Crypto Caselaw Minute #45–7/18/19
This week’s CCM covers an alleged loss of a lot of bitcoin that its owner forgot about, a case involving the bazingamoola ICO done by Telegram, and yet another escrow gone wrong. Maybe escrow is not always a great idea? Enjoy!
Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.
(As always, Rosario summaries are “NMR” and Palley summaries are “SDP”. Image credit: https://pixabay.com/photos/smorgasbord-food-buffet-banquet-792906/ (Pixabay license)
Srinvasan v. Kenna, 2019 U.S. Dist. LEXIS 119253 (4:18-cv-03977-HSG N.D.Cal., 7/17/2019) [SDP]
This case involves an alleged bitcoin loss. Plaintiff says he bought 200 bitcoin in July 2011 from a website for which defendant was the CEO. At the time, bitcoin was trading for about $15. Plaintiff filed a lawsuit in California state court in 2018 and it was then removed to Federal Court for the Northern District of California. At issue is where this bitcoin, purchased for $3,000 and now worth roughly $2 million is now.
The factual allegations in a nutshell are that (1) Plaintiff bought the bitcoin via the exchange in 2011, (2) asked to get it back in 2013 but got no response, (3) then forgot that he bought it while in a PhD program, (4) remembered he bought it in 2017 when bitcoin went up in value by a lot, (5) learned that the exchange had gone the way of all flesh, had been out of business since 2013, and no-one had told him.
The Complaint was amended a bunch of times, including most recently on April 2, 2019. That version of the lawsuit includes a single count for Conversion. We’ve talked about this tort before and it’s a civil cause of action that you can use when you allege that someone has stole your stuff. You usually can’t use it for money (subject to some exceptions that we don’t need to worry about here) and can only be applied to identifiable assets. Some courts have allowed conversion claims to be used for allegedly purloined bitcoin. Plaintiff says that because of subsequent forks in bitcoin he’s also entitled to return of bitcoin gold and bitcoin cash (this isn’t quite a boilerplate claim but it’s not the first time we’ve seen this damages claim it by a longshot).
Whether or not bitcoin can be converted for purposes of a motion to dismiss actually isn’t at issue in this ruling though, in which the Court dismissed with prejudice the second amended complaint. With prejudice means the plaintiff doesn’t get to try again. His only remedy is the court of appeals.
Anyway, the problem here is that in the Court’s eyes was that even after multiple amendments it was still all fakata. Plaintiff sued the CEO of the exchange himself, personally, but didn’t sue the exchange. The court said that because plaintiff failed to plead alter ego/corporate veil piercing theories against the CEO the case had to be dismissed.
As the Court puts it: “Plaintiffs miss the point entirely. It is beside the point that Plaintiffs did not name Tradehill as a defendant. Indeed, Plaintiffs must plead alter ego because they brought suit against Tradehill’s CEO, rather than Tradehill itself. And they cannot handwave the alter ego requirements — which this Court plainly stated were necessary in its dismissal order — by stating that they are pleading conversion against Kenna himself, without having pled any facts attributable to Kenna other than acts purportedly performed by him as CEO of Tradehill.”
In short, stale and hand-wavey claims translated into not getting past the start line for a multi-million dollar bitcoin conversion claim. Bad day for the plaintiff. When asked for comment, the CEO of Bitcoin did not return our calls.
Telegram Messenger v. Lantah, 2019 U.S. App. LEXIS 21158 (9th Cir., filed July 17, 2019) [NMR]
This case is a decision from the Ninth Circuit Court of Appeals involving messaging giant Telegram and a trademark dispute. To understand the issues on appeal here we need to take a look back to the initial lawsuit to see how we got here. This case is all about the Grams.
For those that don’t remember Telegram is a secure messaging company. Awhile ago Telegram did an ICO that raised something like a quadrazillion dollars in private sales for the purpose of building out a 3rd Generation blockchain network for their secure messaging platform. Telegram planned to call their tokens “Grams.” Around the same time Lantah, LLC was a startup aiming to build a blockchain network and filed for an intent to use trademark application on the mark “Grams.” As the Court put it “[e]ach plans to call its cryptocurrency “GRAM.” Telegram sought to enjoin Lantah from using the GRAM mark, and the district court issued a preliminary injunction.”
Now that we are current on what the dispute was why did the Ninth Circuit get involved? Well, Lantah’s attorneys appealed the district court’s order granting Telegram’s preliminary injunction. This type of appeal is called an interlocutory appeal, and it allows a party to have a higher court review a decision of the lower court before the trial is concluded. In this case, the lower court stayed the case (meaning put the case on hold) until they received a ruling from the court of appeals. Here, Lantah argued that the district court abused it’s discretion by issuing the preliminary injunction. The appeals court disagrees. Why?
The appeals court looks at the lower courts decision and determines if they applied the correct rule of law, and then if the application was illogical, implausible, or without support from the facts in the record. Here, the parties in the case disagreed about whether Telegram could succeed in the case on the merits, because Lantah disputed whether Telegram had used the mark in commerce. The Court ruled that the district court’s preliminary injuction was fine, because the district court’s determination that Telegram had used the mark in commerce was a-okay for a couple of reasons.
When Telegram was fundraising for an ICO the size of the Hercules-Corona Borealis Great Wall they provided would be purchasers with documents, such as “Purchase Agreement for Grams,” which “required the buyers to pay Telegram by a specified payment date in exchange for the right to receive the agreed-upon number of GRAMs in the future.” Additionally, “ [t]he district court also pointed to several publications that reported on Telegram’s efforts to offer the GRAM cryptocurrency.” In the opinion of the Court this sort of evidence shows that the district court did not abuse its discretion in determining that Telegram was using the mark in commerce.
It’s also worth mentioning that the appeals court pointed out that the district court never should have stayed the case pending this appeal. Essentially, staying the case may prevent the appeals court from having all the necessary information to rule on an interlocutory appeal. That wasn’t the case here, but it’s interesting to see nonetheless, especially this gem of a line “[w]e have repeatedly admonished district courts not to delay trial preparation to await an interim ruling on a preliminary injunction.” Yikes.
White v. Sharabati, C.A. No. N18C-02–170 WCC (Del. Super. Ct., decided July 2, 2019) [NMR]
At the heart of this case involves an exchange of 484,000 xrp for 46.5 bitcoin in 2017 that went wrong. Yep. Really. Legally though the case is about personal jurisdiction and escrow. Two concepts we cover quite frequently at the Crypto Caselaw Minute.
Elizabeth White is our plaintiff who was allegedly contacted by the defendant Fadi Sharabati on December 27, 2017, and “ asked “to enter into a cryptocurrency transaction, in which [she] would sell 484,000 [xrp] to [Mr. Sharabati] in exchange for 46.5 Bitcoin using a certain online escrow platform.”” Allegedly, the bitcoin never arrived, and somehow the plaintiff traced her xrp to an account on Bittrex.
White filed a lawsuit in February of 2018, and amended her complaint in April identifying Sharabati as the defendant, then a default judgment is entered against Sharabati in May of 2018. Subsequently, the plaintiff moved to garnish the crypto, and ultimately receives $455,010.79 worth of crypto from Bittrex, and for good measure they found some on Poloniex worth about $30,000. As you can imagine this got Sharabati’s attention, and on November 19, 2018, he filed a motion to vacate the default judgment, and that motion was granted on December 17, 2018. His attorney’s then filed this motion seeking to dismiss the case for lack of personal jurisdiction, and to return or escrow the funds that were garnished under the default judgment. This brings us to the present motions.
Personal jurisdiction is the idea that to be subject to the jurisdiction of a court you have to have some connection to the jurisdiction in question. That connection could be a bunch of different things like living there, doing business there, availing yourself of the benefits of the jurisdiction, etc. Here, Sharabati was a Palestinian citizen who resided in Morocco. White lives in New York and does business through the White Company, which is a Delaware entity. White’s argument is that by allegedly using Bittrex, a Delaware company based in Seattle, to hold the stolen funds Sharabati was subject to jurisdiction in Delaware. The Court disagreed. As the Court put it:
Except for Bittrex’s incorporation under Delaware law, this litigation has no other connection to the state, and there is no evidence that Mr. Sharabati has affirmatively established additional contacts with Delaware beyond his mere use of the trading platform.
Or to put it another way, “[u]nder Plaintiff’s logic, any nonresident who uses the website of a Delaware corporation, even once, would be subject to this Court’s jurisdiction.” Checks out.
The second motion was to return the funds that were sent to White by Bittrex and Poloneix. The Court stayed this motion. The Court explained that “[t]he Court is very concerned that forcing Ms. White to return the garnished funds to Mr. Sharabati will result in her never recovering for the alleged fraud committed by Defendant.” In light of this concern the Court ruled that they “will delay the effective date of its dismissal for forty-five days to allow Plaintiff time to file a subsequent action in a proper jurisdiction and take the steps necessary to protect the garnished cryptocurrency for litigation.” White needs to file in another jurisdiction that makes sense and see that the issue is resolved on the merits. Lucky outcome for the plaintiff.
