United Housing Foundation, Inc. v. Forman

Background

Fifty-seven residents sued on behalf of some 15,372 apartment owners after rent charges rose at Co-op City, a large nonprofit housing cooperative built under New York’s Mitchell-Lama program. Residents bought Riverbay “shares” (18 shares per room at $25 per share) to obtain and occupy apartments; the shares were nontransferable to nontenants and generally refundable at the original price. The complaint alleged the project’s information bulletin and other disclosures were misleading and brought federal fraud claims under the Securities Act and Exchange Act, a §1983 claim against the State agency, and several state-law claims.

Reasoning

The Court asked whether these share purchases were really “securities” or simply purchases of housing. Focusing on economic reality rather than the label “stock,” the majority applied prior tests (Howey and Tcherepnin) and found no expectation of profits derived from others’ efforts. The Court rejected three supposed profit sources: tax deductibility (not treated as a managerial profit), government subsidies or lower costs (not liquid profits), and income from commercial facilities (too speculative and incidental). Because buyers were motivated by obtaining housing rather than investment returns, the Court held the transactions fall outside the federal securities laws and reversed the Court of Appeals.

Real world impact

The decision means these federal securities claims cannot proceed in federal court. The Court did not decide whether the residents proved fraud on the merits, and it noted that whether federal regulation should reach such housing problems is a legislative question for Congress or state law.

Dissents or concurrances

Justice Brennan dissented, arguing the shares were securities both as “stock” and as investment contracts, and that tax benefits, subsidies, and commercial income could constitute profits derived from others’ efforts.