Legal Document

421 U.S. 837 95 Supreme Court Reporter 2051 44 United States Reports Lawyer’s Edition 2d Series KF101.8 U54 621 UNITED HOUSING FOUNDATION, INC., et al., Petitioners,v.Milton FORMAN al. State of NEW YORK and the New York Housing Finance Agency, Petitioners, versus Milton Nos. 74—157 74—647. Argued April 22, 1975. Decided June 16, Rehearings. Denied Oct. 6, See 423 884, 96 157. Mr. Justice Brennan dissented with an opinion in which Douglas White joined. Syllabus 1 Respondents are 57 residents Co-op City, a massive cooperative housing project organized, financed, constructed under Private Law (Mitchell-Lama Act). They brought this action on behalf all apartment owners derivatively corporation, alleging, nter alia, violations antifraud provisions Securities Act 1933 Exchange 1934 (hereafter collectively Acts), connection sale to respondents shares common stock corporation. Citing substantial increases tenants' monthly rental charges as result higher construction costs, respondents' claim centered City Information Bulletin issued project's initial stages, allegedly misrepresented that developers would absorb future cost due such factors inflation. Under Mitchell-Lama Act, was designed encourage private build low-cost housing, provides large, long-term low-interest mortgage loans tax exemptions, conditioned step-by-step state supervision cooperative's development. Developers must agree operate facilities 'on nonprofit basis' may lease apartments only state-approved lessees whose incomes below certain level. The corporate petitioners case built, promoted, presently control City: Foundation (UHF), membership initiated sponsored project; Riverbay, organized by UHF own land buildings issue is subject instant action; Community Securities, Incorporated (CSI), UHF's wholly owned subsidiary, general contractor sales agent. To acquire prospective purchaser buy 18 Riverbay for each room desired at $25 per share. cannot be transferred nontenant, pledged, encumbered, or bequeathed (except surviving spouse), do not convey voting rights based number (each having one vote). On termination occupancy tenant offer his share, unlikely event does repurchase, sell more than their original price, plus fraction amortization he has paid during tenancy, then satisfying statutory income eligibility requirements. arrangement resident committed make payments accordance size, nature, location apartment. Acts define 'security' 'any . stock, investment contract, or, general, any interest instrument commonly known 'security." Petitioners moved dismiss complaint lack federal jurisdiction, maintaining did constitute securities thus defined. District granted motion dismiss. Appeals reversed, holding (1) since purchased were called 'stock' definitional sections literally applicable (2) transaction contract Acts, there being profit expectation from reductions resulting (i) produced commercial established use tenants; (ii) deductions portion allocable mortgage; (iii) savings fact substantially less comparable nonsubsidized housing. Held: involved litigation 'securities' within purview claims cognizable court, properly dismissed complaint. Pp. 847-858. 2 (a) When viewed they terms substance (the economic realities transaction) rather form, instruments here ordinary sense conferring right receive 'dividends contingent upon apportionment profits,' Tcherepnin Knight, 389 332, 339, 88 548, 554, 19 564, traditional characteristics negotiable, pledge hypothecation, proportional owned, possibility appreciating value. contrary, these purchased, making profit, but acquiring subsidized 848-851. 3 (b) A share 'investment contract' defined term which, like 'security," involves venture premised reasonable profits derived entrepreneurial managerial efforts others. Here neither kinds traditionally associated offered respondents; instead, indicated Bulletin, stressed 'non-profit' nature project, focus acquisition place live. 851-854. 4 (c) Although deductible purposes, applied (benefits generally available home mortgagors) 'profits,' and, event, derive third parties. 854-855. 5 (d) Low rent attributable financial subsidies no embodies attributes other types government subsidies. Pacific KF135 P2 855. 6 (e) Such might City's leasing used reduce rentals prospect never mentioned Bulletin) too speculative insubstantial bring entire Acts. These established, essential services huge complex. 855-857. 7 Cir., 500 Federal Reporter, 2nd 1246, reversed. 8 Simon Haw. Hawai‘i KFH45 A2 Rifkind, Number 74 9 Daniel M. Cohen, 10 Louis Nizer, both cases. 11 Paul Gonson, Washington, D.C., Commission, amicus curiae, special leave Court. 12 POWELL delivered 13 cases whether entitling supervised cooperative, 1934. 14 City. Built between 1965 1971, it houses approximately 50,000 people 200-acre site containing 35 high-rise 236 town houses. Law, enacted ameliorate perceived crisis availability decent low-income urban In order them large long-term, exemptions. Receipt benefits willingness have review virtually every step development cooperative. N.Y.Priv.Hous.Fin.Law §§ 11—37, amended (1962 Supp.1974 1975). developer also facility basis,' § 11—a(2a), fall level who been approved State.1 15 corporation purpose 'aiding encouraging' creation 'adequate, safe sanitary accommodations wage earners persons law moderate income,'2 Appendix 95a App.), responsible initiating sponsoring Acting Corporation (Riverbay) constituting litigation. contracted Services, its serve agent project.3 As required decisions Commissioner. 16 eligible purchaser4 desired. $25, total $450 room, $1,800 four-room sole enable occupy City; effect, purchase recoverable deposit explicitly tied apartment: nontenant; nor can pledged encumbered; descend, along apartment, spouse. No attach such: participation affairs appertains entitled vote irrespective owned. 17 Any wants terminate occupancy, forced move out,5 selling price extremely declines repurchase stock,6 off, 31—a (Supp.1974—1975). May 1965, subsequent completion planning, circulated seeking attract tenants what someday After describing advantages particular, informed estimated largely anticipated CSI, $283,695,550. Only sum, $32,795,550, raised tenants. remaining $250,900,000 financed 40-year loan Agency. current operating expenses met While vary, depending 'average' $23.02 $92.08 Several times approval Commissioner, revised CSI allow increased costs. addition, incurred had reflected Bulletin. meet expenditures, Commissioner's approval, repeatedly secured Ultimately $125 million figure result, while purchasing remained average periodically, reaching $39.68 July 1974.7 20 precipitated present lawsuit. Respondents, sued court 15.372 owners, upwards $30 damages, reductions, 'appropriate' relief. Named defendants (petitioners herein) UHF, several individual directors organizations, York, heart falsely represented bear further alleged misled purchases failed disclose critical facts.8 bases, asserted two fraud 1933, amended, 17(a), 48 Statutes-at-Large 84, Code KF62 77q(a); 1934, 10(b), 891, 78j(b); Regulations 240.10b—5 (1975). presented against Financing Agency Civil Rights 1871, 42 1983, pendent state-law claims. 21 denying allegations,9 ground jurisdiction lacking. maintained parties sovereign immunity grounds. 22 Forman Inc., 366 F.Supp. 1117 (SDNY 1973). It held denomination not, itself, ruled, relying primarily Court's SEC C. Joiner Leasing Corp., 320 344, 64 120, L.Ed. (1943), W. Judge Howey Co., 328 293, 66 1100, 90 1244 (1946), security induced tangible material profits, could realistically expected. words, 'the fundamental transaction' insurmountable barrier (respondents') th(e) court.' F.Supp., 1128.10 23 Second Circuit 1246 (1974). rested decision alternative First, include sections, applicable. Second, concluded meaning Howey, three sources: ruled unavailing.11 Accordingly, remanded consideration merits. 24 view importance issues we certiorari. Foundation, Forman, 419 1120, 801, 819 conclude disputed transactions contemplation statutes, reverse. 25 Section 2(1) 77b(1), defines 26 note, treasury bond, debenture, evidence indebtedness, certificate profit-sharing agreement, collateral-trust certificate, preorganization subscription, transferable voting-trust security, fractional undivided oil, gas, mineral rights, 'security,' in, temporary interim for, receipt guarantee of, warrant subscribe purchase, foregoing.'12 27 providing definition Congress attempt articulate relevant criteria distringuishing 'non-securities.' rather, sought sufficiently broad so many our world concept security.' H.R.Rep. 85, 73d Cong., 1st Sess., (1933). task fallen Commission (SEC), body charged administering ultimately courts decide myriad society come coverage statutes. 28 determination write clean slate. Well-settled principles enunciated establish represent 'countless variable schemes devised those seek money others promise U.S., 299, 1103, therefore 29 We reject outset suggestion transaction, evidenced 'stock,'13 considered simply because includes words stock.' Rather adhere basic principle guided area: 30 '(I)n searching scope word Act(s), form should disregarded emphasis reality.' 336, 553, 564 (1967). 31 supra, 298, S.Ct., 1102. 32 primary eliminate serious abuses unregulated market. capital market enterprise system: raise profit-making exchanges traded, need regulation prevent protect investors. Because character intended application statutes turn underlying name appended thereto. Thus, construing background purpose, canon construction: 33 '(A) thing letter statute yet statute, spirit, intention makers.' Church Holy Trinity States, 143 457, 459, 511, 512, 36 226 (1892). 34 American Trucking Assns., 310 534, 543, 60 1059, 1063, 84 1345 (1940).14 Respondents' reliance support 'literal approach' defining misplaced. assignments interests oil leases, coupled promoters' drill exploratory well, securities. Looking inducement provided proposed leases even though 'leases' included list definition. dictum noted '(i)nstruments security), matter law, if face answer description.' 351, 123 (emphasis supplied). And later, again dictum, stated 'might' shown 'by proving document Id., 355, 125 By using conditional 'may' dicta made clear establishing inflexible rule barring inquiry into transaction. obvious point that, contrast before explicit terms, most bearing titles likely covered statutes.15 given dispositive, suggest irrelevant security. There occasions when 'stocks' 'bonds' will lead justifiably assume laws apply. This clearly some significant typically named instrument. 37 contend, they, believing governed purchase. Common suggests intend residential state-subsidized personal use, believe reality something stock. none 'that H.R.Rep.No. 11. Despite name, deemed feature stock: profits.' 555. Nor possess negotiable; hypothecated; confer proportion owned; appreciate short, solely living space; invest profit. 38 Appeals, decision, argue agreed 'commonly 'security" laws. considering examine substance—the transaction—rather names employed perceive distinction, 'instrument either case, test distinguishing dealings 39 'whether scheme others.' 301, 1104.16 40 test, shorthand run through touchastone presence meant appreciation investment, Joiner, supra (sale agreement well), earnings investors' funds, (dividends association's profits). investor 'attracted prospects return' investment. 300, 1103. contrast, motivated desire consume item purchased—'to develop themselves,' put it, ibid.—the apply.17 supra.18 41 doubt investors attracted live, returns investments. distributed emphasized undertaking: 'A non-profit controlled democratically members—the services. 43 'People find community enjoyable reason. Most join, however, simple reason way obtain price. However, advantages. provide ownership, just rent. favorable environment family living. 45 'The bond collective ownership you makes different. neighbors. Home atmosphere small town. very little turnover cooperative.' App. 162, a—166 a. 46 Nowhere promoters emphasizes 'nonprofit' endeavor. explains exceed difference returned rebate, invested informs purchasers unable resell first back 'at it.'19 163 respondents. 47 recognized securities, conceded 'no possible resale (this) F.2d, 1254. correctly noted, yielded well appreciation, proceeded 'an 'income' least ways.' Ibid. Two supposed sources disposed summarily. Appeals' deductibility purposes charge mortgage. know basis payment interest, consequent constitutes profits.20 nothing homeowner pays 216 Internal Revenue Code, 216; Eckstein 452 1036, 196 Ct.Cl. 644 (1971). found space going Again, inappropriate theory 'profits' accept. low derives York. benefit liquidated cash; real sense, welfare benefits, food stamps, 49 final source relied net facilities, professional offices parking spaces, operation washing machines. income, any, conveniences, located areas Conceptually, readily kind investment.21 supra. But indeed far 50 Initially note means offsetting costs Thus potential reductions. 353, 124. Moreover, record return fees greater actual rented.22 short stores question returning tenants, enormous complex.23 'incidental appurtenant' project. N.Y.Priv.Hous.Fin. 12(5) Undoubtedly attractive opportunity, reduction 'expectation profit' necessary Howey.24 51 type characterizes dealing. What distinguishes transaction—and absent here—is where parts hope receiving others, commodity consumption quarters use.25 52 address merits allegations fraud. indicate protected regulation.26 us, interested 53 Since complaint.27 judgment 54 Reversed. 55 BRENNAN, whom DOUGLAS WHITE dissenting. 56 & N Dec. Immigration Nationality Decisions dissent. property 'securities,' my view, contracts.' Both 78c(a)(10), including, among things, contract.' ingredients 1104, '(t)he 338, enterprise; questions involve productive 'profits 58 discloses activities Corporation, owner operator lessor office space. appear, revenues excess $1 year flow activities, 361a Appeals. 1254 (CA2 1974). Even after deduction expenses—taxes alone take half gross—the residue hardly de minimis, Therein lies patent fallacy conclusion aspect corporation's 'speculative insubstantial.' Ante, 856. rightly management 1117, 1128 stockholders necessarily bound rely produce rents integral part 59 stockholders, efficiently end minimized. appeals partly bargain prices. substitutes York.' efficiency enters equation assessed residents. extent resident-stockholders reduced subsidies, them. refers, ante, 855, ingredient 'come utilize Investors Wall Street day surprised learn obtained profits. accorded portions carrying rejects argument statement '(t)hese ..' true provision 216, 'to same position dwelling house taxes concerned.' S.Rep. 1631, 77th (1942). homeowners 'tenant apartment.' others,' whereas realized does. Setting up advantage requiring specialized skills. If arrangements go awry themselves without hoped-for See, e.g., depend 'efforts management, organize realize 61 leases. citrus groves. Though taxation factor disposition cases, investments offering principal attraction investor. Cunnane, Tax Shelter Investments 1969 Reform Taxes 450 business becoming independent operator. He could, relies him here, analysis arises. 62 Besides express rejection forms surprise knowledgeable economists proposition, 852, earnings.1 All varieties accrue saved earned.2 Not teach same, sophisticated compels practical income.3 finds distinguish, example, after-tax income. 'central purposes' investors,' Tcherepnin, errs inducements motives Construction faithful 'central' investors.' 63 discussed. literature encouraging important, although conclusive, evidence. Bulletins, mentioning emphasize 'reasonable price' 166a, 187a, 'every effort' keep low, id., 174a, 194a. discussed course treatment made. 175a, 195a. deny limits distinction consumer goods frivolous. 858. useful resolution us. Of course, get element consumption, annuity Variable Annuity 359 65, 79 618, 640 (1959), analogous situation. all, expressly labeled 'stock.' constituted contract,' 'in 65 Therefore, definitions, 123; see 554. 'Security' broadly object including security,' Stock 'such notes, bonds, stocks, pretty much standardized carries settled meaning.' 123. nevertheless allows exception 'stock,' justification excepting singularly unpersuasive. states '(c)ommon 851. commentators expressed misgivings about question.4 departs unacceptably '(i)n enforcement act offerings judged be.' absence features normally consideration, leads me Cf. Affiliated Ute Citizens 406 128, 92 1456, 741 (1972). 67 contracts.'5 erred dismissing suit.6 68 At oral argument, petitioner contended strenuously comprehensive capitalistic beneficial public enterprise, created partnership groups modest incomes. disagree characterization role play avoiding danger evils raising sums involved. Capital Gains Research Bureau, 375 180, 195, 275, 284, 237 (1963); 2—3 York's intensive helps avoid evils. N.Y.Priv.Hous.Fin.Law. contemplated concurrent enacting 75, 624 (concurring opinion), existence excluding appropriate Indeed, resident-stockholder particularly protection. observed: 69 '(I)f ever group deserve full careful disclosure proposals group. selection lives. demands good percentage Their minimal, probably don't lawyers accountants guide Further, great deal credence statements respect reputable civic labor unions, proposal stamped imprimatur state.' 1125. 70 concluding however but, reading different, perhaps better, redress until denied plainly Note, Cooperative Corporations Laws, 71 Col.L.Rev. 118 SEC, tardily, corporations regulatory authority agree. affirm Eligibility limited families six (or four more, seven charge). 31(2)(a) Preference admission veterans, handicapped, elderly. 31(7)—(9). composed cooperatives, groups. major cooperatives acted UHF—sponsored cooperatives. referred herein variously 'purchasers,' 'owners,' 'tenants.' hold legal title respective apartments, entitles apartments. virtue usually described out violates 'occupancy agreement,' essentially grows standards. date withdrawn received full. time suit filed 7,000 waiting fund nearly contributions insure wanting compensation shares. increased, requirements expanded accordingly. n. 1, following facts omitted: adhered previous projects built CSI; knew estimate followed subsidiary UHF; (iv) CSI's worth legally complete costs; (v) Commissioner waived regarding liquidity approving contractor; (vi) additional undisclosed Riverbay. warned increases, omitted facts. argued prior increased. claimed suffered damages retrieve 1983 finding 'federal well-pleaded Act.' 1132 (1973). rulings reach agency distinct itself 'person' 32(5) implicitly voluntarily participating area plenary regulation. Parden Terminal R. 377 184, 1207, 233 (1964). issues. 3(a)(10) 78c(a)(10) identical same. 342, 556, (1967); S.Rep.No.792, (1934). precisely why appears tradition convenience. Rohan Reskin, Practice 2.01(4) With Circuit, recently consider rejected literal approach urged C.N.S. Enterprises, G. 508 1354 (CA7 1975); McClure First National Bank Lubbock, 497 490 (CA5 1974), cert. denied, 420 930, 1132, 402 (1975); Lino Investing 487 689 (CA3 L. Loss, Regulation 493 (2d ed. 1961) ('substance governs form: things look estate estate'). quoted dictum. Indeed 'form substance,' analyzing 'withdrawable share' was, substance, 'certificate 'transferable share.' speaks (Emphasis supplied.) Ninth 'solely' read strict limitation construed realistically, securities.' Glenn Turner 474 476, 482, 414 821, 94 117, lowever, case. Release 33—5347, Fed.Reg. 1735 (Jan. 18, Rohan, Implications Condominium Marketing Programs Which Feature Rental Pool, Conn.L.Rev. (1969). difficult 348, 122, stated: 'Undisputed seem us naked leasehold rights. Had mailed promised exploration quite different proposition.' drillings gave 'most value Lure.' 349, purely incidental requirement effectively insures sold cost. Consonant whenever buyers willing pay 138a. If, reason, still sale. 842-843. Rosenbaum, Resort Laws—A Case Study Governmental Inflexibility, Va.L.Rev. 785, 795—796 (1974); Geo.L.J. 1515, 1524—1526 spaces machines exclusively collected exceeds overcharge rebate. also, rebate patronized almost Tex.L.Rev. 623, 630—631, gross facilities. figures rented Miller, Apartments: Real Estate Securities?, B.U.L.Rev. 465, (1965). urge abandon adopt 'risk capital' articulated California Silver Hills Country Club Sobieski, Cal.2d 811, Cal.Rptr. 186, 361 906 (1961). El Khadem Equity 494 1224 (CA9), 900, 183, 146 Coffey, Economic Realities 'Security': Is More Meaningful Formula?, W.Res.L.Rev. 367 Long, An Attempt Return 'Investment Contracts' Mainstream Regulation, Okla.L.Rev. 135 (1971); Hannan Thomas, Importance Reality Risk Defining Hastings L.J. 219 inclined apply Purchasers risk sense. dissatisfied recover 5, assert becomes bankrupt stand lose whole But, over 92% carefully regulates bankruptcy normal unrealistic possibility. insolvency ongoing 'differ(s) vastly' 'fluctuating' 90—91, 631—632, (1959) (Brennan, J., concurring). 242—249; Introduction Symposium: Interpreting Statutory Definition Security: Some Pragmatic Considerations, St. Mary's 96, 126—128 curiae brief urging Traditionally views governing considerable weight. Sexbe Bustos, 74, 272, 279, 231 Investment Company Institute Camp, 401 617, 626—627, 91 1091, 1097, SEC's flatly contradicts Commission's recent release. 1973), 'sale condominium units development,' 'offered promoter, party designated arranged promoter,' 1736. explained 'commercial elements project' '(a) offset unit.' Advisory Committee Report 74—91 (1972); Dickey Thorpe, Security Offerings, N.Y.L.F. 473 inconsistency above release now supports. Berman Stone, Sale Condominiums, Homes, Homesites, Bus. 411, 420—425 Comment, Regulation: Beyond Disclosure, U.Pa.L.Rev. 639, 654—655 20, 628. unexplained contradiction accord weight views. Reliance Electric company Emerson 404 418, 426, 596, 601, 575 Blue Chip Stamps Manor Drug Stores, 723, 746—747, 10, 1917, 1930, 539. suggested developments condominiums transactions. Condominiums: Purchaser's Perspective, 1403 Others disagreed, claiming extensive developed decades unduly costly sellers 24; 20. extension important balance responsibility. manner transactions, present, better left Congress, assess instructed Secretary Urban Development conduct investigation study problems, difficulties, housing.' 740, 3532 (1970 ed., Supp. IV). Settlement Procedures 1974, 1724, 2601 seq. IV); Interstate Land Sales Full Disclosure 82 590, 1701—1720. claims, vague conclusory allegation dismissed. 9, counts predicated independently court. Samuelson, Economics 618—626 (9th Apparently dividends shareholders, really partial refunds already needed. 435; Coase, Problem Social Cost, Econ. (1960). 492—493 1961). occasion (1961), determine result. 74—647, barred Eleventh Amendment. unnecessary contention, requires Amendment defense. bar am 'public corporation' 43(1) Supp.1974—1975), empowered '(t)o sue sued,' 44(1). authorized accept funds State, Fed- eral Government, source,' 44(16), obligations financing, 44(7) 46. Significantly, liable agency's notes debts State. 46(8). 'alter ego' State; Cowles Mercer County, Wall. 118, 86 (1869); Bator, Mishkin, D. Shapiro Wechsler, Hart Wechsler's Courts System 690 Compare Matherson Long Island Park Comm'n, 442 566 1971), Zeidner Wulforst, 197 23, (EDNY 1961), Whitten University Fund, 177 (CA1 Charles Simkin Sons, 352 (SDNY), aff'd mem., 486 1393 unlike agency, Amendment, consented suit. 'With regard duties liabilities arising article state, commissioner supervising person.' added). sure, waiver strictly construed, consent Kennecott Copper 327 573, 745, 862 (1946); Ford Motor Department Treasury, 323 347, 89 (1945); Great Northern Life insurance Read, 322 47, 873, 1121 (1944). Nevertheless, language permit courts.

Classification Label: 7