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FORMAN v. COMMUNITY SERVS.

September 6, 1973

Milton and Ellen FORMAN et al., Plaintiffs,
v.
COMMUNITY SERVICES, INC., et al., Defendants


Pierce, District Judge.


The opinion of the court was delivered by: PIERCE

OPINION AND ORDER

PIERCE, District Judge.

 This action has been commenced by 57 residents of Co-op City, *fn1" a low-middle income cooperative housing project located in the Borough of the Bronx, New York City. They sue on behalf of themselves and all other residents of Co-op City, alleging, among other things, violations of the anti-fraud provisions of the Securities Exchange Act of 1934, *fn2" and of the Securities Act of 1933, *fn3" in connection with the sale to plaintiffs of shares of the common stock of the cooperative housing corporation.

 The amended complaint also asserts violations of the plaintiffs' civil rights by one of the government defendants, *fn4" premised upon the protections afforded by the federal securities laws; and it further sets forth several claims, pendent to the federal claims, based on New York State law, including an asserted derivative cause of action on behalf of the cooperative corporation.

 The corporate defendants constitute the amalgam which conceived, built, promoted and, at this time, controls the management of Co-op City. United Housing Foundation (UHF) initiated and sponsored the project. *fn5" UHF was organized under New York's nonprofit corporation statute *fn6" and is comprised of housing cooperatives, civic groups and labor unions. Community Services Inc. (CSI) is the general contractor and sales agent for the project. CSI was organized under New York's business corporation statute *fn7" and is a wholly owned subsidiary of UHF. Riverbay Corporation (Riverbay) is the cooperative housing corporation in which plaintiffs purchased shares, and which owns and operates the project. Riverbay was organized by UHF as a "mutual company" under New York's Mitchell-Lama Act, *fn8" and is named as a defendant here only to facilitate the derivative aspects of the action.

 The individual defendants are officers or directors, or both, of some, and in some cases all, of the corporate defendants.

 Pursuant to the Mitchell-Lama Act, the defendant New York State Housing Finance Agency (the Agency) provided the bulk of the financing for the project through long-term, low-interest mortgage loans; and the defendant New York State Division of Housing and Community Renewal (the State Division) is responsible for the supervision of the development, construction, promotion and operation of the project.

 The question before this Court, raised by defendants' motion to dismiss for lack of subject matter jurisdiction, is narrow, but dispositive: Is a "share" of a state-financed and supervised, nonprofit cooperative housing corporation a "security" within the meaning of the federal securities laws ? *fn9" If so, plaintiffs are properly in federal court; if not, each of the alleged bases for federal jurisdiction must fail, and with them, the pendent state claims.

 For the reasons set forth herein, this Court holds that the shares involved in this action are not "securities" within the meaning of the federal securities laws, and dismisses the complaint in its entirety pursuant to Fed. R. Civ. P. 12. Such ruling has no bearing on the merits of plaintiffs' grievances, which may well deserve to be fully aired in appropriate New York State forums. *fn10"

 Background

 Co-op City is no ordinary enterprise. Reputed to be the largest cooperative housing development in the United States, the project was conceived in 1964, completed in 1972, and presently houses some 45,000 people. The complex is located on a 200-acre site, includes more than 30 high-rise buildings and more than 230 townhouses, which in total provide about 15,400 apartment units ranging from three to seven rooms.

 The project was facilitated by New York's salutary Mitchell-Lama Act, the express purpose of which is to address critical housing problems in New York's urban areas by encouraging private enterprise to participate with the state and municipalities *fn11" in the creation of nonprofit housing cooperative undertakings for persons with low incomes. *fn12" Toward that goal, the Agency is empowered to provide low-interest financing through the issuance of loans secured by first mortgages on the projects; *fn13" and tax exemptions, *fn14" and certain other inducements are provided for corporate participants from the private sector. *fn15"

 State regulation and supervision of the housing enterprises built under the Mitchell-Lama Act is mandated by law. The cooperative corporation cannot be created without the approval of the Commissioner of the State Division. *fn16" The statute mandates that no directors or subscribers to its stock may profit from the resale of such stock, *fn17" and provides that the tenant may not sublet at a price greater than approved by the Commissioner. *fn18" The statute requires the Commissioner's approval before the corporation can contract for operation of the project. *fn19" In fact, from the initiation of a project and continuing thereafter state control is pervasive. *fn20"

 It is contemplated that a Mitchell-Lama cooperative project thus subsidized and supervised will be owned by a mutual company formed under the Act whose stock is held almost exclusively by persons who actually live in the project. *fn21" In accord with the purposes of the Act, the legislature has declared that no one may live in the project whose probable aggregate income exceeds six times the rental fees *fn22" and further, the legislature has indicated that preference shall go to the aged, the handicapped and to veterans. *fn23"

 Thus by definition, the tenants of Co-op City are persons of limited, and in some cases, fixed incomes. They secured their right to occupancy by completing a Subscription Agreement and Apartment Application form, wherein they agreed to subscribe to 18 shares of Riverbay common stock -- at $25 par value per share -- for each room in the apartment they selected. After their applications were screened and accepted by the State Division, they signed a three-year, non-proprietary Occupancy Agreement (lease), paid for or ...


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