David Silver. Photo: J. Albert Diaz/ALM

A class action filed by consumers who were ripped off by the owner of a cryptocurrency company will not be settled in arbitration, a federal appeals court has ruled.

The U.S. Court of Appeals for the Eleventh Circuit on Monday upheld a West Palm Beach federal judge’s ruling that the case is not subject to arbitration.

The class members are customers of Cryptsy, a company that converted customers’ bitcoin into real cash. According to Eleventh Circuit’s per curiam opinion, founder Paul Vernon over the course of three years converted $8 million of bitcoin into cash, which was deposited into his bank account through a company called Coinbase, the defendant in the class action.

Vernon fled the country after the money was in his hands.

Lead plaintiff Brandon Leidel brought claims against Coinbase for aiding and abetting Cryptsy’s breaches of its fiduciary duties, aiding and abetting Vernon’s theft of his customer’s money, negligence and unjust enrichment from collecting fees for converting bitcoin that belonged to Cryptsy’s customers but instead ended up in Vernon’s personal account.

Coinbase argued Cryptsy’s receiver is bound by the arbitration clause in the user agreements that Cryptsy, through Vernon, entered into in 2013 and 2014 “because the receiver merely stepped into the shoes of Cryptsy with respect to those agreements,” the opinion said.

U.S. District Judge Kenneth Marra ruled the arbitration clause in the user agreements didn’t apply because Leidel did not assert a right to benefits under those agreements as evidenced by the fact that Leidel had not brought a claim for breach of contract, just tort claims.

Marra subsequently denied Coinbase’s motion to compel arbitration, and the defendant appealed, arguing it was entitled to arbitration under the doctrine of equitable estoppel.

However, the court reasoned, “Leidel does not seek to enforce the User Agreements entered into by Vernon and Cryptsy. Because Defendant has failed to establish both that Leidel is relying on a contract to assert his claims and that the scope of the arbitration clause in that contract covers the dispute, Leidel is not equitably estopped from avoiding the arbitration clause in defendant’s user agreements.”

The case was decided by Circuit Judges William Pryor, Julie Carnes and R. Lanier Anderson.

The class is represented by Silver Miller in Coral Springs and the Wites Law Firm in Lighthouse Point.

“I have preached that accountability, transparency and verification are needed in the crypto exchange space,” Silver Miller co-founder David Silver  said in a statement Monday. “This ruling brings the plaintiffs one step closer to finding out just what type of know your customer protocols and anti-money laundering protections Coinbase employed and whether Coinbase complied with state and federal statutes in that regard. Coinbase has delayed and tried to keep discovery hidden from the public long enough. That stops now.”

Marc Wites of the Wites Law Firm said the appeal was correctly decided, and he was eager to proceed.

The plaintiffs’ “only contractual relationship was with Cryptsy. They did not sue Coinbase for breach of contract and thus were not bound by the arbitration agreement,” Wites said.

Andrew Kemp-Gerstel of Liebler Gonzalez & Portuondo in Miami represents the defendant and did not respond to a request for comment by deadline.