United Housing Foundation, Inc. v. Forman Case Brief Summary | Law Case Explained

United Housing Foundation, Inc. v. Forman | 421 U.S. 837 (1975)

In the 1946 case Securities and Exchange Commission versus W.J. Howey Company1, the United States Supreme Court established a three-part test for determining whether a scheme represents an investment contract and therefore a security under the Securities Act of 1933.2 Under the Howey test, a scheme is an investment contract if there’s an investment of money, there’s an expectation of profits, and profits would arise solely from the efforts of others.3 In the 1975 case United Housing Foundation, Incorporated versus Forman, the Court considered whether shares of stock that were sold in a housing cooperative qualified as securities under the Howey test.

Co-op City was a large low-to-moderate-income housing project in New York City. The project was initiated and sponsored by the United Housing Foundation, or UHF, a nonprofit corporation. In addition, UHF organized Riverbay Corporation to own and operate Co-op City.

To acquire an apartment in Co-op City, an eligible buyer had to purchase eighteen shares of stock in Riverbay for each room desired at twenty-five dollars per share. The sole purpose of acquiring the shares was to enable the purchaser to occupy the apartment. The shares couldn’t be transferred to nontenants, and any tenant who wanted to or was forced to terminate his or her residency at Co-op City had to offer the shares back to Riverbay at its initial selling price.

In addition, mortgage and operating expenses of Co-op City were to be covered by monthly rental charges paid by tenants. Initially, this cost was estimated to be twenty-three dollars per room. However, due to increased construction costs and other expenses, the average monthly rental charges increased periodically, and in 1974, reached close to forty dollars per room.

Subsequently, residents of Co-op City, including Milton Forman, sued UHF and others in federal district court, alleging violations of the Securities Act of 1933. Specifically, they argued that they were misled in purchasing shares of Riverbay stock. In response, UHF and others moved to dismiss the action, arguing that the shares weren’t securities within the definition of the Securities Act. The court granted the motion, and Forman and others appealed to the Second Circuit, which reversed. The United States Supreme Court granted cert.




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