This is a suit by a pledgee of stock against a corporate stock transfer agent for damages resulting from a failure to transfer stock and for conversion based on a wrongful refusal to transfer and the stamping of a restrictive legend on the stock certificate. Plaintiff, a Connecticut bank (hereinafter bank), held a certificate for 10,000 shares of the common capital stock of National Environmental Controls, Inc. (then known as Arizona Biochemical Company, Inc.; hereinafter National) as security for indebtedness owed to it. When the obligations for which the certificate stood as collateral came into default, the bank sought to foreclose on the collateral by selling it on the public market through brokers. When the brokers delivered the stock certificate to the corporate transfer agent for transfer in connection with the sale, the Registrar and Transfer Company, Inc. (hereinafter R&T) refused to transfer the stock, stamped it with a restrictive legend, and returned it to the broker with advice that the requested transfer could not be made unless an opinion of counsel was furnished to show that this transfer was within the exemptions of the Securities Act of 1933 (15 U.S.C.A. 77a et seq.) (hereinafter Securities Act).
The stock in question had been issued to John N. Valianos on October 13, 1965. At that time Valianos was, as appears from the certificate itself, the president of the company. In connection with the issuance of the stock certificate National received an "investment letter" from Valianos in which he acknowledged that the stock was being issued under the exemptions of § 4(2) of the Securities Act and in which he represented his intention to purchase the stock "for investment purposes only and not with a view to distribution".
R&T was notified by National at that time of the issuance of this "letter stock" and accordingly it noted in its records that this was unregistered stock and should not be transferred in the absence of either registration or an opinion of counsel that the transfer did not require registration.
Subsequently, on September 3, 1968 R&T was advised by National that any such stock, if presented for transfer, should be stamped with a legend reflecting its unregistered status and returned to the person seeking transfer.
In late August of 1969, when the stock certificate was delivered for transfer, R&T knew that Valianos owned at least 19% of the outstanding common capital stock of National.
The matter arises on cross-motions for summary judgment in which, in substance, plaintiff alleges a duty by R&T to transfer in accordance with §§ 8-406(1) and 8-401 of the Uniform Commercial Code (U.C.C.) and defendant alleges that the transfer was forbidden by the Securities Act.
As appears from the affidavits, depositions and exhibits, the following facts are not in dispute:
1. National is and was at all relevant times a corporation of the State of Delaware.
2. R&T is a corporation of the State of New Jersey with its principal place of business in Jersey City.
3. The bank is the holder as pledgee of certificate JU243 registered in the name of John N. Valianos for 10,000 shares of the common capital stock of National.
4. Certificate JU243 was issued October 13, 1965 under the exemption of § 4(2) of the Securities Act.
5. R&T, at all relevant times, was transfer agent for National.
6. R&T was notified by National at the time of the issuance of JU243 that these shares were being issued under the exemptions of § 4(2) and was furnished with a copy of an investment letter signed by Valianos. R&T had accordingly noted in its records that this was unregistered stock and should not be transferred unless there was a registration or in the opinion of counsel for the company the transfer did not require registration -- i.e. a "stop transfer order" had been noted.
7. On about September 3, 1968 R&T was instructed by National that "investment shares" coming into its hands should thereafter be stamped with an investment ...