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DEAN WITTER & CO. v. EDUCATIONAL COMPUTER CORP.

January 23, 1974

DEAN WITTER & CO., INC.
v.
EDUCATIONAL COMPUTER CORPORATION (PA.), Defendant. EDP TECHNOLOGY, INC. and Educational Computer Corporation (Del.), Defendants and Third-Party Plaintiffs, v. Doris B. BARON et al., Third-Party Defendants


Gorbey, District Judge.


The opinion of the court was delivered by: GORBEY

This is an action by a broker against the issuer of corporate stock to obtain transfer of certain legended stock certificates and damages for the issuer's delay or refusal to transfer the shares. Before this court is a motion by the issuer's successor for summary judgment. The issuer has refused transfer because the broker's customer had previously obtained the transfer of the same stock by providing the issuer with an affidavit stating that these shares had been lost. For the reasons which follow, the motion is granted.

 The motion for summary judgment is based upon the following uncontested facts.

 On April 5, 1968, Gilbert B. Rozran (Rozran) placed an order to sell 500 shares of Educational Computer Corporation, a Pennsylvania corporation (ECC of Pa.), stock with Robert G. Snider, an account executive in the San Diego, California office of Dean Witter & Co., Inc. (Dean Witter). *fn1" The sell order was executed by Dean Witter on the same day, at a total price of approximately $16,100. *fn2" At the time of the sale, no stock of ECC of Pa. was in Rozran's account with Dean Witter. *fn3"

 On April 15, 1968, Rozran delivered to Dean Witter, Certificate No. 17, issued by North American Electronic Systems, Inc., in the name of Corrine N. Levesque. *fn4" Shortly thereafter, Dean Witter received an instrument entitled, "Use of Certificate Registered in Name Other Than That of the Customer", executed by Corrine N. Levesque, authorizing Rozran to sell the securities of North American Electronic Systems, Inc., in the name of the said Corrine N. Levesque. *fn5"

 On or about April 19, 1968, Rozran delivered to Dean Witter Certificate No. 6, issued by North American Electronic Systems, Inc., dated July 7, 1967, and requested that Dean Witter return Certificate No. 17 to him. Certificate No. 6 was issued in the name of Gilbert B. Rozran. Unknown to Dean Witter, an affidavit was executed by Rozran, wherein he acknowledged the sale of Certificate No. 6 to Doris B. Baron, and stated that since July 7, 1967, the Certificate could not be found and was otherwise lost, mislaid or destroyed. *fn6" Upon receipt by North American Electronic Systems, Inc. of the evidence of the sale of 5,000 shares of stock of that company, and the request of Mrs. Baron, that company caused the transfer of 5,000 shares from Rozran to Doris B. Baron to be registered. It issued a replacement Certificate (No. 16) to Mrs. Baron, in place of the lost Certificate No. 6. Shortly thereafter, North American Electronic Systems, Inc. notified its transfer agent, Franklin National Bank, that Certificate No. 6 had been lost, and instructed Franklin National Bank not to honor any request for the transfer or exchange of the shares represented by Certificate No. 6. *fn7"

 Certificate No. 6 had the following typed on its face: "ISSUED SUBJECT TO PROVISIONS ON REVERSE SIDE HEREOF". On the reverse side of the Certificate, the following language appeared:

 
"By accepting within Certificate, for Systems Operations Support, Inc., the holder hereof, Dr. Gilbert B. Rozran, President, does hereby appoint Doris B. Baron as proxy to vote the shares represented hereby at the shareholders' meeting to be held September 16, 1967 with the knowledge and approval that Doris B. Baron intends to vote for the adoption of corporate amendments to be proposed at said meeting and on such other business as may come before the meeting; and it is further stated that the within shares were obtained as a charitable contribution to SOS, Inc., a non-profit corporation, per release by Doris B. Baron, with no present intention of resale and without reliance or any solicitation, advertisements, dealers or agents." *fn8"

 Since the Certificate gave no indication that it covered stock of ECC of Pa., Rozran gave Dean Witter a prospectus of ECC of Pa., covering a public offering of its stock in March, 1968 -- a month before Rozran's attempted sale. *fn9" This prospectus, dated March 7, 1968, issued by ECC of Pa., stated on the front page thereof: "Prior to this offering, there had been no public market for the Company's Common Stock." It was made clear in the prospectus that the company had not previously registered any shares with the Securities and Exchange Commission. The prospectus was given to Dean Witter's employees for the purported purpose of providing information regarding the stock in question and was retained and used by Dean Witter to verify the change of company name from North American Electronic Systems, Inc. to ECC of Pa., and the exchange ratio of these shares. *fn10" Although the prospectus stated that the change of name and reclassification of shares were effective on September 22, 1967, Rozran's sale in April, 1968, was accompanied by the delivery to Dean Witter of certificates bearing the name of the previous issuer.

 Rozran's request to exchange Certificate No. 6 for Certificate No. 17 was highly unusual. *fn11" Moreover, a legend like that on Certificate No. 6 would necessarily mean to a broker, such as Dean Witter, that the stock's transfer was subject to an "investment legend"; *fn12" and that the Certificate was not in "good deliverable form". *fn13" On June 3, 1968, more than a month and a half after the receipt of Certificate No. 6, Dean Witter forwarded that Certificate to ECC of Pa.'s transfer agent, Franklin National Bank, with the request that the transfer agent issue a Certificate in the name of Dean Witter, in the amount of 500 shares, and a Certificate in the name of Gilbert B. Rozran, in the amount of 750 shares. *fn14" This was Dean Witter's first contact with ECC of Pa.'s transfer agent. *fn15"

 The transactions in question all took place in a period of extreme activity in the securities markets. During this period, certain stock exchanges were closed one day a week, and closed earlier on the days they were open. Trading volume on the New York Stock Exchange in excess of twenty million shares was not unusual and the transfer functions (i.e., back offices), were in arrears. This condition existed throughout the entire industry until the second quarter of 1969.

 On June 10, 1968, the transfer agent advised Dean Witter in writing that Certificate No. 6 had been replaced against an affidavit of loss, executed and delivered to ECC of Pa. by Rozran. *fn16" Franklin National Bank further advised Dean Witter that it had been instructed by ECC of Pa. not to effect any transfer of any shares represented by Certificate No. 6. *fn17"

 In order to cover the sale of the 500 shares of ECC of Pa. stock sold on April 5, 1968, Dean Witter made a demand on Rozran that he deliver to it, 500 valid, transferrable shares of ECC of Pa. stock, but Rozran failed to do so. *fn18" Consequently, Dean Witter purchased 500 shares of stock in the open market. It made that purchase on or about June 29, 1968, at a price of approximately $69,000. *fn19"

 The plaintiff's claim that it is entitled to have the Certificate transferred is founded in § 8-401 of the Uniform Commercial Code. *fn20" The relevant portion reads in part, as follows:

 
"§ 8-401 Duty of Issuer to Register Transfer
 
(1) Where a security in registered form is presented to the issuer with a request to register transfer, the issuer is under a duty to ...

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