Section 1-305(b) of the UCC provides, “Any right or obligation declared by [the Uniform Commercial Code] is enforceable by action unless the provision declaring it specifies a different and limited effect.”
This foundational section supports substantive Code provisions by ensuring that a remedy is available where appropriate, even when no remedy is expressly specified in the substantive provision itself.
The Permanent Editorial Board for the Uniform Commercial Code (PEB) acts under the authority of the American Law Institute and the Uniform Law Commission (also known as the National Conference of Commissioners on Uniform State Laws). The PEB has resolved to issue supplemental commentary on the Uniform Commercial Code (UCC) from time to time. The supplemental commentary of the PEB generally will be known as a PEB Commentary, to distinguish it from the Official Comments to the UCC. A PEB Commentary may be denominated a commentary, a report, or otherwise as determined by the PEB.
The Resolution states that:
The underlying purposes and policies of the PEB Commentary are those specified in Section 1-103(a). A PEB Commentary should come within one or more of the following specific purposes, which should be made apparent at the beginning of the Commentary: (1) to resolve an ambiguity in the UCC by restating more clearly what the PEB considers to be the legal rule; (2) to state a preferred resolution of an issue on which judicial opinion or scholarly writing diverges; (3) to elaborate on the application of the UCC where the statute and/or the Official Comment leaves doubt as to the inclusion or exclusion of, or application to, particular circumstances or transactions; (4) consistent with Section 1-103(a)(2), to apply the principles of the UCC to new or changed circumstances; (5) to clarify or elaborate upon the operation of the UCC as it relates to other statutes (such as the Bankruptcy Code and federal and state consumer protection statutes) and general principles of law and equity pursuant to Section 1-103(b); or (6) to otherwise improve the operation of the UCC.
For more information about the Permanent Editorial Board for the Uniform Commercial Code, visit www.ali.org or www.uniformlaws.org.
Section 1-305(b) of the UCC provides, “Any right or obligation declared by [the Uniform Commercial Code] is enforceable by action unless the provision declaring it specifies a different and limited effect.” This foundational section supports substantive Code provisions by ensuring that a remedy is available where appropriate, even when no remedy is expressly specified in the substantive provision itself.
Section 1-305(b)’s functioning is exemplified by UCC Article 8’s indirect holding system, in which indirect ownership of investment securities or other financial assets is carried out by means of book entries in an entitlement holder’s securities account. Article 8 imposes certain duties on the securities intermediary to provide the entitlement holder with the economic and other incidents of the ownership. In particular:
However, Article 8 does not itself directly provide any express remedy to an entitlement holder for violations of these duties by its securities intermediary. Possible interpretive questions might accordingly arise but are resolved by reference to Section 1-305(b).
Suppose that Broker maintains a securities account for Customer; 1,000 shares of Issuer are credited to that account. Customer wishes to hold the Issuer shares directly in certificated form rather than in the securities account and directs Broker to debit her securities account and forward her a security certificate; however, Broker fails to comply. Assuming no further facts would excuse Broker’s failure to comply, Broker is in violation of its duty under Section 8-508. Section 1-305(b) accordingly provides that Customer is entitled to enforce her right by action, whether for applicable money damages, equitable relief, or otherwise.
In Harris v. TD Ameritrade, Inc., which involved facts paralleling this illustration at a high level of generality, the court held that the customer—as opposed to perhaps the Securities and Exchange Commission or another governmental agency—had no right of action for the securities intermediary’s breach of its obligation under Section 8-508. The court’s reasoning was that no right of action was stated in Section 8-508 itself, and that applicable state law did not permit the court to find an implied private right of action. In this respect the court saw Section 8-508 as being on a footing similar to that of SEC Rule 15c3-3 (also invoked by the plaintiffs in the case), for which federal precedents have denied an implied private right of action. But the court mistakenly failed to consider Section 8-508 in conjunction with Section 1-305(b), which (as noted above) provides that the securities intermediary’s obligation to its entitlement holder is “enforceable by action” and thereby creates an express right of action for the entitlement holder.
The same is generally true throughout the Code, including for each of the other duties of a securities intermediary described above. For example, if Broker had failed to take action to obtain payment for Customer of a dividend declared by Issuer, failed to vote or exercise warrants as directed by Customer, or failed to liquidate holdings of the stock when directed by Customer, then Section 1-305(b) would enable Customer to enforce her rights for these violations by action despite the silence about such enforcement in the respective texts of Sections 8-504, 8-505, 8-506, or 8-507 themselves.
A contrary understanding, in addition to neglecting the express provision of Section 1-305(b), would be inconsistent with the purposes and policies of Article 8’s and many of the Code’s other substantive provisions. The UCC provides the framework for a multitude of consensual business transactions among private parties who routinely rely on the ready enforceability of those transactions. Accordingly, the law cannot generally relegate those parties, if harmed by the violation of a right or the non-fulfillment of an obligation, to possible vindication by governmental rather than independently initiated enforcement.
Like all UCC rights and obligations that have no contrary specification, a securities intermediary’s Article 8, Part 5, duties are enforceable by action as defined in Section 1‑201(b)(1). The Official Comments to Sections 1-305 and 8-102 are hereby amended as follows:
Section 1-305, Comment 2
2. Under subsection (b), any right or obligation described in the Uniform Commercial Code is enforceable by action, even though no remedy may be expressly provided other than in this section, unless a particular provision specifies a different and limited effect. Whether specific performance or other equitable relief is available in a particular case is determined not by this section but by specific provisions and by supplementary principles. Cf. Sections 1-103, 2-716.
Section 8-102, Comment 17
17. “Security entitlement” means the rights and property interest of a person who holds securities or other financial assets through a securities intermediary. A security entitlement is both a package of personal rights against the securities intermediary and an interest in the property held by the securities intermediary. A security entitlement is not, however, a specific property interest in any financial asset held by the securities intermediary or by the clearing corporation through which the securities intermediary holds the financial asset. See Sections 8-104(c) and 8-503. The formal definition of security entitlement set out in subsection (a)(16) of this section is a cross reference to the rules of Part 5. In a sense, then, the entirety of Part 5 is the definition of security entitlement. The Part 5 rules specify the rights and property interest that comprise a security entitlement.
Rights and obligations relating to a security entitlement are enforceable by action. See Section 1-305(b) and PEB Commentary No. 25, dated August 12, 2022. The Commentary is available at https://www.ali.org/peb-ucc.
In addition, the following new Official Comment is added to Section 8-501:
6. Enforceability of Rights and Obligations. Rights and obligations relating to a security entitlement are enforceable by action. See Section 1-305(b) and PEB Commentary No. 25, dated August 12, 2022. The Commentary is available at https://www.ali.org/peb-ucc.
