Page images

Mr. JEFFREYS. You see we are actually carrying on business almost entirely within a State and the only way that this thing would bring us into

the purview would be to turn around our advertising and going across State lines. For instance, if the fact that a man from Washington, D.C., would come into Virginia to buy a lot doesn't put us in interstate commerce except that we are using the medium of advertising throughout the adjoining States. You see, otherwise we are not in interstate commerce except in this one particular. We are not selling lots through the mail. It is not carried on that way.

Senator MONDALE. What percentage of your lots are sold sight unseen?

Mr. JEFFREYS. I make this statement to the best of my knowledge, but I don't know of any lot that has ever been sold to anybody sight unseen. There may be cases of it but I don't know of any, unless somebody came down and bought it for somebody else.

Senator MONDALE. I think there is a very clear, profound distinction between your type of operation and the outrageous type of operation that calls for the need of this type of legislation. I think first of all your type of responsible promotion has the most to gain from full disclosure that would dry up these promoters. It rids you of the unethical competitor.

Secondly, and this has to be carefully reviewed by this committee, that the nature of the imposition upon your type of competitor, if there is to be any, could be the least onerous possible, time delays, information requirements should only be those necessary.

Senator WILLIAMS. If there were a practical way, there is a logic here to what you say that I can appreciate. You know the SEC has in certain areas what they call a long form and a short form. And if there were any practical way to apply to your situation an abbreviated short form of disclosure, I think we should consider it. They have a one-page form—they call it regulation A-for certain situations in equity securities. Where you are selling in the sort of provincial sense, meaning that people are within reach and do come on the site and see the site, there is a difference, and yet there are some things that you can't see. If you want to sell them in 48 hours, you can't see those elements in the county seat because 48 hours can carry over

Mr. JEFFREYS. Of course a man still has his legal redress against a responsible organization.

Senator WILLIAMS. No.

Senator MONDALE. You see one of the problems in real estate is that we are back in the old caveat emptor days in real estate, unlike personality.

Mr. JEFFREYS. Which is the way we learned it in law schoo!.

Senator MONDALE. And unfortunately, today the way in which thousands of consumers learn to great hardship and great loss of funds that they have been taken by these outrageous operations, that adds a special

complication that there are very few, if any, protections outside of the fraud statutes today for those who would resort to these tactics in real estate. You don't carry over the implied warranties in personalty to realty, as you are well aware.

Mr. JEFFREYS. Senator, I have three positions here. First and foremost, I am opposed to the bill. I think you gentlemen understand that, and I would like to see the bill not become law.

for you.

Secondly, I think

Senator WILLIAMS. You know, that is persuasive in itself. I think if we pass this and it became law, it will make some additional work

Mr. JEFFREYS. I think I have enough right now. But secondly, I think that we would like to be a part of one of these exemptions. We think people of our type, I am not talking about American Realty Service Corp., but our group should be in one of the exemptions. I mentioned of course the possibility of the personal inspection.

Senator WILLIAMS. What was the other two?

Mr. JEFFREYS. The other two was contiguous States and radius of say 150 miles or something like that, was my third possible point that I thought would help us.

Thirdly, we object very strenuously to that part about the 48-hour cooling period. That is my position and I certainly do appreciate the time that you all have given me here.

Senator WILLIAMS. That is the one thing that I just can't understand, 48-hour cooling off. You know, it is like asking a guy to come around the corner, but you are not selling hot merchandise.

Mr. JEFFREYS. Well I am not a salesman. I look at this thing from a legal standpoint, and I have talked to the people in the selling department of American Realty about this, and as a matter of fact I wanted to-I wish I had the executive vice president here with me who does have charge of all of that—and they tell me that it will hurt. So it scares me.

This thing, the effect on our business—I am not concerned about the disclosure because we want to tell them everything—but I am concerned about the effect it will have on your salesmen.

Senator MONDALE. Will you try your hand on some proposed amendments ?

Mr. JEFFREYS. Yes, sir, I will be glad to and send them to you. I will also be glad to furnish other information.

Senator WILLIAMS. I would say that would come well beyond the retainer that I am sure you receive. This would be a special fee basis by your client. Now do you see what a friendly committee this is?

Mr. JEFFREYS. I would be glad to provide you all with anything you would like to have. I apologize for not having my statement written out today, I didn't have the time and I just jumped around anyway,

Senator WILLIAMS. That is all right. It has been very helpful, and I am glad Senator Mondale suggested that we try to get in language of some of


ideas. I will say that you mentioned you might come to New Jersey. I have been advised, I don't know whether it is true or whether it isn't true, it must be, because the name was mentioned, you certainly gnified yourself in New Jersey, if it is true that one of your lawyer representatives up there is Wesley Lance.

Mr. JEFFREYS. Yes, sir, that is correct, and he is working with us. The cost of land is so high in your area and we are trying to get up something there, but we do have Mr. Lance.

Senator WILLIAMS. He is one of our most distinguished citizens in New Jersey, even though he happens to be of the other political persuasion, but he has served as president of the senate, on occasion, I believe, of the State senate, and he is one of our very valuable citizens. Mr. JEFFREYS. I am a Democrat myself in Virginia, but Mr. Lance came very highly recommended to us and we feel very good about having him in New Jersey. We hope we are going to be in your State.

Senator Williams. If July 12 were not such an important day in Virginia Senator Robertson would have stayed for all of the testimony. We thank you for the time you have so generously given.

Mr. JEFFREYS. I appreciate your allowing me to testify. (Mr. Jeffreys later submitted the following letter and amendments :)

RICHMOND, VA., July 7, 1966. Hon. HARRISON A. WILLIAMS, U.S. Senate, Washington, D.O.

DEAR SENATOR WILLIAMS: As requested by Senator Mondale when I appeared before your Committee on Wednesday, June 22, 1966, in regard to Senate Bill 2672, I would like to submit my suggestions on some proposed amendments to the bill. As I stated when I appeared before the Committee, I am basically opposed to passage of the bill, but I feel that the enclosed suggestions as to amendments would certainly be more equitable in correcting the harm that would result to my client, American Realty Service Corporation, from the standpoint of the passage of the bill.

I appreciate the consideration of the Committee in allowing me to appear, and I hope that you will give consideration to my views and objections of the bill. Very truly yours,


Attorney at Law.

AMENDMENTS TO SENATE BILL 2672 (AS AMENDED) 1. (a) Page 4, line 19, after the word "territory” insert the following: "or states or territories contiguous thereto."

(b) Page 4, line 22, after the word "within" strike out the rest of the sentence and insert in lieu thereof the following: “the state or territory in which the subdivision is located."

2. Page 4, line 19, after the word "territory” insert the following: "or within a two-hundred (200) mile radius of the subdivision."

3. Page 4, after line 22, insert the following:

“(9) the sale or lease of real estate if the purchaser or his representative has inspected the real estate and the contract of sale contains an affirmation by the purchaser that he or his representative has inspected the real estate before executing the contract."

Senator WILLIAMS. Is Mr. Herbert Wenig, assistant attorney general of California, with us?

I would like to have you, sir, before lunch, if we could.

Senator MONDALE. Mr. Chairman, I would like to issue a personal note here. When I was attorney general of Minnesota, I was active in this land problem. Mr. Wenig and I spent many hours together working on this problem. And it is going to be a treat to have him.

Senator WILLIAMS. You made the transcontinental journey for the purpose of being before this committee, and we are grateful indeed.



Mr. WENIG. Mr. Chairman and Senator Mondale, my name is Herbert Wenig, assistant attorney general of the State of California.

I understand you are a happy committee. I hope you won't be too hungry a committee, although I expect to take only 15 minutes.

Senator WILLIAMS. Fine.

Mr. WENIG. Our real estate commissioner, Milton Gordon, and our attorney general, Thomas Lynch, would like to be here, but they have previous engagements.

Senator WILLIAMS. Are you appointed or elected, by the way?

Mr. WENIG. I am appointed under a civil service system. As a matter of fact, Senator, I have served under six attorneys general, starting with Attorney General Earl Warren.

Senator WILLIAMS. The attorney general is elected?

Mr. WENIG. The attorney general is elected, not appointed by the Governor, as he is in some States.

The real estate commissioner, Milton Gordon, has already submitted to you a statement, along with answers to the questions which your staff has propounded to him, and a report on California's experience with out-of-State subdivisions. I also have with me a statement from Attorney General Thomas C. Lynch. I will submit these documents for inclusion in the record at the end of my testimony.

As a preliminary, Mr. Gordon asserts, once more, his belief that there is a need for this type of legislation. In his statement, however, he has made several suggestions, for additions to the bill.

The amended bill that you have before you is a disclosure-type regulation, based upon the 1933 Securities Act. The key to the legislation is the requirement that a prospectus be given to the prospective buyer, setting forth all of the pertinent facts.

Our experience, however, with this type of arrangement is that, in the first place, it is difficult to ascertain that the purchaser does receive the document prior to committing himself, and that, if he does receive it, whether he reads it or can actually find it among the diverting, colorful, foliating sales material.

California has had a long experience in its endeavor to protect the buyer against fraudulent promotions as well as improvident developments. For many years, we had a disclosure-type statute, but we came to the conclusion that other things must be done for the protection of the unsophisticated purchaser. This came to our attention some 4 or 5 years ago, during the upsurge of the raw-land development, involving mostly out-of-State promotions.

In October of 1962, these promotions had become so scandalous that Governor Brown and the attorney general called the National Conference on Interstate Land Sales, which was attended by representatives from some 33 States. One of the principal speakers at that conference was the then-attorney general of Minnesota, Senator Mondale.

Stimulated by that conference, a number of States adopted subdivision legislation, and others improved their statutes. California, as pointed out in the statement of Milton Gordon, the real estate commissioner of California, added to the disclosure procedure by requiring compliance with certain standards before a prospectus or a public report would issue.

For example, a developer has to demonstrate his ability to deliver title to the property, that he has adequate financial arrangements for the construction of off-site improvements, and that the lots can be used for the purpose for which they are being offered. Out-of-State subdivisions are treated as real estate securities and are subjected to the fair, just, and equitable test applicable to other security offerings.



We would suggest that Congress might well profit by California's experience with the disclosure technique and consider amending the bill to require compliance with certain standards. For example, there is a specific requirement in the bill that there be a disclosure of a blanket

а encumbrance on a piece of property. Is this mere disclosure sufficient protection? The ordinary lot buyer probably will not fully comprehend what this disclosure means. Should an individual lot buyer be allowed to buy a lot where there is no release clause and the buyer will be hopelessly bought-out when the blanket encumbrance is foreclosed, although the lot has been paid for? Under the California statute, where there is a blanket mortgage, there must be provision for release of lots from the encumbrance when the sales price for an individual lot has been paid.

Since the splurge of interstate raw-lot sales, cther States, like New York, have adopted laws which have enabled them to deal with interstate land sales. The attorney general of California, Mr. Thomas C. Lynch, joins the California real estate commissioner in recognizing that the present bill will provide some protection with respect to those States which are investor States and which do not have strict subdivision laws. California, on the other hand, has a much stronger law than the proposed bill, based upon the premise that in such complicated matters as subdivision development, involving as it does questions of financing, development of resources, and construction, the State should impose standards to protect the unsophisticated home-lot buyer. Hence, we come before you today seeking an amendment to the proposed Federal legislation which looks in another direction.

California and her sister States today stand helpless at their borders against the out-of-State mail-order defrauder, law evader, and invader. When an out-of-State mail-order promoter is selling lots in a State, without complying with State law, the most that a State can do is obtain an injunctive decree in its own courts, based on the fact that the promoter is doing business in the State, contrary to State laws. And Senator Mondale has indicated there is even some doubt about that. If an injunction is obtained but the promoter chooses to ignore it, there is nothing a State can do.

You may recall, Senator Williams, at a prior hearing on this bill you put this question to our real estate commissioner:

Senator WILLIAMS. The fraudulent schemer located in some other State, if he doesn't comply, how do you reach him? Mr. GORDON. That is a tough problem.

As a matter of fact, it is not only a tough problem, it is presently impossible of solution, unless the amendments that we are proposing can be placed in the bill.

In Mr. Gordon's statement to the committee, he tells us that, during 1965, he issued 33 desist and refrain orders relating to out-of-State developments illegally offered for sale in California. It is interesting to note that the subdivisions were located in Arizona, Arkansas, Florida, Hawaii, Idaho, Maine, Nevada, Oregon, Tennessee, Utah, Washington, Australia, Bahama, and Brazil.

And he states: While theoretically California may have the means to bring these developers to justice, if they flaunt the order, as a practical matter, by remaining out of the State, the developers can avoid the imposition of effective sanctions.

« PreviousContinue »