NEW ENGLAND MERCHANTS NATIONAL BANK OF BOSTON, administrator, vs. OLD COLONY TRUST COMPANY & others.

GRANT, J. This is an action brought against the trustees of a Massachusetts business trust with transferable shares (G. L. c. 182) and their transfer agent by which the plaintiff seeks to recover certain liquidating dividends which the trust declared and paid on its common and preferred shares in 1960 and 1964 in the course of winding up its affairs. [Note 1] The case was submitted on a statement of agreed facts [Note 2] to a

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judge of the Superior Court, who found for the defendants. The plaintiff appealed from the ensuing judgment.

The agreed facts may be summarized as follows. On December 24, 1931, one Francis A. Gallop was the record owner of 105 of the common shares and ninety of the preferred shares of the trust. On that date he indorsed in blank the transfer forms which appeared on the backs of the two certificates which evidenced his ownership of those shares, and the genuineness of his signature on both certificates was guaranteed by a brokerage house. In 1955 Gallop submitted to the transfer agent an affidavit in which he asserted that he had lost his certificates and by which he applied for the issuance of new certificates. Upon Gallop's submitting a lost securities bond running in favor of the transfer agent and the trust, the trustees authorized the issuance of replacement certificates, which was done. In 1960 the trustees called all the common and preferred shares for redemption. Gallop surrendered his replacement certificates and was paid the liquidating dividends which the trustees had by then declared on both classes of stock. He was also paid a final liquidating dividend which was declared on the common stock in 1964.

One James F. Bacon died in 1966, and the plaintiff was duly appointed as administrator of his estate. The plaintiff discovered among Bacon's papers the two certificates for the common and preferred shares of the trust which had originally been issued to Gallop and which bore his indorsements in blank. Those certificates had never been presented to the transfer agent for the issuance of new certificates in Bacon's name, and neither the books and records of the transfer agent nor those of the trust had ever reflected any transfer from Gallop to Bacon of any ownership or other interest in any shares of the trust of either class. [Note 3] The plaintiff, after

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notice to the surety on Gallop's lost securities bond, surrendered the original certificates to the transfer agent in 1967 and demanded payment of the liquidating dividends which had been declared in 1960 and 1964. The defendants refused payment, and the present action was commenced on October 5, 1967.

The parties skirmished over the pleadings for two years. In 1969 the case reached the Supreme Judicial Court on the plaintiff's exceptions to an order of the Superior Court sustaining the defendants' demurrer to the plaintiff's second substitute declaration (declaration). The parties argued at some length the question whether the case was governed by the provisions of art. 8 ("INVESTMENT SECURITIES") of the Uniform Commercial Code (G. L. c. 106, Sections 8-101 et seq.). [Note 4] The court concluded that the shares of the trust were "securities" within the meaning of Section 8-102 (1)(a) of the Code (G. L. c. 106, Section 8-102 [1][a], as appearing in St. 1957, c. 765, Section 1), that the plaintiff was the "holder" of those securities within the meaning of Section 1-201(20) of the Code (G. L. c. 106, Section 1-201[20], as appearing in St. 1957, c. 765, Section 1), and that the declaration stated a cause of action because, on the facts alleged, the plaintiff fell within the ambit of Section 8-105(2)(c) of the Code (G. L. c. 106, Section 8-105[2][c], as appearing in St. 1957, c. 765, Section 1), which provides: "In any action on a security . . . (c) when signatures are admitted or established production of the instrument entitles a holder to recover on it unless the defendant establishes a defense or a defect going to the validity of the security." New England Merchants Natl. Bank v. Old Colony Trust Co., 356 Mass. 612, 615-616 (1970). [Note 5] Because payment is a matter of defense, and because none of the previously recited facts concerning payment appeared from the declaration, the court expressly declined (356 Mass. at 616)

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to pass on the question whether the defendants might have a defense under Section 8-207(1) of the Code (G. L. c. 106, Section 8-207[1], as appearing in St. 1957, c. 765, Section 1), which provides: "Prior to due presentment for registration of transfer of a security in registered form the issuer [Note 6] . . . may treat the registered owner as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner" (emphasis supplied). [Note 7] The plaintiff's exceptions were sustained, and the case went back to the Superior Court, where it languished until 1980.

In our view the only question for decision is whether the defendants, by paying the liquidating dividends to Gallop prior to the presentment to them of the certificates originally issued to him, have established a "defense" to the action within the meaning of Section 8-105(2)(c) which is effective against the plaintiff. We conclude that they have and that they are entitled to prevail in this action.

We start our analysis by a consideration of the rules which had been enunciated in the cases which were decided prior to the adoption of art. 8 of the Code. In the absence of a specific statutory provision such as Section 3(a) of the Uniform Stock Transfer Act (see G. L. c. 155, Section 29, as in effect prior to St. 1957, c. 765, Sections 2 and 21 [Note 8]), it was generally held or considered that an ordinary business corporation [Note 9] was

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protected in paying liquidating dividends to a shareholder of record prior to receipt of notice that the shareholder had pledged his shares to someone else as collateral security for a loan. See, e.g., Merchants & Mechanics Bank v. Boyd Co., 143 Ga. 755 (1915); Bay City Bank v. St. Louis Motor Sales Co., 255 Mich. 261, 263 (1931) ("[T]he corporation had a right to treat the registered holder as owner for all purposes"); Bank of Hollister v. Schlichter, 191 N.C. 352, 356 (1926); Bank of Commerce's Appeal, 73 Pa. 59, 64 (1873). Contra Bath Sav. Inst. v. Sagadahoc Natl. Bank, 89 Me. 500, 505 (1897) (national bank). A different result was reached under Section 3(a) of the Uniform Stock Transfer Act (note 8, supra), apparently for the reason that a liquidating dividend was thought not to be a "dividend" within the meaning of Section 3(a). See Bay City Bank v. St. Louis Motor Sales Co., 255 Mich. at 263-265; Bogardus v. Kentucky State Bank, 281 S.W. 2d 904, 905-906 (Ky. 1955). In Morrison v. Gulf Oil Corp., 189 Miss. 212, 221-222 (1940), which was also decided with reference to Section 3(a) of the Act, it was held that a corporation was liable to a pledgee of its shares for the value of a stock dividend which it had paid to a shareholder of record after receiving notice of the pledgee's claim.

It was in light of that background that the American Law Institute (A.L.I.) and the National Conference of Commissioners on Uniform State Laws (Commissioners) recommended the adoption of Section 8-207(1) of the Code, which expressly provides that "[p]rior to due presentment for registration of transfer of a security in registered form [Note 10] the issuer . . . may treat the registered owner as the person exclusively entitled . . . to exercise all the rights and powers of an owner." The language of subsection (1) clearly changes

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the result reached in the cases on liquidating dividends which were decided under Section 3(a) of the Uniform Stock Transfer Act. Taken on its face and standing by itself, the language would appear to go beyond the result reached in the cases which were decided under the common law, in the sense that it would permit an issuer or its transfer agent to ignore a known adverse claimant until such time as he actually presents securities in form proper for registration of transfer. [Note 11] No case has been brought to our attention, nor have we found any, in which a court has had occasion to consider Section 8-207(1) at length. In the few cases in which it has been cited, the courts appear to have assumed that subsection (1) means just what it says. See Monarch Life Ins. Co. v. State Tax Commn., 39 App. Div. 2d 31, 33 (1972), aff'd 32 N.Y. 2d 850 (1973); Donsavage Estate, 420 Pa. 587, 593 n.6 (1966); Huebner Estate (No. 1), 51 Pa. D. & C. 2d 611, 618 (1971) (the "provision is obviously directed to a means by which corporations may protect themselves from liability, not to the determination of property rights of shareholders or alleged shareholders inter se"). See also 12 Fletcher, Cyclopedia of the Law of Private Corporations Section 5500, at 349 (rev. perm. ed. 1971).

Finally, we observe the official comment made by the A.L.I. and the Commissioners when they advanced their 1977 recommendations for changes in Section 8-207 (see note 7, supra), which reads in material part as follows: "Subsection (1) states the issuer's right to treat the registered owner of a certificated security as the person entitled to exercise all the rights of an owner. This right of the issuer is limited

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by the provisions of Part 4 of this article -- once there has been due presentation for registration of transfer, the issuer has a duty to register ownership in the name of the transferee. Section 8-401. Thus its right to treat the old registered owner as exclusively entitled to the rights of ownership must cease." The only change in subsection (1) that was recommended in 1977 was the addition of the word "certificated" before the word "security." We think it obvious that the recommended change was not one of substance, [Note 12] and we regard the quoted comment as an authoritative construction of subsection (1) in its present form.

We conclude that Section 8-207(1) protected the defendants in paying the liquidating dividends to Gallop, that they have established a "defense" to the present action within the meaning of Section 8-105(2)(c), and that the plaintiff has failed to sustain its "burden of establishing that [it] or some person under whom [it] claims is a person against whom the defense . . . is ineffective," as required by Section 8-105(2)(d). In particular, the plaintiff has failed to establish that Bacon was a "purchaser [Note 13] for value [Note 14] who [took] without notice of the particular defense" within the meaning of Section 8-202(4) of the Code (G. L. c. 106, Section 8-202[4], as appearing in St. 1957, c. 765, Section 1) because, on this record, the time when and the circumstances in which Bacon acquired possession of the certificates originally issued to Gallop are matters of conjecture.

Accordingly, the entry is

Judgment affirmed.