All Seasons Resorts, Inc. v. Abrams

the memberships it offers to the public are not securities under General Business Law § 352-e.

ASR owns and operates campgrounds for the use and enjoyment of its members in seven States outside of New York. Each campground contains parking sites for recreational vehicles improved with facilities for providing electrical, water and sewer services. In addition, at a typical campground ASR provides a general store, a recreational hall, a swimming area and facilities and equipment for various athletic and recreational activities. The rights and obligations of the members are spelled out in the membership agreement, the certificate of membership and a question and answer sheet.

Membership, as defined in the membership agreement, constitutes "only a license for nonexclusive use of such recreational facilities as may be provided from time to time by ASR”. The certificate of membership provides that a member "is entitled to use all present and future resorts available through ASR for the benefit of its membership as a whole, wheresoever such resorts are located * * * ASR may purchase, lease, operate, or otherwise make such resorts available. The location and nature of all such resorts and the properties, existing or intended, are subject to change by ASR but ASR agrees to use its best efforts to maintain or improve the existing quality of such properties and resorts * * * All such resorts will be developed in such manner as ASR may deem suitable for the enhancement of enjoyment and recreational value, provided, however (1) ASR shall be under no obligation to increase the number of resorts; and (2) ASR may dispose of resorts at any time and in any manner deemed appropriate by ASR, provided however, in such event ASR will provide alternate resort facilities.”

By specific terms of the agreement, members acquire no "legal or beneficial interest in ASR or its assets” and no "right or interest in property, contract rights or business of ASR”. Members are not entitled to "any share of income, gain or distribution by or of ASR”. Nor do members acquire "any voting rights in ASR or pertaining to its business” or any right to participate in ASR’s management.

In the agreement a member represents that he is acquiring the membership solely for his personal enjoyment and that of his immediate family and "not for resale or profit and that

[the] membership has not been represented or sold * * * as an investment opportunity.” To prevent the acquisition or sale of memberships for investment purposes, the agreement imposes restrictions upon the alienation of memberships. For the first two years a membership may not be transferred at all, except to family members by operation of law. It may not, in any event, be transferred more than twice and may be sold only once. The price paid on a transfer may not exceed the original purchase price plus the reasonable cost of the transfer.

The question and answer sheet provided to prospective members includes the following:

"does my membership represent a good investment?

"Only as an investment in your future outdoor recreational needs. ASR is selling use, not investment.”

Members must pay an initial fee which ranges from $4,495 to $6,095 depending upon which, if any, of certain optional features they purchase. Annual dues are $152. Increases in the dues are limited to the yearly increase in a specified consumer price index.

The Attorney-General moved to dismiss pursuant to CPLR 3211 (a) (7) and ASR cross-moved under CPLR 3211 (c) for summary judgment. Special Term concluded that ASR memberships are not participation interests or investments in real estate or cooperative interests in real estate as those terms are used in section 352-e (1) (a) and that the memberships do not come within the statute’s general definition of "securities”. The court declared that the registration requirements of section 352-e did not apply and granted injunctive relief. The Appellate Division reversed, noting that the Martin Act is a remedial statute which should be liberally interpreted. It held that, although a membership did not include the right to share in any profits and entailed no ownership interest in any of the assets of ASR, it should, nevertheless, in view of the large size of the initial fee, be construed as a participation interest in real estate within the sense of that term in section 352-e (1) (a). Plaintiff appeals as a matter of right (CPLR 5601 former [a] [ii]). For reasons hereinafter stated, we now reverse and reinstate the judgment of Special Term.

I

n construing section 352-e (1) (a), we are mindful that the statute, as part of New York’s Blue Sky Law, should be liberally construed to give effect to its remedial purpose of

shares in limited real estate partnerships or real estate syndicates. In Reiter v Greenberg (supra), for example, we referred to shares in a syndicate formed to acquire real estate for investment purposes as "participating interests” (id., at p 390). (See also, Steingart v 21 Assoc., 31 Misc 2d 212 , 214; Freeze v Smith, 254 Mich 386 , 236 NW 810 ; Conroy v Schultz, 80 NJ Super 443 , 194 A2d 20 [all applying the term "participation interests” or "units” to real estate syndicates].)

It is in this sense (i.e., as descriptive of participating interests in limited partnerships or syndicates) that, we believe, the term is used in section 352-e (1) (a). Such construction is consistent with the usual meaning of the term, with its use in the statute in conjunction with the terms "investments” and "real estate ventures”, with the title of the statute "The Real Estate Syndicate Act”, and with the statutory purpose in protecting the public from fraudulent exploitation in the marketing and sale of securities and speculative investment schemes (see, People v Lexington 61st Assoc., 38 NY2d 588 , 595; People v Federated Radio Corp., 244 NY 33 , 38, supra; Matter of Gardner v Lefkowitz, 97 Misc 2d 806 , 809, supra; Mihaly & Kaufmann, Practice Commentary, McKinney’s Cons Laws of NY, Book 19, General Business Law art 23-A, pp 7-13). We hold, then, contrary to the conclusion of the Appellate Division, that ASR memberships do not amount to "participation interests or investments” in real estate ventures (§352-e [1] M).

Nor do the ASR memberships fall within the term "cooperative interests in realty” estate. From its use elsewhere in our statutory law, the phrase "cooperative interests in realty” estate has acquired a meaning which includes cooperatives, as the term is usually understood, condominiums and interests in real estate owned through homeowner associations (see, Condominium Act, Real Property Law art 9-b, § 339-ee; General Business Law § 352-e [2-b]). ASR memberships do not fit any of these forms of interests in real property.

A person having a cooperative interest in real estate (e.g., a tenant-shareholder in a cooperative apartment) typically owns stock in a cooperative corporation and has a "proprietary” leasehold granted by the corporation (see, Matter of State Tax Commn. v Shor, 43 NY2d 151 , 154; Matter of Payson v Caputa, 9 AD2d 226 , 232; People ex rel. McGoldrick v Sterling, 283 App Div 88 , 90-91; 19 NY Jur 2d, Condominiums and Co-operative Apartments, § 47). The characteristics of condominium owner

ship are individual ownership of a unit, an undivided interest in designated common elements, and an agreement among unit owners regulating the administration and maintenance of the property (see, Kaufman & Broad Homes v Albertson, 73 Misc 2d 84 ; 19 NY Jur 2d, op. cit., § 9). A homeowners association is another form of ownership of property by the individual. Ordinarily, the association holds title to the property and the homeowners derive their ownership through shares of interest in the association (see, General Business Law § 352-e [2-b]; 13 NYCRR 22.1 [a] [3]; see, e.g., People v Development Servs., 92 Misc 2d 759 ).

Membership in ASR does not convey a cooperative interest or a condominium interest because the members hold no stock in ASR and no ownership or leasehold interest in or right to exclusive possession of any of its property. Moreover, the characteristics of ownership through a homeowners association are simply not present. The common element in all of these forms of cooperative ownership — that the individual holds some ownership interest in the property — is absent. Indeed, by the very terms of the agreement, an ASR membership can constitute "only a license for nonexclusive use of * * * recreational facilities”.

We conclude, then, that ASR memberships are neither "participation interests or investments” in real estate ventures nor "cooperative interests in realty” within the meaning of section 352-e (1) (a).

The next question is whether the ASR memberships are securities in the general or common-law sense as the term is used in the broad category "securities” in sections 352 and 352-e (1) (a). Although our court has not defined the term "securities”, there is ample authority in the decisions of lower courts in our State and the courts of other jurisdictions (see generally, What Constitutes an "Investment Contract” Within the Meaning of State Blue Sky Laws, Ann., 47 ALR3d 1375 , 1382; Coffey, Economic Realities of a "Security”: Is There a More Meaningful Formula?, 18 W Res L Rev 367, 377 [1967]; Mihaly & Kaufmann, Practice Commentary, McKinney’s Cons Laws of NY, Book 19, General Business Law art 23-A, p 15; and see, Meagher v Metropolitan Life Ins. Co., 119 Misc 2d 615 , 618; Matter of Gardner v Lefkowitz, 97 Misc 2d 806 , 812-813, supra; Matter of Waldstein, 160 Misc 763 , 767, supra).

The most often cited test for determining whether a given interest is a security, and one that has been adopted in New York (see, Matter of Gardner v Lefkowitz, supra, at p 813; Mihaly & Kaufmann, op. cit., p 15), is that enunciated by the Supreme Court in the seminal case of Securities & Exch. Commn. v Howey Co. ( 328 US 293 , 297-298, supra; see, Payable Accounting Corp. v McKinley, 667 P2d 15 , 19 [Utah 1983]). The so-called "Howey test”, as restated by the Supreme Court in Landreth Timber Co. v Landreth ( 471 US 681 , 689-691, supra), is whether "looking at the economic realities, the transaction 'involve[d] an investment of money in a common enterprise with profits to come solely from the efforts of others (328 U.S., at p 301)’ ”. (See, various rephrasings and interpretations of the "Howey test” in United Hous. Found. v Forman, 421 US 837 , 847-853, 858, supra; Tcherepnin v Knight, 389 US 332 , 336-340; Daily v Morgan, 701 F2d 496 , 498-499, supra; Khadem v Equity Sec. Corp., 494 F2d 1224 ,1227-1229; Securities & Exch. Commn. v Turner Enters., 474 F2d 476 ,481-482; Payable Accounting Corp. v McKinley, 667 P2d 15 , 17-19 [Utah 1983], supra; Dunwoody Country Club v Fortson, 243 Ga 236 , 253 SE2d 700 , 703, supra; Conroy v Schultz, 80 NJ Super 443 , 194 A2d 20 , 24-25, supra; see also, paraphrase of "Howey test” by commentators Mihaly and Kaufmann as posing three questions: "(1) Is there an investment of money? (2) Is the investment in a common enterprise? (3) Are profits expected to result solely from the efforts of others?” [Practice Commentary, McKinney’s Cons Laws of NY, Book 19, General Business Law art 23-A, p 14].)

If we apply the "Howey test” and the definition of profit formulated by the Supreme Court in United Hous. Found. v Forman (421 US, at p 852 ["either capital appreciation resulting from the development of the initial investment” or "a participation in earnings resulting from the use of investors’ funds”]), we must conclude that the ASR membership is not a "security”. For an interest to be a security under Howey, there must be an expectation of financial gain or profit. There is simply none here.

Nor does the membership have the attributes of an investment (see, Matter of Waldstein, 160 Misc 763 , 767, supra, defining security as "any form of instrument used for the purpose of financing and promoting enterprises, and which is designed for investment” [emphasis added]). The membership may be transferred only twice and sold once and then, not at a profit. As specified in the ASR question and answer form,

for determining the existence of a security under New York law.

Suffice to say that a "risk capital” analysis, if used, would not affect the result. The memberships being sold are in an established business which operates several campground resorts in seven different States. A member and his family receive the immediate right to use all existing facilities without charge. Although the initial membership fee is substantial, a prospective member is not induced to join by representations that ASR will provide more or better campgrounds in the future. Indeed, the membership agreement specifies that ASR "shall be under no obligation to increase the number of resorts”. To be sure, the value of a membership — purchased in the expectation that the member and his family will for many years enjoy the use of ASR campgrounds — is not free from risk of loss or diminution. ASR is a young business and, as pointed out by Special Term, a member runs the risk that ASR "will go out of business due to poor management, embezzlement, etc., a risk which every business of necessity incurs”. But that is not the same as the risk incurred by one who puts up capital for a new enterprise in return not for what he then receives but for what he hopes to receive when the enterprise materializes. (See, Jet Set Travel Club v Corporation Commr., 21 Ore App 362 , 535 P2d 109 , in which the court found this distinction determinative in holding that the "risk capital” test was not met.)

We conclude, then, that ASR memberships as described in this record do not fall within any of the statutory categories or within the general definition of securities so as to require registration under General Business Law § 352-e. The order should, therefore, be reversed, with costs, and the judgment of Special Term reinstated.

Chief Judge Wachtler and Judges Meyer, Simons, Kaye, Alexander and Titone concur.

Order reversed, etc.