(a) Except as otherwise provided in Section 55-8-406 NMSA 1978, an issuer is liable for wrongful registration of transfer if the issuer has registered a transfer of a security to a person not entitled to it and the transfer was registered:

(1) pursuant to an ineffective indorsement or instruction;

(2) after a demand that the issuer not register transfer became effective under Section 55-8-403(a) NMSA 1978, and the issuer did not comply with Section 55-8-403(b) NMSA 1978;

(3) after the issuer had been served with an injunction, restraining order or other legal process enjoining it from registering the transfer, issued by a court of competent jurisdiction, and the issuer had a reasonable opportunity to act on the injunction, restraining order or other legal process; or

(4) by an issuer acting in collusion with the wrongdoer.

(b) An issuer that is liable for wrongful registration of transfer under Subsection (a) on demand shall provide the person entitled to the security with a like certificated or uncertificated security and any payments or distributions that the person did not receive as a result of the wrongful registration. If an overissue would result, the issuer's liability to provide the person with a like security is governed by Section 55-8-210 NMSA 1978.

(c) Except as otherwise provided in Subsection (a) or in a law relating to the collection of taxes, an issuer is not liable to an owner or other person suffering loss as a result of the registration of a transfer of a security if registration was made pursuant to an effective indorsement or instruction.

History: 1978 Comp., § 55-8-404, enacted by Laws 1996, ch. 47, § 41.

OFFICIAL COMMENTS

UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.

1. Subsection (a)(1) provides that an issuer is liable if it registers transfer pursuant to an indorsement or instruction that was not effective. For example, an issuer that registers transfer on a forged indorsement is liable to the registered owner. The fact that the issuer had no reason to suspect that the indorsement was forged or that the issuer obtained the ordinary assurances under Section 8-402 [55-8-402 NMSA 1978] does not relieve the issuer from liability. The reason that issuers obtain signature guaranties and other assurances is that they are liable for wrongful registration.

Subsection (b) specifies the remedy for wrongful registration. Pre-Code cases established the registered owner's right to receive a new security where the issuer had wrongfully registered a transfer, but some cases also allowed the registered owner to elect between an equitable action to compel issue of a new security and an action for damages. Cf. Casper v. Kalt-Zimmers Mfg. Co., 159 Wis. 517, 149 N.W. 754 (1914). Article 8 does not allow such election. The true owner of a certificated security is required to take a new security except where an overissue would result and a similar security is not reasonably available for purchase. See Section 8-210 [55-8-210 NMSA 1978]. The true owner of an uncertificated security is entitled and required to take restoration of the records to their proper state, with a similar exception for overissue.

2. Read together, Subsections (c) and (a) have the effect of providing that an issuer has no duties to an adverse claimant unless the claimant serves legal process on the issuer to enjoin registration. Issuers, or their transfer agents, perform a record-keeping function for the direct holding system that is analogous to the functions performed by clearing corporations and securities intermediaries in the indirect holding system. This section applies to the record-keepers for the direct holding system the same standard that Section 8-115 [55-8-115 NMSA 1978] applies to the record-keepers for the indirect holding system. Thus, issuers are not liable to adverse claimants merely on the basis of notice. As in the case of the analogous rules for the indirect holding system, the policy of this section is to protect the right of investors to have their securities transfers processed without the disruption or delay that might result if the record-keepers risked liability to third parties. It would be undesirable to apply different standards to the direct and indirect holding systems, since doing so might operate as a disincentive to the development of a book-entry direct holding system.

3. This section changes prior law under which an issuer could be held liable, even though it registered transfer on an effective indorsement or instruction, if the issuer had in some fashion been notified that the transfer might be wrongful against a third party, and the issuer did not appropriately discharge its duty to inquire into the adverse claim. See Section 8-403 (1978) [55-8-403 NMSA 1978].

The rule of former Section 8-403 [55-8-403 NMSA 1978] was anomalous inasmuch as Section 8-207 [55-8-207 NMSA 1978] provides that the issuer is entitled to "treat the registered owner as the person exclusively entitled to vote, receive notifications, and otherwise exercise all the rights and powers of an owner." Under Section 8-207, the fact that a third person notifies the issuer of a claim does not preclude the issuer from treating the registered owner as the person entitled to the security. See Kerrigan v. American Orthodontics Corp., 960 F.2d 43 (7th Cir. 1992). The change made in the present version of Section 8-404 [55-8-404 NMSA 1978] ensures that the rights of registered owners and the duties of issuers with respect to registration of transfer will be protected against third-party interference in the same fashion as other rights of registered ownership.

"Certificated security" Section 8-102(a)(4) [55-8-102 NMSA 1978]

"Effective" Section 8-107 [55-8-107 NMSA 1978]

"Indorsement" Section 8-102(a)(11)

"Instruction" Section 8-102(a)(12)

"Issuer" Section 8-201 [55-8-201 NMSA 1978]

"Security" Section 8-102(a)(15)

"Uncertificated security" Section 8-102(a)(18)

Repeals and reenactments. — Laws 1996, ch. 47, § 41, repealed former 55-8-404 NMSA 1978, as amended by Laws 1987, ch. 248, § 42, relating to liability and non-liability for registration, and enacted a new section, effective May 15, 1996. For provisions of former section, see the 1995 NMSA 1978 on NMOneSource.com.

Am. Jur. 2d, A.L.R. and C.J.S. references. — Rights of owner and bona fide purchaser of lost or stolen stock certificates, 52 A.L.R. 947.

Duty of corporation upon presentation for transfer of stock standing in one's name as trustee or other fiduciary, 56 A.L.R. 1199.

Issuance by corporation of new stock certificates without requiring surrender of old, 61 A.L.R. 436, 150 A.L.R. 148.

Liabilities and duties of corporation in respect to sale or transfer of corporate stock held by one having life estate, 126 A.L.R. 1298.

Duty of corporation to refuse to transfer stock on books to one who presents properly endorsed certificate on ground of knowledge or suspicion of conflicting rights of registered holder or third person, 139 A.L.R. 273, 75 A.L.R.2d 746.

Rights, duties and liability of corporation in connection with transfer of stock of infant or incompetent, 3 A.L.R.2d 881.

Rights, duties and liability of corporation in connection with transfer of stock of decedent, 7 A.L.R.2d 1240.

Remedy for refusal of corporation or its agent to register or effectuate transfer of stock, 22 A.L.R.2d 12.