All Seasons Resorts, Inc. v. Abrams

• Citation: 506 N.Y.S.2d 10,68 N.Y.2d 81,497 N.E.2d 33
• Parties: , 497 N.E.2d 33, Blue Sky L. Rep. P 72,413, Blue Sky L. Rep. P 72,434 ALL SEASONS RESORTS, INC., Appellant, v. Robert ABRAMS, as Attorney-General of the State of New York, Respondent.
• Decision Date: 03 July 1986
• Court: New York Court of Appeals

Page 10

506 N.Y.S.2d 10

68 N.Y.2d 81, 497 N.E.2d 33, Blue Sky L.

Rep. P 72,413,

Blue Sky L. Rep. P 72,434

ALL SEASONS RESORTS, INC., Appellant, v. Robert ABRAMS, as Attorney-General of the State of New York,

Respondent.

Court of Appeals of New York.

July 3, 1986.

Thomas S. West and Robert J. Alessi, Albany, for appellant.

Robert Abrams, Atty. Gen. (Gerald J. Hurwitz and Robert Hermann, Albany, of counsel), respondent pro se.

OPINION OF THE COURT

HANCOCK, Judge.

We must decide whether plaintiff, All Seasons Resorts, Inc. (ASR), in marketing memberships in a system of outdoor resort campgrounds, is offering securities to the public so as to require compliance with the registration provisions of section 352-e of New York's "Blue Sky" Law, the Martin Act (General Business Law art 23-A). ¹ ASR is a Washington corporation authorized to do business in the State of New York. It neither operates campgrounds nor solicits memberships in New York, but it desires to do both. In the declaratory judgment action before us, ASR seeks to enjoin the Attorney-General from applying the statute to it and requests a determination that the memberships it offers to the public are not securities under General Business Law § 352-e.

I

ASR owns and operates campgrounds for the use and enjoyment of its members in seven States outside of New York. Each campground contains parking sites for recreational vehicles improved with facilities for providing electrical, water and sewer services. In addition, at a typical campground ASR provides a general store, a recreational hall, a swimming area and facilities and equipment for various athletic and recreational activities. The rights and obligations of the members are spelled out in the membership agreement, the certificate of membership and a question and answer sheet.

Membership, as defined in the membership agreement, constitutes "only a license for nonexclusive use of such recreational facilities as may be provided from time to time by ASR". The certificate of membership provides that a member "is entitled to use all present and future resorts available through ASR for the benefit of its membership as a whole, wheresoever such resorts are located * * * ASR may purchase, lease, operate, or otherwise make such resorts available. The location and nature of all such resorts and the properties, existing or intended, are subject to change by ASR but ASR agrees to use its best efforts to maintain or improve the existing quality of such properties and resorts * * * All such resorts will be developed in such manner as ASR may deem suitable for the enhancement of enjoyment and recreational value, provided, however (1) ASR shall be under no obligation to increase the number of resorts; and (2) ASR may dispose of resorts at any time and in any manner deemed appropriate by ASR, provided however, in such event ASR will provide alternate resort facilities."

By specific terms of the agreement, members acquire no "legal or beneficial interest in ASR or its assets" and no "right or interest in property, contract rights or business of ASR". Members are not entitled to "any share of income, gain or distribution by or of ASR". Nor do members acquire "any voting rights in ASR or pertaining to its business" or any right to participate in ASR's management.

In the agreement a member represents that he is acquiring the membership solely for his personal enjoyment and that of his immediate family and "not for resale or profit and that [the] membership has not been represented or sold * * * as an investment opportunity." To prevent the acquisition or sale of memberships for investment purposes, the agreement imposes restrictions upon the alienation of memberships. For the first two years a membership may not be transferred at all, except to family members by operation of law. It may not, in any event, be transferred more than twice and may be sold only once. The price paid on a transfer may not exceed the original purchase price plus the reasonable cost of the transfer.

The question and answer sheet provided to prospective members includes the following:

"does my membership represent a good investment?

"Only as an investment in your future outdoor recreational needs. ASR is selling use, not investment."

Members must pay an initial fee which ranges from $4,495 to $6,095 depending upon which, if any, of certain optional features they purchase. Annual dues are $152. Increases in the dues are limited to the yearly increase in a specified consumer price index.

The Attorney-General moved to dismiss pursuant to CPLR 3211(a)(7) and ASR cross-moved under CPLR 3211(c) for summary judgment. Special Term, 127 Misc.2d 145, 485 N.Y.S.2d 673, concluded that ASR memberships are not participation interests or investments in real estate or cooperative interests in real estate as those terms are used in section 352-e(1)(a) and that the memberships do not come within the statute's general definition of "securities". The court declared that the registration requirements of section 352-e did not apply and granted injunctive relief. The Appellate Division reversed, 109 A.D.2d 189, 491 N.Y.S.2d 516, noting that the Martin Act is a remedial statute which should be liberally interpreted. It held that, although a membership did not include the right to share in any profits and entailed no ownership interest in any of the assets of ASR, it should, nevertheless, in view of the large size of the initial fee, be construed as a participation interest in real estate within the sense of that term in section 352-e(1)(a). Plaintiff appeals as a matter of right (CPLR 5601 former [a][ii] ). For reasons hereinafter stated, we now reverse and reinstate the judgment of Special Term.

II

In construing section 352-e(1)(a), we are mindful that the statute, as part of New York's Blue Sky Law, should be liberally construed to give effect to its remedial purpose of protecting the public from fraudulent exploitation in the offer and sale of securities (see, People v. Federated Radio Corp., 244 N.Y. 33, 38, 154 N.E. 655; Mihaly & Kaufmann, Practice Commentary, McKinney's Cons. Laws of N.Y., Book 19, General Business Law art. 23-A, pp. 9-13; see also, Securities & Exch. Commn. v. Joiner Corp., 320 U.S. 344, 353, 648 S.Ct. 120, 88 L.Ed. 88). In our application of the statute, we find it appropriate to consider as persuasive authority the decisions of the United States Supreme Court and other Federal courts construing the Federal Blue Sky Laws (Securities Act of 1933, § 1 et seq., 15 U.S.C. § 77a et seq.; Securities Exchange Act of 1934, § 1 et seq., 15 U.S.C. § 78a et seq.; see, Dunwoody Country Club v. Fortson, 243 Ga. 236, 253 S.E.2d 700, 703). Although the language of the State and Federal statutes is not identical, the remedial purpose is the same (see, Matter of Gardner v. Lefkowitz, 97 Misc.2d 806, 812, 412 N.Y.S.2d 740), and section 352-e(1)(a), we note, makes specific reference to the Federal Securities Act of 1933. (See also, N.Y. State Div. of Housing, Memorandum of Apr. 19, 1960 recommending adoption of § 352-e and describing the bill as covering intrastate "real estate syndicates and cooperative ventures of the type to which the [SEC] rules and regulations apply".)

Because the sole issue is whether ASR memberships are "securities" within section 352-e, our analysis must start with an examination of the definition of "securities" in the statute itself (see, McKinney's Cons. Laws of N.Y., Book 1, Statutes § 94). The pertinent statutory language is as follows: "securities constituted of participation interests or investments in real estate, mortgages or leases, including stocks, bonds, debentures, evidences of interest or indebtedness, limited partnership interests or other security or securities as defined in section three hundred fifty-two of this article, when such securities consist primarily of participation interests or investments in one or more real estate ventures, including cooperative interests in realty" (General Business Law § 352-e[1][a] ).

The definition includes a list of specific categories of interests or instruments which constitute securities and, in addition, a general category of "securities as defined in section [352 ²." Accordingly, we must determine both whether the ASR membership falls within one of the specific categories and, if not, whether, on examination of its characteristics in the light of decisional law, it meets the broader general definition of "securities" in section 352.

This two-fold analysis dictated by the statutory language comports with the analysis employed by the Supreme Court for determining the existence of a security (see, Landreth Timber Co. v. Landreth, 471 U.S. 681, 685-688, 105 S.Ct. 2297, 2301-2303, 85 L.Ed.2d 692; United Hous. Found. v. Forman, 421 U.S. 837, 848-851, 95 S.Ct. 2051, 2058-2060, 44 L.Ed.2d 621; Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564; Securities & Exch. Commn. v. Howey Co., 328 U.S. 293, 298, 66 S.Ct. 1100, 1102, 90 L.Ed. 1244). Whether the label of a particular interest and the description given to it by the parties brings it literally within one of the enumerated categories in section 352-e is not determinative (see, Landreth Timber Co. v. Landreth, supra, 471 U.S. at p. 686-687, 105 S.Ct. at p. 2302; United Hous. Found. v. Forman, 421 U.S. 837, 850-851, 95 S.Ct. 2051, 2059-2060; supra). We must go beyond the "literal test" and--applying a flexible and adaptable approach (see, Securities & Exch. Commn. v. Howey Co., supra, 328 U.S. at p. 299, 66 S.Ct. at 1103)--"look to the function of [the ASR membership], to search for substance over form with emphasis on economic reality" (Matter of Avon Prods. v. State Tax Commn., 90 A.D.2d 393, 395, 458 N.Y.S.2d 278), to see if it displays the characteristics of "securities" in the general sense of the term as used in sections 352 and 352-e (see, Landreth Timber Co. v. Landreth, supra, 471...