Federal Deposit Insurance Corp. v. W. Hugh Meyer & Associates, Inc., 864 F.2d 371 (5th Cir. 1989)

Items we will discuss: A pledge (also sometimes called a pawn) is a form of possessory security, and accordingly, the assets which are being pledged need to be physically delivered to the beneficiary of the pledge (the pledgee). Pledges are in commercial contexts used in trading companies (especially, physically, commodity trading), and are still used by pawnbrokers, which, contrary to their old world image, remain a regulated credit industry. THREE REQUIREMENTS : 1. Secured Party must give Debtor something of value; 2. Debtor must have rights in the collateral ; 3. Secured party must take possession of the collateral set forth; must be signed and authenticated. Pledge :

Is a legal document that certifies ownership of a specific number of shares of stock in a corporation. According to Cornell Law... "Certificated security" means a security that is represented by a certificate. Perfect(ion) - relates to the additional steps required to be taken in relation to a security interest in order to make it effective against third parties[1] or to retain its effectiveness in the event of default by the grantor of the security interest. Alleged; supposed; reputed Stock Certificate : Certificated Stock : Perfecting A Security : Putative

Facts of the Case Hugh Meyer regularly entered into financing agreements with First National Bank of Midland Bank. In 1982, he and the bank executed a “Separate Collateral Agreement, wherein he pledged 5 Power Test Stock Certificates as collateral. The Agreement also referenced that dividends would be part of the collateral. While Midland took possession of the stock certificates, they never registered the stock in their name nor did they put a stop transfer on dividends. In September1983 various notes owed and personally guaranteed by Meyer became due to Midland. In October 1983 Midland became insolvent and appointed the FDIC as receiver of the funds. The F DIC immediately came after Meyer who hired attorneys Grambling & Mounce. In April 1985 Meyer received a dividend check from Power Test Stock. In May 1985 Meyer gave the check Grambling as security for his promise to pay their retainer fees.

The Issue : “Whether the Code recognizes a security interest in stock shares — more precisely, in the language of the code, "certificated securities"[1] — if the holder of the putative security interest has never possessed the shares.” [1] Both the base stock and the dividend stock in this case were represented by certificates — i.e., were certificated. The UCC speaks of "security interests in securities." For the sake of clarity, we will refer to the contested dividend stock as stock, or as stock shares, except where it is necessary to invoke the exact language of the UCC.

First the court had to determine which party developed security interest in the stock. Mere knowledge of a possible but as yet uncreated security interest does not suffice to defeat the perfected security interest of a later creditor. A contrary rule would undermine the " race of diligence among creditors " contemplated by the U.C.C. See Matter of E.A. Fretz Co., Inc., 565 F.2d 366, 371 (5th Cir.1978).” " race of diligence among creditors “ =

“A mere unexercised contractual right to create a property interest is not itself a property interest. “ The question of whether the FDIC ever developed a security interest in the shares is necessarily precursor to the question of whether a conversion occurred. “Again, a contrary rule would undermine the incentives carefully established by the UCC's distinctions among:  secured interests,  perfected secured interests,  and other interests.

"A security interest in a security is enforceable and can attach only if it is transferred to the secured party or a person designated by him pursuant to a provision of § 8.313(a)." As applied to this case, this means that the FDIC, and similarly Grambling & Mounce, can claim a security interest in the contested stock only if it took that interest pursuant to a VALID "transfer" as defined elsewhere in the Code. The First National Bank Of Midland held the stocks but did not transfer or register the shares nor place a stop transfer on the Dividends. NEITHER DID THE FDIC!!! Texas Code § 8.313(a)

First Midland never possessed the DIVIDEND shares. The district court's determination that Grambling & Mounce has a perfected security interest in the shares while First Midland is an unsecured creditor is both consistent with the law and supported by the evidence. The decision of the district court is therefore AFFIRMED. CONCLUSION

The question: The law firm claimed that it, and not the bank, had a perfected security interest in the dividend because the dividend was in the law firm’s possession. Which party had a perfected security interest in the $500,000 dividend? Business Law 12 th Edition: 1. A perfected security interest has priority over unsecured creditors and unperfected security interests. When two or more parties have claims to the same collateral, a perfected secured party’s interest has priority over the interests of most other parties [c]. This includes priority to the proceeds from a sale of collateral resulting from a bankruptcy (giving the perfected secured party rights superior to those od the bankruptcy trustee…” U.C.C. - ARTICLE 9 - SECURED TRANSACTIONS (2010) › Part 3. Perfection and Priority › § PRIORITIES AMONG CONFLICTING SECURITY INTERESTS IN AND AGRICULTURAL LIENS ON SAME COLLATERAL. (a)[General priority rules.] Except as otherwise provided in this section, priority among conflicting security interests and agricultural liens in the same collateral is determined according to the following rules: (1)Conflicting perfected security interests and agricultural liens rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest or agricultural lien is first perfected, if there is no period thereafter when there is neither filing nor perfection. (2) A perfected security interest or agricultural lien has priority over a conflicting unperfected security interest or agricultural lien. (3) The first security interest or agricultural lien to attach or become effective has priority if conflicting security interests and agricultural liens are unperfected. Assignment

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