Court Opinion

ID: 9426109
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:16:52.602034+00
Date Added: 2024-06-11T17:22:59.179367
License: Public Domain

Mr. Justice Brennan,
with whom Mr. Justice Douglas and Mr. Justice White join, dissenting.
I dissent. The property interests here are “securities,” in my view, both because they are shares of “stock” and because they are “investment contracts.”
I
Both the Securities Act of 1933, 15 U. S. C. § 77b (1), and the Securities Exchange Act of 1934, 15 U. S. C. § 78c (a) (10), define the term “security” as including, among other things, an “investment contract.” The essential ingredients of an investment contract have been clear since SEC v. W. J. Howey Co., 328 U. S. 293, 301 (1946), held that “[t]he test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” See Tcherepnin v. Knight, 389 U. S. 332, 338 (1967). There is no doubt that Co-op City residents invested money in a common enterprise; the only questions in*861volve whether the investment was to be productive of “profits to come solely from the efforts of others.”
The record discloses little of the activities of Riverbay Corporation, the owner and operator of Co-op City, as a lessor of commercial and office space. It does appear, however, that revenues well in excess of $1 million per year flow into the corporation from such activities, Appendix in Court of Appeals 361a (hereafter App.), a fact noted by the Court of Appeals. 500 F. 2d 1246, 1254 (CA2 1974). Even after deduction of expenses — taxes alone take half of the gross — the residue could hardly be de minimis, even for an operation as large as Co-op City. Therein lies the patent fallacy of the Court’s conclusion that this aspect of the corporation’s activities is “speculative and insubstantial.” Ante, at 856. The District Court rightly recognized that management by third parties is essential in a project so massive as Co-op City. 366 F. Supp. 1117, 1128 (SDNY 1973). Co-op City residents as stockholders were thus necessarily bound to rely on the management of Riverbay Corporation to produce income in the form of rents from the commercial and office space made an integral part of the project.
As stockholders, Co-op City residents also necessarily relied on corporate management to build and operate the facility efficiently to the end that monthly charges would be minimized. The Court of Appeals held that profits were involved partly because Co-op City offered housing at bargain prices. 500 F. 2d, at 1254. The Court substitutes its own judgment in holding that “[t]he low rent derives from the substantial financial subsidies provided by the State of New York.” Ante, at 855. It is simple common sense that management efficiency necessarily enters into the equation in the determination of the charges assessed against residents. But even to the extent that the resident-stockholders do benefit in re*862duced charges from government subsidies, the benefit is not for this reason any the less a profit to them. The welfare benefits to which the Court refers, ante, at 855, may also be profits, but those profits lack the essential ingredient of profits present here that “come solely from the efforts of others.” Here the resident investors utilize the efforts of others to obtain government subsidies. Investors in Wall Street who do this every day will be surprised to learn that the benefits so obtained are not considered profits.
The Court of Appeals also relied on the tax deductibility accorded to portions of the monthly carrying charges paid by Co-op City residents as a source of profit to them. 500 F. 2d, at 1254. The Court rejects this argument with the statement that “[t]hese tax benefits are nothing more than that which is available to any homeowner . . . .” Ante, at 855. This is true but irrelevant to the question whether they constitute profits that “come solely from the efforts of others.” The special federal tax provision for cooperative owners, 26 U. S. C. § 216, was intended “to place the tenant stockholders of a cooperative apartment in the same position as the owner of a dwelling house so far as deductions for interest and taxes are concerned.” S. Rep. No. 1631, 77th Cong., 2d Sess., 51 (1942). This tax benefit constitutes a profit both for the individual homeowners and for the “tenant stockholders of a cooperative apartment.” The difference is that the profit of the individual homeowner does not “come solely from the efforts of others,” whereas the profit from this source realized by a resident of Co-op City does. Setting up and operating a corporation so as to take advantage of special tax provisions is a project requiring specialized skills. If the arrangements go awry the residents can find themselves without the hoped-for tax advantages. *863See, e. g., Eckstein v. United States, 196 Ct. Cl. 644, 452 F. 2d 1036 (1971). Thus, the investors must depend upon the “efforts of others,” here Co-op City’s management, properly to organize and operate the project to realize the tax advantage for them.
In SEC v. C. M. Joiner Leasing Corp., 320 U. S. 344 (1943), the investment was in oil leases. In Howey it involved citrus groves. Though taxation was not a factor in the Court’s disposition of those cases, each of those investments was of a type offering tax advantages as a principal attraction to the investor. Cunnane, Tax Shelter Investments After the 1969 Tax Reform Act, 49 Taxes 450 (1971). It is no answer that the individual investor could have obtained the same tax advantages by purchasing an entire citrus business or by becoming an independent oil operator. He could, but if he did his profits from tax advantages would not then “come solely from the efforts of others.” It is only when he relies on third parties to produce the profits for him that, as here, the question of investment contract analysis arises.
Besides its express rejection of each of the forms of profit found by the Court of Appeals, the Court must surprise knowledgeable economists with its proposition, ante, at 852, that profits cannot assume forms other than appreciation of capital or participation in earnings.1 All of the varieties of profit involved here accrue to the resident-stockholders in the form of money saved rather than money earned.2 Not only would simple common sense teach that the two are the same, but a more sophisticated economic analysis also compels the conclusion that in a practical world there is no difference between *864the two forms of income.3 The investor finds no reason to distinguish, for example, between tax savings and after-tax income. Under a statute having as one of its “central purposes” “to protect investors,” Tcherepnin, 389 U. S., at 336, it is obvious that the Court errs in distinguishing among types of economic inducements which have no bearing on the motives of investors. Construction of the statute in terms of economic reality is more faithful to its “central” purpose “to protect investors.”
There can be no doubt that one of the inducements to the resident-stockholders to purchase a Co-op City apartment was the prospect of profits in one or more of the forms I have discussed. The fact that literature encouraging purchase mentioned some is important, although not conclusive, evidence. See Joiner, supra, at 353. The Information Bulletins, while not mentioning income from commercial and office space as an advantage of stock ownership, did emphasize the “reasonable price” of the housing, App. 166a, 187a, and they asserted that “every effort” would be made to keep monthly carrying charges low, id., at 174a, 194a. Tax benefits were also discussed as an advantage of ownership, though of course no guarantee of favorable federal and state tax treatment was made. Id., at 175a, 195a.
I do not deny that there are some limits to the broad' statutory definition of a security, and the Court’s distinction between securities and consumer goods is not frivolous. Ante, at 858. But the distinction is not useful in the resolution of the question before us. Of course, the purchase of the stock to get an apartment involves an element of consumption, but it also involves an element of investment. The variable annuity contract con*865sidered in SEC v. Variable Annuity Co., 359 U. S. 65 (1959), presented a not irrelevant analogous situation. What was purchased, after all, was expressly labeled “stock.” In any event, what was purchased constituted an “investment contract,” within Howey, for resident-stockholders of Co-op City invested “in a common enterprise with profits to come solely from the efforts of others.” They therefore were purchasing securities within the purview of the Securities Act of 1933 and the Securities Exchange Act of 1934.
II
Moreover, both statutes define the term “security” to include “stock.” Therefore, coverage under the statutes is clear under the Court’s holding in Joiner that “[i] instruments may be included within any of these definitions, as matter of law if on their face they answer to the name or description.” 320 U. S., at 351; see Tcherepnin, 389 U. S., at 339. “Security” was broadly defined with the explicit object of including “the many types of instruments that in our commercial world fall within the ordinary concept of a security,” H. It. Rep. No. 85, 73d Cong., 1st Sess., 11 (1933). Stock is therefore included because instruments “such as notes, bonds, and stocks, are pretty much standardized and the name alone carries well-settled meaning.” Joiner, 320 U. S., at 351. Even if this principle nevertheless allows room for exception of some instruments labeled “stock,” the Court’s justification for excepting the stock involved in this case is singularly unpersuasive. The Court states that “[c]ommon sense suggests that people who intend to acquire only a residential apartment in a state-subsidized cooperative, for their personal use, are not likely to believe that in reality they are purchasing investment securities simply because the transaction is *866evidenced by something called a share of stock.” Ante, at 851. But even informed commentators have expressed misgivings about this question.4 Thus the Court’s justification departs unacceptably from the principle of Joiner that “[i]n the enforcement of an act such as this it is not inappropriate that promoters’ offerings be judged as being what they were represented to be.” 320 U. S., at 353.
While the absence in the case of Co-op City stock of some features normally associated with stock is a relevant consideration, the presence of the attributes that led me to conclude that this stock constitutes an “investment contract,” leads me also to conclude that it is a “stock” for purposes of the two statutes. Cf. Affiliated Ute Citizens v. United States, 406 U. S. 128 (1972).
In sum, I conclude that the interests purchased by the stockholders here were “securities” both because they were “stock” and because they were “investment contracts.”5 In my view therefore the Court of Appeals correctly held that the District Court erred in dismissing this suit.6
*867III
At oral argument, petitioner United Housing Foundation contended strenuously that comprehensive state participation and regulation of the construction and operation of Co-op City constituted Riverbay Corporation not a capitalistic enterprise but a beneficial public housing enterprise, created by a partnership of public and private groups for the benefit of people of modest incomes. I need not disagree with this characterization to conclude that nevertheless there is a role for the fed*868eral statutes to play in avoiding the danger of fraud and other evils in the raising of the massive sums the project involved. See SEC v. Capital Gains Research Bureau, 375 U. S. 180, 195 (1963); H. R. Rep. No. 85, 73d Cong., 1st Sess., 2-3 (1933). No doubt New York's intensive regulation also helps avoid those evils. See N. Y. Priv. Hous. Fin. Law. But Congress contemplated concurrent state and federal regulation in enacting the securities laws. SEC v. Variable Annuity Co., 359 U. S., at 75 (concurring opinion), and therefore the existence of state regulation does not and cannot be a reason for excluding . appropriate application of the federal statutes. Indeed, the resident-stockholder investors of Co-op City are particularly entitled to the federal protection. The District Court properly observed:
“[I]f ever there was a group of people who need and deserve full and careful disclosure in connection with proposals for the use of their funds, it is this type of group. . . . The housing selection decision is a critical one in their lives. The cost of housing demands a good percentage of their incomes. Their savings are most likely to be minimal, and they probably don't have lawyers or accountants to guide them. Further, they are people likely to put a great deal of credence in statements made with respect to an offering by reputable civic groups and labor unions, particularly when the proposal is stamped with the imprimatur of the state.” 366 F. Supp., at 1125.
I part from the District Court in concluding however that investors not only should be protected but, under my reading of the statutes, are protected by the securities laws. A different, perhaps better, form of redress can and will be devised for this kind of investment, but until it is these investors are not to be denied what the *869federal statutes plainly allow them. See Note, Cooperative Housing Corporations and the Federal Securities Laws, 71 Col. L. Rev. 118 (1971). The SEC, though perhaps tardily, has come to the view that these housing corporations fall within its regulatory authority because the kind of investment involved is a “security” under the statutes. I wholly agree. I would affirm the judgment of the Court of Appeals.

 See P. Samuelson, Economics 618-626 (9th ed. 1973).

 Apparently there is at least a possibility that dividends could be paid to shareholders, but these would really just be partial refunds of money already paid in which was not needed.

 See, e. g., P. Samuelson, supra, n. 1, at 435; Coase, The Problem of Social Cost, 3 J. Law & Econ. 1 (1960).

 See, e. g., 1 L. Loss, Securities Regulation 492-493 (2d ed. 1961).

 Accordingly, I have no occasion to examine the “risk capital” approach of Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811, 361 P. 2d 906 (1961), to determine whether that would lead to the same result.

 Petitioners in No. 74-647, the State of New York and the New York State Housing Finance Agency, argue that respondents’ suit against them is barred by the Eleventh Amendment. The Court finds it unnecessary to deal with this contention, but my conclusion requires that I answer the Eleventh Amendment defense. The Court of Appeals found no Eleventh Amendment bar here, and I am in agreement with this result.
The Housing Finance Agency is a “public benefit corporation” under New York law, N. Y. Priv. Hous. Fin. Law §43 (1) (1962 and Supp. 1974-1975), empowered “[t]o sue and be sued,” §44 (1). The agency is authorized to accept funds from the State, the Fed*867eral Government, or “any other source,” § 44 (16), but it also is empowered to issue notes, bonds, or other obligations to obtain financing, §§ 44 (7) and 46. Significantly, the State is not liable on the agency’s notes or bonds, and such obligations do not constitute debts of the State. § 46 (8). The agency is therefore not an “alter ego” of the State; rather it is an independent body not entitled to assert the Eleventh Amendment. See Cowles v. Mercer County, 7 Wall. 118 (1869); P. Bator, P. Mishkin, D. Shapiro & H. Wechsler, Hart & Wechsler’s The Federal Courts and the Federal System 690 (2d ed. 1973). Compare Matherson v. Long Island State Park Comm’n, 442 F. 2d 566 (CA2 1971), and Zeidner v. Wuljorst, 197 F. Supp. 23, 25 (EDNY 1961), with Whitten v. State University Construction Fund, 493 F. 2d 177 (CA1 1974), and Charles Simkin & Sons, Inc. v. State University Construction Fund, 352 F. Supp. 177 (SDNY), aff'd mem., 486 F. 2d 1393 (CA2 1973).
The State of New York, unlike the agency, may assert the Eleventh Amendment, but it has consented to suit. “With regard to duties and liabilities arising out of this article the state, the commissioner or the supervising agency may be sued in the same manner as a private person.’’ N. Y. Priv. Hous. Fin. Law § 32 (5) (emphasis added). To be sure, state waiver statutes are to be strictly construed, and they do not necessarily indicate consent to suit in federal court. See Kennecott Copper Corp. v. State Tax Comm’n, 327 U. S. 573 (1946); Ford Motor Co. v. Department of Treasury, 323 U. S. 459 (1945); Great Northern Life Ins. Co. v. Read, 322 U. S. 47 (1944). Nevertheless, the language used in § 32 (5) is in my view sufficiently broad to permit suit in both state and federal courts.