Attorney Albert Chapar recently prevailed for his client Clifford Harris, Jr., known professionally as TI, in a critical appellate matter before the 11th Circuit Court of Appeals. The case was Fedance v. Harris, No. 20-12222.
The Court of Appeals affirmed a previous decision by Judge Pannell of the Northern District of Georgia, dismissing a multi-million dollar securities claim brought against TI and others. The claim was founded upon the sale of a digital asset. The Opinion addressed several areas of interest. With the advent of cryptocurrency, legal analysts have been deeply interested in how this new medium of exchange might test existing legal principles. The Opinion also addressed the different circumstances under which federal limitations periods begin and the potential applicability of the doctrine of “equitable tolling.”
As for the cryptocurrency issue, cryptocurrency is an amazing technological change and presents new questions in many areas that are not within my area of expertise likely including banking or tax. However, the Opinion in this case followed a developing pattern that the fact that a “thing” that people may invest in is a digital asset does not really change the basic way courts should analyze the question “is it a security?” In this case, as in other cases and consistent with prior SEC guidance, the Howey Test still works just fine. Whether via the purchase of whiskey, traditional stocks, or a digital asset, if a person invests “money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others” it’s a security. The Court of Appeals on Page 19 quoted: “Plenty of items that can be consumed or used—from cosmetics to boats to Scotch whisky—have been the subject of transactions determined to be securities because they had the attributes of an investment.” Thus, existing rules work just fine on that question even when cryptocurrency is involved.
The Opinion does add to the body of law in the Eleventh Circuit with respect to broader issues not limited to securities law because the Court analyzes statutes of limitation and the principle of equitable tolling.
How was that set up? Well, key legal questions presented in this case included (1) when does the statute of limitations for a 12(a)(1) securities claim (alleging the wrongful sale of unregistered securities) begin to run and (2) can fraudulent concealment by a defendant “equitably toll” a statute of limitations if a plaintiff has been prevented by such fraud from knowing of the existence of a cause of action?
The District Court previously ruled, and the Eleventh Circuit Court of Appeals agreed, that 12(a)(1) claims are not subject to a “discovery rule.” Rather, the applicable one-year statute of limitations “accrues” on the date of the sale – without regard to the subjective knowledge of a plaintiff. The District Court also held that “equitable tolling” is simply unavailable under any circumstances to toll, or provide relief to a plaintiff who has otherwise missed the statute of limitations. Opinion at 6. The Court of Appeals agreed that the date of the running of the cause of action for 12(a)(1) actions (alleged sale of unregistered securities) is on the date of the sale. The statute of limitations “accrues” on such a date. No “discovery rule” applies to the running of that statute of limitations in 12(a)(1).
However, the Court of Appeals rejected a blanket rule that equitable tolling is never available to a plaintiff in such a case. See Opinion discussion throughout III.A. However, “The defendant must have actively concealed facts such that the plaintiff remained “ignorant of a potential claim, not merely ignorant of evidence.” Opinion at 15 (punctuation and citation omitted).
Thus, in this case, although equitable tolling was potentially available if some form of fraudulent concealment on the part of Tip or other defendant prevented the Plaintiff or any class member from knowing of the existence of the cause of action (as opposed to concealment of just some facts). However, the Court of Appeals made clear that no fraudulent concealment could possibly be shown under the facts as plead. Plaintiff and the class members knew (or had to know) they’d bought a security. Every element of the Howey Test, which identifies the criteria for whether something is a security, was present here and not concealed. Hence, the Court of Appeals affirmed the District Court’s dismissal of the untimely claim.
Still, the Opinion provides clarity on the question of whether equitable tolling can be available in other federal causes of action. Even when a statute of limitations accrues and begins to run even if a plaintiff does not know of the existence of the cause of action, the limitations period still can then be equitably tolled if fraudulent actions of a defendant prevent a plaintiff from knowing of the cause of action. In a registration case like this, it’s hard to figure out how that could happen, given that the fact of registration is a matter of public record. However, in other cases without that “public record” element, perhaps a future plaintiff might be able to prove that equitable tolling is still available. Evidently, the panel here wanted to make that clear.
The Court of Appeals wove seven of Tip’s song titles in the Opinion. The Court of Appeals made clear to Plaintiff that with regard to the question of him having purchased securities, per one of Tip’s songs: “You Know What it Is.” Opinion at 20.