Protected Purchaser Provision of UCC 8-303 Does Not Defeat Claims

On June 18, 2019, the First Department issued a decision in Black Diamond Capital Mgt., LLC v. Oppenheimer Master Loan Fund, LLC, 2019 NY Slip Op. 04890, holding that the protected purchaser provision of UCC 8-303 did not defeat a plaintiff's claims, explaining:

The "protected purchaser" provision of UCC 8-303 does not entitle Eaton to summary judgment. The three requirements for protected purchaser status are that the purchaser has (1) given value; (2) not had notice of any adverse claim to the security; and (3) obtained control of the security. The UCC 8—102(a)(1) definition of an adverse claim, as amended in the 1994 revisions to the UCC and adopted in New York in 1997, is a claim that a claimant has a property interest in a financial asset and that it is a violation of the rights of the claimant for another person to hold, transfer, or deal with the financial asset. As stated in the commentaries, this definition was intended to reject case law that might have been read to suggest that any wrongful action concerning a security, even a simple breach of contract, gave rise to an adverse claim. Absent unusual circumstances, an action for breach of contract would not give rise to a property interest in securities. However, where intentional or tortious conduct has resulted in a breach, the principles of equitable remedies dictate that a purchaser would not be able to avail itself of the protections of UCC 8-303. A different result would permit a party to knowingly induce the breach of an agreement to transfer a security and claim protected purchaser status, leaving the injured party with no recourse to obtain the actual security.

The present case involves more than a simple breach of contract. The securities at issue are unique as they are part of a closely held corporation and concern controlling rights. Additionally, the record does not establish, as a matter of law, that Eaton's conduct in interfering with plaintiffs' agreement to purchase the securities was unintentional and done without knowledge of plaintiffs' rights. Issues of fact remain as to whether Eaton tortiously interfered with plaintiffs' contractual rights.

(Internal quotations and citations omitted).

A significant part of our practice is representing buy-side financial institutions, often in disputes arising from the purchase or sale of securities. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a dispute over the purchase or sale of securities or other financial instruments.