Court Opinion

ID: 9479538
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:21:13.217539+00
Date Added: 2024-06-11T17:47:06.027029
License: Public Domain

WILLIAM A. NORRIS, Circuit Judge,
joined by Judges WIGGINS, BRUNETTI, O’SCANNLAIN and TROTT, dissenting:
This case involves the resale of a condominium apartment in a resort complex in Hawaii. The developer of the complex had offered the original condominium purchasers the opportunity to participate in a rental pool arrangement (RPA) run by Hotel Corporation of the Pacific (HCP). In an RPA, an agent is responsible for renting and managing all apartments that participate in the pool, and each owner receives a pro rata share of the rental income. It is not disputed that a sale of a condominium by a developer who also provides an RPA normally constitutes the sale of a security.
Here the resellers of the condominium, the Libermans, had elected not to participate in the RPA when they purchased their condominium from the developer. In reselling the condominium, the Libermans’ real estate agent, Dubois, informed the prospective buyer, Hocking, that the RPA was available should he wish to participate as a condominium owner. After buying the Li-bermans’ condominium, Hocking in fact became a participant in the RPA managed by *1463HCP. Hocking has not alleged or proffered evidence that Dubois had any affiliation or selling arrangement with HCP, or that Hocking was led to believe that she did.
The sole question presented by this appeal is whether these facts give rise to a genuine issue for trial as to whether the sale of the Libermans’ condominium to Hocking constituted the sale of a security that is regulated by the federal securities laws. My view that it does not is based largely on the reasoning of the SEC in its amicus brief.
I agree with the SEC that in the absence of probative evidence of some affiliation or selling arrangement between the Liber-mans (or their agent Dubois) and the manager of the rental pool, the condominium sale did not involve the sale of a security because Hocking’s contract to participate in the rental pool was a separate transaction. See Brief of Amicus Curiae SEC, at 3. I fear that the breadth of the majority opinion and the paucity of any probative evidence that Dubois did anything more than inform Hocking of the availability and economics of the rental pool will spawn litigation under the federal securities laws whenever a similar buyer becomes disappointed with the economic return he realizes from his condominium and RPA. Hocking, as a disappointed investor in a condominium and an RPA, is indistinguishable from thousands of others. The fact that his investment did not live up to his expectations does not, without more, mean that he can sue the real estate agent for violation of the federal securities laws. Judge Hug put it succinctly in his dissent from the original panel decision when he said that “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.” Hocking v. Dubois, 839 F.2d 560, 571 (9th Cir.1988).
I
A
Although the sale of real estate ordinarily does not involve an “investment contract” for purposes of the federal securities laws,9 courts have held that the sale of real estate will constitute the sale of a security when related management services are provided either by the real estate promoter or by someone having an affiliation or selling arrangement with the promoter. See, e.g., SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946) (promoter sells land with service contract for cultivation of oranges; promoter of land and manager of orange groves were under “direct common control” of one another); Cameron v. Outdoor Resorts of America, Inc., 608 F.2d 187 (5th Cir.1979) (promoter sells condominium campsites, and retains exclusive right to rent campsites in owner’s absence and to share profits with owner); Wooldridge Homes v. Bronze Tree, 558 F.Supp. 1085 (D.Colo.1983) (promoter sells unimproved resort property and promises to build condominiums and arrange for management services for two years); Hodges v. H & R Investments, 668 F.Supp. 545 (N.D.Miss.1987) (promoter of condominium guarantees buyer minimum rental income and promises to pay referral fee to buyer).
A requirement of an affiliation or selling arrangement between the promoter of property and the provider of management services stems from the nature of an investment contract. An investment contract requires both an investment of money and an expectation of profits from the efforts of others. See Howey, 328 U.S. at *1464298-99, 66 S.Ct. at 1102-03. An investment of money in the purchase of a condominium is not, in itself, a securities transaction; nor does it become one when the purchaser independently procures management services from others. As the SEC puts it, “[u]nless there is a link between the seller of the property (or his agent) and the provider of services, these are two separate transactions, and the property sale is not covered by the securities laws.” Brief of Amicus Curiae SEC at 10-11.
The SEC’s view that Dubois’ sale of the Libermans’ condominium did not involve the sale of a security is consistent with the position taken by the SEC in Release 5347. The Release notes that “[t]he offer of real estate as such, without any collateral arrangements with the seller or others, does not involve the offer of a security.” 1 Fed.Sec.L.Rep. (CCH) ¶[ 1049, at 2071. However, the release states, “[w]hen the real estate is offered in conjunction with certain services, a security, in the form of an investment contract, may be present.” Id. One such service noted in the release is an RPA. Id. at 2072. The release makes clear that the investment contract test is satisfied where the condominium sale is “coupled with” the RPA. Id. at 2070. Where the condominium seller (or his agent) and the RPA operator have no affiliation or selling arrangement, there is no such “coupling.” The SEC informs us that this has long been its position in its enforcement policy under the securities laws:
The release does not apply to persons who resell their own individual units ... and have no affiliation or selling arrangement with the pool operator.
The Commission’s staff has expressed that understanding of the release on numerous occasions. Subsequent to the issuance of the Commission’s release, persons involved in developing real estate projects have frequently sought the informal advice of the Commission’s Division of Corporation Finance as to whether the Division would recommend Commission enforcement action if the property were sold without complying with the registration provisions of the Securities Act. The Division has declined to take a “no-action” position where there is an affiliation or selling arrangement between the developer [i.e. seller] and the rental pool operator. Where, however, no such affiliation or selling arrangement is present, the Division has taken a no-action position.
Brief of Amicus Curiae SEC at 13-14.
In my view, the SEC’s position is a sound and principled attempt at drawing the line between those sales of residential real estate that involve an investment contract and those that do not. The SEC’s position sensibly limits the reach of the federal securities laws by excluding sales of individual condominium units where the seller (or his agent) has no connection with anyone who provides management services, while at the same time including cases in which the seller is affiliated with a provider of management services. As a hypothetical illustration, suppose the seller in this case had been the developer of the resort complex and had operated an RPA for condominium owners who wished to participate. Suppose further that Dubois had been a real estate agent who had an arrangement with the developer to sell units on commission and that Dubois hyped the developer’s RPA as part of her sales pitch. In this hypothetical, the commission agreement between Dubois and the developer could satisfy the SEC’s proposed requirement of a link between the seller of the property (or his agent) and the provider of investment services. Note that this result would obtain whether or not Dubois had authority to offer participations in the developer’s RPA to prospective buyers of the condominiums.10
In the actual case before us, however, there is no evidence that the Libermans or their agent Dubois had any connection whatsoever with HCP, the operator of the RPA. As the SEC puts it, “Since in this case there is no suggestion of any affiliation or selling arrangement between the *1465sellers of the condominium (or the real estate agent) and the operator of the rental pool, the sale of the condominium was not a transaction that involved an investment contract.” Brief of Amicus Curiae SEC at 11. On this important and technical issue involving the applicability of the securities laws to real estate transactions, I believe we should afford the views of the agency charged by Congress with the responsibility for administering those laws “great weight.” United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 858 n. 25, 95 S.Ct. 2051, 2063 n. 25, 44 L.Ed.2d 621 (1975).11
B
The majority fails to afford any deference to the views of the SEC. Indeed the majority does not even discuss the SEC’s position that in the absence of a link between Dubois and HCP, we should not hold that Dubois offered Hocking a security in the form of a participation in HCP’s rental pool. Instead, the majority simply adopts its own test as to what constitutes the offering of a security in the context of a condominium sale and a rental pool agreement: “It is enough if the [condominium and RPA participation] were presented to Hocking as part of the same transaction or scheme, and that he purchased them as such.” Majority Opinion at 1458 (emphasis added). In my view, this test is much too imprecise to serve as a meaningful standard for determining when a realtor’s discussion of an available RPA transforms a condominium sale into a sale of a security. For aught I can tell, under the majority’s standard a sale of a condominium may be converted into a securities transaction anytime a real estate agent informs the buyer about an available RPA. The majority’s test is so standardless that unwary realtors who do nothing more than advise prospective condominium purchasers about the availability and economics of an RPA will find themselves in federal court defending actions brought under the federal securities laws on the authority of the decision in this case.12
The majority protests that
Hocking has put forward numerous facts concerning whether the condominium sale and rental agreements were presented to him as parts of one transaction.... [which] distinguish this case from the everyday situation where a real estate agent or broker merely provides information to the purchaser regarding the availability of a rental pool or shared amenities such as a swimming pool or tennis courts.
*1466Majority Opinion at 1458. In my view, this gossamer distinction between “merely pro-vidfing] information” and “present[ing] as part of the same transaction” is no distinction at all. I can find nothing in either the majority’s analysis or the “numerous facts” put forward by Hocking that indicates where the line is to be drawn, or what it is about the present case that places it on one side of the line rather than the other. As I read the opinion, the majority does not require any evidence of facts that would distinguish this case from the garden-variety transactions that the majority asserts its standard will not reach. Rather, the majority relies on the unexceptional facts that Dubois provided Hocking with information about the RPA and that she obtained the RPA forms for him. See id. at 1457-58. The majority also apparently relies on Hocking’s assertion “that without the rental agreements, he would not have entered into the transaction,” id., although I fail to see the relevance of Hocking's subjective state of mind to the question whether Du-bois offered a security.
In sum, while a jury could doubtless infer from the evidence cited by the majority that the condominium and RPA “were presented to Hocking as part of the same transaction,” I can see no reason why a similar inference could not be drawn in any case in which a broker “merely provide[d] information to the purchaser regarding the availability of a rental pool,” id. at 1458.13 The majority asserts that the two situations are different, but fails to provide any principled basis for making the distinction. Because of this absence of a limiting principle, I fear that the majority’s test will prove to be nothing but a recipe for indiscriminate use of the federal securities laws against real estate agents involved in -the sale of condominiums.
I know of no precedent for the majority’s “presented as part of the same transaction” test for determining when the purchase of a condominium and a participation in a rental pool may be coupled for purposes of the federal securities laws. In the real estate cases cited by the majority there was in fact a link between the seller of the real estate and the manager of related investment services,14 just as the SEC urges there must be. As I noted above, had Dubois been affiliated with HCP and used HCP’s rental pool as an inducement to persuade Hocking to buy the condominium, the securities laws might well have covered the transaction. See supra page 1465. But it is undisputed that Dubois had no such affiliation, and the majority offers absolutely no authority — and, indeed, no explanation — for its conclusion that a realtor is subject to the federal securities laws in the absence of an affiliation or selling arrangement with a seller of investment services. The cases cited by the majority for the proposition that the term “offer” has a broader meaning in securities law than in contract law are merely authority for the undisputed proposition that a realtor need not be “legally authorized” to offer, an investment contract as part of a real estate transaction to convert it into a sale of a security.15 They are not authority for the proposition that a condominium sale may be a security transaction in the absence of a link between the seller and the provider of investment services.
Nor is Blackwell v. Bentsen, 203 F.2d 690 (5th Cir.), cert. dismissed, 847 U.S. 925, 74 S.Ct. 528, 98 L.Ed. 1078 (1954), authority for the majority’s standard. Blackwell involved the purchase of citrus groves and harvesting services. Although the real estate and the management services were sold by different companies, the two com*1467panies were owned and operated by the same people. The Fifth Circuit held that, because the land and services were sold as “essentially one transaction,” the entire sale was covered by the securities laws. The majority claims that Blackwell’s “essentially one transaction” language supports the majority’s “presented as the same transaction” standard, but it obviously does nothing of the sort. In Blackwell there was a clear affiliation between the seller of real estate and the seller of management services, whereas in this case there was none. The majority overlooks this distinction as though it were a mere incidental fact, when it is critical.
II
This case is before us on an appeal from summary judgment in favor of Dubois. In order to defeat summary judgment, Hocking must produce evidence that would permit a jury to find, by a preponderance of the evidence, the facts necessary to sustain his claim that Dubois offered him a security. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986) (“The judge’s inquiry ... asks whether reasonable jurors could find by a preponderance of the evidence that the plaintiff is entitled to a verdict.”). If the evidence in the record “is such that it ‘would require a directed verdict’ ” against Hocking, then there is no issue of fact for trial and summary judgment is appropriate. Id. at 250. In order to meet his burden of raising material issues of fact, Hocking must adduce evidence that is “significantly probative” of his claim. First Nat’l Bank v. Cities Service, 391 U.S. 253, 288, 88 S.Ct. 1575, 1592, 20 L.Ed.2d 569 (1968); ALW, Inc. v. United Air Lines, Inc., 510 F.2d 52, 55 (9th Cir.1975). The evidence must be more than a “mere scintilla.” British Airways Bd. v. Boeing Co., 585 F.2d 946, 952 (9th Cir.1978).
In my view, the evidence before us, even when interpreted in the light most favorable to Hocking, proves no more than the following facts: In the course of selling Hocking the Libermans’ condominium, Du-bois advised Hocking about the availability and economics of HCP’s rental pool arrangement, and discussed the investment potential of a combination of the appreciation on the condominium and the cash flow from the RPA. She assisted Hocking in preparing an application to HCP for a participating interest in the RPA, and offered to help him resell the condominium at some time in the future.
These facts, if true, fail to distinguish this transaction in any principled way from any other sale of a resort condominium that involves a discussion between the sales agent and the buyer about the availability and economics of an RPA. Surely the federal securities laws were never intended to discourage realtors from performing their important function of providing prospective buyers with as much relevant information as possible to help them make informed judgments about the property they are considering. It was obviously important to Hocking to know about HCP’s rental pool and its economic potential. It was natural for him to want the benefit of his realtor’s knowledge and advice on the subject. Giving advice on the investment potential of a security cannot properly be equated with offering a security. Yet the majority’s “presented as part of the same transaction or scheme” test is so broad and imprecise that it could readily be interpreted as encompassing virtually any condominium sale involving a discussion between the realtor and the buyer about an RPA.
The majority cites Hocking’s deposition testimony that Dubois told him that “the investment would be handled by a local company, or her company or someone that she would help [him] get in touch with.” Hocking deposition, Record on Appeal (“ROA”) at 64, quoted in Majority Opinion at 1452. In my view, this snippet of testimony has no significant probative value. It is so equivocal that it is hard to tell what material fact, if any, the testimony tends to prove. Nor does the majority enlighten us as to the probative value of the testimony under its “presented as part of the same transaction or scheme” standard. In context, the testimony cannot possibly mean *1468that Hocking was saying that he expected anyone other than HCP to be responsible for the management of the RPA.16 The testimony indicates only that Dubois promised that she would assist Hocking in the purchase and resale of the condominium, and that this assistance would include helping him apply to HCP for an RPA participation.17 If Hocking intended to try to prove by this scintilla of evidence that Du-bois or her employer Vitousek & Dick had an affiliation with HCP or its rental pool, he could easily have submitted a clarifying affidavit to that effect in opposition to Du-bois’ motion for summary judgment. On the record before us, however, I fail to see how this excerpt of his deposition testimony is probative of anything beyond a routine sale of a resort condominium.
In sum, if Dubois’ sale of the Libermans’ condominium is swept under the majority’s “presented as part of the same transaction or scheme” standard, then I think the standard is so all-encompassing that any realtor would be well-advised to steer clear of the subject of rental pools in the course of selling condominiums. Such a result, I believe, is counterproductive and fails to serve any of the purposes of the federal securities laws. I would affirm the summary judgment for the defendants.

. Section 2(1) of the Securities Act, 15 U.S.C. § 77b(1), and section 3(a)(10) of the Securities Exchange Act, 15 U.S.C. § 78c(a)(10), both define "security” as including an "investment contract.” The leading case on the meaning of "investment contract” is Howey, which defined the term as "a contract, transaction or scheme whereby a person (1) invests his money (2) in a common enterprise and (3) is led to expect profits solely from the efforts of the promoter or a third party.” 328 U.S. at 298-99, 66 S.Ct. at 1102-03. See also United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975) (definition of investment requires "a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”).

. In this respect I agree with the majority that "legal authority” to offer the security is not required for an offering to take place within the meaning of the securities laws. See Majority Opinion at 1457.

. The majority contends that Forman does not require us to defer to the SEC’s views in this case, because the Court there held that deference is inappropriate when the SEC reverses its position without explanation. In this respect, however, Forman is clearly distinguishable from today’s case. In Forman, the issue was whether the purchase of cooperative apartment units was an investment contract, where the purchasers were buying the units to live in and were not seeking to ”receiv[e] profits from the efforts of others.” 421 U.S. at 858, 95 S.Ct. at 2063. In its brief amicus curiae, the SEC argued that the sale was an investment contract. The Supreme Court noted, however, that the SEC’s argument contradicted its position in Release 5347, which had said that the securities laws cover only those real estate transactions in which the real estate is "offered and sold with emphasis on the managerial efforts” of others. 421 U.S. at 858 n. 25, 95 S.Ct. at 2063 n. 25 (quoting Release 5347, 38 Fed.Reg. 1735, 1736 (Jan. 18, 1973). In the Court’s view, the SEC’s new position — which seemed to abandon the requirement of "profits from the efforts of others” — represented an "unexplained contradiction” of its previous position.
By contrast, the SEC’s position in the current case is entirely consistent with Release 5347. The SEC is attempting to rein in the expansive interpretation of Release 5347 by insisting that it does not apply to brokers in the secondary condominium market who have no affiliation with persons selling investment services. The majority notes that the SEC’s interpretation of Release 5347 is "not readily apparent from the language of the release.” Majority opinion at 1457. Perhaps not, but nothing in the release ever remotely suggested that brokers lacking any connection with the seller of management services were subject to the securities laws. The SEC’s position is entirely consistent with the Release and with common sense. Because the SEC is not contradicting itself as it was in For-man, I believe its views are entitled to deference.

. The National Association of Realtors is legitimately concerned about this peril to its industry. See Brief Amicus Curiae of the National Association of Realtors, at 5.

. Dubois’ assistance in obtaining the RPA forms for Hocking is surely too inconsequential to create a meaningful difference between this case and any other case in which a real estate agent merely provides information to a prospective purchaser.

. See, e.g., Howey, 328 U.S. at 296, 66 S.Ct. at 1101; Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036 (10th Cir.1980).

.Moreover, in the cases cited by the majority, the offeror was affiliated with the seller of investment services. See Diskin v. Lomasney & Co., 452 F.2d 871, 875 (2d Cir.1971) (stock prospectus circulated by stockbroker); SEC v. Commercial Inv. & Dev. Corp. of Florida, 373 F.Supp. 1153, 1164-65 (S.D.Fla.1974) (‘‘newsletter" issued by investment company).

. In his testimony, Hocking stated unequivocally that he understood that HCP was responsible for managing the RPA:
I knew and relied upon the fact that approximately fifty other condominium owners participated in the pooling arrangement of which I was a part. The monthly statements which I received from the company operating the pooling arrangement indicated that I was receiving approximately 2% of the total rental income from the building each month. When I visited my condominium, I observed that the building in which it was located was operated like a hotel from the lobby, and I received copies of the brochures and advertisements which the pooling company distributed to the mainland. I relinquished control of the condominium to the pooling company right at the time I purchased it and only had access to it for not more than two weeks per year.
Hocking affidavit ¶ 6, ROA at 93.

. It is instructive to read Hocking's testimony immediately preceding the excerpt quoted by the majority:
[Hocking:] That was my purpose in investing in Hawaii, to be a first-person buyer and, shortly after it topped off, to then turn it around and sell it.
[Question:] You said as soon as it was topped off, you would turn around and sell it.
What do you mean by that?
[Hocking:] I was informed by my real estate agent, Miss Dubois, that the way to invest in Hawaii was to buy an investment in a condominium or something along that line before the building is finished and then, when the building is finished, the property will have appreciated.
Shortly thereafter, it has appreciated to the greatest extent. We would then turn around and sell it. There was no worry about coming up with more money because the investment would be handled by a local company or her company or someone that she would help me get in touch with.
Hocking Deposition, ROA at 64 (emphasis added).