Indiana UCC Security Interests In Stock Certificates

Question Presented. Recently, a client asked (for a friend) whether certain shares of stock in a closely held corporation may be at risk to collection by a creditor. The shareholder apparently had granted a so-called blanket security interest in the shareholder’s assets to secure a personal loan. Whether the creditor filed a UCC Financing Statement (aka UCC-1 Form) with the Secretary of State was unknown. On the other hand, the shareholder (the debtor) still had possession of the stock certificate. Apparently, the shareholder wanted to sell the stock, and there was some concern about whether, upon a default of the loan, the creditor could pursue the stock in a loan enforcement proceeding.

Security Interests, Generally. In re Cruse, 2013 Bankr. LEXIS 360 (Bankr. S.D. Ind. Jan. 28, 2013), about which I wrote here, helps with some of the fundamentals related to the creation of UCC security interests:

• Article 9.1 of the Uniform Commercial Code governs the creation and perfection of liens in personal property. Indiana’s version can be found at Ind. Code ch. 26-1-9.1.

• Both “attachment” and “perfection” are needed to enforce a security interest against the debtor (and third parties).

• “Attachment” pertains to the creation of the security interest as between the secured party (creditor) and the debtor and requires the debtor to have rights in the collateral he intends to pledge to the secured party. Attachment involves the execution of a written security agreement between the debtor and the creditor that describes the collateral (unless the creditor is in possession of the collateral). The element of attachment is a relatively straightforward consideration.

• “Perfection” is an additional step that makes the security interest effective against third parties. The matter of perfection can be more complicated and depends on the nature of the property being pledged as collateral.

Perfection By Control. My research suggests that Indiana Code § 26-1-9.1-314 “Perfection by control” governs the perfection element in the situation presented to me. Subsection (c) provides:

A security interest in investment property is perfected by control under IC 26-1-9.1-106 not earlier than the time the secured party obtains control and remains perfected by control until:

(1) the secured party does not have control; and
(2) [the following occurs]:

(A) if the collateral is a certificated security, the debtor has or acquires possession of the security certificate….

(Uncertificated securities have slightly different rules … a subject for another day.)

Official comment 3 to the statute states:

Control Means Possession. Indiana Code § 26-1-9.1-106 “Control of investment property,” section (a), states that “a person has control of a certificated security … as provided in IC 26-1-8.1-106.” In turn, Indiana Code § 26-1-8.1-106 “Control of securities” tells us:

Official comment 2 states that “delivery of a certificated security occurs when the purchaser obtains possession of the security certificate, or when an agent for the purchaser (other than a securities intermediary) either acquires possession or acknowledges that the agent holds for the purchaser.”

After a couple hours of research, I found little Indiana case law applicable to my client’s question. But, the Indiana Court of Appeals, as an aside, offered the following nugget in Perry v. Madison Acquisition, LLC, No. 49A02-0610-CV-00863, at *9-10 (Ind. Ct. App. Aug. 21, 2007) (mem.):

The Court of Appeals’ finding in Perry, coupled with my interpretation of the above statutes and their official comments, indicates that perfection occurs through physical possession of the stock certificate.

Financing Statement. I should point out that the creditor in Perry had also filed a UCC Financing Statement, perhaps as a belt-and-suspenders measure. It’s frankly unclear to me whether, under Indiana law, a UCC filing alone would perfect a security interest in a certificated stock. Perhaps there is case law addressing this issue that I didn’t uncover, but if I were advising a creditor on such a transaction, I would recommend taking control (possession) of the stock certificate. Otherwise, there is a risk that the stock could be transferred to a third party free and clear of the creditor’s interest.

Answer. Getting back to my client’s question, the answer is: it depends. Was there attachment? Perhaps more importantly, was there perfection? Since the shareholder still maintained possession of the stock certificate, a strong argument could be made that the security interest, even assuming it attached, was unperfected. This suggests that the stock could be transferred to a third-party purchaser for value, free and clear.

Part of my practice involves the enforcement of UCC security interests. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@dinsmore.com. Also, don’t forget that you can follow me on X @JohnDWaller or on LinkedIn, or you can subscribe to posts via email as noted on the bottom of this page.