customer’s disposition of account securities.
- The fraud claim failed for lack of actionable misrepresentation (and related reliance/duty-to-speak deficiencies), given the absence of any commitment by the intermediary to restrict the customer’s account activity.

## Legal Principles

- Under U.C.C. § 8-106, a secured party obtains “control” of a security entitlement only if the securities intermediary agrees to comply with entitlement orders from the secured party without further consent of the entitlement holder.
- Unilateral notice to a securities intermediary of a lender’s security interest, without the intermediary’s assent to follow the lender’s orders, does not create a control agreement and does not bind the intermediary.
- Absent a control agreement or similar undertaking, a securities intermediary generally owes duties to its customer, not to a third-party secured lender claiming an interest in the customer’s account.
- Negligence liability requires a cognizable duty; where the claimed harm is purely economic and there is no special relationship or undertaking, Pennsylvania law does not impose a duty to protect a third party from a customer’s misuse of its own brokerage account.
- Fraud requires a misrepresentation (or actionable nondisclosure where there is a duty to speak) and justifiable reliance; an intermediary’s failure to assume obligations proposed by a lender does not itself supply these elements.

## Conclusion

The court dismissed the lender’s negligence, fiduciary-duty, and fraud claims, holding that a securities intermediary has no obligation to protect a secured lender’s interest in a customer’s account securities unless the intermediary affirmatively agrees—typically through a signed U.C.C. Article 8 control agreement—to follow the lender’s directions without the customer’s further consent.


First Nat’l Bank of Palmerton v. Donaldson, Lufkin & Jenrette Sec. Corp., No. CIV.A.98-4966, 1999 WL 163606 (E.D. Pa. Mar. 19, 1999)