Opinion by Judge Robert N. McDonald
Held: (1) Under the Maryland Securities Act (the “Act”), the offer and sale of a tenant-in-common (“TIC”) interest in commercial real estate under terms requiring a mandatory management contract with an affiliate of the seller and granting the purchasers only a limited opportunity to change management involves a “security.” (2) The statute of limitations periods for claims brought under the Act for sale of an unregistered security and for transacting business as an unregistered broker-dealer or agent are not tolled by the judicially created discovery rule of Poffenberger v. Risser, 290 Md. 631 (1981), or under the fraudulent concealment provision of Md. Code, Courts & Judicial Proceedings §5-203 (“CJ §5-203”). (3) The statute of limitations periods for claims brought under the Act for fraud in the offer or sale of a security and for transacting business as an unregistered investment advisor and for material misrepresentations made in that capacity are not tolled by the discovery rule of Poffenberger but may be tolled under the fraudulent concealment provision of CJ §5-203.
Facts: In 2003, petitioner, who had owned and managed rental properties for over forty years, sold eleven different properties through the respondent real estate brokerage for approximately $4 million. For favorable tax treatment petitioner sought to re-invest the proceeds in other real estate and based on the respondent’s advice, petitioner used much of the proceeds to purchase five fractional interests or TICs in various commercial buildings.
The TICs were all created by DBSI, Inc. of Idaho, or an affiliate. Purchasers of the TICs were required to retain DBSI or its affiliate as the property manager and in return the purchasers would receive a set annual rate of return on their purchase monies. The property manager could only be removed by majority vote of all TIC owners of a specific property and a new property manager could only be appointed by the unanimous consent of all the TIC owners. The TIC owners had no direct control over the property.
In 2008, after petitioner learned that DSBI would be suspending payments on certain properties, DBSI filed a voluntary petition for bankruptcy under Chapter 11 of the bankruptcy code. The properties subject to petitioner’s TICs were foreclosed. The bankruptcy court ultimately found DSBI’s transactions to have been constructively or actually fraudulent. The Securities Division of the Maryland Attorney General’s Office contacted petitioner in 2009 in the course of investigating the offer and sale of the TICs in Maryland. On March 23, 2010, the petitioner filed suit in Circuit Court against the respondent for violation of the Act, breach of contract and common law tort claims of fraud, negligent misrepresentation, negligence and constructive fraud. The Circuit Court granted summary judgment for the respondent on all counts finding in pertinent part that the TICs were not a security under the Act and, even if they were deemed a security, the petitioner’s claims were time barred. Following petitioner’s timely appeal the Court of Appeals granted certiorari to determine, inter alia, whether (1) the TICs are securities under the Act; and (2) whether the petitioner’s claims under the Act are time barred.
Analysis: The Court of Appeals first analyzed the Act to determine if the TICs were securities. The Act broadly defines a “security” to include an “investment contract” but the meaning of the term “investment contract” was a matter of first impression for the Court. The Court noted that when interpreting the Act, it may consider the federal Securities Act because the Act states that it is to be coordinated with the related federal law. Reviewing pertinent federal precedent, particularly SEC v. Howey, 328 U.S. 293 (1946), the Court determined that an “investment contract” was an investment of money in a common enterprise with an expectation of profits derived from the significant efforts of others.
In this case, the sole issue was whether the purchasers of TICs had an expectation of profits derived from the significant efforts of the property manager. The Court concluded that the Howey test was met because the profits were generated by the property manager’s actions. Even though the investors, acting collectively, had the authority to remove the property manager, the efforts by the property manager were no less dominant and essential to the success of the enterprise than are the efforts of the management of a corporation. The TIC investment was, therefore, held to be a “security” under the Act.
The Court then considered whether the petitioner’s claims under the Act were time barred. The petitioner’s private causes of action under the Act included allegations of respondent’s (1) offer and sale of an unregistered security, (2) transacting business as an unregistered broker-dealer or agent, (3) misrepresentations or omissions of material fact in the offer and sale of a security, and (4) violations of the investment advisor requirements of the Act (i.e., both lack of registration as an investment advisor and misrepresentations made in that capacity). The statutes of limitations under the Act for each of these various claims had lapsed.
The Court analyzed whether petitioner’s claims could be tolled by either (1) the Poffenberger discovery rule, which delays the accrual of the statute of limitations until when the wrong is discovered or when the wrong should have been discovered through reasonable diligence; or (2) CJ §5-203, which delays the accrual of the cause of action when the plaintiff remains ignorant of the cause of action due to the defendant’s fraudulent concealment.
Analyzing the private causes of actions under the Act, the Court found that Poffenberger discovery rule did not toll the relevant statutes of limitations. The Court compared the limitations provisions for the causes of actions involving lack of registration (of the security or as a broker-dealer) with the limitations provisions for causes of action involving misrepresentations and fraud. Citing Md. Code Corp. & Assn’s, §11-703(f)(1)&(2)(i), the Court noted that for the sale of an unregistered security or acting as an unregistered broker-dealer, a cause of action must be brought “after the earlier to occur” of (1) three years after the contract of sale or purchase; or (2) one year after the violation. On the other hand, citing Md. Code Corp. & Assn’s, §11-703(f)(1)&(2)(ii), the Court noted that for a violation of the anti-fraud provisions, a cause of action may not be brought “after the earlier to occur” of (1) three years after the contract of sale or purchase or (2) one year after “discovery of the untrue statement or omission, or after discovery should have been made by the exercise of reasonable diligence.” The limitations provision applicable to the investment advisor requirements likewise requires such a claim to be brought no later than the earlier of (1) three years “after the date of the advisory contract or the rendering of investment advice” or (2) two years after “the discovery of the facts constituting the violation.” Md. Code Corp. & Assn’s, §11-703(f)(3). The Court concluded that because the limitations provisions applicable to anti-fraud and investment advisor violations under the Act includes their own discovery rule, the legislature did not intend for the Poffenberger discovery rule to apply to those violations. Further, the legislature did not intend for the Poffenberger discovery rule to apply to registration violations because it did not include a discovery rule in the limitation for those violations, as it did for the anti-fraud violations. Thus, the Court held the Poffenberger discovery rule to not apply to these private causes of action under the Act.
The Court analyzed next whether CJ §5-203 applied to the private causes of action under the Act. It found that CJ §5-203 did not apply to the violations of the registration provisions because a reasonably prudent buyer could have discovered those violations from publicly available information at the time of sale of the unregistered security or sale by an unregistered broker-dealer. However, CJ §5-203 could toll the anti-fraud violations because the tolling arises from the affirmative misconduct of the defendant and has been held applicable to limitations as to both statutory and common law claims. Finding no indication that the legislature did not intend for CJ §5-203 to apply to claims of fraud under the Act if plaintiff’s acquisition of knowledge of the violation is hindered by defendant’s fraudulent concealment, the Court held that CJ §5-203 could apply to anti-fraud claims under the Act. Because the issue of fraudulent concealment is fact-intensive and the Circuit Court did not explicitly consider whether the undisputed facts negated tolling under CJ §5-203, the Court reversed the Circuit Court’s grant of summary judgment for the respondent to the extent the counts under the Act asserted claims for fraud.
The judgment of the Circuit Court was affirmed in part and reversed in part and the case remanded back to the Circuit Court.
The full opinion is available in PDF.