Forman v. Community Services, Inc., 72 Civ. 3980.

Decision Date06 September 1973
Docket NumberNo. 72 Civ. 3980.,72 Civ. 3980.
Citation366 F. Supp. 1117
PartiesMilton and Ellen FORMAN et al., Plaintiffs, v. COMMUNITY SERVICES, INC., et al., Defendants.
CourtU.S. District Court — Southern District of New York

COPYRIGHT MATERIAL OMITTED

George Berger, Phillips, Nizer, Benjamin, Krim & Ballon, New York City, for plaintiffs.

Martin London, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendants Community Services, Inc., United Housing Foundation, Harold Ostroff, Robert Szold, Milton Altman, George Schechter, Anthony Marino, Irving Alter, Julius Goldberg, and Paul Kramer.

Alan G. Blumberg, Szold, Brandwen, Meyers & Altman, New York City, for defendants Szold, Altman, Alter.

David Peck, Sullivan & Cromwell, New York City, for Riverbay Corp.

Louis J. Lefkowitz, Atty. Gen. of the State of New York by Daniel M. Cohen, Asst. Atty. Gen., New York City, for defendants State of New York and New York State Housing Finance Agency.

OPINION AND ORDER

PIERCE, District Judge.

This action has been commenced by 57 residents of Co-op City,1 a low-middle income cooperative housing project located in the Borough of the Bronx, New York City. They sue on behalf of themselves and all other residents of Co-op City, alleging, among other things, violations of the anti-fraud provisions of the Securities Exchange Act of 1934,2 and of the Securities Act of 1933,3 in connection with the sale to plaintiffs of shares of the common stock of the cooperative housing corporation.

The amended complaint also asserts violations of the plaintiffs' civil rights by one of the government defendants,4 premised upon the protections afforded by the federal securities laws; and it further sets forth several claims, pendent to the federal claims, based on New York State law, including an asserted derivative cause of action on behalf of the cooperative corporation.

The corporate defendants constitute the amalgam which conceived, built, promoted and, at this time, controls the management of Co-op City. United Housing Foundation (UHF) initiated and sponsored the project.5 UHF was organized under New York's nonprofit corporation statute6 and is comprised of housing cooperatives, civic groups and labor unions. Community Services Inc. (CSI) is the general contractor and sales agent for the project. CSI was organized under New York's business corporation statute7 and is a wholly owned subsidiary of UHF. Riverbay Corporation (Riverbay) is the cooperative housing corporation in which plaintiffs purchased shares, and which owns and operates the project. Riverbay was organized by UHF as a "mutual company" under New York's Mitchell-Lama Act,8 and is named as a defendant here only to facilitate the derivative aspects of the action.

The individual defendants are officers or directors, or both, of some, and in some cases all, of the corporate defendants.

Pursuant to the Mitchell-Lama Act, the defendant New York State Housing Finance Agency (the Agency) provided the bulk of the financing for the project through long-term, low-interest mortgage loans; and the defendant New York State Division of Housing and Community Renewal (the State Division) is responsible for the supervision of the development, construction, promotion and operation of the project.

The question before this Court, raised by defendants' motion to dismiss for lack of subject matter jurisdiction, is narrow, but dispositive: Is a "share" of a state-financed and supervised, nonprofit cooperative housing corporation a "security" within the meaning of the federal securities laws?9 If so, plaintiffs are properly in federal court; if not, each of the alleged bases for federal jurisdiction must fail, and with them, the pendent state claims.

For the reasons set forth herein, this Court holds that the shares involved in this action are not "securities" within the meaning of the federal securities laws, and dismisses the complaint in its entirety pursuant to Fed.R.Civ.P. 12. Such ruling has no bearing on the merits of plaintiffs' grievances, which may well deserve to be fully aired in appropriate New York State forums.10

Background

Co-op City is no ordinary enterprise. Reputed to be the largest cooperative housing development in the United States, the project was conceived in 1964, completed in 1972, and presently houses some 45,000 people. The complex is located on a 200-acre site, includes more than 30 high-rise buildings and more than 230 townhouses, which in total provide about 15,400 apartment units ranging from three to seven rooms.

The project was facilitated by New York's salutary Mitchell-Lama Act, the express purpose of which is to address critical housing problems in New York's urban areas by encouraging private enterprise to participate with the state and municipalities11 in the creation of nonprofit housing cooperative undertakings for persons with low incomes.12 Toward that goal, the Agency is empowered to provide low-interest financing through the issuance of loans secured by first mortgages on the projects;13 and tax exemptions,14 and certain other inducements are provided for corporate participants from the private sector.15

State regulation and supervision of the housing enterprises built under the Mitchell-Lama Act is mandated by law. The cooperative corporation cannot be created without the approval of the Commissioner of the State Division.16 The statute mandates that no directors or subscribers to its stock may profit from the resale of such stock,17 and provides that the tenant may not sublet at a price greater than approved by the Commissioner.18 The statute requires the Commissioner's approval before the corporation can contract for operation of the project.19 In fact, from the initiation of a project and continuing thereafter state control is pervasive.20

It is contemplated that a Mitchell-Lama cooperative project thus subsidized and supervised will be owned by a mutual company formed under the Act whose stock is held almost exclusively by persons who actually live in the project.21 In accord with the purposes of the Act, the legislature has declared that no one may live in the project whose probable aggregate income exceeds six times the rental fees22 and further, the legislature has indicated that preference shall go to the aged, the handicapped and to veterans.23

Thus by definition, the tenants of Co-op City are persons of limited, and in some cases, fixed incomes. They secured their right to occupancy by completing a Subscription Agreement and Apartment Application form, wherein they agreed to subscribe to 18 shares of Riverbay common stock—at $25 par value per share—for each room in the apartment they selected. After their applications were screened and accepted by the State Division, they signed a three-year, non-proprietary Occupancy Agreement (lease), paid for or financed the purchase of their stock, and moved in as the buildings were completed and their apartments were ready for occupancy.

Beyond the face value of $25 per share and the right to occupancy, the Riverbay shares carry little, if any independent value or meaning. The Riverbay By-Laws provide that they may not be pledged or otherwise encumbered; the shares may descend intact, with the right to occupancy, only to a surviving spouse. The stock transaction is rescindable by either party. The shares may not be owned separate and apart from actual occupancy in Co-op City, and a tenant who wishes to move out— or who is forced out for violation of the lease, or because his income has increased beyond income limits—is required to divest himself of the stock. He must first offer the shares to the cooperative corporation for repurchase, and the By-Laws provide that he will be compensated for these shares with exactly the amount he paid for them. In the unlikely event that the corporation does not repurchase the shares,24 only then is he free to sell the shares elsewhere and then the Mitchell-Lama Act provides that he may not sell them for more than the original purchase price, plus a fraction of the mortgage amortization which he has paid during his tenure at Co-op City.25 It is implicit in the By-Laws and the Act that he may not sell to a person who does not meet the income and credit requirements for occupancy. Voting rights in the affairs of the cooperative corporation are not tied to the number of shares owned, which could vary greatly according to apartment size. Rather, to facilitate the democratic cooperative ideal, each apartment is allotted one vote.26

The obligations of the Co-op City residents flow from the lease, not the stock. In addition to the usual landlord/tenant covenants with respect to services and care of the premises, the lease provides that the resident's financial commitment is to pay annual carrying charges, prorated in advance monthly payments. The apportionment is not based on the number of shares owned, but rather on other factors such as size, type and location of apartment. This monthly payment is, for all practical purposes, rent. It represents a proportionate allocation of all the expenses of Riverbay in connection with the construction, ownership, maintenance, operations and activities associated with the housing corporation. These include such items as taxes, mortgage indebtedness, repairs, improvements and wages for Riverbay employees.

It is the amount of these carrying charges for Co-op City apartments which is the stress-point in this litigation.

In May of 1967, CSI as sales agent for Riverbay began promoting the sale of shares which carried with them the concomitant right to reside in Co-op City. Construction was then underway, but nowhere near completion. The Information Bulletin circulated through the mails to prospective tenant/stockholders set forth an estimated average monthly carrying charge of $23.02 per room. Thus, assuming he met the income eligibility requirements, the prospect for a three-room apartment could expect to pay about $1,350 for stock in...

To continue reading

Request your trial
10 cases
  • United Housing Foundation, Inc v. Forman New York v. Forman 8212 157 74 8212 647
    • United States
    • U.S. Supreme Court
    • 16 Junio 1975
    ...state parties moved to dismiss on sovereign immunity grounds. The District Court granted the motion to dismiss. Forman v. Community Services, Inc., 366 F.Supp. 1117 (SDNY 1973). It held that the denomination of the shares in Riverbay as 'stock' did not, by itself, make them securities under......
  • Monell v. Department of Social Services of City of New York
    • United States
    • U.S. Court of Appeals — Second Circuit
    • 8 Marzo 1976
    ...United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975) (for opinion below, see 366 F.Supp. 1117, 1120 (S.D.N.Y.1973) (Pierce, J.)). We need not consider whether the State Housing Finance Agency is a "person" under § 1983, for that agency is not before ......
  • Forman v. Community Services, Inc.
    • United States
    • U.S. Court of Appeals — Second Circuit
    • 12 Junio 1974
    ...L.Ed.2d 218 (1966). The complaint was therefore accordingly dismissed in its entirety for lack of subject matter jurisdiction. 366 F.Supp. 1117 (S.D.N.Y.1973). Expressing no opinion whatsoever on the merits, but finding jurisdiction nevertheless, we reverse and Appellants are 57 residents o......
  • One-O-One Enterprises, Inc. v. Caruso
    • United States
    • U.S. District Court — District of Columbia
    • 31 Agosto 1987
    ...391 F.Supp. 538, (S.D.Cal.1975) (substance of transaction and economic reality exalted over form); Forman v. Community Services, Inc., 366 F.Supp. 1117, 1126-27 (S.D.N.Y.1973) (same), rev'd, 500 F.2d 1246 (2nd Cir.1974), rev'd sub nom. United Housing Foundation v. Forman, 421 U.S. 837, 848-......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT