Hocking v. Dubois, 85-1932

• Citation: 839 F.2d 560
• Decision Date: 10 February 1988
• Docket Number: No. 85-1932,85-1932
• Parties: , Fed. Sec. L. Rep. P 93,622 Gerald M. HOCKING, Plaintiff-Appellant, v. Maylee DUBOIS and Vitousek & Dick Realtors, Inc., a Hawaii corporation, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 560

839 F.2d 560

56 USLW 2492, Fed. Sec. L. Rep. P 93,622

Gerald M. HOCKING, Plaintiff-Appellant, v. Maylee DUBOIS and Vitousek & Dick Realtors, Inc., a Hawaii corporation, Defendants-Appellees.

No. 85-1932.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 13, 1986.

Decided Feb. 10, 1988.

Patrick C. Clary, Las Vegas, Nev., for plaintiff-appellant.

John P. Foley and John C. Morrell, Las Vegas, Nev., for defendants-appellees.

Appeal from the United States District Court for the District of Nevada.

Before GOODWIN, HUG and REINHARDT, Circuit Judges.

REINHARDT, Circuit Judge:

This is an action for fraud brought under the federal securities laws against a real estate agent and the broker that employed her. Appellant Hocking based federal jurisdiction on the claim that the real estate agent offered a "security" within the meaning of the federal securities laws. He also alleged pendent state causes of action for fraud. The district court entered summary judgment, concluding that it lacked subject matter jurisdiction because no security was involved. On appeal, the central issue is whether the real estate agent's alleged conduct, if true, constituted the offering of an "investment contract" within the meaning of the federal securities laws. There is no dispute that the agent, Dubois, transmitted an offer to sell a condominium unit from the owner to the plaintiff. There is, however, a genuine issue of fact whether the offer included an option to participate in a rental pool operated by the developer of the condominium complex. ¹ The question is whether that fact is a material one. We hold that it is, and that the offer of a condominium with an option to participate in a rental pool arrangement constitutes the offer of an investment contract under the securities laws. Accordingly, we reverse the grant of summary judgment.

I.

Gerald Hocking visited Hawaii and became interested in buying a condominium there as an investment. When he returned to his home in Las Vegas, he made this known to a co-worker whose wife, Maylee Dubois, was a licensed real estate agent in Hawaii. She was employed by Vitousek & Dick Realtors, Inc., a Hawaiian real estate brokerage firm. A meeting was arranged between Hocking and Dubois. Subsequently, Dubois agreed to help Hocking find a suitable unit.

Dubois found a condominium unit owned by Tovik and Yaacov Liberman that was for sale. The unit was located in a resort complex developed by Aetna Life Insurance Company ("Aetna"). As a part of the original development, Aetna had offered purchasers an opportunity to participate in a rental pool arrangement ("RPA"). ² This was optional and the Libermans had not participated in the rental pool.

In arranging the sale of the Libermans' condominium, Dubois advised him of the availability of the rental pool arrangement. See note 1 supra. Hocking purchased the condominium unit from the Libermans on June 23, 1979. On July 5, 1979, Hocking entered into a rental management agreement with Hotel Corporation of the Pacific ("HCP") and a rental pool agreement that was to take effect six months later. Although the record is not clear on the relationship between HCP and the developer, Aetna, it appears that HCP performed management services at the option of the condominium purchasers.

Hocking subsequently filed suit alleging violations of the antifraud provisions of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j (1982), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5 (1987), and state law claims of fraud, negligence, and breach of fiduciary duty. He alleged various acts of fraud by Dubois in inducing him to buy the unit and in services she performed or failed to perform thereafter. The district court granted summary judgment for defendants on the securities claim and dismissed the pendent state claims for lack of subject matter jurisdiction.

II.

We review the grant of summary judgment de novo. SEC v. Belmont Reid & Co., 794 F.2d 1388, 1390 (9th Cir.1986). Our task is identical to the trial court's: while viewing the evidence in the light most favorable to Hocking, we must determine whether the defendants have shown that there are no disputed issues of material fact and that they are entitled to judgment as a matter of law. Alaska v. United States, 754 F.2d 851, 853 (9th Cir.), cert. denied, 474 U.S. 968, 106 S.Ct. 333, 88 L.Ed.2d 317 (1985). We also review de novo the district court's determination whether a transaction is a security. Belmont Reid & Co., 794 F.2d at 1390.

III.

The term "security" is defined in section 2 of the Securities Act of 1933, 15 U.S.C. Sec. 77b(1) (1982), and in section 3 of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78c(a)(10) (1982). The sections, which are substantially identical, Tcherepnin v. Knight, 389 U.S. 332, 335-36, 88 S.Ct. 548, 552-53, 19 L.Ed.2d 564 (1967), define a security to include any "investment contract." However, the definition is not a static one. Congress cast it "in sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world fall within the ordinary concept of a security." H.R.Rep. No. 85, 73d Cong., 1st Sess 11 (1933). ³ It embodies a flexible principle "capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits." SEC v. W.J. Howey Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 (1946); see also United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975).

The now classic definition of an investment contract is found in SEC v. W.J. Howey Co. In Howey, investors purchased portions of a citrus grove in Florida. The seller offered each investor a land sales contract and a service contract under which defendant cultivated, harvested, and marketed the fruit. The service contract was for a ten-year period with no option to cancel. The investors nominally owned the land, but had no right to specific fruit or to enter the land. Their rights were limited to the receipt of profits from the pooling of all the harvested fruit. 328 U.S. at 295-96, 66 S.Ct. at 1101-02. The Court noted that the buyers lacked the knowledge, skill, and equipment necessary in the citrus fruit business and that the only way they could hope for a return on their investment was by absolute reliance on the efforts and abilities of the Howey Company. Id. at 299-300, 66 S.Ct. at 1103-04. The Court, in finding an investment contract, held:

[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.

328 U.S. at 298-99, 66 S.Ct. at 1103. Under Howey, then, an investment contract consists of (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profits produced by the efforts of others. ⁴

Generally, simple transactions in real estate, without more, do not satisfy the Howey criteria. See, e.g., De Luz Ranchos Inv., Ltd. v. Coldwell Banker & Co., 608 F.2d 1297, 1301 (9th Cir.1979) (defendants' only obligation to purchaser was to transfer title); Woodward v. Terracor, 574 F.2d 1023, 1025 (10th Cir.1978) (same); Mosher v. Southridge Associates, 552 F.Supp. 1231, 1232 (W.D.Pa.1982) (sale of condominium with no attendant restrictions); Johnson v. Nationwide Industries, 450 F.Supp. 948, 953 (N.D.Ill.1978) (no allegation of a collateral arrangement in addition to the transfer of land), aff'd, 715 F.2d 1233 (7th Cir.1983); Happy Investment Group v. Lakeworld Properties, Inc., 396 F.Supp. 175, 180 (N.D.Cal.1975) (defendants performed no skilled activities after land transferred). When a purchaser is motivated exclusively by a desire to occupy or develop the land personally, no security is involved. See, e.g., Howey, 328 U.S. at 300, 66 S.Ct. at 1103; Joyce v. Ritchie Tower Properties, 417 F.Supp. 53, 55-56 (N.D.Ill.1976) (purchase of condominium as personal residence).

Real estate transactions may involve an offer of securities when an investor is offered both an interest in real estate and a collateral expectation of profits. See Forman, 421 U.S. at 853 n. 17, 95 S.Ct. at 2061 n. 17. However, drawing the line between the offering of land sales contracts and investment contracts has not been easy. To resolve this difficulty, at least in the area of condominiums, the Securities and Exchange Commission issued guidelines in 1973 on the applicability of federal securities laws to the burgeoning resort condominium market. See Offers and Sales of Condominiums or Units in a Real Estate Development, Securities Act Release No. 33-5347, 1 Fed.Sec.L.Rep. (CCH) p 1049 (Jan. 4, 1973) (listed at 17 C.F.R. Sec. 231.5347 (1987)). We read the Howey criteria in light of those guidelines.

In Release 5347, the Commission states unequivocally that it will view a condominium as a security if it is offered with any one of three specified rental arrangements. ⁵ The second of these arrangements, the controlling one here, is "[t]he offering of participation in a rental pool arrangement." 38 Fed.Reg. 1735, 1736 (1973). Unlike a transaction covered under the first arrangement, the offering of a condominium with an RPA automatically makes the investment a security. ⁶

The district court, in its order granting summary judgment to Dubois, seems to have recognized that the second arrangement described in the SEC guidelines is the type of arrangement involved here. Nevertheless, the court decided that the rule governing the second arrangement was not controlling because the RPA at issue here was optional. This was...