Debtor Pfautz offered as security to Liberty Bank mutual fund shares that were uncertificated. Liberty Bank signed a loan collateral account with Pfautz that required the transfer agent and custodian of shares to release the securities only upon Liberty Bank’s instructions. A stop transfer was placed on the account to ensure the shares would not be sold or transferred to any other party, essentially freezing the assets. When Pfautz filed for bankruptcy a few years later, the bankruptcy trustee attempted to collect the shares, arguing that the loan collateral account did not give Liberty Bank control of the investments.

CASE QUESTIONS

1. How can an investment product be perfected?

2. Did Liberty Bank perfect its security interest in the mutual fund shares? Who should get the proceeds from the collateral and why?