Happy Investment Group v. Lakeworld Prop., Inc.

• Decision Date: 19 May 1975
• Docket Number: No. C-73-0280-OJC.,C-73-0280-OJC.
• Court: U.S. District Court — Northern District of California
• Parties: HAPPY INVESTMENT GROUP, a joint venture, et al., Plaintiffs, v. LAKEWORLD PROPERTIES, INC., a corporation, et al., Defendants.

396 F. Supp. 175

HAPPY INVESTMENT GROUP, a joint venture, et al., Plaintiffs, v. LAKEWORLD PROPERTIES, INC., a corporation, et al., Defendants.

No. C-73-0280-OJC.

United States District Court, N. D. California.

April 9, 1975.

Order Reinstating Action May 19, 1975.

COPYRIGHT MATERIAL OMITTED

John F. Wells, Alfred N. Gertmenian, George F. Dunker, Stark, Stewart, Simon & Sparrowe, Oakland, Cal., John F. Banker, San Francisco, Cal., Harold A. Berliner, Nevada City, Cal., for plaintiffs.

Max Thelen, Jr., Paul R. Haerle, Robert B. Pringle, John D. Carter, Thelen, Marrin, Johnson & Bridges, San Francisco, Cal., Stephen M. Chandler, Chandler, Bruner & Blunden, San Leandro, Cal., Kurt W. Melchior, D. Ronald Ryland, Severson, Werson, Berke & Melchior, San Francisco, Cal., Fred K. Howell, Jr., Berkeley, Cal., for defendants.

MEMORANDUM AND ORDER

OLIVER J. CARTER, Chief Judge.

This case is before the Court on defendants' motion to dismiss, or in the alternative, for summary judgment. The action was brought by a group of plaintiffs who purchased lots in two recreational subdivisions (Alta Sierra Estates and Prosser Lakeview Estates) owned, developed and sold by defendants. Plaintiffs have alleged claims under the Securities Exchange Act of 1934 and under the Interstate Land Sales Full Disclosure Act of 1968, in addition to pendent claims and a claim for declaratory relief.

Defendants have made a series of motions: first, that this Court lacks jurisdiction under the Securities Exchange Act because, as a matter of law, the lots are not securities; second, that the Court lacks jurisdiction under the Interstate Land Sales Act because the subdivisions are exempt from regulation; third, that, even if there is jurisdiction under the Interstate Land Sales Act, no cause of action has been stated. Additionally, defendants have moved to dismiss plaintiffs' claim for punitive damages and have alleged that plaintiffs' claims under the Interstate Land Sales Act are barred by the statute of limitations.

Did Plaintiffs Buy Securities?

The first, and perhaps the most crucial, issue in this case is whether plaintiffs have a claim under the Securities Exchange Act of 1934. Are lots in a recreational subdivision federal securities?

Plaintiffs claim that they entered into investment contracts with defendants when they purchased lots in Alta Sierra and Prosser Lakeview. In the field of investment contracts, we are primarily governed by two Supreme Court cases: SEC v. Joiner Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88 (1943) and SEC v. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1945). Together, these two cases set forth the basic proposition that an investment contract exists when purchasers were led to invest money in a common enterprise with the expectation that they would collect profits solely through the efforts of others. SEC v. Howey, supra at 298, 66 S.Ct. 1100. In Howey, for example, plaintiffs had invested in orange groves in Florida. Defendants cultivated and serviced the orange groves, giving a share of the profits to plaintiffs. The buyers were non-residents and depended entirely on defendants for the cultivation and harvesting of the oranges.

The word "solely" has been somewhat diluted in this Circuit by the Court of Appeals' decision in SEC v. Glenn Turner Ent., Inc., 474 F.2d 476 (9th Cir. 1973). In that case, the Ninth Circuit held that the word "solely" must be realistically defined; the investor should not be thrown out of court because he has made a "modicum of effort".

"Rather we adopt a more realistic test, whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." Glenn Turner, supra, at 482.

This Court, in its analysis, will bear in mind the Ninth Circuit's interpretation of the Howey-Joiner rule.

With this basic underlying framework in mind, the Court turns to the facts of the instant case. First, the Court notes that there appears to be no real factual dispute among the parties; therefore this motion is appropriate for decision under F.R.Civ.P. 56.¹ The Court's attention focuses upon the proposition that defendants made the "essential managerial efforts" which affected the success of Alta Sierra and Prosser Lakeview.

Defendants did undertake to, and apparently have completed, the installation of roads and utilities in the subdivisions. These improvements were separately bonded. In 1970-71 defendants developed a resale program at Alta Sierra to help purchasers re-sell their lots; this program was instituted after all plaintiffs in this action had bought their lots.²

Plaintiffs at Alta Sierra received the Alta Sierra Sentinel, a news bulletin which contained glowing reports of home building, community activities, and of the general progress of the subdivision. There was, according to various handouts prepared by Lakeworld, an Architectural Control Committee, formed to "protect the investment of property owners in Alta Sierra." (Plaintiffs' Exhibit E-1, page 2). Apparently the Committee's purpose was review of proposed house plans to see that the plans met the Alta Sierra standard. How active this Committee actually was is unclear to the Court from the materials supplied by the parties.

Other literature indicated that "Commercial and Multiple Areas" were being planned and would "be designated" in the near future. (Plaintiffs' Exhibit E-1, page 3). Again, whether anything came of this general assertion is unknown to the Court.

The items enumerated above appear to reflect the total commitment that defendants had made to the subdivisions. Defendants had no service or managerial contracts of any nature with any plaintiff.

Once a purchaser had signed a bill of sale for a lot in either subdivision, he had full title to it; defendants retained no legal interest, beyond taking a deed of trust to secure repayment.

On the face of this series of facts, the Court preliminarily concludes that defendants did not have "essential managerial" control over the lots once they passed from defendants to plaintiffs. Plaintiffs argue, however, that the lots cannot be viewed separately, but must be viewed as part of a whole. Plaintiffs were told that they were being offered a chance to share in a "viable recreational community." (Plaintiffs' Exhibit F-3). Defendants' literature informed readers that defendants were experts and leaders in the field of recreational-resort planning (Exhibit F-1), that the subdivisions had been carefully researched and planned to insure quality and integrity (Exhibit E-2, page 30). It was also emphasized by Lakeworld salespersons that land per se was an excellent investment and that land values were sure to go up.³ (Exhibits (A-21, S).

Plaintiffs argue that because they relied upon defendants' efforts as experts in the resort land business to create a "viable" and successful recreational subdivision, a simple land sale was turned into an investment contract and a security. The Court finds, for the reasons below, that it must reject plaintiffs' argument, for the facts of the case do not support the contention that the sale of the lots in Alta Sierra and Prosser Lakeview represented an investment contract.

First, the situation presented here is unlike other investment contract cases in that plaintiffs will not realize any actual profits on their investment until their lots are sold. In Howey, for example, plaintiffs received annual profits from the harvest and sale of oranges while holding ownership of shares in orange groves. In 1050 Tenants Corp. v. Jakobson, 503 F.2d 1375 (2d Cir. 1974), ownership of shares in a cooperative housing corporation resulted in reduced monthly rates as a result of income from professional offices in the building, as well as yearly tax benefits. In Huberman v. Denny's Restaurants, Inc., 337 F.Supp. 1249 (N.D.Cal.1972) plaintiff, who bought property already under lease received rent plus 5% of the gross sales as owner of the property. The value of the land in this case may indeed increase while plaintiffs hold it, but at no time until sale of the land will plaintiffs realize any actual monetary profit.

The value of plaintiffs' land may increase, but that alone is not enough to make the land a security; the land must be developed or operated by others. Loss, Securities Regulation, 492. Buying land with expectations of profit does not make the transaction a security. Contract Buyers League v. F & F Investment, 300 F.Supp. 210 (N.D.Ill. 1969); Huberman v. Denny's Restaurants, Inc., supra.

Plaintiffs in this action urge, however, that they relied upon defendants' efforts to develop their land into a successful subdivision. It is certainly the case that defendants, through their literature and sales talks, seem to have given the impression that they would contribute substantial efforts to create a thriving subdivision, but in fact they offered no concrete programs, presented no substantive plans to further this goal. The defendants, in retrospect, were masters of generalizations. For example, although defendants claimed they were "placing emphasis upon home construction" (Plaintiffs' Exhibit A-2) and were going to "work closely with appropriate Northern California homebuilders" (Id.) they actually offered no help insofar as individual home construction went, except to supply a list of names of local contractors with approximate bidding prices. (Plaintiffs' Exhibit E-1, p. 2). Again, although plaintiffs were told that commercial areas were being planned and would "be designated" in the near future, nothing was said about defendants' participating in efforts to draw commerce or commercial enterprises to the area.

In Los Angeles Trust Deed and Mortgage Exch. v. SEC, 285 F.2d 162 (9th Cir. 1960) defendants, who sold individual trust deed notes to plaintiffs under a program called the "Secured 10% Earnings Program," advertised...