Law School Case Brief
United Hous. Found., Inc. v. Forman - 421 U.S. 837, 95 S. Ct. 2051 (1975)
The touchstone in defining a security is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. By profits, the court means either capital appreciation resulting from the development of the initial investment, or a participation in earnings resulting from the use of investors' funds.
United Housing Foundation (UHF), a nonprofit membership corporation established for the purpose of aiding and encouraging the creation of adequate, safe and sanitary housing accommodations for wage earners and other persons of low or moderate income, initiated and sponsored the development of Co-op City. Co-op City was a massive housing cooperative in New York City. Acting under the Mitchell-Lama Act, UHF organized the Riverbay Corporation (Riverbay) to own and operate the land and buildings constituting Co-op City. In order to acquire an apartment in Co-op City, an eligible prospective purchaser must buy 18 shares of stock in Riverbay for each room desired. The sole purpose of acquiring these shares was to enable the purchaser to occupy an apartment in Co-op City. In effect, their purchase was a recoverable deposit on an apartment. The shares were explicitly tied to the apartment: they cannot be transferred to a non-tenant; nor can they be pledged or encumbered; and they descended, along with the apartment, only to a surviving spouse. No voting rights attach to the shares as such: participation in the affairs of the cooperative appertains to the apartment, with the residents of each apartment being entitled to one vote irrespective of the number of shares owned. Any tenant who wanted to terminate his occupancy, or was forced to move out, was required to offer his stock to Riverbay at its initial selling price.
When Co-op City attempted to increase rental charges, respondents, 57 residents of Co-op City, sued in federal court on behalf of all 15,372 apartment owners, and derivatively on behalf of Riverbay, seeking upwards of $30 million in damages, forced rental reductions, and other appropriate relief. The respondents alleged 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 tenant's 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. On the other hand, UHF, denied the substance of the respondents’ allegations and moved to dismiss the complaint on the ground that federal jurisdiction was lacking. They maintained that shares of stock in Riverbay were not "securities" within the definitional sections of the federal Securities Acts. The district court ruled in favor of UHF. However, on appeal, the Court of Appeals for the Second Circuit reversed. Thereafter, UHF appealed.
Can the shares of stock purchased by the respondents from the cooperative be deemed as “securities” within the definitional sections of the federal Securities Acts?
The Court held that held that the shares of stock purchased from the cooperative did not constitute "securities" within the purview of the federal securities acts. According to the Court, such shares lacked the right to receive dividends contingent upon an apportionment of profits. Furthermore, the Court ruled that the shares were not negotiable, could not be pledged or hypothecated, could not confer voting rights in proportion to the shares owned, and did not appreciate in value. Thus, the Court reversed the decision and ruled in favor of UHF.
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