APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE (D.C. Bankruptcy No. 70-94).
Seitz, Chief Judge, Gibbons and Rosenn, Circuit Judges.
This is a consolidated appeal from two separate orders of the district court in a Chapter XI bankruptcy proceeding instituted by Lammot duPont Copeland, Jr. (hereinafter "Copeland" or "debtor"). The appeals are united by a common factual basis. In July of 1967, Copeland personally guaranteed payment on a $2,700,000 loan by Pension Benefit Fund, Inc. ("Pension Benefit") to two corporations and entered into an agreement which required him to pledge as collateral security 18,187 shares of Christiana Securities Co. stock. An "escrow agreement" was simultaneously executed between Copeland, Pension Benefit and Wilmington Trust Company ("Wilmington Trust") which designated Wilmington Trust as escrow holder of the pledged stock.
Nearly three years later, in April, 1970, there was a default on the loan. Following written demand upon the principal corporations for payment, Pension Benefit notified Copeland and Wilmington Trust by letter of September 11, 1970 of the uncured default and of its intention to demand the surrender of the escrowed stock in accordance with the pledge agreement. Copeland did not respond to this letter, but on October 20, 1970, filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., and an application to stay enforcement of Pension Benefit's lien on the Christiana stock. Thereafter, Copeland withdrew his objection to the delivery of the stock to Pension Benefit, and the stock was turned over by Wilmington Trust on December 1, 1970. The market value of the stock on this date was less than the unpaid balance due on the loan. Subsequently, Pension Benefit filed an amended proof of claim to recover the difference.
It was not until July 27, 1972, nearly a year and a half later, that the debtor first objected to Pension Benefit's proof of claim and filed a counterclaim seeking, inter alia, an accounting for any surplus which might exist in the appreciated value of the stock over the amount due on the loan. Pension Benefit moved to dismiss the counterclaim for failure to state a claim upon which relief could be granted, and the debtor moved for summary judgment. By order of April 3, 1973, Pension Benefit's motion to dismiss was denied, and the debtor's motion for summary judgment was granted insofar as it requested an evaluation proceeding to ascertain the value of the stock. The order additionally required Pension Benefit to make application to the court before selling or encumbering the stock. Following the district court's affirmance of the referee's order, Pension Benefit appealed.
In addition to counterclaiming for recovery of the surplus value of the stock after payment of the debt, on October 19, 1973, debtor filed an independent application for an order requiring Pension Benefit to surrender the stock itself and dividends received with respect thereto. Debtor's application was denied by the district court, sitting as a bankruptcy court, by order dated February 3, 1975. Debtor and the Statutory Creditors' Committee appealed.*fn1
We shall consider first the issues raised in debtor's appeal since, if he is successful in recovering the stock, Pension Benefit's appeal will be rendered moot.
Copeland asserts a superior right to possession of the stock by virtue of his status as debtor-in-possession which enables him to exercise all the powers of a trustee in bankruptcy, Bankruptcy Act § 342, and specifically, to avail himself of all rights and remedies of any creditor -- real or hypothetical -- who had or could have obtained a lien on the debtor's property on the date of bankruptcy. Bankruptcy Act § 70c. The rights of a lien creditor must be determined by reference to state law. Pertinent here is § 9-301(1)(b) of the Uniform Commercial Code as enacted in Delaware, 6 Del. C. § 9-301(1)(b),*fn2 which provides:
"(1) Except as otherwise provided in subsection (2), an unperfected security interest is subordinate to the rights of
"(b) a person who becomes a lien creditor without knowledge of the security interest and before it is perfected."
Since under § 70c of the Bankruptcy Act the trustee has all rights of an ideal lien creditor under § 9-301(1)(b) of the Code, his rights in the stock are superior to Article 9 claimants whose interests were unperfected as of the date of bankruptcy.
Copeland contends that Pension Benefit's security interest in the Christiana stock was unperfected on the date of bankruptcy. He asserts that the district court therefore erred in denying his application for an order requiring Pension Benefit to surrender the stock and dividends received with respect thereto.
Copeland first argues that Pension Benefit's security interest was unperfected because it had not attached as of October 20, 1970, the date on which debtor filed his Chapter XI petition. The district court determined to the contrary.
Section 9-303 provides that a "security interest is perfected when it has attached and when all of the applicable steps required for perfection have been taken." Attachment occurs under § 9-204 when there is an agreement that the security interest attach, value is given, and the debtor has rights in the collateral. A security interest attaches immediately upon the happening of these events "unless explicit agreement postpones the time of attaching." § 9-204(1). Although the aforementioned prerequisites to attachment had been fulfilled on the date the pledge agreement was executed in 1967,*fn3 Copeland contends that the parties explicitly agreed to postpone the time of attachment. In support of this contention, he relies upon paragraph 8 of the pledge agreement which states:
"8. In the event there is a default by the Pledgor in the performance of any of the terms of this Agreement, or if there is a default in the payment of the loan as provided in the note and if such default continues for a period of fifteen (15) days, the Pledgee shall have the right, upon fifteen (15) days notice, sent by registered mail to the Pledgor, to call upon The Wilmington Trust Company to forthwith deliver all of the stock and stock powers which it is holding as security hereunder to Pledgee, or such other party as Pledgee may designate, and thereupon, without any liability for any diminution in price which may have occurred, and without further consent by the Pledgor, the said Pledgee may sell all or part of the said stock in such manner and for such price or prices as the said Pledgee may be able to obtain. At any bona fide public sale, the Pledgee shall be free to purchase all or any part of the pledged stock. Out of the proceeds of any sale, the Pledgee shall retain an amount equal to the entire unpaid principal and interest then due on the loan plus the amount of the actual expenses of the sale and shall pay the balance to the Pledgor. In the event that the proceeds of any sale are insufficient to cover the entire unpaid principal and interest of the loan plus the expenses of the sale, the Pledgor shall be liable for any deficiency."
Copeland argues that by the terms of this paragraph, Pension Benefit's security interest did not attach until each of the following events had occurred: (1) the debtor had defaulted; (2) default had continued for fifteen days; (3) fifteen days written notice by registered mail had been sent to the debtor by Pension Benefit; (4) proper demand had been made upon Wilmington Trust to deliver the stock and stock powers; and (5) the stock and stock powers had been delivered to Pension Benefit. Since the stock was not turned over to Pension Benefit until December 1, 1970, he maintains that the security interest had not attached, and consequently, was not perfected, on the pivotal date of bankruptcy, October 20, 1970.
We believe that the relevant language of paragraph 8 which debtor urges postpones the date of attachment merely establishes an orderly procedure for enforcement of the security interest upon default. It is understandable that debtor would seek to protect his stock to the fullest extent possible from hasty and premature foreclosure attempts by Pension Benefit. Indeed, § 9-501 of the Code, with exceptions not here relevant, specifically recognizes the right of parties to a security agreement to agree among themselves as to the duties and responsibilities of a secured party when default occurs. To read paragraph 8 as anything other than an attempt to safeguard debtor's interest in the valuable pledged stock against unwarranted claims of default and improper attempts to enforce the security interest would distort the nature of the transaction envisioned by the parties and would render Pension Benefit's security for repayment of the loan largely meaningless. We say this because Pension Benefit's interest in the stock would be subordinate to any intervening creditors who had obtained and perfected a security interest in the stock after Pension Benefit but before bankruptcy, a result clearly not intended by either party. We therefore conclude that the pledge agreement was not intended to delay the date of attachment of Pension Benefit's security interest, but rather was designed to protect debtor's interest in the stock from improper attempts by Pension Benefit to obtain its possession in the event there was a claim of default.
Our conclusion is not altered by the two cases which debtor argues support his proffered interpretation of the pledge agreement. The first -- In re Portland Newspaper Publishing Co., Inc., 3 U.C.C. Rep. Serv. (Callaghan) 194 (Bankr. D. Ore. 1966), aff'd on other grounds, 271 F. Supp. 395 (D. Ore. 1967), aff'd sub nom. DuBay v. Williams, 417 F.2d 1277 (9th Cir. 1969) -- is sufficiently dissimilar as to warrant only brief mention. While the opinion by the referee in that case contains language which would appear to lend some support to debtor's position, the circuit court affirmed on alternate grounds. Since it found that no security interest had been created in future accounts receivable, the court did not reach the question of whether the parties had effectively agreed to postpone the time of attachment.
The primary case relied upon by debtor is In re Dolly Madison Industries, Inc., 351 F. Supp. 1038 (E.D. Pa. 1972), aff'd mem., 480 F.2d 917 (3d Cir. 1973). That case involved a sale of stock which was accomplished by means of the simultaneous execution of a purchase agreement, promissory note and escrow agreement. In order to secure payment of the purchase price of the stock, the purchase agreement created a security interest in the stock which was placed by the purchaser in escrow. Paragraph 1(b)(3) of the purchase agreement contained the following provision:
"In the event that AFL shall be in default in the payment of principal or interest under its promissory note . . and if said default shall not be cured within five days after receipt by AFL of notice thereof from seller, then the escrow agent, upon notice thereof from seller, shall deliver the certificates to seller, whereupon seller's rights and obligations in and to the shares represented by the certificates . . . shall be those of a secured party holding collateral under the provisions of Article IX of the Uniform Commercial Code as in effect in the Commonwealth of Pennsylvania." 351 F. Supp. at 1040 (emphasis added).
The district court held that the italicized portion of the agreement manifested the parties' intention to delay attachment of the security interest, pursuant to § 9-204(1), until the event of an uncured default in ...