SCOVT affirms summary judgment in favor of defendant who pledged investment account as security, holding plaintiff did not have a valid security interest in account that was never subject to the control of the plaintiff as required by terms of the security agreement .

Berkshire Bank v.  Kelly, 2023 VT 2 

WAPLES, J. Plaintiff Berkshire Bank filed this action seeking possession of funds in an investment account owned by defendant Thomas Kelly, which defendant purportedly pledged as security for a business loan to his sister Dorothea Kelly. The civil division granted summary judgment in favor of defendant, concluding that plaintiff did not have a valid security interest in the account. We agree and affirm.

 

The trial court ruled a a security interest never attached under 9A V.S.A. § 9-203(b) and granted defendant's motion for summary judgment because plaintiff never possessed or controlled the Merrill Lynch account as required by the language of the pledge agreement.  

Article 9 provides that a creditor has a secured interest in collateral when the interest attaches, meaning "when it becomes enforceable against the debtor with respect to the collateral." 9A V.S.A. § 9-203(a). In turn, a security interest becomes enforceable against the debtor when one of four specified evidentiary conditions is satisfied. Id. § 9-203(b)

 

The parties agree that prior to the commencement of this litigation the Merrill Lynch account was never in plaintiff's possession or control, ruling out three of the methods of satisfying the evidentiary requirement. See 9A V.S.A. § 9-203(b)(3)(B)-(D) (providing for possession, delivery, or control pursuant to security agreement as alternative evidentiary tests of enforceability).

 

Accordingly, the security interest only attached if the evidentiary condition set forth in § 9-203(b)(3)(A) was met; that is, if defendant "authenticated a security agreement that provides a description of the collateral.".

Here, the agreement between the parties defined the collateral as "all of [defendant's] property . . . in the possession of, or subject to the control of, [plaintiff] . . . whether existing now or later and whether tangible or intangible in character, including" defendant's Merrill Lynch account.

On appeal, plaintiff argues that the security agreement describes  the collateral as the Merrill Lynch account, and that the  possession-or-control language is not a precondition to the creation of the security interest.

The language of the clause does not support plaintiff's interpretation, since it refers to the account already being in plaintiff's control. Under the plain meaning of this language, collateralization was dependent on transfer of possession or control of the Merrill Lynch account to plaintiff. Because that event never occurred, the security interest never attached.

 

 Plaintiff argues "a security agreement may create or provide for a security interest in after-acquired collateral." 9A V.S.A. § 9-204(a), and that the pledge agreement described the collateral as property within plaintiff's possession or control "whether existing now or later."  We are not persuaded by this argument. The account never met the description of the collateral because plaintiff never took control of it as the agreement contemplated. Section 9-204 applies to property in which the debtor does not have any rights at the time the security agreement is executed. The rule on after-acquired property does not assist plaintiff.

 

Finally, plaintiff argues that its security interest eventually did attach when defendant complied with the court's order directing him to set aside $208,000 "as security for the asserted debt in this matter" by placing that amount in escrow with his attorney, claiming that  plaintiff took possession of the collateral under 9A V.S.A. § 9-313(c)(1) at that point. We disagree. 

Section 9-313(c)(1) provides that a secured party takes possession of collateral held by a person other than the debtor when "the person in possession authenticates a record acknowledging that it holds possession of the collateral for the secured party's benefit." Id. cmt. 3. However, "a court may determine that a person in possession is so closely connected to or controlled by the debtor that the debtor has retained effective possession, even though the person may have agreed to take possession on behalf of the secured party." Id.

 

We conclude that such is the case here. We see nothing in the record indicating that defendant's counsel was acting as an agent of plaintiff. Under these circumstances, we conclude that plaintiff did not take possession of the collateral when the funds were placed in escrow by court order.

Because defendant's Merrill Lynch account was never within plaintiff's control, it did not fall within the description of collateral contained in the parties' pledge agreement, and no security interest ever attached to the account. The civil division therefore correctly granted summary judgment in favor of defendant.

 

Affirmed.