Understanding California Commercial Code: Secured Transactions

Introduction to Division 8, Chapter 3

The California Commercial Code (Division 8, Chapter 3) deals with the transfer of certificated and uncertificated securities. This chapter is crucial for ensuring a smooth and secure transaction process.

Delivery of Certificated Securities

Section 8301 states that delivery of a certificated security to a purchaser occurs when any of the following three actions occur:

• Physical delivery of the security certificate
• Notice of the transferor's intent to sell or assign the security
• Book-entry transfer initiated by the transferor

A purchaser of a certificated security acquires all rights in the security that the transferor had or had power to transfer.

Delivery of Uncertificated Securities

Section 8301 also states that delivery of an uncertificated security to a purchaser occurs when any of the following two actions occur:

• The book-entry transfer is initiated by the transferor
• The notice of the transferor's intent to sell or assign the security is provided

A purchaser of an uncertificated security acquires all rights in the security that the transferor had or had power to transfer.

Protected Purchasers and Transfer Rights

Section 8303 defines the term "protected purchaser."

A protected purchaser is a person who has purchased securities from a transferor without notice of any adverse claims against the security.

Purchasers of limited interests acquire rights only to the extent of the interest purchased, and purchasers of certificated securities who had notice of an adverse claim do not improve their position by taking from a protected purchaser.

Endorsements on Securities

Section 8304 states that an endorsement may be in blank or special.

An endorsement in blank includes an endorsement to bearer, while a special endorsement specifies to whom a security is to be transferred or who has power to transfer it.

A holder may convert a blank endorsement to a special endorsement.

Supplying Necessary Endorsements

If a security certificate in registered form is delivered without a necessary endorsement, the purchaser becomes a protected purchaser only when the endorsement is supplied.

Against a transferor, a transfer is complete upon delivery and the purchaser has a specifically enforceable right to have any necessary endorsement supplied.

Completing Instructions and Guaranties

Section 8305 specifies that if an instruction has been originated by an appropriate person but is incomplete in any other respect, any person may complete it as authorized and the issuer may rely on it as completed.

Section 8306 provides that a person who guarantees a signature of an endorser of a security certificate warrants that at the time of signing all three specified conditions were true.

A person who guarantees a signature of the originator of an instruction makes additional warranties and also warrants that at the time the instruction is presented to the issuer, two specified conditions are true.

Guaranties and Warranties

A person who guarantees a signature or endorsement makes the warranties of a signature guarantor.

The issuers may not require special guaranties as a condition to registration of transfer.

The warranties are made to a person taking or dealing with the security in reliance on the guaranty, and the guarantor is liable to the person for loss resulting from their breach.

Proof of Authority and Transfer Demand

Section 8307 provides that the transferor of a security on due demand is required to supply the purchaser with proof of authority to transfer or with any other requisite necessary to obtain registration of the transfer.

If the transferor fails within a reasonable time to comply with the demand, the purchaser may reject or rescind the transfer.