Problem.Perfection by possession

     A.  Clara was looking at items in the attic of her mother’s home following her mother's death.  In a will, her mother had devised all of those items to Clara.  Beneath the lining of an old trunk Clara found a previously undiscovered set of letters written by John Steinbeck to Clara’s grandfather.  Clara took the trunk home (letters included) and a few weeks later, after an expert authenticated the letters, Clara loaned them indefinitely to the local Steinbeck museum for display, subject to her request that they be returned.

     Soon thereafter, Clara agreed that the letters could stand as security for a $10,000 loan, made to her best friend Nel by Nel’s boss Peter, to help Nel pay for uninsured medical expenses.  So Clara, Nel, Peter and the museum did the following: (1) Nel signed a promissory note in favor of Peter in the amount of $10,000; the note explicitly described and referred to the Steinbeck letters as collateral for the loan; (2) Clara and Peter orally agreed that the letters would serve as collateral for Nel’s obligation under the promissory note; (3) Peter and the museum orally agreed that the museum would return the letters to Clara only after confirming with Peter that Nel had repaid the loan. The parties took no other steps in furtherance of the transaction.

     Two months later, Clara filed a petition under Chapter 7 of the Bankruptcy Code.  From information in Clara's bankruptcy schedules and from discovery, the trustee learned all of the information described above. Nel had by then defaulted in payments on the loan but, as of the time that Clara filed her bankruptcy petition, Peter had not taken any action to sue on the debt or obtain possession of the letters.  In the bankruptcy case Peter asserted a security interest in the letters and the bankruptcy trustee sought to avoid Peter's asserted lien on the ground that Peter had not perfected the security interest.  A local reporter caught wind of the litigation and the national media have picked up the story.

     You are the judge. The parties, and a national audience, await your ruling. Will the trustee prevail?  You may begin with the premise that a bankruptcy trustee generally may avoid (i.e. eliminate) an Article 9 security interest that is not perfected at the time the bankruptcy petition is filed (Commentary.Avoiding liens in bankruptcy). Would your answer be any different if Clara had signed a security agreement describing the Steinbeck letters as collateral and granting a security interest in the letters to Peter?  See U.C.C. 9-203, U.C.C. 9-308(a), U.C.C. 9-310(b)(6), U.C.C. 9-313.

     B.  Denise and Roland dissolved their marriage.  In a proceeding to divide their property, the court entered a judgment awarding Denise $500,000 to equalize the division of property (having valued and awarded other property to Roland) and ordering the debt to be secured by Roland's stock in Microsoft.  Roland took an appeal.  He was unable to post a bond to stay execution of the judgment pending appeal, but the court stayed execution upon his deposit of his Microsoft stock certificates with the clerk of the court in lieu of a bond.  Thereafter, Deidre, Roland's wife from an earlier marriage, caused the sheriff to execute on the Microsoft stock in the possession of the clerk to satisfy a judgment that she had obtained against Roland for unpaid spousal support.  The sheriff took possession of the stock pursuant to the writ and noticed its sale.  Upon learning of the execution, Denise filed a third party claim to the stock, claiming that she had a perfected security interest in the stock that took priority over Deidre's execution lien.  Assuming that a prior perfected security interest takes priority over a subsequent execution lien, should Denise prevail in her third party claim?  U.C.C. 9-203(b)(3)(C), U.C.C. 9-313, U.C.C. 8-301(a), U.C.C. 1-201(32), (33).