## Facts

- Lammot duPont Copeland, Jr. guaranteed a $2.7 million loan made to two corporations and pledged 18,187 shares of Christiana Securities Co. stock as collateral.
- Copeland, the secured creditor (Pension Benefit Fund, Inc.), and Wilmington Trust Company executed an escrow agreement naming Wilmington Trust as escrow holder of the pledged stock.
- After the primary obligors defaulted, Pension Benefit notified Copeland and Wilmington Trust of the uncured default and its intent to demand the escrowed stock.
- Copeland filed a Chapter XI petition and sought to stay enforcement of Pension Benefit’s lien.
- Copeland later withdrew his objection to delivery; Wilmington Trust delivered the stock to Pension Benefit, and the stock’s market value was less than the unpaid loan balance.
- Pension Benefit filed a deficiency claim in the Chapter XI case.
- About 18 months later, Copeland objected to the claim and asserted a counterclaim, arguing that Pension Benefit’s security interest was unperfected on the bankruptcy filing date because Wilmington Trust allegedly held the stock as an agent for both sides rather than as the secured party’s bailee.
- The district court held the security interest had attached and was perfected before the bankruptcy filing; it ordered valuation-related relief and denied Copeland’s request for turnover of the stock and dividends.
- Copeland (joined by the creditors’ committee) and Pension Benefit filed consolidated appeals addressing perfection and valuation/remedies.

## Issues

1. Whether a security interest in certificated stock is perfected under U.C.C. § 9-305 when the stock is held by an escrow agent as a “bailee with notice,” even if the escrow arrangement is tripartite and executed by both debtor and secured party.
2. Whether the security interest had attached by the time of the Chapter XI filing, such that the debtor-in-possession could not treat the creditor as unperfected as of the petition date.
3. Whether the debtor was entitled to turnover of the stock and dividends (and related accounting relief), or whether valuation/deficiency treatment was proper given the creditor’s secured status.

## Decision

- The Third Circuit affirmed the district court’s determination that Pension Benefit’s security interest had attached before the Chapter XI filing.
- The court held the security interest was perfected under U.C.C. § 9-305 because Wilmington Trust held the stock as a bailee with notice of the secured party’s interest.
- The court rejected the argument that the escrow agent’s role in a tripartite agreement prevented perfection by possession through a bailee.
- The court left intact the district court’s valuation-related disposition and refused to order turnover of the stock and dividends to the debtor.

## Legal Principles

- Under U.C.C. § 9-305, a security interest in certificated securities may be perfected by possession either by the secured party or by a third-party bailee who has notice of the secured party’s interest.
- A third-party escrow holder can qualify as a “bailee with notice” for § 9-305 purposes even if the escrow arrangement is created by an agreement signed by both debtor and secured party.
- The debtor’s participation in selecting or contracting with the escrow holder does not, by itself, defeat perfection where the holder has notice and the arrangement deprives the debtor of unfettered control over the collateral.
- When a security interest is attached and perfected as of the bankruptcy petition date, the debtor-in-possession cannot use avoidance/strong-arm theories premised on unperfected status to reclaim the collateral or its proceeds.

## Conclusion

The Third Circuit held that the creditor’s security interest in pledged stock was attached and perfected before the Chapter XI filing because the escrow agent’s possession, with notice, satisfied U.C.C. § 9-305, defeating the debtor’s attempt to treat the lien as unperfected and to compel turnover of the stock and dividends.


In re Copeland, 531 F.2d 1195 (3d Cir. 1976)