SILVER HILLS COUNTRY CLUB v. SOBIESKI

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District Court of Appeal, First District, Division 2, California.

SILVER HILLS COUNTRY CLUB, Country Clubs, Inc., John Bowen, Dean Melvin Jennings, ‘Skeets' Slater, ‘Bill’ Rasey and ‘Gordy’ Hinrichs, Petitioners and Respondents, v. John G. SOBIESKI, as Commissioner of Corporations of the State of California, Respondent and Appellant.*

Civ. 19249.

Decided: December 20, 1960

Stanley Mosk, Atty. Gen., Harold B. Haas, Victor Griffith, Deputies Atty. Gen., for appellants. Broun & King and LeRoy A. Broun, Fremont, for respondents.

On September 4, 1959, John Sobieski as the Commissioner of Corporations of the State of California, issued a Desist and Refrain Order directed to petitioners, to halt the sale by them of memberships in the Silver Hills Country Club. The basis of the Commissioner's action was that petitioners were engaged in the sale of ‘securities' as defined in section 25008 of the Corporations Code, that they had not applied for or received a permit so to do from his department and hence were violating the law. After following the proper procedure before the department to have the action of the Commissioner rescinded and being denied relief, the petitioners sought a writ of mandate directing the Commissioner to vacate and set aside his said order. From the judgment granting the peremptory writ of mandate the Commissioner appeals.

The facts are undisputed. In June of 1959, petitioner John E. Bowen acquired a parcel of land of approximately 22 acres in Novato, Marin County, and thereafter, with the other petitioners, undertook to develop the same for use as a country club, and in furtherance of the undertaking petitioners sold and engaged others to sell memberships in the Club until served with the Desist and Refrain Order.

Membership in the Club is obtained by application which must be passed upon by a Board of Governors, appointed by the petitioners. Charter memberships sell for $150 and future memberships are proposed to sell at $200 and $250. Dues are set by the Board. All applicants are informed of the by-laws and members must subscribe to them. Upon acceptance of the application and payment of the membership fee and dues and subscribing the by-laws, the applicant becomes a member of the Club, and thereafter is entitled to the use of all the Club's faciities. The membership application and by-laws provide that no interest in the real or personal property of the Club is conferred upon or granted a member, his only right being the use of the Club. All income, profits and assets of the Club are the property of the petitioners and a member has no present or future right to participate therein. Members may be expelled for misconduct. Memberships may be resold and pass by inheritance, subject to approval of the Board. So long as the member remains in good standing, both he and his family are entitled to full use of the Club.

The appellant argues that the buyer of one of these memberships acquires a ‘transferable share’ or ‘beneficial interest in title to property’ within the meaning of Corporations Code, § 25008 defining a ‘security.’ This argument is based upon the theory that the membership privileges include an irrevocable and transferable right of user of real and personal property, which is an equitable interest in property. The membership application purports to grant the members only the use of the premises for the period of their membership, and specifically negates any proprietary interest by virtue of club membership. Pope v. Henry, 1852, 24 Vt. 560, 565; Swartz v. Swartz, 1846, 4 Pa. 353, 358; Flickinger v. Shaw, 1890, 87 Cal. 126, 133, 25 P. 268, 11 L.R.A. 134; Ricoli v. Lynch, 1923, 65 Cal.App. 53, 58, 223 P. 88; Cooke v. Ramponi, 1952, 38 Cal.2d 282, 286, 239 P.2d 638, are cited by appellant for the proposition that the members acquired irrevocable licenses. These cases are based upon the doctrine of equitable estoppel; the licensee expended either money or its equivalent in labor in the execution of a license, unenforceable because it was parol, and the license was found to be irrevocable to prevent the licensor from perpetrating a fraud upon the licensee. That is not the situation here, where the membership fee is paid only after approval of the membership application and by-laws by the prospective member, which instruments make it clear that membership gives nothing more than a bare right to use the premises. Another case cited by appellant in connection with his irrevocable license argument is Bomberger v. McKelvey, 1950, 35 Cal.2d 607, 619, 220 P.2d 729. It held that a license coupled with an interest was irrevocable. The basis once again was prevention of fraud, there a right to remove a building would have been meaningless if the right to enter the property to get such structure was terminable before removal. The instruments in question here merely give members the right to use the premises for limited purposes; the membership is revocable by its own terms, and not made irrevocable by any legal or equitable theory; this is a grant of a license which does not create any estate therein. Emerson v. Bergin, 1888, 76 Cal. 197, 201, 18 P. 246; Bryant v. Marstelle, 1946, 76 Cal.App.2d 740, 746, 173 P.2d 846.

Since we have concluded that the appellant is wrong in his basic premise, that is, that membership is a transferable share of or beneficial interest in the property of the Club, the remainder of his argument is moot. However, for purposes of completeness it will be discussed briefly. Assuming an interest of sufficient quantum had passed, the next inquiry is whether the interest would be a ‘security.’ If an instrument of sale creates a present right to a present or future participation in either the income, profits or assets of a business carried on for profit, it is a ‘security,’ as defined in the Corporate Securities Law. People v. Oliver, 1929, 102 Cal.App. 29, 36, 282 P. 813; People v. Sidwell, 1945, 27 Cal.2d 121, 127, 162 P.2d 913. Appellant contends that the membership in the Club falls within this definition. It is clear that the Corporate Securities Law does not contain an all-inclusive formula by which to test the facts in every case; whether a particular instrument is to be considered a ‘security’ is a question to be determined in each case. People v. Syde, 1951, 37 Cal.2d 765, 768, 235 P.2d 601; People v. Hoshor, 1949, 92 Cal.App.2d 250, 253, 206 P.2d 882. In making such a determination courts look through form to substance. People v. Sidwell, supra, 27 Cal.2d at page 128, 162 P.2d 913; People v. Hoshor, supra. The authorities recognize that the first test is investment with the expectation of profit. California Corporation Laws, Ballantine & Sterling, § 479, p. 621 (1949); 33 Cal.L.Rev. 358 (1945). This profit motive is implicit in the cases cited earlier, and verbalized in People v. Davenport, 1939, 13 Cal.2d 681, 690, 91 P.2d 892. It is true that in the future initiation fees may increase, and that the value of present memberships may be enhanced, but that is true of most rights having a monetary value, and should not itself be the basis of declaring such a security. The by-laws do not provide that this Club is to be a non-profit organization, nor do they negate a monetary distribution to members; but, since there is no provision in any of the instruments for a distribution of profits or income to the members it is unlikely that memberships are purchased with profit in mind. All indications are that acquisition of membership is motivated by the recreational facilities offered. The only analogous case that we have found is in another jurisdiction (a most appropriate one by name); Hacker v. Goldberg, 1931, 263 Ill.App. 73, 76, held a membership in a country club was not a ‘security’ as defined by the Illinois Securities Law for the reason which is compelling here, the lack of expectation of income or profit as motivation for purchase.

The judgment is affirmed.

SHOEMAKER, Justice.

KAUFMAN, P. J., and DRAPER, J., concur.