Opinion ID: 74978
Heading Depth: 4
Heading Rank: 1

Heading: Trust Shares

Text: 14 The district judge determined that the trustees of the charitable remainder trusts created by Duncan and Smick did not have standing to collect damages associated with TheraTx's breach of the Agreement because the rights provided to the PersonaCare shareholders by section 6.6 of the Agreement were not assignable. The district judge did not determine the effective date of Duncan and Smick's transfer of their TheraTx stock to the respective charitable trusts, because he concluded that Duncan and Smick had not suffered actual monetary damages with regard to the TheraTx stock transferred to the trusts as a result of the breach. The district judge reasoned that [t]he only monetary benefit that Messrs. Duncan and Smick received from donating TheraTx shares to the charitable trusts was their ability to claim charitable tax deductions based on the value of the stock at the time of the transfer.” R14-103-3. He concluded that, because the suspension of trading had not delayed or affected Duncan and Smick's ability to transfer the stock to the trusts, TheraTx's breach of contract had not affected the value of the charitable donations made by Duncan and Smick and the associated tax deductions. On appeal, the Duncan Group argues that if Duncan and Smick continued to hold all of their TheraTx stock at the time of TheraTx's breach, and the transfer of their TheraTx stock to charitable remainder trusts did not become effective until after the breach, then they have standing to sue for the damage caused by to them 15 by the breach regardless of their subsequent disposition of the stock. The Duncan Group further argues that Duncan and Smick were damaged by TheraTx's breach because the suspension of trading caused a reduction in the trust income that they were entitled to receive annually during their lifetimes by interfering with the trusts’ ability to sell the shares and reinvest the proceeds elsewhere. We find, however, that ownership of the shares was transferred prior to the date of the breach, and as a result, the trusts have no standing to sue for damages. Delaware law governs our analysis. At the time of the breach, 13 January 1995, § 8-313 of Delaware’s Uniform Commercial Code (“U.C.C.”) set forth the requirements for when transfer of a security to a purchaser occurs. See DEL. CODE. ANN. tit. 6, § 8-313 (1995). A recipient by gift is a purchaser under the Delaware U.C.C. See DEL. CODE. ANN. tit. 6, § 1-201(32) (1995). Section 8-313 lists several ways that transfer may occur, depending on whether the security being transferred is certificated or uncertificated. The securities held by Duncan and Smick were certificated securities because they were represented by instruments that specified Duncan and Smick as the owners and provided that transfer could be registered on the books of the corporation. See R13-98-Exs. R,S: see also DEL. CODE. ANN. tit. 6, § 8-102(1)(a) (1995) (defining a certificated security). 16 According to the U.C.C. provisions then in force, certificated securities were deemed transferred to a purchaser only: (a) At the time he or a person designated by him acquires possession of a certificated security; . . . (c) At the time his financial intermediary acquires possession of a certificated security specially endorsed to or issued in the name of the purchaser; (d) At the time a financial intermediary, not a clearing corporation, sends him confirmation of the purchase and also by book entry or otherwise identifies as belonging to the purchaser (i) a specific certificated security in the financial intermediary’s possession ; (ii) a quantity of securities that constitute or are part of a fungible bulk of certificated securities in the financial intermediary’s possession . . . DEL. CODE. ANN. tit. 6, § 8-313(1) (1995). Application of this statute is complicated by the fact that both Duncan and Smick were trustees of their respective trusts. Certain facts, however, are clear. Both provided their stock certificates to Alex. Brown with instructions to transfer ownership to their respective trusts. Alex. Brown issued statements indicating that it had transferred TheraTx stock from the individual donees to the trust accounts, in December 1994 for Smick and January 1995 for Duncan. Alex. Brown was the stockbroker for the trusts. We find that when Duncan and Smick endorsed their stock certificates and provided them to Alex. Brown with instructions to transfer the stock to the trusts, Alex. Brown acquired possession of 17 the certificated security on behalf of the trusts, thereby satisfying § 8-313(1)(a). It is possible that, because Alex. Brown qualifies as a “financial intermediary” as defined in § 8-313(4), that other subsections of § 8-313 were also satisfied. We express no opinion as to these other possible methods of transfer as the requirements of § 8-313(1)(a) were satisfied. We do note, however, that while the transfers of the shares were not reflected on TheraTx’s books until after the breach, § 8-313 imposes no such requirement on the validity of a transfer. Indeed, § 202 of Delaware’s corporations code, which controls over sections of the U.C.C., provides that restrictions on the transfers of security “may be enforced against the holder of the restricted security” or her successor, but do not provide for enforcement against the corporation. DEL. CODE. ANN. tit. 8, § 202(a) (1995). Duncan and Smick intended to transfer their shares to charitable remainder trusts, and the records of Alex. Brown reflect that those intentions were carried out. To allow Duncan and Smick to enforce trading restrictions against themselves in order to collect damages thwarts both their original intent to transfer their shares prior to the date of the breach and the parties’ contractual agreement that contract rights, including remedies for breach, were not to be transferrable.