Court Opinion

ID: 9479539
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:21:13.222687+00
Date Added: 2024-06-11T17:47:06.390646
License: Public Domain

WIGGINS, Circuit Judge,
joined by Judge TROTT, dissenting:
Stated precisely, the issue in this case is whether a real estate broker can be held liable under the federal securities laws for marketing a condominium apartment whose buyer is entitled, but not obligated, to join a rental pool offered and managed by a party not affiliated with the seller. The majority believes that if the real estate broker markets the condominium apartment and rental pool as a “single package,” even if the parties offering them are unaffiliated, then the investment possibly amounts to the purchase of a “security” as defined in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). Maj. op. at 1456-58. The majority is thus unwilling to grant summary judgment in favor of Dubois, believing that Hocking has raised material issues of fact regarding whether the condominium apartment and rental pool were marketed as a package and whether the sale involved an investment of money in a common enterprise with an expectation of profits produced by the efforts of others. Ante at 1458-1461.
Unlike the majority, I believe that holding a real estate broker liable for the sale of an individual condominium apartment strays too far from the dominating purpose of the Securities Act of 1933 and the Securities Exchange Act of 1934: “to regulate *1469the schemes devised by those who seek the use of the money of others with the lure of profits.” Note, Federal Securities Registration of Condominiums: A Purchaser’s Perspective, 62 Geo.L.J. 1403, 1405 (1974) (emphasis added); see United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849, 95 S.Ct. 2051, 2059, 44 L.Ed.2d 621 (1975) (focus of the Acts is on the unregulated “sale of securities to raise capital for profit-making purposes”); SEC v. W.J. Howey Co., 328 U.S. at 299, 66 S.Ct. at 1103 (purpose of the Acts is to regulate the conduct of those “who seek the use of the money of others on the promise of profits”). Individual sellers of condominiums do not attract purchasers in order to put their money to “use”; they are instead selling them a tangible asset. In my view, therefore, the Acts reach only the rental pool operator’s offering of collateral agreements that induce condominium owners to forego the personal use of their apartment on the promise of profits to be derived from a common enterprise in which they lack any effective control. The essential factor of a collateral agreement is absent anytime an individual owner sells his condominium without authority to bind the rental pool operator, exactly the situation here. For that reason, I respectfully dissent.
I
A
“[W]hen a purchaser is motivated by a desire to use or consume the item purchased — ‘to occupy the land or develop it themselves,’ as the Howey Court put it— the securities laws do not apply.” Forman, 421 U.S. at 852-53, 95 S.Ct. at 2060-61 (citation omitted). Accordingly, condominium apartments purchased for the purpose of occupying them as a residence do not involve investment contracts. Nor is this conclusion obviated simply because the property owner anticipates a normal appreciation in the value of the property and would not have consummated the purchase absent that expectation. See Joyce v. Ritchie Tower Properties, 417 F.Supp. 53, 54-55 (N.D.Ill.1976) (“the sale of a condominium unit to be occupied by the plaintiff as his residence,” even though he was expecting its appreciation in value, did not involve the sale of a security). The logic of this conclusion is irrefutable: “A piece of real estate, such as a condominium, has an inherent worth,” and its appreciation depends more on economic variables than it does “on the efforts of a promoter.” Bender v. Continental Towers Ltd. Partnership, 632 F.Supp. 497, 501 (S.D.N.Y.1986); accord Dumbarton Condominium Ass’n v. 3120 R Street Assoc. Ltd. Partnership, 657 F.Supp. 226, 230 (D.D.C.1987); Mosher v. Southridge Assocs., Inc., 552 F.Supp. 1231, 1232 (W.D.Penn.1982); Johnson v. Nationwide Indus., Inc., 450 F.Supp. 948, 953 (N.D.Ill.1978).
But a far more troubling situation arises where, as here, an investor purchases a condominium apartment expecting its appreciation in value and using it only intermittently as a vacation home, and yet finances the investment through rental income derived from the efforts of others. This type of transaction possesses some qualities of an investment whose success depends on the efforts of others, but it equally possesses qualities of an investment whose success depends on economic variables well beyond the control of the promoter. Like other real estate investments, the arrangement could fail if the anticipated appreciation is not ultimately realized; equally true, the arrangement could collapse if the rental proceeds are insufficient to sustain the finance costs of the initial purchase. Logically, the federal securities laws ought to afford a measure of protection to investors who are misled by false projections of rental income, see Rosenbaum, The Resort Condominium and the Federal Securities Laws — A Case Study in Governmental Inflexibility, 60 Va.L.Rev. 785, 796 (1974) (“purchasers should be furnished information bearing on [a promoter’s] competence in operating resort rental facilities”), but not for investors who are disappointed because economic variables18 fail to yield an expected appre*1470ciation in the value of the condominium, see Bender, 632 F.Supp. at 501.
B
The Securities and Exchange Commission (“Commission”) has itself struggled for many years with the mechanics of this type of transaction, offering in 1973 the following guidelines as a solution:
In summary, the offering of condominium units in conjunction with any one of the following will cause the offering to be viewed as an offering of securities in the form of investment contracts:
1. The condominiums, with any rental arrangement or other similar service, are offered and sold with emphasis on the economic benefits to the purchaser to be derived from the managerial efforts of the promoter, or a third party designated or arranged for by the promoter, from rental of the units.
2. The offering of participation in a rental pool arrangement; and
3. The offering of a rental or similar arrangement whereby the purchaser must hold his unit available for rental for any part of the year, must use an exclusive rental agent or is otherwise materially restricted in his occupancy or rental of his unit.
Guidelines as to the Applicability of the Federal Securities Laws to Offers and Sales of Condominiums or Units in Real Estate Development, Securities Act Release No. 33-5347, [1972-1973 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 79,163, at 83,539-40 (Jan. 4, 1973) (hereinafter “Release No. 33-5347”). Each of these types of real estate transactions, according to the release, involve investments with business emphasis and therefore are appropriately the subject of the federal securities laws. But see Note, The Economic Realities of Condominium Regulation Under the Securities Act of 1933, 19 Ga.L.Rev. 747 (1985) (stressing that the guidelines should be revised because they unduly stress promoters’ profit motives in attracting purchasers rather than the economic reality of the condominium owner’s retained control over the rental arrangements for his apartment).
In its amicus curiae brief, the Commission takes the position that the views expressed in its release apply only to persons engaged in the business of building and selling condominium apartments. Further, the Commission argues that, although unstated in the release, the sale of an individual condominium apartment cannot constitute the sale of a security, even if the buyer anticipated enrollment in a rental pool, absent an affiliation between the condominium seller and the rental pool operator. The majority dismisses this view merely as an interpretation of the Commission’s 1973 release. Maj. op. at 1456. That release, however, represents the Commission’s interpretation of the federal securities Acts and is, therefore, to be accorded “great weight”; the Commission’s interpretation of its own release is, in my view, entitled to equal deference. Cf. Forman, 421 U.S. at 858 n. 25, 95 S.Ct. at 2063 n. 25.
The majority dismisses the Commission’s view nonetheless, perceiving it as an attempt to “pull apart the package into separate transactions,” neither of which, according to the logic of the majority’s argument, could alone constitute the sale of an investment contract. Maj. op. at 1456-57. This view, however, unknowingly adopts the Commission’s previously stated conclusion that, “where an investment contract is present, it consists of the agreement offered and the condominium itself.” Release No. 33-5347, at 82,536 n. 1. But as one commentator has aptly observed, this conclusion implies, illogically, that a condominium owner who joins a rental pool sometime after the initial purchase thereby invests in a security consisting of both the condominium apartment and the rental pool agreement. See Rosenbaum, 60 Va.L.Rev. at 791. For example, had the Libermans *1471enrolled in the rental pool rather than place their condominium on the real estate market, the Commission, and presumably the majority, would assert that they had invested in a “security” consisting of both the condominium and the rental agreement. The problem with this theory, of course, is that the condominium apartment, already belonging to the Libermans, is not what they would have “received” in return for their investment. Quite the contrary, use of the condominium apartment is what they would have “given up” in exchange for the opportunity to profit from the rental pool.
The better interpretation, the only one that makes logical sense given the Commission’s position in its amicus curiae brief, is that the “investment contract” consists only of the rental agreement itself and not of the condominium apartment and the rental agreement combined. The same is true regardless of whether the condominium apartment and the rental agreement are marketed, in the words of the majority, as a “single package,” or whether they are marketed separately. Thus, the initial purchase of the condominium apartment, even if the buyer anticipates enrollment in a rental pool, does not implicate the federal securities laws. Once the buyer commits the use of the condominium apartment to the rental pool, however, that act constitutes an exchange of value that satisfies the first prong of the Howey test. See International Bhd. of Teamsters v. Daniel, 439 U.S. 551, 560 n. 12, 99 S.Ct. 790, 797 n. 12, 58 L.Ed.2d 808 (1979) (“This is not to say that a person’s ‘investment,’ in order to meet the definition of an investment contract, must take the form of cash only, rather than of goods and services.”); Hector v. Wiens, 533 F.2d 429, 432 (9th Cir.1976) (“an ‘investment of money’ means only that the investor must commit his assets to the enterprise in such a manner as to subject himself to financial loss”). Whether the second and third prongs of the Howey analysis are satisfied would, of course, depend on the type of rental agreement involved and the amount of control retained by the condominium apartment owner. E.g., Cameron v. Outdoor Resorts of Am., Inc., 608 F.2d 187, 191-92 (5th Cir.1979) (holding an investment contract where a promoter was given “the exclusive right to rent the [condominium] campsite in the absence of the owner and his guests”), aff'd on reh’g, 611 F.2d 105 (5th Cir.1980); see Note, 19 Ga.L.Rev. at 772-75 (economic realities of investment contracts depend on the type of rental agreement and the amount of control retained by the condominium owner).
This conclusion is fully consistent with the Supreme Court’s decision in Howey. There, investors anticipated profits to be earned by the marketing of citrus products grown on their property. According to the Court, “[t]he resulting transfer of rights in land [was] purely incidental,” even inconsequential, in the sense that the real estate was considered a component of the investment contract. 328 U.S. at 300, 66 S.Ct. at 1103. But the investors’ foregoing of the use of their land, purchased only coincidentally from the same promoter, was critical to the exchange of value needed to enter the service contract. In other words, the “investment of money” needed for the first prong of the Howey test was not satisfied by paying the cost of the real estate and service contracts considered together, but rather by foregoing the use of an asset in order to commit it to the use of another on the promise of profits. See id. at 300-01, 66 S.Ct. at 1103-04.
C
As this case well demonstrates, absurd results attach to any other interpretation. If the condominium apartment is itself considered a component of the investment contract, its seller could be held liable for representations regarding its resale value even though that value has nothing to do with the “efforts of others.” No justification exists for a resort condominium owner to have a federal remedy for losses of this sort while residential condominium owners are deprived of a similar remedy. State laws may offer protection for losses of this sort; the federal securities laws are not so designed.19
*1472Moreover, the effect of concluding that a condominium apartment is a component of the investment contract is that neither real estate brokers who are unlicensed in the sale of securities nor securities brokers who are unlicensed in the sale of real estate can market the sale of an individual condominium apartment whose buyer is entitled to join a rental pool. See Rosenbaum, 60 Va.L.Rev. at 797-98. The individual owner, under these circumstances, will either have to market the unit himself, thereby defeating the stated purpose of promoting complete disclosure to potential buyers, or seek that elusive broker who is appropriately, yet needlessly, licensed in both fields. See id. at 801-02. Such a rule is, frankly, utter nonsense. See generally Berman & Stone, Federal Securities Laws and the Sale of Condominiums, Houses, & Homesites, 30 Bus.Law. 411, 412 (1975) (warning developers to “be prepared to deal with a misapplication of the securities acts to the conventional offer and sale of real estate units”); Comment, Looking Through Form to Substance: Are Montana Resort Condominiums “Securities”?, 35 Mont.L.Rev. 265 (1974) (emphasizing that the real estate transactions involved in the sale of resort condominiums is adequately protected by state laws and that compliance with securities regulations is either redundant or pointless).
Conversely, requiring promoters of rental pools to comply with the requirements of the federal securities acts, regardless of whether the target of their offering acquires the condominium directly from them or from previous owners, serves the legitimate purpose of regulating the conduct of those “who seek the use of the money of others on the promise of profits.” SEC v. W.J. Howey, 328 U.S. at 299, 66 S.Ct. at 1103; see Note, 62 Geo.LJ. at 1413-28 (suggesting types of information that ought to be given to potential investors in rental pools). Equally important, placing the burden of compliance with the securities regulations on the promoter of the rental pool avoids the problem that real estate agents will otherwise encounter if they help prospective condominium purchasers obtain financing. See Rosenbaum, 60 Va.L.Rev. at 804-15. It may well be that investors will not consummate the purchase of condominium apartments without being told of the opportunity to join a rental pool. But the burden of disclosing the expected financial benefits of the rental pool is placed appropriately on its promoter and not on the individual condominium seller. Even the least sophisticated buyer would recognize that information provided by an individual condominium seller has no greater value than any other “stock tip” provided by one investor to another.
D
In summary, I believe that an investor may have recourse in the federal securities laws only for losses he sustains after committing his condominium apartment to a rental pool whose promoter has not fully disclosed its financial advantages and disadvantages. That loss may, in appropriate circumstances, include the costs of financing the initial investment in the condominium. But I also believe that an investor cannot recover for these losses against the condominium seller or the seller’s agent, nor can he recover under federal law for losses caused by an inadequate appreciation in the value of the condominium. Until Congress passes legislation otherwise, any remedy provided to condominium buyers against these parties or for this type of loss is, appropriately, a matter of state law.
*1473II
If the law and facts in this case are as I perceive them, Hocking cannot recover against Dubois for two reasons. First, Hocking’s claim is lodged against the wrong party — at least to the extent that he claims his profits from the rental pool failed to sustain, as allegedly promised, the costs of financing his condominium apartment. It is undisputed that Dubois, as the Libermans’ real estate agent, lacked any authority to offer Hocking a rental agreement on behalf of the Hotel Corporation of the Pacific, Inc. (“HCP”) — the promoter of the rental pool. Indeed, the record reveals that Hocking entered into the rental agreement directly with HCP sometime after purchasing the condominium. There is, therefore, no basis for holding that Dubois either had the capacity to, or in fact did, “offer” Hocking an investment contract. The party who made that offer, HCP, simply has not been named in this lawsuit.
Second, Hocking’s theory of liability lies, for the most part, on the fact that the condominium apartment failed to appreciate in value as allegedly promised. Hocking does not deny that his entire motive in investing in this condominium apartment was to profit from its expected appreciation. Nor can he seriously deny that he was able to make his monthly payments on the condominium apartment — at least in part from the proceeds of the rental pool— up until the point that the “balloon” payment became due. The crux of his complaint, then, is that the condominium apartment was not sold before that time because it failed to appreciate in value as he had predicted. This claim is undoubtedly a matter of state law.
Dubois is entitled to summary judgment for both of these reasons. Accordingly, I would affirm the judgment of the district court.

. Distinguishable, of course, are those cases holding that an investment contract exists when the appreciation in the value of the real estate is derived from the efforts of a developer rather than ordinary economic factors. See, Aldrich v. *1470McColloch Properties, Inc., 627 F.2d 1036, 1039 n. 1 (10th Cir.1980) (“Capital appreciation through development should be distinguished from a general increase in land values concurrent with neighborhood growth and improvements”); cf. SEC v. CM. Joiner Leasing Corp., 320 U.S. 344, 349, 64 S.Ct. 120, 122, 88 L.Ed. 88 (1943) (the capital appreciation in investors’ leases depended on a promoter’s efforts in drilling a test oil well). See generally 1 L. Loss, Securities Regulation 491-92 (2d ed. 1961).

. I find it appropriate at this juncture to repeat the admonition of the Supreme Court:
It has been suggested that the sale of housing developments such as condominiums and *1472cooperatives is in need of federal regulation and therefore the securities laws should be construed or amended to reach these transactions. Others have disagreed, claiming that the extensive body of regulation developed over more than four decades under these Acts would be inappropriate and unduly costly to the sellers and buyers of residential housing. Moreover, extension of the securities laws to real estate transactions would involve important questions as to the appropriate balance between state and federal responsibility. The determination of whether and in what manner federal regulation may be required for housing transactions, where the characteristics of an investment in securities are not present, is better left to Congress, which can assess both the costs and benefits of any such regulation.
Forman, 421 U.S. at 859 n. 26, 95 S.Ct. at 2064 n. 26 (citations omitted).