By: John R. Brumberg , Peter St. Tienne Wolff
In our first article, we introduced the subject of Bitcoin and cryptocurrencies in litigation. This article discusses several of the hottest recent cases involving Bitcoin and cryptocurrencies.
Cryptocurrency litigants often accuse their opponents of being scoundrels, thieves, or pathological liars. These cases—arising in the divorce, commercial litigation, partnership, and law firm dispute contexts—involve all of the above. Some have reached a resolution or conclusion, while others remain pending in this developing area of the law.
California, being a community property state, treats all property acquired during a marriage by either spouse as presumptively owned in community by both spouses. In In re Marriage of De Souza, 266 Cal. Rptr. 3d 890-94 (Ct. App. Aug. 10, 2020), the husband Francis bought certain Bitcoins after the filing of divorce but, contrary to California law, failed to disclose his purchase to his wife Erica. Accordingly, those Bitcoins were not initially included in the marital estate subject to division. Upon learning of the failure to disclose the Bitcoins, the court held that the failure to disclose material information was a breach of Francis’s fiduciary duty.
Erica moved for an emergency order compelling Francis to immediately transfer her full interest in the community Bitcoins. Although Francis argued that “even if he failed to disclose material information, his disclosure caused no impairment to Erica’s community interest because . . . the bitcoins ‘earned millions of dollars for the community, thereby greatly enriching, not impairing, the community estate,’” the court found that this was irrelevant and indicated that “the financial success of one undisclosed investment does not erase the harm to the community estate, and Erica, occasioned by a separate undisclosed transaction.” The Court Ordered Francis to pay the wife $22,500 in cash and transfer 249.445 additional bitcoins as well as to pay Erica’s attorney’s fees. Notably, the value of the Bitcoins rose from $45,000 at the time of their purchase in April 2013 to approximately $8,000,000 near the time of the court’s transfer order in December 2017 – January 2018.
Takeaway: Courts disfavor efforts to hide bitcoin-related assets.
In Symphony FS Ltd. v. Thompson, 2018 WL 6715894, at n.1 (E.D. Pa. Dec. 20, 2018)., Symphony, an Irish company trading in digital assets, attempted to procure Bitcoin through Volantis Escrow Platform LLC (Volantis), an escrow broker. The party who was to provide the Bitcoins absconded with Symphony’s money and never provided the Bitcoin after Volantis paid the money. Believing that Volantis was a sham LLC, Symphony sued its principal, Thompson, asserting claims of unjust enrichment, constructive trust, conversion, breach of fiduciary duty, and fraud. However, the court refused to grant an injunction against the principal Thompson, holding that Symphony was not likely to succeed on the merits because Volantis was likely a legitimate LLC and there was no basis upon which to pierce the corporate veil.
Takeaway: Courts will observe corporate formalities unless there is some suggestion of fraudulent behavior.
In Ox Labs v. Bitpay, Inc., 2020 WL 1039012, at *1-2 (C.D. Cal. Jan. 24, 2020), Ox Labs inadvertently credited 200 Bitcoins to Bitpay’s account. Defendant Bitpay sold the 200 Bitcoins without Ox Labs’s permission in the regular course of business on July 10, 2015 for $57,000. Ox Labs brought claims of conversion and unjust enrichment. The court granted summary judgment for Ox Labs on its conversion claim and indicated that the statute of limitations began to run on that claim when Bitpay sold Ox Labs’s Bitcoins. Whether a two-year or three-year statute of limitations applied turned on whether the court classified Bitcoin as tangible property, which was subject to a three-year statute of limitations, or intangible property, which was subject to a two-year statute of limitations. Ultimately, the court held that Bitcoin was tangible property and that a three-year statute of limitations applied.
The 200 Bitcoins appreciated significantly in price since the time when they were converted by BitPay. Ox Labs argued that it was entitled to a specific recovery of the Bitcoin, or, alternatively, the value that the Bitcoin would have appreciated in the time after the conversion. The court disagreed, indicating that
Plaintiff is simply seeking 200 Bitcoins because they are worth more today than they were back in 2015 when it accidentally credited Defendant. Plaintiff has not provided, and the Court is not aware of any authority permitting Plaintiff to seek specific recovery and reap such a windfall based on a similar factual pattern.
Further, the court stated that Ox Labs was not entitled to recover 200 Bitcoin because it could not track the particular Bitcoin which had been converted. Moreover, the court refused to allow Ox Labs to recover the lost value of its Bitcoin because “Plaintiff [had] not provided any evidence that it would have kept the 200 Bitcoins from 2015 through the present day.”
Takeaway: Questions of specific performance, valuation, and equities in cryptocurrencies are far from settled.
In one of the seminal cases in this area of the law, the personal representative of the Estate of David Kleiman and W&K Info Defense Research, LLC brought claims alleging damages between $201 million and $28 billion against Craig Wright for conversion, unjust enrichment, misappropriation, breach of fiduciary duty, breach of partnership duties of loyalty and care, fraud, constructive fraud, civil theft, and requesting a preliminary injunction. Kleiman v. Wright, Case No. 9:18-cv-80176-BB (S.D. Fla. Jan. 14, 2019). The litigation took on the proportions of an epic saga and, as of June 2021, has generated over 650 docket entries, many of which involve discovery disputes particular to the cryptocurrency industry.
W&K, a company owned by David Kleiman and Craig Wright, mined hundreds of thousands of Bitcoins and created valuable blockchain intellectual property. The parties disputed who owned the Bitcoins and whether the Bitcoins could even be accessed and retrieved. Wright, who was attempting to avoid equitably dividing the Bitcoin, alternatively claimed that identifying bitcoin that he had mined would be unduly burdensome and also impossible. In ruling on a Motion to Compel, which sought to unmask Wright’s bitcoin-related assets, the Magistrate Judge indicated that (1) Dr. Wright and David Kleiman entered into a 50/50 partnership to develop Bitcoin intellectual property and to mine bitcoin; (2) any Bitcoin-related intellectual property developed by Dr. Wright prior to David Kleiman’s death was property of the partnership; (3) all bitcoin mined by Dr. Wright prior to David Kleiman’s death was the property of the partnership when mined; and (4) Plaintiffs presently retain an ownership interest in the partnership’s bitcoin and any assets traceable to them.
Wright initially attempted to avoid turning over the Bitcoin by claiming that diversity jurisdiction did not exist. However, the court declined to credit this argument, holding that Wright “seems to argue that even though his numerous conflicting statements are the very reason confusion has been created as to the ownership of W&K, the Court should nonetheless use these statements as a basis to challenge the Court’s subject matter jurisdiction.” Wright also claimed that he was the creator of Bitcoin and that he could not access certain Bitcoin, attempting to avoid turning the Bitcoin over. The magistrate judge held that it was “incredible . . . that someone who controlled almost 1 million bitcoin would encrypt it in a way that he could not access it, and then would not care if he lost it all.” Therefore, in addition to ruling against Wright on key factual issues, the Magistrate Judge ordered that the Plaintiff was entitled to attorney’s fees and struck several of Wright’s affirmative defenses. Although these stringent penalties were ultimately overturned by U.S. District Court Judge Beth Bloom, Wright was ordered to reimburse Plaintiffs’ attorney’s fees and expenses in the amount of $165,800.19.
Takeaway: Despite the difficulty of tracking cryptocurrency, courts will encourage the tracking of those assets.
In the Wright litigation, despite the difficulty that may arise in locating, tracking, and identifying cryptocurrency assets that have been moved through many different entities, courts will encourage the tracking of those assets. Moreover, courts will not deal favorably with persons or entities who attempt to prevaricate, dissemble or lie about their access to cryptocurrency assets. Courts will use their inherent power to reach beyond technical defenses to accessing bitcoins and other cryptocurrencies.
The lawyers who brought the Kleiman suit were subsequently themselves the subject of a lawsuit by their former law partner, Cyrulnik, who claimed that the partners prevented Cyrulnik from obtaining his share of the firm, namely “a fee payable in cryptocurrency by one of the firm’s clients that only days before had suddenly appreciated exponentially to more than $250 million.” Cyrulnik v. Roche, (Fla. Cir. Ct. Miami-Data Cty. Mar. 9, 2021) (Verified Complaint ¶ 1.) Cyrulnik brought statutory claims under Florida law, requested an accounting, and brought claims of breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, conversion, unjust enrichment, and civil conspiracy. Cyrulnik v. Roche, (Fla. Cir. Ct. Miami-Data Cty. Mar. 9, 2021). According to Cyrulnik, the conspiring partners sought to delay Cyrulnik’s impending legal action, stringing him along and proposing a Sunday settlement discussion, but instead filing their lawsuit on Saturday night. Roche Cyrulnik Freedman LLP v. Cyrulnik, (S.D.N.Y. June 11, 2021). The partners allegedly held a secret meeting to terminate Cyrulnik just as the cryptocurrency reached its peak price and as Cyrulnik’s share reached $60 million in value.
Cyrulnik himself was accused by his partners of “increasingly abusive, destructive, erratic, and obstructive behavior,” “turn[ing] what was supposed to be a collegial, respectful, collaborative, and diverse law firm into a war zone in which Cyrulnik fought to maximize his bottom line at the expense of associates, partners, diversity initiatives, and the firm itself.”
The Cyrulnik litigation remains pending.
Takeaway: Attorneys should memorialize the terms of their retention and address law firm partnership documents to deal with the risk that the assets underlying the contingency fee agreements could rapidly appreciate or depreciate in price.
Peter St. Tienne Wolff is a Partner in the Commercial Litigation and Fiduciary, Estates and Trusts Litigation Practice Groups of Pietragallo Gordon Alfano Bosick & Raspanti, LLP. His practice includes fiduciary litigation in the Orphan’s Court and matters involving commercial and personal contracts, business torts, trade secrets, injunctions, professional liability, premises liability, employment, defamation, and requests for information under the Pennsylvania Right to Know Law.
John R. Brumberg is a Partner at Pietragallo Gordon Alfano Bosick & Raspanti, LLP. He is a member of the Litigation Group. John has experience successfully representing a wide variety of clients, from publicly traded companies involved in complex litigation to individuals making large personal injury claims. He has also served as counsel to numerous individuals and small businesses.
This article has been published in PLI Chronicle: Insights and Perspectives for the Legal Community, https://plus.pli.edu.