Gerald M. Hocking v. Maylee Dubois and Vitousek & Dick Realtors, Inc., a Hawaii Corporation

GOODWIN, Before HUG REINHARDT, Judges. Circuit REINHARDT, Judge: Circuit brought This is an action for fraud against under the federal securities laws agent real estate and the broker that em Hocking ployed Appellant her. based feder real jurisdiction al on the claim that the agent “security” estate offered a within the meaning of the federal securities laws. He alleged pendent also state causes of action for fraud. The district court entered sum mary judgment, concluding that it lacked subject jurisdiction matter because no se curity appeal, was involved. On central agent’s issue is whether the real estate conduct, alleged true, if the of constituted fering of an “investment contract” within meaning of the federal securities laws. dispute There is no agent, Dubois, that the transmitted an offer to sell a condominium unit from the plaintiff. owner to the There is, however, genuine issue of fact whether option participate the offer included an pool operated by developer in a rental complex.1 ques- the condominium Hooking’s poses summary judgment, 1. In her answer to only Third Amended we need note Complaint, record, Dubois denies that the offer includ- that evidence in the when viewed in the option participate pool ed an in a rental light Hocking, genu- most favorable to raises a arrangement. The district court did not make a ine issue of material fact as to whether offer finding factual on this issue because it reasoned option. example, included an such For Hock- optional pool pre- that the nature of the rental ing stated that he had been informed of the finding cluded the of a As discussed availability Dubois, pool arrangement by of the rental below, fully reasoning was incorrect. purchased and that he would not have Further, only For convenience option. and because hereafter the condominium without the involved, legal purchasing we deal throughout with the issues within two weeks of the condomin- ium, opinion pool the rest of our we treat as entered into the rental ar- evidence, plaintiffs rangement. an established Despite fact claim that the of- this the resolu- option participate fer included an pool arrangement. in a rental tion of the factual issue must await a trial on actually summary judgment We do not make the merits or a motion for pur- such by Hocking. factual here. determination For filed Exchange a material one. Securities Act of that fact is U.S.C. tion is whether (1982), is, 78j promulgated and that the offer of and Rule 10b-5 hold that it We § thereunder, (1987), 17 C.F.R. condominium with 240.10b-5 § arrangement fraud, constitutes negligence, and state law claims of in a rental contract under fiduciary duty. alleged offer of an breach He Accordingly, re- we the securities laws. inducing various acts of fraud Dubois in summary judgment. grant of buy verse the him to the unit and in services she performed perform or failed to thereafter.

I. granted summary judg- district court ment for defendants on the securities claim Hocking visited Hawaii and be- Gerald pendent and dismissed the state claims for buying interested in a condominium came subject jurisdiction. lack of matter there as an investment. When he returned Vegas, he made to his home Las this wife, Maylee

known to a co-worker whose II. Dubois, agent a licensed real estate was grant summary judg We review the of employed Hawaii. was Vitousek & She ment de novo. v. SEC Belmont Reid & Realtors, Inc., real Dick a Hawaiian estate Co., 1388, (9th Cir.1986). 794 F.2d 1390 brokerage meeting arranged firm. A was Our task is identical to the trial court’s: Hocking between and Dubois. Subse- viewing light while in evidence agreed help Hocking quently, Dubois Hocking, most favorable to we must deter find a unit. suitable mine whether the defendants have shown Dubois found a condominium unit owned disputed that there are no issues of materi by Tovik and Yaacov Liberman that was they al fact judg and that are entitled to The unit located in a for sale. was resort ment as a matter of law. Alaska v. United complex developed by Aetna Life Insur- States, 851, (9th Cir.), cert. 853 (“Aetna”). Company part ance As a of the denied, 968, 333, 474 U.S. 106 S.Ct. 88 original development, Aetna had offered (1985). We also review de L.Ed.2d 317 opportunity participate in purchasers an novo the district court’s determination (“RPA”).2 pool arrangement a rental This whether a transaction is a Bel optional was and the Libermans had not Co., mont Reid & 794 F.2d at 1390. participated pool. in the rental III. arranging

In the sale of the Libermans’ condominium, Dubois advised him of the “security” The term is defined in section availability pool arrangement. of the rental 1933, 2 of Securities Act of 15 U.S.C. supra. Hocking purchased note 1 77b(l) (1982), and in section 3 of the § from condominium unit the Libermans on Exchange 1934, Securities of 15 Act U.S.C. 23, 5, 1979, July June 1979. On 78c(a)(10)(1982). sections, which are § management agree- entered into a rental Tcherepnin identical, v. substantially Corporation ment with Hotel of the Pacific 335-36, 548, Knight, 389 U.S. 332, 88 S.Ct. (“HCP”) pool agreement 552-53, (1967), 19 L.Ed.2d 564 define a was to take effect six months later. Al- to include “investment con though the record is not clear on the rela- tract.” the definition is not a tionship developer, and the between HCP Congress sufficiently static one. cast it “in Aetna, appears performed that HCP general broad and terms so as to include management option services at the of the many types within that definition the purchasers. instruments that our commercial world

Hocking subsequently alleging ordinary concept filed suit fall within the of a securi 85, provisions ty.” H.R.Rep. Cong., violations of the antifraud of the No. 1st 73d Sess. RPA, costs, agent responsible agent’s pro 2. Under an is each receives a rata owner renting managing project. the resort or not share of the rental income whether pooled, income from the units actually owner’s was rented. individual unit pro after each owner assessed a rata share of 564 em- physical assets inal interests principle a flexible (1933).3 embodies 11 It enterprise. ployed in the the count to meet adaptation

“capable of 298-99, at 1103. at 66 S.Ct. by those 328 U.S. devised schemes less and variable then, Howey, con- an investment Under on money of others the use who seek (1) an investment tract consists How v. W.J. profits.” SEC promise (3) (2) enterprise, money, in a common 1100, 299, 293, Co., 66 S.Ct. ey 328 U.S. expectation profits produced also see United (1946); 1103, 90 L.Ed. by the efforts of others.4 Forman, Foundation, v. Inc. Housing 2060, 44 L.Ed. Generally, simple transactions U.S. more, estate, satisfy do not real without 2d 621 See, e.g., De Luz Howey criteria. an invest- definition of classic The now Inv., Banker & Ltd. v. Coldwell Ranchos in SEC v. W.J. is found ment contract Co., Cir.1979) (de (9th F.2d Howey, investors purchased Howey Co. In only obligation fendants’ Florida. The grove in a citrus portions of Terracor, title); Woodward to transfer sales a land each investor seller offered Cir.1978) (same); F.2d which contract under and a service contract Associates, Southridge Mosher v. harvested, cultivated, and mar- defendant (sale (W.D.Pa.1982) F.Supp. contract was The service keted the fruit. restric condominium with no attendant no ten-year period with for a Industries, tions); Johnson v. Nationwide nominally owned cancel. The investors (N.D.Ill.1978) (no F.Supp. alle or to land, right specific fruit had no but gation arrangement in addi of a collateral rights were limited the land. Their enter land), aff'd, 715 F.2d tion to the transfer of pooling from the of receipt profits of to the (7th Cir.1983); Happy Investment 1233 295-96, at fruit. 328 U.S. all the harvested Inc., Group Properties, v. Lakeworld 396 noted that 1101-02. The Court 66 S.Ct. at (defend 175, (N.D.Cal.1975) F.Supp. 180 skill, knowledge, buyers lacked the the performed ants no skilled activities after necessary citrus fruit equipment in the transferred). land When a only way they could that the business and occupy exclusively by motivated a desire to hope on their investment was for a return develop personally, security no or the land on the efforts and by absolute reliance See, e.g., Howey, is involved. 328 U.S. at Id. Company. at Howey of the abilities 1103; Joyce v. Ritchie 300, 66 S.Ct. at Court, 299-300, in 1103-04. The 53, 66 S.Ct. at Properties, Tower F.Supp. 55-56 contract, finding held: (N.D.Ill.1976) (purchase of condominium as residence). personal purposes investment contract [A]n contract, Act means a of the Securities may Real estate transactions involve an whereby person transaction or scheme an investor is of offer of securities when money in a common enter- invests his real estate in fered both an interest profits solely prise expect and is led to For See expectation profits. of collateral promoter or a man, 17, from the efforts at U.S. at 853 n. 95 S.Ct. party, being drawing immaterial whether third it n. 17. the line between enterprise offering in are evi- the of land contracts and the shares the sales easy. byor nom- investment contracts has not been by denced formal certificates 47, (1933). Cong., S.Rep. purposes were No. 73d 1st Sess. 1 The remedial of the 1933 Act expressed as follows: classify 4. This test has led courts to a wide exploitation prevent The aim is to further variety of novel economic schemes as "invest- unsound, fraudulent, by public the the sale Gross, See, e.g., ment contracts.” Smith v. through misrepresen- and worthless securities 639, curiam) (9th Cir.1979) (per F.2d 642-43 tation; place adequate true informa- (earthworms); Interplanetary, investor; SEC v. Koscot protect honest tion before Inc., Cir.1974) (cos- (5th 497 F.2d 478-85 seeking capital by presenta- enterprise, honest Inc., metics); Group, tion, competition Miller v. Central Chinchilla against dis- afforded Cir.1974) (chinchil- through public 494 F.2d 416-18 offered to the securities honest las). promotion.... crooked controlling the RPA at issue here difficulty, at least because resolve this To condominiums, the Securities and optional. This was incorrect. Wheth area of guidelines in Exchange issued does not security Commission er was offered a applicability of federal securi- 1973 on the optional depend discretionary on the na burgeoning resort condo- ties to the laws Rather, depends ture of the RPA. it sim See minium market. Offers and Sales ply upon whether offer included an or Units in a Real Estate Condominiums RPA, offeree, so that the if he or she chose Act Release No. Development, Securities Indeed, in How- participate, could do so. ¶ (CCH) 33-5347, Fed.Sec.L.Rep. 1049 ey, required the investors were not to enter (Jan. 4,1973) (listed at 17 231.5347 C.F.R. § into service contracts with the defendants. Howey (1987)). We read the criteria merely The investors were told that light guidelines. of those investment was not feasible without a con tract, and that the defendants’ contract In Release the Commission superior a con was to all others. 328 unequivocally states that will view U.S. at security as a if it is offered with dominium 66 S.Ct. at 1101. The Court’s conclusion specified arrangem three one of that the transaction was an investment con arrange ents.5 The second of these tract was “unaffected the fact that here, ments, controlling is “[t]he purchasers accept some choose not to offering participation in a Id. at service ... contract.” Fed.Reg. arrangement.” enough at 1104. “[I]t [defend under Unlike a transaction covered merely ingredients the essential ants] offer arrangement, offering first of a Id. at of an investment contract.” automatically condominium with an RPA (emphasis added). Similarly, S.Ct. at security.6 makes the investment a Hocking’s participation fact that in the compulsory pre RPA was not would court, grant The district its order finding here. clude the of a Dubois, ing summary judgment to seems to America, Cameron Outdoor Resorts recognized arrange the second have Inc., 187, 193 (5th Cir.1979) (inves guidelines in the is the ment described SEC camp tors could refuse to rent out their type arrangement involved here. Never theless, on personally), the court decided that the rule sites or could rent them out reh’g, governing arrangement (5th Cir.1980); the second was not 611 F.2d 105 Wool- Arrangement pro- 5. The release summarizes three situations which It is clear 2 that is meant to offering security: coverage would involve a vide the exclusive language Arrangement for RPAs. While the general, 1 ostensi- condominiums, any 1. The with rental ar- covering bly "any arrangement,” giving rental service, rangement or other similar are of- phrase interpretation an all-inclusive would emphasis fered and sold with on the econom- meaningless language Arrange- render purchaser ic to derived benefits be 2. ment managerial promoter, efforts of the from the The SEC makes this conclusion clear else- party designated arranged or a third or for guidelines. Compare, example, where in its promoter, from rental of the units. following two statements from the Release: offering participation 2. The in a rental together The offer of the unit offer of with the pool arrangement; and opportunity in such a rental offering of a rental or similar ar- 3. pool involves the offer of investment contracts rangement whereby purchaser must hold registered exemption which must be unless an any part his unit available for rental for is available.... year, agent must use an exclusive rental or is materially otherwise restricted in his occu- pancy or rental of his unit. If the condominiums are not offered and 1735, Fed.Reg. emphasis 38 at 1736 sold with on the economic benefits purchaser to the to be derived from the mana- others, 6. Whether the condominium is offered with em- gerial efforts of an owner of a ... phasis on the benefits to be derived from the may, purchasing condominium unit unit, after his only efforts of others is relevant non-pooled arrange- where there is a enter into non-pooled arrangement. causing This is be- ment ... a sale of a without only Arrangement phrase cause 1 contains the to be involved in the sale of the unit. "emphasis (CCH) ([1049 Fed.Sec.L.Rep. on the benefits to the be 1 at 2071-2072 (1973) added). managerial (emphasis derived from the efforts of [others]." 566 Inc., Tree, together and Homes, pool their investments v. Bronze who

dridge Inc. (de- 1085, (D.Colo.1983) profits 1087 and losses in accord- F.Supp. split the net option- managerial services were fendant’s investments. See pro rata their ance with period). two-year al after initial Co., 459, 460 Bache & Brodt v. 595 F.2d interests, Cir.1978). (“This (9th pooling of here, controlling Release pro-rata sharing of usually combined with a the offer of the compels conclusion that characterized as horizon- profits, RPA constitut- with an has been condominium original)). commonality.” (emphasis ed the offer of a tal giving up their By pooling their assets

IY. profit loss claims to or attributable guidelines, investments, apart particular from the we investors Even their Howey criteria an find that under the three dependent fortunes on make their collective an RPA con offer of a condominium with single enterprise. common the success of of an investment contract. stitutes an offer commonality Clearly, horizontal describes purchasers relationship that of a com- Money. Defendants 1. Investment of pany’s share with one another. securities pur- dispute do not standard, Howey’s This is the run-of-the-mill situa- requirement. first chase satisfied money in the condomin- Hocking invested tion for which the securities laws were ium. designed apply. Enterprise. Common 2. There has The strictest definition of common enter among disagreement the circuit been some prise commonality, horizontal involves appeals courts of on what satisfies the i.e., pooling an investor assets with other enterprise. requirement of a common Id.; see, Hirk, e.g., investors. 561 F.2d at Incomco, 1115, Mordaunt v. U.S. we define common enter 801, 801-02, 1115-16, 105 83 L.Ed.2d S.Ct. prise broadly, more as a venture in which J., (1985) (White, dissenting from the the “fortunes of the investor are interwov certiorari). require denial of Some “hori dependent upon en the efforts and commonality,” usually zontal evidenced the investment seeking success of those pooling of assets from two or more inves parties.” third SEC v. Glenn W. Turner See, single tors into a fund. nt., Inc., E 474 F.2d 482 n. 7 Pierce, e.g., Lynch, Curran v. Merrill denied, Cir.) added), cert. (emphasis Smith, Inc., Fenner & 622 F.2d (1973); U.S. S.Ct. L.Ed.2d 53 (6th Cir.1980), grounds, on other aff'd Brodt, 595 F.2d at 460. Vertical common U.S. 72 L.Ed.2d 182 ality require does not that several investors Council, Agri-Research (1982); Hirk v. Rather, pool their funds. “vertical com

Inc., (7th Cir.1977); 100-01 monality requires that the investor and the Trade, Chicago Board Wasnowic of promoter in be involved some common ven 1066, (M.D.Pa.1972), aff'd, F.Supp. mandating ture without that other inves denied, (3d Cir.1973), cert. 491 F.2d 752 tors also involved in be that venture.” 2407, U.S. 94 S.Ct. 40 L.Ed.2d 773 Brodt, 461; (citing Hector v. 595 F.2d at (1974). The rejected Fifth Circuit has hori Wiens, (9th Cir.1976)). 533 F.2d commonality zontal in favor of “vertical commonality permitted, commonality” focusing When vertical is on investor de — pendence promoter expertise single on rather even a venture that has but a inves fortuity than the of collective investments. enterprise pro tor can a common if be Corp., v. SEC Continental Commodities depends moter’s remuneration on the suc (5th Cir.1974); 497 F.2d SEC summarize, cess of the venture. To hori Inc., Interplanetary, Koscot commonality zontal describes a common en (5th Cir.1974). accept We horizon both investors, terprise among several while ver tal and commonality. vertical commonality tical describes a common en terprise Horizontal between the investor and the sell commonality the re- describes er, lationship by promoter shared See party. two or more investors or some other L. Regula- option of Securities Loss, a condominium with for RPA Fundamentals of automatically constitutes the offer (1983). of a tion 197 n. commonality vertical When we embraced Brodt, Expectation by Produced state that we intended in we did not of Profits with vertical common Others’ respect replace With to the third horizontal Efforts. i.e., Howey, rather, meaning prong expectation of of broadened the ality; we others, pool profits produced by enterprise beyond the “strict the efforts of

common requisite circuits. conclude this ing requirement” used other we is met words, whenever In sim a condominium is 595 F.2d at 460.7 other we sold with an option. establish RPA This is what ply added an additional means of the Commission enterprise, guidelines which comes into has done in its ing a common for condomin- pooling is no of funds rationale of the SEC’s auto- play only when there iums. venture. See El in a matic application several investors of the securities laws to Corp., Equity Khadem v. Securities expressly RPAs set forth in the (9th Cir.) (court looks first F.2d Release. 1972 the Real Estate commonality), for horizontal and then vertical Advisory Committee, which the late former denied, rt. 419 U.S. Casey SEC Chairman William established ce 42 L.Ed.2d 146 applicability to address the of the securities investments, published laws to real estate creates hori- pool arrangement A rental reasoning. its recommendations and zontal commonality parties other in- with SEC, Report the Real Advisory Estate in the RPA. If Dubois’ offer to sell volved (1972). The Committee Committee con- option the condominium did not include cluded that “where a rental is made RPA, joining Hocking’s then invest- offering, available the course of the be his ment the condominium would really being what is sold to the and not an investment in a common alone whereby profits an investment contract are investors, venture. In the absence of other expected all, produced through to be if at commonality there would be no horizontal party pur- the efforts of a other than the Brodt, following proper would be chaser-owner.” Id. at 77-78. The Commit- move on to an examination of the vertical regarding tee’s recommendations condo- But, relationship involved. as we have not- substantially adopted by miniums were earlier, purposes ed we assume for of this guidelines. in its SEC We believe opinion that the offer of a condominium to logic underlying the Release is did include an offer of an provides proper clear and the basis for the Accordingly, enter an RPA. horizontal Howey. construction of commonality exists. readily apparent advisory It is that an RPA for committee SEC and its enterprise. recognized having condominiums is a rule common wisdom buys Each investor one share —a condomin- that would make the sale of all the condo pools particular ium —in a common venture that the miniums in a condominium devel opment subject rents from all of the units. The success of to the securities laws or participant’s each individual investment would exclude the sale of all those units— depends clearly regardless fortuity on the entire RPA’s suc- of the of the individual respect expectations particular cess. At least to the common economic Howey, enterprise prong rule, precisely buyer. applicability this is A which why depended subjective the reason the SEC felt that an offer on the intentions of explains pooling: 7. Professor Loss the fact that vertical does “horizon- er view insist on such commonality require- commonality." is the broader of the two The strictest view is not tal satisfied, ments: merely com- at least with vertical monality, unless the himself shares in broker The broadest view is satisfied with "vertical commissions, enterprise apart commonality"; approach recognizes the from his that a (citations omitted) enterprise" "common customer, and between broker Loss, insisting Regulation any without on sort of L. Fundamentals Securities of (1983) (footnotes omitted). pooling among customers’ accounts. A strict- 255 set security under the test constitutes purchaser of prospective each individual Howey. unit, extremely dif- forth be would separate each arbitrary be and would to administer ficult make the seller’s— it inasmuch as would V. liability depend on the any and broker’s — argument that the appellee’s address We thoughts unformed and often undisclosed security it is not a because condominium specific condominium buyer. Even a the of Aetna, Hocking by the to not offered was security the day be unit could on was that Dubois developer, and because atti- not, the investment depending on next not found agent she could be not Aetna’s prospective particular tudes of a under the securities for her actions liable the day. For these reasons particular on a arguments these two We address laws. Advisory Committee Real Estate SEC’s separately. mechani- “rather willing to recommend was view, in- respect to the condomin appellees’ In cal tests” with adopted in its vestments, security the SEC the time the which at ium ceased be agree, Id. at 78. We and be- guidelines. purchased it because Liber Libermans bright line rule RPA, the Release’s lieve that participate not to mans chose proper interpretation of only reflects and, therefore, the sale to did not condominiums. The Howey applied as interest in an transfer of an involve the RPA with an purchase of a condominium Thus, logic gist appellees’ of RPA. Howey requi- meets the third option thus security was not a that the condominium expectation profits there be an site that intermediate there had an because been manage- entrepreneurial or upon the based in the buyer who chose not rial efforts of others.8 determining A as this for RPA. rule such security makes is a then, alleged whether only, does the transac- Not condominiums, no sense in the context of of a secur- constitute the offer tion at issue matter, or, for investment. guidelines, but it also that ity under the SEC originally Howey resale as well as from the efforts of others. criterion was that 8. The third here, facts ought This latter situation characterizes the profits the investment to accrue from profits investment in a condo- where from the Howey, "solely from the efforts of others.” 1) may come from the an RPA 301, minimum at 1104. neither U.S. at 66 S.Ct. pro condominium’s rata share of net rents from applied criteri nor this circuit has this Court RPA, depends upon which the efforts of the others, rigidly. example, we have found securi on For 2) appreciation on the condo- part by profits ties to exist when are made in resale, does minium at the time of which not others, part through the efforts efforts of depend upon others' efforts. purchaser. See SEC v. Glenn W. Turner profit The existence of these two avenues denied, Ent., (9th Cir.), 474 F.2d 476 cert. Howey, characterized the facts of where also 38 L.Ed.2d 53 In U.S. 94 S.Ct. fruit, profits but also from came from harvested Ent., Howey we held that the Glenn W. Turner What the increased value of the land over time. require "the test should be construed there, here, important important as is efforts made those other than the investor profits during period ownership that the ones, undeniably significant are the those essen managerial entrepreneurial come from the managerial efforts which affect the failure tial others, of those efforts of and that the efforts enterprise.” or success of the 474 F.2d at 482. "undeniably sig tire other than the investor Supreme When the Court next considered Ent., W. Turner nificant ones”. SEC v. Glenn Foundation, Housing Howey Inc. v. test in United Deep SEC v. 474 F.2d at 482. See also Goldfield Forman, U.S. 44 L.Ed.2d Nev., (9th Mines F.2d Cir. Co. (1975), appears assented the Court to have 1985); Wiens, Hector v. Turner, omitting reading proposed by to the therefore, Cir.1976) curiam). Howey, (per does including "entrepre "solely” and the modifiers contemplate profits must come managerial” neurial or before "efforts.” others, and not also from from efforts U.S. at S.Ct. at 2060. reasoning increased land values. Our is consist Howey SEC, Just as the test allows us to find the guidelines ent with that of the for the expected security profits existence of a when are contemplate a condominium that the offer of purchaser’s necessarily as well as from the own efforts constitutes the with an RPA others, expectation security, irrespective from the allows us of an efforts of also offer of a expected profits appreciation profits find a from from at the time of re when are appreciation at time of sale. of condominium value tangible rights actually problem with this rea- bundle was of- The fundamental purchased by buyer, fered to or the soning misperceives it the nature not is that According Hocking, the rent- who offered or sold those rights to him. option. to an Drawing arrangement optional an ar- distinctions based on the fact that pool was al buying party the rangement anyone to one offered real estate and anoth- available project. Any pur- unit the condominium er form- the RPA precisely is the sort participate interpretation to over-substance could choose whether that Con- chaser gress, purchase sought or at a the SEC and the courts in the RPA at the time have subsequent pur- through Similarly, any drafting to avoid the broad later date. the regardless to securities laws and their chaser could elect mandated liberal Howey, prior example, decisions.9 There ex- construction. In of the owners’ logical appellees’ companies, reason for as- there ists no were two one that sold sumption option myste- orange groves that the somehow the and another that riously disappeared from the scene follow- managed pooled growing the and market- ing purchase the Libermans’ of the condo- ing oranges. separation of the This did not did minium. Just because the Libermans prevent finding the Court from that option enter the RPA not exercise their companies’ products two were offered to- that came their condominium does not gether. U.S. at 66 S.Ct. at option mean that the itself ceased to exist. Rather, option, at least as is de- willingness The same to look to the sub exist, Hocking, continued to scribed stance of a transaction rather than its form Hocking right to exercise that obtained directly reflected in the SEC’s treatment part option and enter the RPA as a of his of resort condominium Im investments. acquisition of the condominium. mediately publication after of the SEC’s appellees recognize seem to that the condominiums, 1973 release on develop optional nothing nature of an RPA has attempted er to evade the reach of the do with whether a condominium is a securi- including release the rental that, argue ty. they while the arrangement in its advertisements and in optional fact the RPA was does not that forming availability investors of the of a affect the characterization of the condomin- separate company’s pooling program only security, ium as a somehow the fact that they expressed purchas after an interest option the Libermans did not exercise their ing purposes. for investment The SEC ob equal- does. Both of these facts should be permanent injunction against tained a this characterization, ly just to this irrelevant Properties, v. Marasol practice. SEC as should the fact that chose to Fed.Sec.L.Rep. Transfer [1973 Binder] option. optional If exercise his nature ¶ 94, 159 (CCH) (D.D.C. 1973). Sept. As irrelevant, so must the fact that be Proper it, Marasol put one commentator individual has chosen to exercise or not to ties serves as “an effective warning option. exercise that developers are that courts willing beyond to look form to the economic Conceivably, appellees could be realities. and the substance of a scheme.” suggesting that no was involved Note, Regulation Federal Securities because the Libermans offered Perspec Condominiums: A Purchaser’s pool manager condominium and the rental tive, Geo.LJ. so, agree offered the RPA. If we cannot Furthermore, appli with this view. What determines the has refused to SEC of the securities laws here is what cability argument accede there is no here, "option” theory, 9. While we use the term we do least in to refuse to contract with the Hocking, Rather, look, not intend term to connote that realty owner. we must as Libermans, legal indeed the right had an absolute did, Howey practical court realities pooling arrangement to enter into the situation, and to whether an RPA pool manager. of the rental without the consent Here, actually Howey, offered. See 328 U.S. at 299- Howey, significance it is of no as in 301, 66 S.Ct. at 1103-04. discretion, pool operator retained some at being purchaser as each the RPA successive security offer a even where individual previous condominium made his decision whether to terminates with Embarcadero, Applying the RPA. this the- SEC No-Action owner. generally to Letter, ory Fed.Sec. investments other than Transfer Binder] [1976-77 3, 1976). ¶ (CCH) 80,956 (Dec. equally would condominiums lead absurd L.Rep. Moreover, system demarking a results. a argument raised before the SEC was broker, scope of inquired ephem- the securities laws as estate who local real eral as this one would be far worse in its subject be to the securi- whether he would developers effect on condominium and bro- units in a condomin- ties laws if he resold kers than would the more inclusive rule pool arrange- rental project ium that had a espoused by the To hold an SEC.11 originally registered ment. The units were offer of a condominium with an Upon on that basis. as securities and sold participate in an RPA is not an offer of a pool agree- existing sale of a unit the therefore, security, prac- would make little purchaser ment terminated and the new legal tical or sense. separately required apply to enter pool, any assurance of the rental without VI. acceptance the decision left to the and with pool manager. discretion of the finally We consider whether Du argument bois, broker, real estate was that Hocking’s broker’s be- may as held be existing RPA terminated a misrepresentations cause when allegedly liable for she resold, 10(b) in- condominium was resale made to her client. Section and Rule only expressly volved the condominium and therefore 10b-5 extend fraudulent state security. was not a The SEC refused to ments made “in pur connection with the ruling issue a no-action on these facts.10 any security,” regardless chase sale of Thus, on facts far more favorable to the of who 78j(b) makes them. 15 U.S.C. § here, presented (1982); Thus, broker than those the SEC 17 C.F.R. 240.10b-5. liabil § accept purchas- ity provisions declined to the view that a under these antifraud is not er of a condominium with an RPA could limited to the seller a security or his uncouple only agents; somehow the two and sell regardless it includes all brokers the condominium. they represent. of whom

Finally, appellees’ were courts to follow Because the condominium with its RPA theory admittedly security, what was a securi- is a Dubois Hocking’s acted as —that ty when offered the issuer could cease securities broker. Just like pur other securities, to be one when it reaches the hands of a Hocking may chaser of sue his subsequent purchaser, merely because an representations own broker for fraudulent buyer separates intermediate par- the two made in connection with the offer or sale of See, ties —the result security. would be erratic and incon- e.g., Hatrock v. Edward applications sistent Co., (9th the securities Cir.1984) laws D. Jones & 750 F.2d 767 (broker’s A investments. unit in a con- misrepresentation of rumor as project dominium originally developed supported 10(b) fact finding of section vio an RPA security lation); would remain a Leone, Toombs v. 777 F.2d 465 purchasers hands of Cir.1985) (broker successive until one not liable because no ma chose not to although use the made). when terial misstatement or omission It RPA — a later of the same unit relatively entered purchas common for securities RPA, again the unit brokers; would become a often, ers to sue their own then, Conceivably, a unit could sellers of the securities are not even being known, alternate between and let alone the sellers’ A brokers. While a no-action letter contains supra regarding 11. See discussion the benefit of staff, informal advice of SEC staffs enforcement it reflects what the bright line rule for the treatment of condo- recommendation to the miniums as securities. Commission will be if a transaction is consum- exactly mated response. as described in the § C.F.R. 200.81 the Libermans dependent have offered liability is not security broker’s contract, in the buy defendant did not seller is a the Libermans on whether as the the broker acted contract; or whether they simply bought action a investment course, Dubois’ liabili- agent.12 Of seller’s property. they That is all parcel of real Hocking can depend on whether ty will property. selling parcel of real were —a or other representation show a fraudulent prospective buyer may be because a Just by to duty owed Dubois of a violation arrangement with the de- to reach an able us now. Hocking. That issue is before unit, pool to rent his this veloper’s rental re- Accordingly, judgment below is mean that time a unit surely does not is remanded for fur- the case versed and unit, simply year, sells his ten owner opin- this consistent with proceedings ther thereafter, thirty years he is sell- years, or ion. reason, ing security. For the same a a AND REMANDED. REVERSED arranges simply for the sale of broker who may buyer the unit and notifies the that he HUG, Judge, dissenting: Circuit developer’s in the rental be able to enroll respectfully dissent. I pool offering security. a This is a is not in this case is wheth- The essential issue properly gov- real estate transaction and is was offered to “investment contract” er an by estate erned real law. correctly notes Hocking. majority The analysis con- majority’s The extends the circumstances, that, a real es- under some cept of an “investment contract” well be- offering constitute an “investment tate can interpretation in yond Supreme Court’s “security” within the and thus a contract” designed Howey test to Howey. meaning security laws. The of the federal cover the situation where the investor is an investment Supreme has defined Court buy parcel of Co., induced to a real estate be- Howey 328 v. W.J. contract SEC 298-99, offering promoter 66 S.Ct. to make his U.S. cause (1946), as follows: L.Ed. through management profitable purposes for buyer investment contract In Howey, the real estate. [A]n contract, Act means a the Securities orange grove land in the the ten acres of person whereby a transaction or scheme relying, not on middle of an orchard was money a common enter- invests his of the ten acres or the the intrinsic value expect profits solely prise and is led to them, put instead use to which he could but promoter or a from the efforts of the upon promoter to tend and harvest party.... third pro- oranges him a check for the and send disagreement majority My basic ceeds. may securities laws well is that while the principle to applied has this The SEC by developer a who promotion extend to seeks to SEC Release 5347 condominiums. management with a offers a condominium governing the rules when such establish arrangement giving buyer the comfort promoter register must his condominium collecting doing nothing the checks but breezy It is a rather project as a efforts, they developer’s do not from the release, setting style, forth some letter transaction. The to this attenuated extend for when condominium bright line rules Hocking. sold their unit Libermans register projects. developers must their authority to commit Aetna or They had no in its release notes footnote As the participate in the HCP to allow present, investment contract is pool. Although may Aetna well “where an (2d Cir.1986), person Carpenter, not con- v. by 12. The reach of the rule that aff’d — U.S. —, Court, misleading equally divided nected with the seller who makes (1987). A number of purchase 98 L.Ed.2d 275 that affect a securities can S.Ct. statements 10(b) years a similar conclu earlier our court reached be sued under section and Rule 10b-5 is case, Zweig Corp., v. Hearst by sion in a civil case. illustrated one recent in which a colum- Cir.1979). The offer of a nist for the Wall Street Journal was found crim- F.2d by 10(b) within this rule. inally estate broker is well for a violation. United States a real liable agreement operated offered and ium and a rental that is consists of arranged developer. We are condominium.” here concerned with a condominium owner notify develop The release is intended no who has connection whatsoever with a they bright ers of a line rule of when must pool. register purports ap projects. It their Howey Exchange ply applies majority Release SEC [Securities Corp., [Leasing Com’n v. Joiner to a broker who extends the offer of an C.M.] U.S. L.Ed. 88 individual homeowner to sell his unit be- (1943) “option” reasonably and is accurate when it cause the offer includes an ] states: pool original a rental developer. It is most doubtful that the words, condominiums, coupled In other designed apply SEC release was to this arrangement, with a rental will be circumstance, and even more doubtful that they if deemed to be securities are of- Howey the test could apply. through advertising, fered and sold sales literature, promotional schemes or oral An objection, even more fundamental representations emphasize which the eco- however, is the fact that there exists no purchaser nomic benefits to the to be had, evidence that the or Libermans Dubois managerial derived from the efforts of “option.” offered, such an The entire ma- promoter, party designated the or a third opinion premised jority is the on conclusion arranged by promoter or in rent- genuine that there exists a issue of materi- ing the units. al fact as to whether the offer from the Howey it away But moves from the con- Libermans that was communicated to cept reasoning Hocking and its own it “option” when states partic- included an following paragraph ipate pool that the mere in the operated by rental offering conjunction (See of a condominium in developer. page 1.) 562 and footnote participation pool in rental arrange- a I find no evidence in the record that even offering ment “will cause the suggests to be option viewed an was offered. The Li- offering as an of securities in the form participated of bermans had not in the rental investment contracts.” pool They simply bought themselves. a selling and were that condo- Supreme While Court has cited the minium. agent Dubois was the real estate Forman, release, see 421 U.S. at 853 n. who communicated the Libermans’ offer to 95 S.Ct. at 2061 n. expressed has no Hocking. sell the condominium to She also opinion interpretation on the SEC’s of How- Hocking alerted to the existence of the ey. challenged Several writers have that developer’s pool. rental There is no evi- interpretation. See, e.g., Rosenbaum, dence in the record that the Libermans had Resort Condominium and the Federal Se- ” “option a transferable to enter the rental curities Study Laws—A Case in Govern- pool binding that was on the developer, nor mental Inflexibility, 60 Va.L.Rev. 785 that Dubois communicated an offer of such (1974); Comment, The Economic Realities ” “option along an with the offer to sell Registration Condominium Under the the condominium. Securities Act 19 Ga.L.Rev. 747 (1985); Comment, Looking Through Form evidence cited majority to Substance: Are Montana Resort Con- footnote 1 does support finding that ” “Securities"?, dominiums 35 Mont.L.Rev. “option an Hooking’s offered. Although I have some doubts statement he that had been informed of the whether the mere offer a developer of availability developer’s rental pool, regardless rental promotional em- no offered, indication that Dubois or that phasis, truly meets the Howey test (or sat- the Libermans were convey, able to isfies the release’s earlier reasoning), we enforceable for a new need not determine that issue because we pool. enter the rental Nor does the fact are not concerned with a developer Hocking who is eventually enrolled in the offering complete package of a pool provide condomin- such evidence. that, regardless of I summary, submit

In bright line rule validity of the SEC’s developers to requiring purpose for the no sense to it makes projects,

register their have Here we to this case. rule

apply that unit, rejected bought a Libermans, who to sell now seek pool, and he if notified Dubois

unit. partic- perhaps he could

bought the unit It pool. developer’s rental in the

ipate the Libermans either to envision

hard offering kind of promoters as

Dubois an “investment that constitutes

package Supreme

contract,” by the as defined

Court. for lack dismissal affirm the

I would no se- jurisdiction because matter

subject involved.

curity was ROBERTO, Plaintiff-Appellee, Annie Gen., Boaz, Atty. Agana, L. Asst. Dennis Guam, defendants-appellants. for David L.G. J. BORDALLO Ricardo P.C., Cook, Cook, A. & Jeffrey Cunliffe Shimizu, Defendants-Appellants. Guam, plaintiff-appellee. Agana, for 86-2201.

No. Appeals,

United States Court

Ninth Circuit. CANBY,** SCHROEDER, Before 15, 1987*. April Submitted WIGGINS, Judges. Circuit 11, 1988. Decided Feb. Judge: SCHROEDER, Circuit employ former plaintiff is a The Roberto filed government of Guam. She ee of against the Gov 1983 suit this U.S.C. § Bordallo, Guam, and his Ricardo ernor of Shimizu, alleging Staff, de David Chief seeking damages process due nial of resignation from a classified her forced district court position. government plain for the granted summary judgment holding the defendants liability, tiff on ** * replace Judge Judge Canby Ken- appropriate was drawn panel for submis- finds this case nedy. reviewed the pursuant read the briefs and argument to Ninth He has sion without oral 34(a). Fed.R.App.P. record. Circuit Rule 34-4 and

Case Details

Case Name: Gerald M. Hocking v. Maylee Dubois and Vitousek & Dick Realtors, Inc., a Hawaii Corporation

Court Name: Court of Appeals for the Ninth Circuit

Date Published: Feb 10, 1988

Citation: 839 F.2d 560

Docket Number: 85-1932

Court Abbreviation: 9th Cir.