Crypto Caselaw Minute #3 — 9/18/2018

Stephen Palley
Sep 22, 2018 · 4 min read

In this week’s crypto caselaw minute a Japanese Bank dodges defending against a lawsuit in the Eastern District of Virginia and we grapple with bitcoin’s essential nature — is it money, property, both? — for purposes of pleading a cause of action for conversion.

Strap in tight — it’ll be over in a minute (ok, maybe two).

Transferring bitcoin to a Japanese exchange was not enough standing alone for a Virginia federal court to exercise personal jurisdiction over the exchange’s Japanese bank when the bank shut down U.S. wire transfers. Babiak v. Mizuho Bank, №1:18-cv-352, 2018 U.S. Dist. LEXIS 159696, at *2 (E.D. Va. Sep. 17, 2018)

Bitcoin may be borderless but personal jurisdiction analysis in the United States isn’t.

Plaintiff opened an account with Mt. Gox in May 2013 and sent bitcoin to the exchange to fund the account. Mt. Gox’s bank stopped processing international wires in June 2013. Plaintiff submitted several withdrawal requests to Mt. Gox thereafter, none of which were fulfilled. He sued the bank for tortious interference with a contract. The Court granted the Bank’s motion to dismiss for lack of personal jurisdiction, applying International Shoe principles, as interpreted by the 4th Circuit.

Here, the Bank had no presence in Virginia and “did not reach into Virginia to solicit or initiate business. If anything, Virginians reached out to Defendant” by wiring money from the U.S. to it. Furthermore, contacts with the bank were not direct — withdrawal requests were made to the exchange, not the bank.

In reaching its conclusion, the Court distinguished this case from a sister case, Greene v. Mizuho Bank, Ltd., 169 F. Supp. 3d 855 (N.D. Ill. 2016), where a motion to dismiss was granted because of insufficient contacts with Illinois, but where the Court found minimum contacts with California where “Defendant became aware of [Plaintiff’s] California address when it received the wire transfer, it accepted the wire transfer, and it earned a service fee off the wire transfer.”

Is there a lesson here for banks serving crypto-exchanges? The best I can come up with is this: the less contact you have with the exchange’s customers the less likely you are to get hauled into court in their jurisdictions. In other words, same old personal jurisdiction analysis. (Are we starting to see a theme?)

Bitcoin is property for purposes of pleading a cause of action for conversion. Norman v. Stratman, 2018 Cal. Superior LEXIS 884.

Conversion is a centuries old intentional tort one state’s high court has defined as “any distinct act of ownership or dominion exerted by one person over the personal property of another in denial of his right or inconsistent with it.” Sage Title Grp., LLC v. Roman, 455 Md. 188, 218, 166 A.3d 1026, 1043 (2017). It’s not exactly the same thing as theft but from a lay perspective maybe similar enough. Cases are varied as to whether or not a claim for conversion can be alleged for money. The general rule in the US seems to be that you can convert money if it’s specifically identifiable (that was the issue in the Sage case, which I just cited).

So, to our question — is bitcoin money or property? Can it be the subject of a conversion of a claim? According to this California court, it’s property and, yes, it can be converted: “While the law is unsettled whether Bitcoin should be treated as money or as property for various legal issues, for the purposes of a claim for conversion bitcoin is fairly treated as property and thus [plaintiff] had pleaded sufficient facts to support a claim for conversion.”

Pro-tip: check to see if a company that you hire to purchase bitcoin for you actually exists before you send it money or you may end up like the Plaintiff in a newly filed lawsuit in the Eastern District of Pennsylvania, Symphony FS Limited v. J. Barry Thompson, 5;18-cv-03904 (E.D. Pa., Filed 9/11/18).

Plaintiff alleges that it wired over 4 million dollars to a existent company that defendant pretended existed, for the purpose of purchasing bitcoin. There was no corporate entity though — the company defendant claimed existed was never actually incorporated. Making matters worse, defendant allegedly kept the cash and didn’t buy the bitcoin.

Speculating somewhat — that conversion claim might not work if the money can’t be specifically identified, but there are an unjust enrichment, constructive trust, and fraud counts as well, at least one of which will surely survive if the allegations are proved to be true.

This is a new lawsuit and no motion practice has taken place yet. We’ll provide a summary if and as there are rulings in the case.

*The usual disclaimers apply: These are my opinions only, and may not be shared by my employer, clients, friends, or the newspaper guy, It’s not legal advice and I may change my mind: “I contain multitudes.”

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