Silver Hills Country Club v. Sobieski

• Decision Date: 18 May 1961
• Citation: 361 P.2d 906,13 Cal.Rptr. 186,87 A.L.R.2d 1135,55 Cal.2d 811
• Court: California Supreme Court
• Parties: , 361 P.2d 906, Blue Sky L. Rep. P 70,550, 87 A.L.R.2d 1135 SILVER HILLS COUNTRY CLUB et al., Respondents, v. John G. SOBIESKI, as Commissioner of Corporations, etc., Defendant and Appellant. S. F. 20664.

Page 186

13 Cal.Rptr. 186

55 Cal.2d 811, 361 P.2d 906, Blue Sky L. Rep. P 70,550,

87 A.L.R.2d 1135

SILVER HILLS COUNTRY CLUB et al., Respondents, v. John G. SOBIESKI, as Commissioner of Corporations, etc., Defendant and Appellant.

S. F. 20664.

Supreme Court of California, In Bank.

May 18, 1961.

Rehearing Denied June 14, 1961.

Stanley Mosk, Atty. Gen., Harold B. Haas and Victor Griffith, Deputy Attys. Gen., for appellant.

Broun & King and LeRoy A. Broun, Fremont, for respondents.

TRAYNOR, Justice.

Petitioners are partners in a venture to organize the Silver Hills Country Club in Marin County and to conduct it as a business for profit. In June 1959 they contracted to purchase for $75,000 a 22-acre ranch including a ten-room house, two smaller houses, a stable, and other improvements. The contract of sale provided for a down payment of $400, a payment of $50,000 18 months from the date of the contract, and the payment of $1,000 a month to begin three years from the date of the contract. At the time of the proceeding below petitioners had paid only the $400 down payment.

After making the down payment and taking possession of the property petitioners sowed grass, installed a swimming pool, and remodeled the main building adding showers, a steam-room, and health and exercise equipment. They plan to make further improvements including additional swimming pools and a nine-hole golf course.

They have financed these improvements in part by the sale of memberships in the country club. To date they have sold 110 'charter memberships' for $150 each. They have also given out 60 'honorary charter memberships.' They plan to sell a total of 200 'charter memberships' for $150 each, thereby raising $30,000; 300 memberships for $200 each, thereby raising $60,000, and 500 memberships for $250 each, thereby raising $75,000. The price of a membership is to increase as additional facilities are added to the club. Golf memberships are to be offered at a later time for an additional $200 each. Apart from the price of a membership a member must also pay monthly dues, the amount of which is fixed at the time he purchases his membership.

Both the membership application and the bylaws provide that a member has no rights in the income or assets of the club. A member and his immediate family, however, have the right to use all of the club facilities except the golf course, for which special membership is required. A member cannot be expelled except for misbehavior or failure to pay the monthly dues. The membership is transferable, but only to persons approved by the board of directors of the club.

The commissioner of corporations has concluded that a membership interest in the country club is a security and that the sale thereof without a permit is prohibited by the corporate securities act. Corp.Code, § 25500. ¹ On September 4, 1959, he issued a 'Desist and Refrain Order' directing petitioners to stop the sale of memberships. After a hearing he denied petitioners' motion to vacate the order. Petitioners then sought a writ of mandate in the superior court to compel the commissioner to vacate his order. The court granted the writ, and the commissioner appeals.

Section 25008 of the Corporations Code defines a security as follows:

"Security' includes all of the following:

'(a) Any stock, including treasury stock; any certificate of interest or participation; any certificate of interest in a profit sharing agreement; any certificate of interest in an oil, gas, or mining title or lease; any transferable share, investment contract, or beneficial interest in title to property, profits, or earnings.

'(b) Any bond; any debenture; any collateral trust certificate; any note; any evidence of indebtedness, whether interest bearing or not.

'(c) Any guarantee of a security.

'(d) Any certificate of deposit for a security.'

The commissioner contends not only that a membership in the club is a beneficial interest in the title to property and therefore a security within the literal language of subdivision (a) of section 25008 but also that the purchase of such an interest is attended by the very risks the corporate securities act was designed to minimize. Petitioners contend that a membership is not a beneficial interest in property, on the ground that a member of the club has no rights in either the assets or the income of the club, and that in any event a membership is not within the scope of the act on the ground that it is purchased, not for investment, but for the use and enjoyment of the purchaser.

Section 25008 defines a security broadly to protect the public against spurious schemes, however ingeniously devised, to attract risk capital. People v. Syde, 37 Cal.2d 765, 768, 235 P.2d 601. To effectuate this purpose the courts look through form to substance. Domestic and Foreign Pet. Co., Ltd. v. Long, 4 Cal.2d 547, 555, 51 P.2d 73; Oil Lease Service, Inc. v. Stephenson 162 Cal.App.2d 100, 107-108, 327 P.2d 628; see Securities and Exchange Comm. v. W. J. Howey Co., 328 U.S. 293, 298, 66 S.Ct. 1100, 90 L.Ed. 1244; 14 Fletcher, Cyclopedia of Corporations, pp. 179-180; Loss, Securities Regulations, pp. 299-329; Dahlquist, Regulation and Civil Liability Under the California Corporate Securities Act, 33 Cal.L.Rev. 343, 357; 163 A.L.R. 1052-1053. Thus, the sale of fur-bearing animals and the entrusting of those animals to the seller for care and disposition of the fur (Hollywood State Bank v. Wilde, 70 Cal.App.2d 103, 107, 160 P.2d 846), the selling of 'services' in procuring United States Oil Leases (Oil Lease Service, Inc. v. Stephenson, supra, 162 Cal.App.2d 100, 108-113, 327 P.2d 628), and the sale of orange groves coupled with a contract to have the vendor service the land (Securities and Exchange Comm. v. Howey, supra, 328 U.S. 293, 298, 66 S.Ct. 1100, 90 L.Ed. 1244) were all held to be sales of securities.

The purchaser of a membership in the present case has a contractual right to use the club facilities that cannot be revoked except for his own misbehavior or failure to pay dues. Such an irrevocable right qualifies as a beneficial interest in title to property within the literal language of subsection (a) of section 25008. See Yuba River Power Co. v. Nevada Irr. Dist., 207 Cal. 521, 523, 527, 279 P. 128; cf. Civ.Code, § 654; Gov.Code, § 54030. The crucial question nevertheless remains whether the sale of such a membership comes within the regulatory purpose of the corporate securities act.

It has been held...