Cowen and Co. v. Atlas Stock Transfer Co.

• Decision Date: 27 December 1984
• Docket Number: No. 18739,18739
• Parties: 40 UCC Rep.Serv. 1387 COWEN AND COMPANY, a partnership, Plaintiff and Respondent, v. ATLAS STOCK TRANSFER COMPANY, a Utah corporation, and Global Oil Company, a Utah corporation, Defendants and Appellants.
• Court: Utah Supreme Court

Page 109

695 P.2d 109

40 UCC Rep.Serv. 1387

COWEN AND COMPANY, a partnership, Plaintiff and Respondent, v. ATLAS STOCK TRANSFER COMPANY, a Utah corporation, and Global Oil Company, a Utah corporation, Defendants and Appellants.

No. 18739.

Supreme Court of Utah.

Dec. 27, 1984.

James N. Barber, Barber, Verhoes & Yocom, Salt Lake City, for defendants and appellants.

Randy L. Dryer, Byron W. Milstead, Parsons, Behle & Latimer, Salt Lake City, for plaintiff and respondent.

HALL, Chief Justice:

Defendants appeal a summary judgment in favor of plaintiff. The district court granted the summary judgment on the issue of defendants' joint and several liability to plaintiff for breach of Atlas Stock Transfer Company's (Atlas) duty to transfer shares of Global Oil Company's (Global) stock in a timely manner under U.C.A., 1953, § 70A-8-401. Defendants also appeal a judgment awarding damages to Cowen and Company (Cowen). We affirm.

Plaintiff Cowen is a partnership organized under the laws of New York State. Its business is buying and selling securities. Cowen is a member of all major stock exchanges and the National Association of Securities Dealers (NASD).

Defendant Global is a Utah corporation whose business is acquiring oil and gas leases. Defendant Atlas is a Utah corporation which, as transfer agent for Global, is responsible for performing stock transfer and registrar functions for Global.

Robert Staff is a resident of Florida and was the registered owner of 45,000 shares of Global common stock, the subject of this action.

On December 19, 1980, Cowen received stock certificate No. 000923, representing 45,000 shares of Global Oil stock, from Dis-Com Securities (Dis-Com), a brokerage house in Florida that clears through Cowen. The certificate was registered in the name of Robert Staff and had no restrictions on its face. Staff had requested that the stock be sold and had endorsed the certificate. Cowen verified and guaranteed Staff's signature through Dis-Com. During the period from December 15, 1980, to February 18, 1981, Cowen sold 24,000 of Staff's shares to various other brokers.

On January 12, 1981, Cowen sent certificate No. 000923 to Atlas requesting that Atlas, as transfer agent for Global, cancel the certificate and reissue the stock: 21,000 shares to be issued in the name of Staff and 24,000 shares to be issued in denominations representing the individual sales by Cowen.

On February 20, 1981, a Cowen employee contacted Atlas to inquire why Atlas had failed to transfer the shares and reissue new certificates as requested. The employee was informed that a stop transfer order had been placed against the certificate. On February 23, Andrew F. Grietz, Jr., vice president and director of compliance for Cowen, contacted Atlas concerning the delay. Grietz was informed that Atlas had received a telegram from a representative of a corporation known as 98161 Canada Limited (Canada Ltd.). Canada Ltd. claimed to be the true owner of the 45,000 shares of Global stock. Upon receipt of the telegram, Atlas put a stop order on the transfer request and advised Canada Ltd. by certified letter dated January 15, 1981, that under Utah law Canada Ltd. must post an indemnity bond or obtain an injunction or order prohibiting the transfer within 30 days or the transfer would be completed as requested. No further communication was thereafter received from Canada Ltd.

Grietz demanded on behalf of Cowen that Atlas effect the stock transfer. Although 30 days had passed since dispatch of the certified letter, Atlas refused to reissue the stock. On February 19, 1982, more than one year after the initial transfer request, Atlas registered the transfer of the stock. Nothing material had changed in the positions of any of the parties.

Industry practice and NASD rules and regulations required Cowen to make delivery of the stock to purchasers within five business days of each sale. Atlas' refusal to reissue the stock rendered Cowen unable to make timely delivery. Cowen attempted to purchase Global shares on the open market but was unable to purchase sufficient shares to cover its delivery obligations. Purchasing brokers therefore "bought in" Cowen, i.e., purchased Global shares on the open market to cover their obligations to their own customers. Under NASD regulations, purchasing brokers were not required to pay for stock until delivery. However, industry practice required Cowen to pay Staff within five days after any order even though Cowen had not received the money from the purchasing brokers. Following that practice, Cowen did pay Staff the sales proceeds within five days of each sale. Cowen issued 12 checks totaling $148,359.17 to Staff, which Staff endorsed and cashed. Cowen issued additional checks to Staff totaling $46,470.48, on which it stopped payment upon learning of Atlas' refusal to transfer the shares. Those proceeds were credited to Staff's cash account with Cowen. Cowen also made $19,000 in additional sales for which checks were never drawn. The $19,000 was credited to Staff's cash account. Therefore, since buy-ins had been effected and Staff had been paid for sales of the stock, Cowen was left holding 24,000 shares of Global stock.

Between the time of the transfer request in January, 1981, and the time of the damages trial in July, 1982, the value of Global stock declined from approximately ten dollars to six and one-half cents per share.

In March, 1981, Cowen filed an action in district court against defendants, alleging that defendant Atlas had wrongfully refused to timely register the transfer of Global stock. In response to Cowen's motion, the district court granted partial summary judgment to Cowen on the issue of liability. In July, 1982, the issue of damages was resolved in a trial before the bench. The judge awarded damages to Cowen in the amount of $213,923.30, together with interest on $148,359.17 from the date of payment from Cowen to Staff.

Chapter 8 of the Utah Uniform Commercial Code, U.C.A., 1953, §§ 70A-8-101 to -406 (1980 ed.), establishes the standards for issuance and transfer of investment securities. ¹ Since Global is a Utah corporation, its rights and duties with respect to transfer of the stock at issue in this case are governed by Chapter 8 of the Utah Uniform Commercial Code. ²

An issuer of stock has a mandatory duty to register a requested transfer of a security if the preconditions set forth in U.C.A., 1953, § 70A-8-401(1) ³ are met. ⁴ Section 70A-8-401(2) expressly creates a right of action in the person presenting a security for registration of transfer for any losses occasioned by unreasonable delay or by failure or refusal to register the transfer. Section 70A-8-406(1) imposes a coextensive duty upon the transfer agent for an issuer. ⁵ Wrongful refusal by a transfer agent to register a requested transfer makes the agent liable to the damaged shareholder. ⁶

Thus, if a party requesting transfer of a security can show that it has met the preconditions of section 70A-8-401(1) and that the issuer or transfer agent has unreasonably delayed or refused to register the transfer, that party has an action for damages against the issuer and/or the transfer agent.

Appellants do not dispute that the requirements of subsections (a), (b) and (d) of section 401(1) had been satisfied as of the date the stock transfer was requested. Stock certificate No. 000923 had been endorsed by its registered owner, Robert Staff; Staff's signature had been verified and guaranteed by Cowen through Dis-Com; and all applicable laws relating to the collection of taxes had been complied with.

Further, by February 15, 1981, Atlas had discharged any duty it had under subsection (c) of section 401(1) to inquire into the adverse claim of Canada Ltd. Atlas contends that it had a duty to inquire into the adverse claim of Canada Ltd. after receiving a telegram from Canada Ltd. wherein Canada Ltd. claimed to be the true owner of the Global shares represented by certificate No. 000923. ⁷ Atlas, however, discharged any duty of inquiry by the actions it took thereafter.

An issuer or transfer agent can discharge any duty of inquiry:

[B]y any reasonable means, including notifying an adverse claimant by registered or certified mail at the address furnished by him or if there be no such address at his residence or regular place of business that the security has been presented for registration of transfer by a named person, and that the transfer will be registered unless within thirty days from the date of mailing the notification, either

(a) an appropriate restraining order, injunction or other process issues from a court of competent jurisdiction; or

(b) an indemnity bond sufficient in the issuer's judgment to protect the issuer and any transfer agent, registrar or other agent of the issuer involved, from any loss which it or they may suffer by complying with the adverse claim is filed with the issuer. ⁸

Atlas sent a certified letter dated January 15, 1981, to Canada Ltd. advising Canada Ltd. that under Utah law it must post an indemnity bond or obtain an injunction or order prohibiting the transfer within thirty days or the transfer would be registered. Atlas received no communication of any kind thereafter from Canada Ltd. By failing to post a bond or to obtain an injunction within thirty days, or at all, Canada Ltd. waived any rights it might have possessed and could not have held Atlas liable for effecting the requested transfer. ⁹ Thus, by February 15, Atlas had discharged any duty of inquiry ¹⁰ and, if the requirements of the remaining subsection of section 401(1) had been met, Atlas was required to register the transfer. Atlas, however, contends that the requirements of section 401(1)(e) were not met in that Cowen was not a bona fide purchaser ¹¹ of the subject shares.

Rule 56(c) of the Utah Rules of Civil Procedure provides that summary judgment is proper only where there is no genuine issue as to any...