The opinion of the court was delivered by: STEWART
This action is brought by 1050 Tenants Corporation ("the Corporation") a cooperative housing corporation, and Herbert and Joan Saltzman, purchasers and holders of shares in the Corporation, as representatives of a class consisting of all past and present shareholders. The complaint alleges that the defendants, sponsors and promoters of the cooperative plan pursuant to which the Corporation was organized and shares offered and sold, violated provisions of federal
securities laws and regulations by making false and misleading statements and omissions in connection with and in the course of issuance of the shares.
Defendants deny the substantive allegations of the complaint and also move to dismiss it under Rule 12(b)(1) and (6), Federal Rules of Civil Procedure, on the grounds that plaintiffs fail to state a claim upon which relief can be granted, and that therefore this Court lacks subject matter jurisdiction. Defendants argue that shares in a cooperative housing corporation are not "securities" within the definition contained in the federal securities laws and regulations, and that therefore plaintiffs state no federal cause of action in Counts One, Two or Three. Dismissal of these counts would of course require dismissal of Counts Four and Five, the pendent state claims.
Thus, the dispositive question on the motion to dismiss presently before this Court is: are the shares of the plaintiff Corporation "securities" under the federal securities laws? If so, plaintiffs have stated valid federal causes of action; if not, plaintiffs' complaint must be dismissed.
This Court denies defendants' motion to dismiss. We find that the shares of stock in plaintiff Corporation are "securities" within the definition of the federal securities laws, and that those laws govern the transactions involved in this action.
The plaintiff Corporation was formed by the defendants pursuant to New York Business Corporation Law § 402, In May, 1968, defendants made a public offering of the corporate stock by formal prospectus, or "Plan", as is required by state law of all offerings of "securities constituted of participation interests or investments in real estate . . ."
Ownership of shares of stock entitled purchasers to proprietary leases in apartments at 1050 Park Avenue.
As provided in the Plan, the Corporation had an authorized capital of 45,000 shares at $1.00 par value per share. 42,400 shares were allotted to the approximately 60 residential apartments offered under the Plan, according to the contemplated selling price of each apartment. (Plan pp. 3, 10)
It was contemplated that the apartments not offered for residential use would be rented out by the Corporation as doctors' offices, the income therefrom to be income to the Corporation. (Plan p. 3) Such income would be used to offset and reduce the periodic assessments on shareholders for maintenance of the building.
The Plan required each shareholder to execute and conform to a uniform proprietary lease. The lease contained prohibitions on subletting or assigning without the consent of the Corporation, as well as restrictions on partial transfer of shares or separate ownership of the lease and shares. (Plan pp. 11-12)
On the Closing Date, according to the Plan, the defendants were required to turn over title to the apartments sold to the Corporation, and stock certificates to the shareholders. (Plan pp. 24-25) The Plan authorized the defendants to retain control of the shares and leases in apartments not sold by the Closing Date. In fact, by the closing on January 30, 1969, all of the apartments had been sold, and title to the property was conveyed to the Corporation by the defendants, who received payment from the proceeds of the sale of shares and leases.
At the closing, the Corporation also assumed pursuant to the Plan several obligations made by the defendants: a three-year agreement making Pease & Elliman, Inc., defendants' sales agent, the Managing Agent of the building, at a fee of $9,000 per year (Plan p. 25); at least eight other service management contracts, including one with an electrical service company for certain electrical installations in the building at a cost of $17,065 (Plan pp. 5-6, Schedule I); and two mortgages (Plan pp. 20-23).
The shareholders-lessees were to, and did, meet to elect a Board of Directors to manage the Corporation's affairs. In such elections, as is usual in corporate decisions in which the shareholders have a voice, each share was entitled to one vote.
The definitions of "securities" under the 1933 Securities Act
and the 1934 Securities Exchange Act
are almost identical, and the Supreme Court has found them to be interchangeable in this situation.
§ 3(a)(10) of the 1934 Act provides:
3. (a) When used in this chapter, unless the context otherwise requires -- (10) The term "security" means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at ...