State v. Silberberg
| Decision Date | 26 December 1956 |
| Docket Number | Nos. 34666,34667,s. 34666 |
| Citation | 166 Ohio St. 101,139 N.E.2d 342 |
| Parties | , Blue Sky L. Rep. P 70,331, 1 O.O.2d 221 The STATE of Ohio, Appellant, v. SILBERBERG, Appellee. The STATE of Ohio, Appellant, v. SILBERBERG et al., Appellees. |
| Court | Ohio Supreme Court |
Syllabus by the Court
1. In determining whether an interest is an investment contract or an interest in a real estate transaction, the principal test is the individual control which the purchaser has over the property or business venture in which he has acquired the interest. If the purchaser is to share in the gross proceeds or net profits of operations managed by the one who is disposing of the interest, the instrument evidencing the interest transferred is generally considered as an investment contract; but, if the purchaser of real property with others is to occupy the premises and conduct the enterprise, the instrument evidencing the interest is generally not an investment contract or security.
2. Where the owner of an improved real estate project made up of multiple residence units sells such undivided but specifically designated units to individual purchasers for personal occupancy by them, and where there is a provision in each contract of sale for title to the entire building project to be taken in the name of a corporation in which the unit owner is to have stock according to the value of his ownership in the project, for the co-operative management of the same, such contracts are for the sale of real estate and are not 'securities' within the meaning of the Ohio Securities Act.
These two criminal cases now in this court on appeal by reason of allowances of motions for leave to appeal were tried together in the Common Pleas Court of Cuyahoga County.
In cause No. 34666, the defendant, Hirsch Meyer Silberberg, was indicted and convicted on two counts of violation of the Ohio Securities Act, the first of which charged him with the sale of a security which was not registered or exempted and which transaction was not registered or exempted under Ohio law, and the second of which charged him with the sale of such security when he was not licensed to make the sale. In cause No. 34667, defendants, Hirsch Meyer Silberberg and The Euclid Green Development Company, were indicted and convicted on six similiar counts involving three other sales.
A written instrument is referred to in each indictment and is a contract to sell for installment payments an undivided interest in real estate with an apartment building located thereon, granting to the purchaser the immediate right to occupy a specified unit in the building.
Two buildings are involved, a six-residential-unit terrace owned by Euclid Green Development Company and a two 15-unit brick building owned by Silberberg. In the former the units sold by the corporation were undivided 6/36 interests in the property described by metes and bounds, and the unit set aside for any purchaser was described by number. In the latter the units sold by Silberberg were undivided 3/58 interests in the property described by metes and bounds, and each unit set aside for a purchaser was described by number.
The contract in case No. 34667, which is similar to the one in case No. 34666 and which we will consider in this opinion, contains an acceleration clause maturing all installments, on the seller's election, in case of default of payment of any installment; covenants by the buyer to carry insurance in not less than $6,500 on the building and to pay all taxes and assessments; and default clauses giving the seller three alternative remedies, i. e., (1) to treat the contract as in force and sue for installments, (2) to treat the contract as void and re-enter, the buyer thenceforth being treated as a mere tenant at will liable to be proceeded against without notice to quit, and the seller being free to sell the property to others, or (3), after electing remedy (2), to apply the buyer's payments to damages suffered and sue him for any balance of damages. (The contract in case No. 34666 provides that payments are to be retained as stipulated damages.)
The contract also contains the following three paragraphs which form the basis for the claim of the state that the contract is a 'security' within the meaning of the Ohio Securities Act:
'It is understood and agreed that the party of the first part shall incorporate a corporation as its own expense on or before June 1, 1959, capitalized at the sale price of said land and building thereon and to issue shares in said corporation in proportion to the value of the interest purchased by the party of the second part.
'It is understood and agreed that when said corporation has been duly formed, that the present owner will transfer by warranty deed with title guaranty at his own expense, all his right, title and interest, including the releasing of any dower right in said property to the said corporation; that taxes and assessments and insurance will be prorated as of the day of transfer to the corporation.
'It is further understood and agreed that these shares of stock will be delivered to the party of the second part when the principal sum, deposit, payments and all and any other conditions of this contract have been fully complied with and payment of same has been made in full.'
The defendants were found guilty by the trial court as charged.
On appeals to the Court of Appeals, the judgments of the Common Pleas Court were reversed, and final judgments were rendered for defendants.
Frank T. Cullitan, Pros. Atty., and Frederick W. Frey, Cleveland, for appellant.
Halle, Haber, Berick & MCNulty and Klein & Klein, Cleveland, for appellees.
The question here presented is whether the contracts entered into between the defendants and the purchasers are securities required to be registered under the Ohio Securities Act, or are they exempt from such registration?
The courts have had difficulty in determining what constitutes a 'security.' As a rule they have preferred not to work out an all-inclusive definition, but have chosen to draw the lines of demarcation as the circumstances of each case present themselves.
In determining whether an interest is an investment contract or an interest in a real estate transaction, the principal test seems to be the individual control which the purchaser has over the property or business venture in which he has acquired the interest. If the purchaser is to share in the gross proceeds or net profits of operations managed by the one who is disposing of the interest, the instrument evidencing the interest transferred is generally held to be an investment contract. Thus in the case of State v. Ogden, 154 Minn. 425, 191 N.W. 916, wherein there were sales of fractional interests in a leasehold of 80 acres of oil lands, evidenced by instruments styled, "statement and purchase," the court held that the interests were investment contracts because the purchasers did not intend to become freeholders or land owners but expected rather to share in the profits of a corporation thereafter to be organized to take over the management of the property. See, also Groby v. State, 109 Ohio St. 543, 143 N.E. 126; Securities and Exchange Comm. v. C. M. Joiner Leasing Corp., 320 U.S. 344, 64 S.Ct. 120, 88 L.Ed. 88; and Securities and Exchange Comm. v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244.
On the other hand, if the purchaser of real property with others is to occupy the premises and conduct the enterprise, the instrument...
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