United Housing Foundation, Inc. v. Forman

421 U.S. 837 (1975)


Co-op City is a housing cooperative in New York City. It was organized, financed, and constructed under the New York State Private Housing Finance Law to provide decent low-income urban housing. New York provides developers large long-term, low-interest mortgage loans, and substantial tax exemptions. The developer may lease apartments only to people whose incomes fall below a certain level and who have been approved by the State. The United Housing Foundation (D) was responsible for initiating and sponsoring the development of Co-op City. D organized the Riverbay Corporation (Riverbay) to own and operate the land and buildings constituting Co-op City. Riverbay, a nonprofit cooperative housing corporation, issued the stock that is the subject of this litigation. To acquire an apartment in Co-op City, an eligible purchaser must buy 18 shares of stock in Riverbay for each room desired. The cost per share is $ 25, making the total cost $450 per room, or $1,800 for a four-room apartment. The sole purpose of acquiring these shares is to enable the purchaser to occupy an apartment in Co-op City. Their purchase is a recoverable deposit on an apartment. The shares are explicitly tied to the apartment: they cannot be transferred to a nontenant; nor can they be pledged or encumbered; and they descend, 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 moves out must offer his stock to Riverbay at its initial selling price of $25 per share. If Riverbay declines to repurchase the stock, the tenant cannot sell it for more than the initial purchase price plus a fraction of the portion of the mortgage that he has paid off, and then only to a prospective tenant satisfying the statutory income eligibility requirements. Preconstruction brochures listed the total estimated cost of the project as $283,695,550. The sum of $32,795,550, was to be raised by the sale of shares to tenants. The remaining $250,900,000 was to be financed by a 40-year low-interest mortgage loan from the New York Private Housing Finance Agency. Ultimately the construction loan was $125 million more than the figure estimated in the 1965 Bulletin. As a result, while the initial purchasing price remained at $ 450 per room, the average monthly rental charges increased periodically, reaching a figure of $39.68 per room as of July 1974. Ps, residents of Co-op City, sued in federal court on behalf of all 15,372 apartment owners, and derivatively on behalf of Riverbay, seeking $30 million in damages, forced rental reductions, and other 'appropriate' relief. P claims that the 1965 Co-op City Information Bulletin falsely represented that CSI would bear all subsequent cost increases due to factors such as inflation. P asserted two claims under the fraud provisions of the federal Securities Act of 1933, as amended, § 17(a), 48 Stat. 84, 15 U.S.C. § 77q(a); the Securities Exchange Act of 1934, as amended, § 10(b), 48 Stat. 891, 15 U.S.C. § 78j(b); and 17 CFR § 240.10b-5 (1975). Ds maintained that shares of stock in Riverbay were not 'securities' within the definitional sections of the federal Securities Acts. The District Court granted D’s the motion to dismiss. The purchase in issue was not a security transaction since it was not induced by an offer of tangible material profits. The Court of Appeals for the Second Circuit reversed. It concluded that the transaction was an investment contract within the meaning of the Acts and as defined by Howey, since there was an expectation of profits from three sources: (i) rental reductions resulting from the income produced by the commercial facilities established for the use of tenants at Co-op City; (ii) tax deductions for the portion of the monthly rental charges allocable to interest payments on the mortgage; and (iii) savings based on the fact that apartments at Co-op City cost substantially less than comparable nonsubsidized housing. The Supreme Court granted certiorari.