500 F.2d 1246 (2nd Cir. 1974), 747, Forman v. Community Services, Inc.

Docket Nº:747, 73-2613.
Citation:500 F.2d 1246
Party Name:Milton FORMAN and Ellen Forman et al., Appellants, v. COMMUNITY SERVICES, INC., et al., Appellees.
Case Date:June 12, 1974
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 1246

500 F.2d 1246 (2nd Cir. 1974)

Milton FORMAN and Ellen Forman et al., Appellants,


COMMUNITY SERVICES, INC., et al., Appellees.

No. 747, 73-2613.

United States Court of Appeals, Second Circuit.

June 12, 1974

Argued April 4, 1974.

Page 1247

Louis Nizer, New York City (Philips, Nizer, Benjamin, Krim & Ballon, George Berger, Jay F. Gordon, Richard S.

Page 1248

Brooks, Janet P. Kane, New York City, of counsel), for appellants.

Simon H. Rifkind, New York City (Paul, Weiss, Rifkind, Wharton & Garrison, alan G. Blumberg, Martin London and George P. Felleman, New York City, of counsel), for appellees.

Daniel M. Cohen, Asst. Atty. Gen. (Louis J. Lefkowitz, Atty. Gen. of State of N.Y., Samuel A. Hirshowitz, First Asst. Atty. Gen., of counsel), for appellees State of New York and New York State Housing Finance Agency.

Before HAYS and OAKES, Circuit Judges, and CHRISTENSEN, District judge. [*]

OAKES, Circuit Judge:

This appeal by resident tenants of Co-op City presents the question whether a share of stock in a cooperative apartment nonprofit company chartered and subsidized under the State of New York's Mitchell-Lama Act 1 is a 'security' within the meaning of the federal securities laws. All the appellees urge that because there is no promise, expectation or possibility of profit in connection with a member's resale of a cooperative share and because the cooperative housing company is created pursuant to an emergency state program for low cost housing, state financed and supervised, and sponsored by a nonprofit foundation, that cooperative shares in it are not securities. The appellee New York State Housing Finance Agency ('the agency') also claims not to be a 'person' within the meaning of the Civil Rights Act of 1871, 42 U.S.C. § 1983, and its jurisdictional counterpart, 28 U.S.C. § 1343(3), and the appellee State of New York claims not to be a proper defendant under 42 U.S.C. § 1983, as well as immune under the eleventh amendment of the United States Constitution. The court below, finding that the cooperative shares involved were not 'securit(ies),' dismissed the counts of the amended complaint alleging violations of the federal securities laws as to all defendants and, since the federal securities allegations represented the only 'well pleaded' underlying basis for jurisdiction under the Civil Rights Act, dismissed the complaint as to the state agency. The remaining counts were dismissed as against the named defendants, since they set forth pendent claims asserted pursuant to state law. United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 16 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 remand.

Appellants are 57 residents owning some 30 apartment units in Co-op City, a huge low-middle income cooperative housing project located in the borough of the Bronx, New York City. Co-op City is apparently the largest cooperative housing development in the United States, presently housing some 45,000 people, with more than 30 high-rise buildings and 230 town houses and a total of 15,400 apartment units ranging from three to seven rooms, on a 200-acre site. Appellants allege on behalf of themselves and all other residents violations by the defendants of the antifraud provisions of the Securities Act of 1933, 15 U.S.C. § 77q(a), and the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The complaint alleges in respect to the defendant New York State Housing Finance Agency that plaintiffs' civil rights have been violated by virtue of the securities law violations alleged directly against the other defendants.

The corporate defendants, appellees here, include United Housing Foundation (UHF) which initiated and sponsored the project. UHF was formed in 1951 under New York's nonprofit corporation

Page 1249

statute, New York Not-for-Profit Corporation Law, with the purpose of fostering the growth of nonprofit cooperative housing for low and low-middle income families and, in addition to Co-op City, it has participated in the sponsorship of several other New York cooperative housing projects; UHF's membership includes 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 the New York Business Corporations Law, for profit, even though it is a wholly owned subsidiary of UHF. The third corporate defendant is Riverbay Corporation (Riverbay), which 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, note 1, supra; 2 it is named as a defendant here principally, if not only, in respect to the derivative causes of action alleged on its behalf under New York state law. The individual defendants are officers or directors or both of some or all of the corporate defendants. Pursuant to the Mitchell-Lama Act, the defendant 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 'Division of Housing') through its commissioner is responsible for the supervision of the development, construction, promotion and operation of the project.

Basically under the Mitchell-Lama Act, cooperatives which are subsidized and supervised are owned by a mutual company formed under the Act the stock of which is held by the actual tenants, as here. Section 12(2-b). No one may live in the project whose probable aggregate income exceeds six times the rental fees, § 31(2)(a), (b), and there is a preference to the aged, the handicapped and veterans, §§ 11, 31(7)(a), (b). Plaintiffs here 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. Under the bylaws of Riverbay, each stockholder is entitled to only one vote on any and all matters regardless of the number of shares of capital stock or any other equity obligations of the housing company which the stockholder owns. Also, the stock may not be owned separate and apart from actual occupancy in Co-op City, nor may it be pledged or otherwise encumbered. The shares descend intact (together with the right to occupancy) only to a surviving spouse, and a tenant who wishes to move out or is forced out, whether by way of violation of the lease or by virtue of his income, must divest himself of the stock by offering it for repurchase, in which case he will be compensated with exactly the amount he paid for the stock. In the event Riverbay does not exercise its right to repurchase (for which it had established a reserve fund of approximately $917,000 as of December 31, 1972), the stockholder is free to sell his shares elsewhere, although under § 31-a of the Mitchell-Lama Act he may not sell them for more than the original purchase price plus a pro rata fraction of the mortgage amortization paid during his tenure at Co-op City.

The obligations of the Co-op City resident flow from his lease, not from his stock. In addition, to what the trial court has termed the usual landlord-tenant covenants with respect to services and care of the premises, the resident is required to pay annual carrying charges pro rated in advance monthly payments, the pro rata portion being based not on

Page 1250

the number of shares owned but on the size, type and location of his apartment. This monthly payment is, as in the case of other cooperatives, in reality rent, that is to say, it represents a proportionate allocation of the expenses of Riverbay in connection with the ownership, maintenance, operations, taxes, mortgage indebtedness, repairs improvements, wages for employees, etc.

The gravamen of the appellants' amended complaint relates to the carrying charges for Co-op City apartments, and particularly the initial 'Information Bulletin' circulated by CSI as sales agent for Riverbay through the mail, originally setting forth an estimated average monthly carrying charge of $23.02 per room. This meant that a prospect for a four-room apartment could expect to pay $1,800 for stock in Riverbay and a monthly rent thereafter of $92.08. The cost of the project, however, increased while it was being built, and in 1968 the current 'Information Bulletin' was revised upward to $25 per room per month, then in 1970-72 to $29.39, then in 1973-74, $35.27. Because it is now estimated that the charge will be $39.68 effective July 1, 1974, what originally was a $92.08 monthly rental bargain for a four-room apartment will now be $148.72 per month. For those who have fixed incomes or whose wages have not gone up with inflation, the change in carrying charges is most serious. 3 The complaint charges in substance that there were misrepresentations and material omissions in the 'Information Bulletins.' It is said, for example, that there was stated a lump sum price of $258,678,000 for the construction of the project to be financed with a $250,000,000 mortgage from the agency, and the Bulletin did go on to state that 'the risk of completing the construction within the lump sum price is on the contractor.' However, it is alleged, the agency and other defendants agreed to a final construction bill of $340,500,000, which was financed through a $125,000,000 increase in the mortgage loan, thereby substantially increasing the carrying charges. 4 Some other allegations apparently are that the 'Information Bulletins' failed to disclose that the...

To continue reading