## Facts

- Jerry and Suzanne Pfautz filed a Chapter 7 bankruptcy case.
- Before bankruptcy, the Pfautzes granted Liberty Bank a security interest in mutual-fund shares treated as uncertificated securities.
- The parties arranged for the shares to be held in a segregated loan-collateral account at State Street Bank and Trust Company, a third-party financial institution.
- Liberty Bank, the Pfautzes, and State Street entered into an agreement governing the collateral account and Liberty Bank’s rights, including rights to dispose of the securities upon default.
- The Chapter 7 trustee moved to compel Liberty Bank to turn over the securities, asserting the bank’s security interest was unperfected and avoidable.
- Liberty Bank moved for relief from the automatic stay to foreclose its asserted security interest; the trustee opposed, again disputing perfection.

## Issues

1. Whether Liberty Bank perfected its security interest in the debtors’ uncertificated securities by obtaining “control” under applicable UCC Article 8/9 provisions.
2. Whether a lack of an express “without further consent of the debtor” clause in the tri-party arrangement prevented a finding of control and thus perfection.
3. Whether, given the status of perfection, the trustee could compel turnover free of the bank’s lien and whether the bank was entitled to relief from the automatic stay.

## Decision

- The court held Liberty Bank had a perfected security interest in the uncertificated securities by “control.”
- The court rejected the trustee’s argument that perfection failed due to the absence of specific “magic words” in the agreement.
- The trustee could not avoid the bank’s perfected interest and could not compel turnover of the securities free and clear of the lien.
- The bank’s perfected interest supported enforcement rights in bankruptcy, providing a basis for relief from the automatic stay consistent with its secured status.

## Legal Principles

- A security interest in uncertificated securities may be perfected by “control” under UCC Articles 8 and 9, rather than solely by filing.
- “Control” may be established through a tri-party arrangement with a securities intermediary that, in substance, places the secured party in a position to direct disposition of the collateral consistent with the UCC control framework.
- Courts may assess functional control based on the account structure and the intermediary’s undertakings, not merely the presence or absence of a particular recital.
- In bankruptcy, a trustee’s strong-arm powers do not defeat a properly perfected security interest; estate property remains subject to the perfected lien, limiting turnover to the trustee on a lien-free basis.

## Conclusion

The bankruptcy court concluded that Liberty Bank’s tri-party collateral arrangement with State Street gave it UCC “control” over the debtors’ uncertificated securities, thereby perfecting its security interest and defeating the trustee’s attempt to obtain turnover free of the bank’s lien.


In re Pfautz, 264 B.R. 551 (Bankr. W.D. Mo. 2001)