Opinion
Civil Action 4:03-CV-591-Y.
March 16, 2005
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS'S MOTION FOR SUMMARY JUDGMENT
Pending before the Court are cross motions for summary judgment that were filed by the parties on June 25, 2004. Having carefully considered the motions, responses, and replies, the Court concludes that plaintiff Virtra Systems, Inc., F/K/A GameCom, Inc. ("GameCom")'s motion should be DENIED and defendant Legg Mason Wood Walker, Inc. ("Legg Mason")'s motion should be GRANTED.
I. RELEVANT BACKGROUND
On August 31, 2001, GameCom and William Hathaway entered into a consulting agreement that required Hathaway to provide specified consulting services to GameCom regarding the potential acquisition of corporate targets. Thereafter, on September 6, the board of directors of GameCom approved the issuance of 700,000 shares of its free-trading stock to Hathaway.
On September 10, GameCom and Olympic Holdings, LLC ("Olympic"), an entity owned and controlled by Hathaway, entered into a Debenture Purchase Agreement. Thereafter, as required under the terms of the consulting agreement, GameCom issued 700,000 of its free-trading shares to Hathaway on September 20 as compensation for services to be rendered. Specifically, GameCom issued and delivered Certificate No. 143, representing 700,000 shares of common stock, to "William E.K. Hathaway II c/o Olympic Holdings, L.L.C."
On September 26, Hathaway deposited Certificate No. 143 into a trading account he had opened at Legg Mason. Legg Mason credited Hathaway's account for 700,000 shares of GameCom common stock. At the same time, Hathaway executed and delivered to Legg Mason in blank an Irrevocable Stock or Bond Power ("Stock Power") covering the 700,000 shares of GameCom common stock.
Legg Mason is a broker-dealer firm registered pursuant to federal and state securities laws. It is the regular course of business of Legg Mason to receive deposits of its customers' stock certificates.
In the ordinary course of its business, Legg Mason delivered Certificate No. 143 and the Stock Power to The Depository Trust Corporation ("DTC"). Upon receipt of Certificate No. 143, DTC credited Legg Mason for 700,000 shares of GameCom stock. Once Legg Mason was credited with the 700,000 shares of GameCom stock, Legg Mason permitted Hathaway to sell his shares of GameCom from his trading account. From October 10 through October 29, Hathaway, with Legg Mason acting as his broker, sold all 700,000 shares of GameCom in his Legg Mason account through the over-the-counter market. Hathaway subsequently withdrew all of the new cash proceeds of the GameCom stock sales from his trading account.
DTC is a custodial and clearing firm for broker-dealer firms. DTC's regular course of business, among other things, is to hold in its name as custodian stock certificates delivered to it by its customers, including broker-dealer firms such as Legg Mason.
Hathaway never performed any services for GameCom under the consulting agreement. Except for funding $20,000 to GameCom, Olympic otherwise defaulted on its funding obligations under the Debenture Purchase Agreement. In particular, Olympic failed, as required, to fund $250,000 to GameCom by September 21, 2001, another $375,000 by October 15, and another $375,000 by November 15.
As a result of Hathaway's failure to perform under the consulting agreement, GameCom terminated the agreement on December 6 and declared Certificate No. 143 to be cancelled. On December 12, GameCom sued Hathaway and Olympic in Tarrant County District Court, obtaining a temporary restraining order enjoining the sale or transfer of Hathaway's shares. After Hathaway and Olympic failed to file an answer, GameCom obtained a default judgment against them on February 28, 2002.
At the time GameCom declared Certificate No. 143 to be cancelled, GameCom was not aware that Hathaway had sold the 700,000 shares of GameCom stock because Hathaway had falsely represented to GameCom that he still owned the shares and that they were pledged to secure a bank loan. On January 22, 2002, Hathaway admitted to GameCom that he had sold the 700,000 shares of stock through his trading account at Legg Mason.
On February 27, DTC presented Certificate No. 143 and the Stock Power to CST, GameCom's transfer agent, for registration of transfer of the share certificate. On February 28, CST, at the request of GameCom, refused the requested registration of transfer and confiscated Certificate No. 143 and the Stock Power. As a result of the confiscation, DTC debited Legg Mason's DTC clearing account for 700,000 shares of GameCom stock. Legg Mason in turn debited Hathaway's trading account for 700,000 shares of GameCom stock, which resulted in a short position of 700,000 GameCom shares in Hathaway's trading account. Pursuant to applicable rules and regulations regarding margin-maintenance requirements for short-stock positions, Legg Mason was required to buy shares of GameCom through the over-the-counter market to cover the short position in Hathaway's trading account. Consequently, Legg Mason paid $277,855 to buy the 700,000 shares of GameCom stock needed to cover the short position.
Legg Mason then demanded that GameCom reimburse Legg Mason the $277,855 Legg Mason paid to cover the short position created by the cancellation and confiscation of Certificate No. 143. GameCom refused Legg Mason's request for reimbursement. Thereafter, on May 12, 2003, GameCom filed suit in state court, seeking a declaration that it had no liability to DTC and Legg Mason for cancelling Certificate No. 143. Legg Mason removed the suit to this Court on June 12. On July 3, Legg Mason filed its answer, asserting counterclaims against GameCom for conversion and failure to register shares.
II. SUMMARY-JUDGMENT STANDARD
Summary judgment is proper when the record establishes "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c). An issue is considered "genuine" if "it is real and substantial as opposed to merely formal, pretended, or a sham." Bazan v. Hidalgo Cty., 246 F.3d 481, 489 (5th Cir. 2001) (citing Wilkinson v. Powell, 149 F.2d 335, 337 (5th Cir. 1945)). Facts are considered "material" if they "might affect the outcome of the suit under governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). To determine whether there are any genuine issues of material fact, the Court must first consult the applicable substantive law to ascertain what factual issues are material. Lavespere v. Niagra Mach. Tool Works, 910 F.2d 167, 178 (5th Cir. 1990). Next, the Court must review the evidence on those issues, viewing the facts in the light most favorable to the nonmoving party. Id.; Newell v. Oxford Mgmt. Inc., 912 F.2d 793, 795 (5th Cir. 1990); Medlin v. Palmer, 874 F.2d 1085, 1089 (5th Cir. 1989).
In making its determination on the motion, the Court must look at the full record including the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits. See FED. R. CIV. P. 56(c); Williams v. Adams, 836 F.2d 958, 961 (5th Cir. 1988). Rule 56, however, "does not impose on the district court a duty to sift through the record in search of evidence to support" a party's motion for, or opposition to, summary judgment. Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 915-16 n. 7 (5th Cir. 1992). Thus, parties should "identify specific evidence in the record, and . . . articulate" precisely how that evidence supports their claims. Forsyth v. Barr, 19 F.3d 1527, 1536 (5th Cir. 1994). Further, the Court's function is not to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial. See Anderson, 477 U.S. at 249.
To prevail on a motion for summary judgment, the moving party has the initial burden of demonstrating that there is no genuine issue as to any material fact and that he is entitled to judgment as a matter of law. See Celotex Corp v. Catrett, 477 U.S. 317, 323 (1986). A defendant moving for summary judgment may submit evidence that negates a material element of the plaintiff's claim or show that there is no evidence to support an essential element of the plaintiff's claim. See Celotex Corp., 477 U.S. at 322-24; Crescent Towing and Salvage Co. v. M/V Anax, 40 F.3d 741, 744 (5th Cir. 1994); Lavespere, 910 F.2d at 178.
To negate a material element of the plaintiff's claim, the defendant must negate an element that would affect the outcome of the action. See Anderson, 477 U.S. at 247. If the defendant moves for summary judgment alleging no evidence to support an essential element of the plaintiff's claim, the defendant need not produce evidence showing the absence of a genuine issue of fact on that essential element. Rather, the defendant need only show that the plaintiff, who bears the burden of proof, has adduced no evidence to support an essential element of his case. See Celotex, 477 U.S. at 325; Teply v. Mobil Oil Corp., 859 F.2d 375, 379 (5th Cir. 1988).
When the moving party has carried its summary-judgment burden, the respondent must go beyond the pleadings and by his own evidence set forth specific facts showing there is a genuine issue for trial. See Arbaugh v. YH Corp., 380 F.3d 219, 222 (5th Cir. 2004) (citing Celotex, 477 U.S. 317, 324 (1986)); see also FED. R. CIV. P. 56(e). This burden is not satisfied by creating some metaphysical doubt as to the material facts, by conclusory allegations, by unsubstantiated assertions, or by only a scintilla of evidence. See Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994). If the evidence is merely colorable or is not significantly probative, summary judgment may be granted. See Anderson, 477 U.S. at 249-50.
III. ANALYSIS
Legg Mason claims that it was entitled to have Certificate No. 143 transferred and registered pursuant to section 8.401 of the Uniform Commercial Code ("UCC"). Section 8.401 of the UCC states:
(a) If a certificated security in registered form is presented to an issuer with a request to register transfer . . . the issuer shall register the transfer as requested if:
(1) under the terms of the security the person seeking registration of transfer is eligible to have the security registered in its name;
(2) the indorsement or instruction is made by the appropriate person or by an agent who has actual authority to act on behalf of the appropriate person;
(3) reasonable assurance is given that the indorsement or instruction is genuine and authorized (Section 8.402);
(4) any applicable law relating to the collection of taxes has been complied with;
(5) the transfer does not violate any restriction on transfer imposed by the issuer in accordance with Section 8.204;
(6) a demand that the issuer not register transfer has not become effective under Section 8.403, or the issuer has complied with Section 8.403(b) but no legal process or indemnity bond is obtained as provided in Section 8.403(d); and
(7) the transfer is in fact rightful or is to a protected purchaser.
(b) If an issuer is under a duty to register a transfer of a security, the issuer is liable to a person presenting a certificated security . . . for loss resulting from unreasonable delay in registration or failure or refusal to register the transfer.
"Certificated security" is defined as "a security that is represented by a certificate." TEX. BUS. COM. ANN. § 8.102(a)(4) (West Supp. 2004).
TEX. BUS. COM. CODE ANN. § 8.401 (West 2002).
GameCom argues that section 8.401 is inapplicable because: (1) Certificate No. 143 was not genuine and (2) Legg Mason is not a "protected purchaser." As to GameCom's arguments that Certificate No. 143 was not genuine, GameCom claims that pursuant to section 8.207 of the UCC, it dealt with Hathaway as the registered owner and cancelled Certificate No. 143 on December 6, 2001. Consequently, Certificate No. 143 was no longer genuine and section 8.205 states that lack of genuineness is a complete defense to transfer of registration.
See TEX. BUS. COM. CODE ANN. § 8.202(c) (West 2002) ("Except as otherwise provided in Section 8.205, lack of genuineness of a certificated security is a complete defense, even against a purchaser for value and without notice.").
Section 8.207 states:
Before due presentment for registration of transfer of a certificated security in registered form . . . the issuer or indenture trustee may treat the registered owner as the person exclusively entitled to vote, receive notifications, and otherwise exercise all rights and powers of an owner.
TEX. BUS. COM. CODE ANN. § 8.207(a) (West 2002). GameCom, relying on this section, argues that on December 6 it dealt with Hathaway as the registered owner and cancelled his shares. Consequently, after that date, Hathaway owned no share, participation, or other interest in GameCom, and Hathaway's interest in Certificate No. 143 was no longer genuine. (See GameCom's Br. in Supp. of Mot. for Summ. J. at 4.)
Genuine is defined as "free of forgery or counterfeiting." TEX. BUS. COM. CODE ANN. § 1.201(b)(19) (West 2004).
After reviewing GameCom's genuineness argument and the relevant statutory provisions, the Court concludes that Certificate No. 143 was genuine. To begin with, section 8.207 is not applicable in this situation because this section is only "meant to apply in what could be called the normal case — the exercise of voting rights and payment of dividends in the normal course of business." Bank of Honolulu v. Hawaii Corp., 829 F.2d 813, 816 (9th Cir. 1987); see also New England Merchants Bank of Boston v. Old Colony Trust Co., 429 N.E.2d 1143 (Mass. 1982). "It was never meant to give the issuer an advantage over a bona fide purchaser." Bank of Honolulu, 829 F.2d at 816. Furthermore, GameCom, to validly cancel Certificate No. 143 as to a protected purchaser, must have first obtained possession of the certificate. See, e.g., Detox Indus., Inc. v. Gullett, 770 S.W.2d 954, 957 (Tex.App.-Houston [1st Dist.] 1989, no writ). Because it failed to do so and the certificate was valid when it was originally issued, GameCom cannot now claim that Certificate No. 143 is not genuine.
Legg Mason, is discussed below, qualifies as a protected purchaser.
GameCom also argues that pursuant to section 8.403 it could not register the transfer because the state court had entered a temporary restraining order and subsequent injunction enjoining the transfer or sale of Hathaway's shares of stock. However, this argument is not persuasive for the reasons stated in Legg Mason's reply. ( See Legg Mason's reply at 3-5.)
As to GameCom's second argument, GameCom argues that it was not required to register the transfer of the shares to Legg Mason because Legg Mason is not a "protected purchaser" because delivery from Hathaway to Legg Mason never occurred. As stated above, one way GameCom can avoid liablity under section 8.401 for failing to transfer registration of Certificate No. 143 to Legg Mason is to demonstrate that Legg Mason is not a protected purchaser.
Section 3.303, which defines a protected purchaser, states:
(a) "Protected purchaser" means a purchaser of a certificated or uncertificated security, or of an interest therein, who:
(1) gives value;
(2) does not have notice of any adverse claim to the security; and
(3) obtains control of the certificated or uncertificated security.
(b) In addition to acquiring the rights of a purchaser, a protected purchaser also acquires its interest in the security free of any adverse claim.
TEX. BUS. COM. CODE § 8.303 (West 2002). After reviewing GameCom's arguments, the Court concludes that they are not persuasive for the reasons stated in Legg Mason's brief and reply brief in support of its motion for summary judgment. Because GameCom has failed to demonstrate that Legg Mason is not a protected purchaser, GameCom was under an obligation, pursuant to section 8.401, to transfer registration of Certificate No. 143 to Legg Mason. Because GameCom failed to do so, GameCom is liable to Legg Mason for $277,855 in damages.
IV. CONCLUSION
Based on the foregoing, it is ORDERED that GameCom's Motion for Summary Judgment [doc. # 24-1] is DENIED.
It is further ORDERED that Legg Mason's Motion for Summary Judgment [doc. # 23-1] is GRANTED.