United Housing Foundation, Inc. v. Forman
Argued April 22, 1975
Decided June 16, 1975
421 U.S. 837
Respondents are 57 residents of Co-op City, a massive cooperative housing project in New York City, organized, financed, and constructed under the New York Private Housing Finance Law (Mitchell-Lama Act). They brought this action on behalf of all the apartment owners and derivatively on behalf of the housing corporation, alleging, inter alia, violations of the antifraud provisions of the Securities Act of 1933 and of the Securities Exchange Act of 1934 (hereafter collectively Securities Acts), in connection with the sale to respondents of shares of the common stock of the cooperative housing corporation. Citing substantial increases in the tenants' monthly rental charges as a result of higher construction costs, respondents' claim centered on a Co-op City Information Bulletin issued in the project's initial stages, which allegedly misrepresented that the developers would absorb future cost increases due to such factors as inflation. Under the Mitchell-Lama Act, which was designed to encourage private developers to build low-cost cooperative housing, the State provides large, long-term low-interest mortgage loans and substantial tax exemptions, conditioned on step-by-step state supervision of the cooperative's development. Developers must agree to operate the facilities "on a nonprofit basis," and may lease apartments to only state-approved lessees whose incomes are below a certain level. The corporate petitioners in this case built, promoted, and presently control Co-op City: United Housing Foundation (UHF), a nonprofit membership corporation, initiated and sponsored the project; Riverbay, a nonprofit cooperative housing corporation, was organized by UHF to own and operate the land and buildings and issue the stock that is the subject of the instant action; and Community Securities, Inc. (CSI), UHF's wholly owned subsidiary, was the project's general
Page 421 U. S. 838
contractor and sales agent. To acquire a Co-op City apartment, a prospective purchaser must buy 18 shares of Riverbay stock for each room desired at $25 per share. The shares cannot be transferred to a nontenant, pledged, encumbered, or bequeathed (except to a surviving spouse), and do not convey voting rights based on the number owned (each apartment having one vote). On termination of occupancy, a tenant must offer his stock to Riverbay at $25 per share, and, in the unlikely event that Riverbay does not repurchase, the tenant cannot sell his shares for more than their original price, plus a fraction of the mortgage amortization that he has paid during his tenancy, and then only to a prospective tenant satisfying the statutory income eligibility requirements. Under the Co-op City Lease arrangement, the resident is committed to make monthly rental payments in accordance with the size, nature, and location of the apartment. The Securities Acts define a "security" as "any . . . stock, . . . investment contract, . . . or, in general, any interest or instrument commonly known as a security.'" Petitioners moved to dismiss the complaint for lack of federal jurisdiction, maintaining that the Riverbay stock did not constitute securities as thus defined. The District Court granted the motion to dismiss. The Court of Appeals reversed, holding that (1) since the shares purchased were called "stock," the definitional sections of the Securities Acts were literally applicable, and (2) the transaction was an investment contract under the Securities Acts, there being a profit expectation from rental reductions resulting from (i) the income produced by commercial facilities established for the use of Co-op City tenants; (ii) tax deductions for the portion of monthly rental charges allocable to interest payments on the mortgage; and (iii) savings based on the fact that Co-op City apartments cost substantially less than comparable nonsubsidized housing.
Held: The shares of stock involved in this Litigation do not constitute "securities" within the purview of the Securities Acts, and since respondents' claims are not cognizable in federal court, the District Court properly dismissed their complaint. Pp. 421 U. S. 847-858.
(a) When viewed, as they must be, in terms of their substance (the economic realities of the transaction), rather than their form, the instruments involved here were not shares of stock in the ordinary sense of conferring the right to receive "dividends contingent upon an apportionment of profits," Tcherepnin v. Knight, 389 U. S. 332, 389 U. S. 339, with the traditional characteristics of being
Page 421 U. S. 839
negotiable, subject to pledge or hypothecation, conferring voting rights proportional to the number of shares owned, and possibility of appreciating in value. On the contrary, these instruments were purchased not for making a profit, but for acquiring subsidized low-cost. housing. Pp. 421 U. S. 848-851.
(b) A share in Riverbay does not constitute an "investment contract" as defined by the Securities Acts, a term which, like the term "any . . . instrument commonly known as a security,'" involves investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Here, neither of the kinds of profits traditionally associated with securities were offered to respondents; instead, as indicated in the Information Bulletin, which stressed the "non-profit" nature of the project, the focus was upon the acquisition of a place to live. Pp. 421 U. S. 851-854.
(c) Although deductible for tax purposes, the portion of rental charges applied to interest on the mortgage (benefits generally available to home mortgagors) does not constitute "profits," and, in any event, does not derive from the efforts of third parties. Pp. 421 U. S. 854-855.
(d) Low rent attributable to state financial subsidies no more embodies income or profit attributes than other types of government subsidies. P. 421 U. S. 855.
(e) Such income as might derive from Co-op City's leasing of commercial facilities within the housing project to be used to reduce tenant rentals (the prospect of which was never mentioned in the Information Bulletin) is too speculative and insubstantial to bring the entire transaction within the Securities Acts. These facilities were established not for profit purposes, but to make essential services available to residents of the huge complex. Pp. 421 U. S. 855-857.
500 F.2d 1246, reversed.
POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, MARSHALL, BLACKMUN, and REHNQUIST, JJ., joined. BRENNAN, J., filed a dissenting opinion, in which DOUGLAS and WHITE, JJ., joined, post, p. 421 U. S. 860.
Page 421 U. S. 840