Court Opinion

ID: 9477223
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:17:30.618581+00
Date Added: 2024-06-11T17:45:45.947697
License: Public Domain

HUG, Circuit Judge,
dissenting:
I respectfully dissent.
The essential issue in this case is whether an “investment contract” was offered to Hocking. The majority correctly notes that, under some circumstances, a real estate offering can constitute an “investment contract” and thus a “security” within the meaning of the federal security laws. The Supreme Court has defined an investment contract in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946), as follows:
[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party....
My basic disagreement with the majority is that while the securities laws may well extend to a promotion by a developer who offers a condominium with a management arrangement giving the buyer the comfort of doing nothing but collecting the checks from the developer’s efforts, they do not extend to this attenuated transaction. The Libermans sold their unit to Hocking. They had no authority to commit Aetna or HCP to allow Hocking to participate in the rental pool. Although Aetna may well have offered the Libermans an investment contract, the Libermans did not buy the investment contract; they simply bought a parcel of real property. That is all they were selling — a parcel of real property.
Just because a prospective buyer may be able to reach an arrangement with the developer’s rental pool to rent his unit, this surely does not mean that any time a unit owner simply sells his unit, one year, ten years, or thirty years thereafter, he is selling a security. For the same reason, a broker who simply arranges for the sale of the unit and notifies the buyer that he may be able to enroll in the developer’s rental pool is not offering a security. This is a real estate transaction and is properly governed by real estate law.
The majority’s analysis extends the concept of an “investment contract” well beyond the Supreme Court’s interpretation in Howey. The Howey test is designed to cover the situation where the investor is induced to buy a parcel of real estate because the promoter is offering to make his investment profitable through management of the real estate. In Howey, the buyer of the ten acres of orange grove land in the middle of an orchard was relying, not on the intrinsic value of the ten acres or the use to which he could put them, but instead upon the promoter to tend and harvest the oranges and send him a check for the proceeds.
The SEC has applied this principle to condominiums. SEC Release 5347 seeks to establish the rules governing when such a promoter must register his condominium project as a security. It is a rather breezy release, in letter style, setting forth some bright line rules for when condominium developers must register their projects. As the release notes in its footnote 1, “where an investment contract is present, *572it consists of the agreement offered and the condominium.”
The release is intended to notify developers of a bright line rule of when they must register their projects. It purports to apply Howey and [Securities and Exchange Com’n v. C.M.] Joiner [Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943) ] and is reasonably accurate when it states:
In other words, condominiums, coupled with a rental arrangement, will be deemed to be securities if they are offered and sold through advertising, sales literature, promotional schemes or oral representations which emphasize 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 in renting the units.
But it moves away from the Howey concept and its own reasoning when it states in the following paragraph that the mere offering of a condominium in conjunction with participation in a rental pool arrangement “will cause the offering to be viewed as an offering of securities in the form of investment contracts.”
While the Supreme Court has cited the release, see Forman, 421 U.S. at 853 n. 17, 95 S.Ct. at 2061 n. 17, it has expressed no opinion on the SEC’s interpretation of How-ey. Several writers have challenged that interpretation. See, e.g., Rosenbaum, The Resort Condominium and the Federal Securities Laws — A Case Study in Governmental Inflexibility, 60 Va.L.Rev. 785 (1974); Comment, The Economic Realities of Condominium Registration Under the Securities Act of 1933, 19 Ga.L.Rev. 747 (1985); Comment, Looking Through Form to Substance: Are Montana Resort Condominiums “Securities"?, 35 Mont.L.Rev. 265 (1974). Although I have some doubts whether the mere offer by a developer of a rental pool, regardless of promotional emphasis, truly meets the Howey test (or satisfies the release’s earlier reasoning), we need not determine that issue because we are not concerned with a developer who is offering a complete package of a condominium and a rental pool that is operated by or arranged for by the developer. We are here concerned with a condominium owner who has no connection whatsoever with a rental pool.
The majority applies SEC Release 5347 to a broker who extends the offer of an individual homeowner to sell his unit because the offer includes an “option” to participate in a rental pool of the original developer. It is most doubtful that the SEC release was designed to apply to this circumstance, and even more doubtful that the Howey test could apply.
An even more fundamental objection, however, is the fact that there exists no evidence that the Libermans had, or Dubois offered, such an “option.” The entire majority opinion is premised on the conclusion that there exists a genuine issue of material fact as to whether the offer from the Libermans that was communicated to Hocking included an “option” to participate in the rental pool operated by the developer. (See page 562 and footnote 1.) I find no evidence in the record that even suggests an option was offered. The Li-bermans had not participated in the rental pool themselves. They simply bought a condominium and were selling that condominium. Dubois was the real estate agent who communicated the Libermans’ offer to sell the condominium to Hocking. She also alerted Hocking to the existence of the developer’s rental pool. There is no evidence in the record that the Libermans had a transferable “option ” to enter the rental pool that was binding on the developer, nor that Dubois communicated an offer of such an “option ” along with the offer to sell the condominium.
The evidence cited by the majority in footnote 1 does not support a finding that an “option ” was offered. Hooking’s statement that he had been informed of the availability of the developer’s rental pool is no indication that Dubois offered, or that the Libermans were able to convey, an enforceable option for a new purchaser to enter the rental pool. Nor does the fact that Hocking eventually enrolled in the rental pool provide such evidence.
*573In summary, I submit that, regardless of the validity of the SEC’s bright line rule for the purpose of requiring developers to register their projects, it makes no sense to apply that rule to this case. Here we have the Libermans, who bought a unit, rejected the rental pool, and now seek to sell the unit. Dubois notified Hocking that if he bought the unit he could perhaps participate in the developer’s rental pool. It is hard to envision either the Libermans or Dubois as promoters offering the kind of package that constitutes an “investment contract,” as defined by the Supreme Court.
I would affirm the dismissal for lack of subject matter jurisdiction because no security was involved.