Opinion
Case No.: 1-01-02501, Adv. No.: 1-02-00138A
April 18, 2003
OPINION
Drafted with the assistance of John Kelly, Law Clerk.
The issue before me is whether a creditor (PNC Bank) who had attempted to levy against certain stock certificates pre-petition may obtain relief from the stay and sell those certificates post-petition, when it did not take physical possession of them at the time of the levy or hold them on the date of the Petition. A temporary injunction by this Court currently prevents PNC Bank from going forward with the sale. The matter now to be decided is whether the injunction should be permanent.
The parties agree that for PNC to be able to proceed with its sale, it must be found to have had "possession" of the certificates on the date the Chapter 13 Petition was filed. The dispute centers on the meaning of the word "possession" under the Pennsylvania Rules of Civil Procedure and the Uniform Commercial Code. PNC asserts that it took "constructive" possession of the certificates when the sheriff executed on them while they were held by a bailee even though the sheriff opted, for undisclosed reasons, to leave them with the bailee. The Debtor asserts that the rules do not recognize constructive possession of a certificate for purposes of attachment through levy.
Debtor cites Pa.R.Civ.P. 3109(a), which provides that "the sheriff may, or at the direction of the plaintiff shall, take manual possession or custody of any tangible personal property . . . upon which the sheriff has made a levy." In reply, PNC cites Pa.R.Civ.P. 3111(b), which provides that "service of the writ [of execution] upon the garnishee shall attach all property . . . which may be attached . . . which is in the possession of the garnishee."
The parties have cited no cases to explain these rules as they might specifically pertain to a stock certificate. They do cite cases dealing with constructive possession in other contexts, and these cases appear to conflict. The reason for the conflict, however, is that the cases cited by PNC dealt with matters covered by Article 9 of the Uniform Commercial Code, 13 Pa.C.S.A. § 9101 et. seq. (such as real property and certificates of deposit) while the Debtor's cases focused on U.C.C. Article 8, 13 Pa.C.S.A. § 8101 et seq. Whether this case is covered by Article 9 or Article 8 merits examination.
These Rules came into being long after one of the cases cited by PNC, Braden's Estate, 165 Pa. 184, 30 A. 746 (1895). The dicta from PNC's other citation, Royal Bank of Pennsylvania v. Selig, 434 Pa.Super. 537, 644 A.2d 741 (1994) is neither controlling nor persuasive.
Article 9 contained, at the time of the sheriff's levy (it has since been amended), the following provision:
A security interest in letters of credit and advices of credit, goods, instruments, money, negotiable documents or chattel paper may be perfected by the secured party's taking possession of the collateral. If such collateral other than goods covered by a negotiable document is held by a bailee, the secured party is deemed to have possession from the time the bailee receives notification of the interest of the secured party.
Under Section 9305, PNC might be deemed to have perfected its interest by virtue of the sheriff's levy on the bailee if the stock certificate could be considered an "instrument" under Article 9. While PNC's argument would embrace this method of perfection, PNC does not rely on Article 9. Both parties cite only Article 8, governing investment securities, which contained the following provision at the time of the levy:
The interest of a debtor in a certificated security may be reached by a creditor only by actual seizure of the security certificate by the officer making the attachment or levy. . . .
In Jennison v. Jennison, 346 Pa.Super. 47, 499 A.2d 302 (1985), the Court stated that, in Pennsylvania, Ashares of stock in closely held corporations should be treated as `securities' under Article 8. . . ." The Jennison Court thoroughly examined the question of whether common stock of a small corporation could be considered to be a security "of a type commonly dealt in upon securities exchanges or markets", as Article 8 defines "certificated securities". The Court, noting that the case was one of first impression in Pennsylvania, examined the law of other states and concluded that common stock is a certificated security. However, at least one Bankruptcy Court within the Commonwealth has reached a different result. The Court in In re U.S. Physicians, Inc., 236 B.R. 593 (Bankr.E.D.Pa. 1999) held that common stock in a closely held professional corporation was not a "security" within the meaning of § 8110, but was an "instrument" subject to Article 9. The U.S. Physicians court did not cite nor attempt to distinguish Jennison.
As I observed in In re Pagnotti, 269 B.R. 326 (Bankr.M.D. Pa. 2001), when examining a state statute not previously interpreted by a state's highest court, a federal court must predict how that highest court would rule. For guidance in such cases, the federal courts look to the decisional law of the Pennsylvania intermediate courts before they look to the decisions of other co-equal Federal courts. Hughes v. Long, 242 F.3d 121, 128 (3d Cir. 2001). Given the declarations of the Superior Court and the fact that PNC does not assert an argument that the stock certificates were "instruments" under Article 9, I conclude that the certificates were certificated securities subject only to Article 8.
Since the certificates are certificated securities and not instruments, then actual physical possession is the only way in which perfection could take place. The comments to Article 8 at 13 Pa.C.S.A. § 8112 make this clear. "[A] valid levy cannot be made unless all possibility of the certificate's wrongfully finding its way into a transferee's hands has been removed." As indicated at footnote 1, supra, PNC's cases are unpersuasive, especially when compared to the U.C.C. comments, since PNC's citations are either dicta or far predating Pennsylvania's current Commercial Code.
For these reasons, I conclude that Pennsylvania would not recognize "constructive possession" as a method for perfection involving shares of stock, and so PNC did not have a perfected security interest on the date of the Petition. Accordingly, PNC cannot take the shares as collateral. They must remain part of the estate. A permanent injunction shall be ordered.
An Order will follow.
ORDER
For those reasons indicated in the Opinion filed this date, IT IS HEREBY ORDERED that Plaintiff's request for a permanent injunction is granted.