Opinion
CIVIL ACTION NO. 1-18-cv-3392-AT
2020-03-11
BDI CAPITAL, LLC, Plaintiff, v. BULBUL INVESTMENTS LLC d/b/a Campbx, Keyur Mithawala Defendants.
John Joseph Richard, Mark B. Carter, Taylor English Duma LLP, Atlanta, GA, Martin Mushkin, Law Office of Martin Mushkin, LLC, Stanford, CT, for Plaintiffs. Pratt H. Davis, Robert Daniel Terry, Parker MacIntyre, Atlanta, GA, for Defendants.
John Joseph Richard, Mark B. Carter, Taylor English Duma LLP, Atlanta, GA, Martin Mushkin, Law Office of Martin Mushkin, LLC, Stanford, CT, for Plaintiffs.
Pratt H. Davis, Robert Daniel Terry, Parker MacIntyre, Atlanta, GA, for Defendants.
ORDER
AMY TOTENBERG, UNITED STATES DISTRICT JUDGE
This matter is before the Court on Defendants Bulbul Investments LLC d/b/a CampBX ("CampBX") and Keyur Mithwala's (collectively, "Defendants") Motion for Summary Judgment [Doc. 75]. Plaintiff BDI Capital, LLC has also filed a Motion to Strike, which contains an embedded request for leave to file a sur-reply. [Doc. 83]. The Motion to Strike is DENIED , but the request to file the sur-reply is GRANTED , and the Court will direct the clerk to file the proposed sur-reply, Doc. 83-1, Pages 9–14. For the reasons that follow, the Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART .
Plaintiff's claims against Defendant Priyam Mithawala were voluntarily dismissed without prejudice on August 8, 2019 (See Doc. 74).
I. STANDARD FOR SUMMARY JUDGMENT
Summary judgment may only be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to summary judgment as a matter of law." FED. R. CIV. P. 56(c). The "purpose of summary judgment is to pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting the Advisory Committee's note to FED. R. CIV. P. 56 ). "[The] party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the [record before the court] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The burden then shifts to the non-movant to establish, by going beyond the pleadings, that there is indeed a genuine issue as to the material facts its case. Thompson v. Metro. Multi–List, Inc. , 934 F.2d 1566, 1583 n.16 (11th Cir. 1991) ; Chanel, Inc. v. Italian Activewear of Fla., Inc. , 931 F.2d 1472, 1477 (11th Cir. 1991). A dispute of material fact "is ‘genuine’ ... [only] if the evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ; see also Matsushita , 475 U.S. at 587, 106 S.Ct. 1348.
When ruling on the motion, the Court must view all the evidence in the record in the light most favorable to the non-moving party and resolve all factual disputes in the non-moving party's favor. Welch v. Celotex Corp. , 951 F.2d 1235, 1237 (11th Cir. 1992) ; Ryder Int'l Corp. v. First Am. Nat'l Bank , 943 F.2d 1521, 1523 (11th Cir. 1991). The Court must avoid weighing conflicting evidence. Liberty Lobby , 477 U.S. at 255, 106 S.Ct. 2505 ; McKenzie v. Davenport–Harris Funeral Home , 834 F.2d 930, 934 (11th Cir. 1987). Nevertheless, the non-moving party's response to the motion for summary judgment must consist of more than conclusory allegations, and a mere "scintilla" of evidence will not suffice. Walker v. Darby , 911 F.2d 1573, 1577 (11th Cir. 1990) ; Peppers v. Coates , 887 F.2d 1493, 1498 (11th Cir. 1989). But where a reasonable fact finder may "draw more than one inference from the facts, and that inference creates a genuine issue of material fact, then the court should refuse to grant summary judgment." Barfield v. Brierton , 883 F.2d 923, 933–34 (11th Cir. 1989) (citation omitted).
The essential question is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson , 477 U.S. at 251–52, 106 S.Ct. 2505.
Keeping in mind that when deciding a motion for summary judgment, the Court must view the evidence and all factual inferences in the light most favorable to the party opposing the motion, the Court provides the following statement of facts. See Optimum Techs., Inc. v. Henkel Consumer Adhesives, Inc. , 496 F.3d 1231, 1241 (11th Cir. 2007) (observing that, in connection with summary judgment, the court must review all facts and inferences in light most favorable to non-moving party). This statement does not represent actual findings of fact. Priester v. City of Riviera Beach , 208 F.3d 919, 925 n.3 (11th Cir. 2000) ("We ... have repeatedly stressed that the ‘facts’, as accepted at the summary judgment stage of the proceedings, may not be the ‘actual’ facts of the case."). Instead, the Court has provided the statement simply to place the Court's legal analysis in the context of this particular case or controversy.
In 2011 Defendant Keyur Mithawala began, through his company CampBX, to develop the code for a Bitcoin trading platform that would allow its users to buy and sell Bitcoins against U.S. Dollars. (Def.'s Statement of Undisputed Material Facts ("SUMF") ¶ 6, not disputed , Pl.'s Resp. to SUMF ("RSUMF") ¶ 6).
Bitcoins are a type of virtual currency, or "cryptocurrency" stored in virtual "wallets." (Id. ¶ 1). A wallet, which is created by the official Bitcoin software, can store bitcoins of a single user. (Id. ¶ 2). Alternatively, a wallet can store bitcoins of multiple users using built-in "Accounts" functionality and track each user's Bitcoin balance independently, which is the type of "wallet" employed by CampBX. (Id. ¶ 2–3). Each account on the CampBX trading platform had two types of balances - Bitcoin and cash (in U.S. Dollars) (Id. ¶ 7).
For the purposes of the Order, generally speaking, "Bitcoin," in the capitalized singular refers to the cryptocurrency with the symbol BTC, while "bitcoin" or "bitcoins" refers more generally to cryptocurrency, inclusive of cryptocurrency modeled on Bitcoin.
It is also possible to store bitcoins in "hardware" wallets which must be physically accessible. See ABA Section of Taxation, Comment Letter on Tax Treatment of Cryptocurrency Hard Forks for Taxable Year 2017, at 4 (Mar. 19, 2018), https://www.americanbar.org/content /dam/aba/administrative/taxation/policy/031918comments2.authcheckdam.pdf.
Transferring bitcoins entails two "keys," a public key and a private key. "Both are large strings of numbers that are mathematically linked to the wallet address.... The private key is used to mathematically derive the public key, which is transformed with a hash function to produce the address that other people can see." Any bitcoin transfer thus creates a transaction ID (TXID), and in the case of a single user wallet as described above, the TXID of outgoing transfers includes a reference to one or more incoming TXID's. (Id. ¶ 4). In the case of a multi-user wallet, the TXID's of individual users may be jumbled due to the pooled nature of the wallet. (Id. ¶ 5).
ABA Section on Taxation, supra note 4.
In 2013, BDI, through Jay Daniel, began the process to set up an account with CampBX. (Id. ¶ 9). There were no transactions, attempted transactions or communications between BDI Capital, LLC ("BDI") and CampBX between May 2015 and July 2017. (Id. ¶ 10).
Somewhere around July 4, 2017, Mr. Daniel alleges that he attempted to make a withdrawal of all of BDI's bitcoins stored on CampBX. (Deposition of Jay Daniel, at 40–42, Doc. 42). Mr. Daniel contends that he was unable to complete the transaction, and received an error message. (Id. at 43:17–22). He contends that he attempted to initiate a help desk ticket, but received a "red error message." (Id. at 47:11–17). Mr. Daniel alleges he tried to make a help desk ticket again the next day, and received another error. (Id. at 49:12–20). Around that time, Mr. Daniel alleges he sent an email to CampBX, but received no response. (Id. at 50:18–20). Mr. Daniel does not have any record of these attempts and no longer has access to the email address from which this email was allegedly sent. (Id. at 27:5–27:16, 28:09–28:19, 52:11–20). Camp BX contends that it has full help desk records preserved from 2011 through the present, and there is no record of any help desk tickets being attempted or submitted by BDI in or around July 2017. (K. Mithawala Decl. ¶ 10, Doc. 75-3).
BDI argues that it sought discovery of "all records regarding this issue and that Defendants intended to use to support any defenses" and that "[n]o such records were produced to show the absence of communications with BDI." (Pl.'s RSUMF ¶ 14). BDI contends that under Fed. R. Civ. P. 37(c)(1), the failure to produce this information precludes Defendants from offering evidence of it. BDI is mistaken. Rules 26(b)(1) and 34(b) do not require a party to produce all of its records to prove the absence of a record; the party need only state that a diligent search was performed and no such records were located. BDI's objection to Defendants' SUMF ¶¶ 16 & 25 are likewise overruled.
Mr. Daniel made no further attempts to withdraw the coins until December of 2017. (Dep. Daniel at 53:17–21, 54:9–12, 17–20). Mr. Daniel contends that he received the same error message when he attempted to withdraw the Bitcoin, ostensibly regarding withdrawal limits, and the same error message when he attempted to make a help desk request. (Id. at 55). Mr. Daniel has no record of these attempts. (Id. at 56:1–4). Defendants likewise have no record of an email or alleged attempted second transaction in July of 2017. (K. Mithawala Decl. ¶ 11). Furthermore, the computer from which all of these transactions originated was destroyed. (Dep. Daniel at 49:2–49:6).
In December of 2017, Mr. Daniel contends that after reading a post on Reddit, he became aware that CampBX was in the process of shutting down or had been shut down, and at this point contacted BDI's counsel. (Id. at 57:14–20, 58:2– 22). The Court picks back up on this thread later.
Meanwhile, Defendants contend that in 2017, they decided to close CampBX because the banks it used had elected to discontinue their business with entities involved with virtual currencies such as Bitcoins. (K. Mithawala Decl. ¶ 13; Dep. K. Mithawala at 150:17-150:24). The Reddit post referenced above was not posted by any of the Defendants. (Def.'s SUMF ¶ 20, not disputed , Pl.'s RSUMF ¶ 20). Defendants contend that they began to notify account holders in a staggered manner to withdraw their coins, ostensibly "to try to prevent an overwhelming number of questions to CampBX's help desk at one time." (K. Mithawala Decl. ¶ 14; Dep. K. Mithawala at 125:14-125:21). There appears to be no dispute that BDI never received such notice, though Defendants contend that this is because BDI was not in the first batch of account holders to be notified. (K. Mithawala Decl. ¶ 16; Daniel Decl. ¶ 13).
Defendants testified to additional reasons for closing the exchange, such as increasing regulatory burden. (Ex. 3, K. Mithawala Depo. 150:17-152:5)
As noted above, BDI contacted its counsel in December of 2017, who sent a demand letter to Defendants dated December 6, 2017. (Am. Compl. ¶ 19, Ex. 2, Doc. 11-1 at 8; Answer ¶ 19 ("Defendants [sic] believes it received the letter referenced in the allegations of Paragraph 19 of the Complaint.")). The letter indicated that it was sent on behalf of Jay Daniel, not BDI, and provided an email address for Mr. Daniel directly. (Doc. 11-1 at 8). The letter stated that "our client is having trouble withdrawing bitcoins from the CampBX account from your company" and that "he has 14.86155791 BTC in their [sic] trading account along with ... $2,816.87." (Id. ). The letter requested that CampBX "transfer these amounts immediately."
Defendant Keyur Mithawala did not receive the letter until approximately January 10, 2018. (Def.'s SUMF ¶ 27, not disputed , Pl.'s RSUMF ¶ 27). Defendants did not respond to the letter. (Id. ¶ 28). Defendants claim that they did not respond to it because it did not contain a valid CampBX user name or email address, making it impossible to identify the account to which it corresponded, and that the email and user name in the letter were not the same as the ones used to register the account. (Id. ¶¶ 28–29). Defendants claim that at the time, CampBX was receiving a large number of fraudulent requests for account takeovers and CampBX did not respond to anyone who did not provide the correct account information. (K. Mithawala Decl. ¶ 20). BDI argues in response that by contacting the lawyer who sent the letter, Defendants could have quickly determined the information necessary to identify the subject account. (Daniel Decl. ¶ 9).
In any case, BDI's counsel located and sent another letter dated January 9, 2018 to all additional addresses it could find for Defendants, (Daniel Decl. ¶ 10) but it was returned as not deliverable. (K. Mithawala Decl. ¶ 22; Def.'s SUMF ¶ 32, not disputed , Pl.'s RSUMF ¶ 32).
BDI filed this lawsuit on July 16, 2018, along with an Emergency Motion for Preliminary Injunction. (Compl., Doc. 1; Mot. Prelim. Inj., Doc. 4). Defendants Bulbul and Keyur Mithawala were served on July 25, 2018. (Docs. 17–18). After CampBX was served with the lawsuit, and thus allegedly first became aware of BDI's desire to retrieve its Bitcoins, it requested certain authentication information including a tax identification number from BDI before it would return BDI's Bitcoins. (K. Mithawala Decl. ¶ 23). BDI disputes that this information was necessary given that BDI contends it had already provided this identifying information. (Daniel Decl. ¶ 4).
Through their Answer, filed on August 15, 2018, Defendants admitted that CampBX was in possession of $2,816.87 in cash and 14.86155791 Bitcoin belonging to BDI. (Am. Compl. ¶ 22, Doc. 11, admitted , Answer ¶ 22, Doc. 21). On November 26, 2018, the Parties entered into a Consent Order on BDI's Motion for Preliminary Injunction. (Doc. 48). The Consent Order recites that the Parties met on September 26, 2018, at which point CampBX returned $2,816.87 in cash and 14.84109000 Bitcoin to BDI.
The remaining 0.02046791 Bitcoin was assessed by the Bitcoin system as transaction charges. "As an accommodation," CampBX provided BDI a check for $126, representing the approximate value as of the time of the transfer of the other Bitcoins. (Doc. 48).
Despite the return of the Bitcoin, BDI has contended throughout this lawsuit that CampBX is unlawfully retaining Bitcoin "forks." (Doc. 48 at 4). The Court addresses this contention further in the section on BDI's conversion claim, below.
III. ANALYSIS
BDI asserts that Defendants are liable to it, over and above the value of the returned Bitcoin, under the federal Commodities Exchange Act, as well as based on several state law claims. The Court addresses each in turn.
A. Commodities Exchange Act
"The Commodity Exchange Act (the ‘CEA’), 7 U.S.C. §§ 1 – 25, regulates those who participate in transactions involving commodities futures." Scott v. Prudential Sec., Inc. , 141 F.3d 1007, 1013 n.10 (11th Cir. 1998), abrogated by Hall St. Assocs., L.L.C. v. Mattel, Inc. , 552 U.S. 576, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008). For the purpose of the present motion, the Court assumes that Bitcoin is a "commodity" under the Act, as no party appears to dispute this. See CFTC v. McDonnell , 287 F. Supp. 3d 213, 217 (E.D.N.Y. 2018) ("A ‘commodity’ encompasses virtual currency both in economic function and in the language of the statute.").
A helpful discussion of the mechanics of commodities futures trading is set forth in Kohen v. Pac. Inv. Mgmt. Co. LLC , 571 F.3d 672, 674 (7th Cir. 2009) (Posner, J.).
The Parties agree that to bring a private right of action under the CEA, a plaintiff must fit into one of the categories set forth in 7 U.S.C. § 25 :
(a) Actual damages; actionable transactions; exclusive remedy
(1) Any person (other than a registered entity or registered futures association) who violates this chapter or who willfully aids, abets, counsels, induces, or procures the commission of a violation of this chapter shall be liable for actual damages resulting from one or more of the transactions referred to in subparagraphs (A) through (D) of this paragraph and caused by such violation to any other person —
(A) who received trading advice from such person for a fee;
(B) who made through such person any contract of sale of any commodity for future delivery (or option on such contract or any commodity) or any swap; or who deposited with or paid to such person money, securities,
or property (or incurred debt in lieu thereof) in connection with any order to make such contract or any swap;
(C) who purchased from or sold to such person or placed through such person an order for the purchase or sale of —
(i) an option subject to section 6c of this title (other than an option purchased or sold on a registered entity or other board of trade);
(ii) a contract subject to section 23 of this title; or
(iii) an interest or participation in a commodity pool; or
(iv) a swap; or
(D) who purchased or sold a contract referred to in subparagraph (B) hereof or swap if the violation constitutes—
(i) the use or employment of, or an attempt to use or employ, in connection with a swap, or a contract of sale of a commodity, in interstate commerce, or for future delivery on or subject to the rules of any registered entity, any manipulative device or contrivance in contravention of such rules and regulations as the Commission shall promulgate by not later than 1 year after July 21, 2010; or
(ii) a manipulation of the price of any such contract or swap or the price of the commodity underlying such contract or swap.
7 U.S.C. § 25 (emphasis added).
There is no dispute that Subparagraph (A) does not apply to this case, as Defendants provided no trading advice for a fee. And courts have held that a "condition precedent" to a Subparagraph (D) claim is that "the plaintiff purchased or sold a contract for future delivery." In re Dairy Farmers of Am., Inc., Cheese Antitrust Litig. , 60 F. Supp. 3d 914, 965–66 (N.D. Ill. 2014), aff'd , 801 F.3d 758 (7th Cir. 2015) (citing See Thompson's Gas & Elec. Serv., Inc. v. BP Am. Inc. , 691 F.Supp.2d 860, 871 (N.D. Ill. 2010) ; In re Soybean Futures Litig. , 892 F. Supp. 1025, 1041 (N.D. Ill. 1995) ). As such, cash or "spot" purchasers of physical commodities do not have a claim under that section. Id. at 965–66 ("Purchasers of physical commodities whose prices were affected by futures trading do not have a claim.").
The same logic — that only "futures contracts" are covered by Section 25 — would logically apply to a Subparagraph (B) claim, as Subparagraph (D) expressly incorporates Subparagraph (B). That is exactly what was held in Berk v. Coinbase, Inc. , No. 18-CV-01364-VC, 2018 WL 5292244, at *2 (N.D. Cal. Oct. 23, 2018) ("[Plaintiff] has a private right of action under the CEA only if he used [Defendant] to make a "contract of sale of [a] commodity for future delivery" – in other words, a "futures contract."). Berk is particularly on point, as the court in that case dismissed with prejudice a claim arising from the purchase of Bitcoin Cash because the plaintiff used the defendant "to purchase Bitcoin Cash, rather than to make a contract to purchase Bitcoin Cash at a specific date in the future." Id. Defendants contend that this Court should follow Berk and dismiss BDI's claims under the CEA because BDI seeks damages arising from the spot sale of a commodity. The Court agrees.
In a last ditch effort to save its claims, BDI asserts that it may bring a claim under Subparagraph C against a person "who purchased from or sold to such person [who violated the CEA] or placed through such person an order for the purchase or sale of ... a contract subject to section 23" of the CEA. (Resp. at 5–6 (citing 7 U.S.C. § 25(a)(1)(C)(ii) )). BDI contends that because it "purchased Bitcoin through a contract for a commodity as described in Section 23(a) of the CEA, ... [it therefore] has a private right of action" under Subparagraph (C). (Id. at 6). As you might expect, this cross-reference portends another block quote. Section 23(a) of the CEA prohibits a transaction for the delivery of commodities under a "margin account, margin contract, leverage account, or leverage contract," or any similar arrangement as determined by the Commodities Futures Trading Commission, except as provided in Section 23(b):
(b) Permission to enter into contracts for delivery of silver or gold bullion, bulk silver or gold coins, or platinum ; rules and regulations.
(1) Subject to paragraph (2), no person shall offer to enter into, enter into, or confirm the execution of, any transaction for the delivery of silver bullion, gold bullion, bulk silver coins, bulk gold coins, or platinum under a standardized contract described in subsection (a) , contrary to the terms of any rule, regulation, or order that the Commission shall prescribe, which may include terms designed to ensure the financial solvency of the transaction or prevent manipulation or fraud. Such rule, regulation, or order may be made only after notice and opportunity for hearing. The Commission may set different terms and conditions for transactions involving different commodities.
(2) No person may engage in any activity described in paragraph (1) who is not permitted to engage in such activity, by the rules, regulations, and orders of the Commission in effect on the date of the enactment of the Futures Trading Act of 1986 [enacted Nov. 10, 1986], until the Commission permits such person to engage in such activity in accordance with regulations issued in accordance with subsection (c)(2).
7 U.S.C. § 23(b). Defendants correctly argue that this section, which deals with unregulated margin accounts and leverage contracts for commodities (specifically gold, silver, and platinum), is inapplicable to this case. Accordingly, Defendants are entitled to summary judgment on this claim.
"A margin account is a device used to extend credit to investors who buy securities. Initially, the investor pays only a percentage of the purchase price, borrowing the difference from the brokerage firm. The purchased securities are themselves used as collateral for the loan. The arrangement is a dynamic one, however, because the value of stock fluctuates. If the market price of the securities decreases, the collateral's value is diminished and the broker may demand that the investor deposit incremental funds." Advest, Inc. v. McCarthy , 914 F.2d 6, 7 (1st Cir. 1990).
A "leverage contract" means "a contract, standardized as to terms and conditions, for the long-term (ten years or longer) purchase ("long leverage contract") or sale ("short leverage contract") by a leverage customer of a leverage commodity," subject to certain other specified provisions. 17 C.F.R. § 31.4(w).
It goes without saying that "Bitcoin Gold" is not the equivalent of "gold bullion" or "bulk gold."
While this disposes of the only federal claim set forth in the Amended Complaint, BDI has also invoked this Court's diversity jurisdiction based on the complete diversity of the parties and the amount in controversy asserted due to the purported difference in value between when BDI's bitcoins were allegedly demanded and when they were returned.
B. Conversion
BDI next argues that Defendants should be held liable for conversion of its bitcoins by failing to return them upon demand. As no court in Georgia has addressed the issue, an initial question is whether bitcoins, as virtual, intangible cryptocurrency, may be the subject of a conversion action at all. Several potential analogues exist. For example. "[c]onversion is not available as a cause of action with respect to intangible property representing an interest in a business. S. Cellular Telecom, Inc. v. Banks , 208 Ga.App. 286, 431 S.E.2d 115, 120 (1993) (citing Hodgskin v. Markatron , 185 Ga.App. 750, 365 S.E.2d 494 (1988) ). However, "specific intangible property may be the subject for an action for conversion, but as fungible intangible personal property, money, generally, is not subject to a civil action for ... conversion." Taylor v. Powertel, Inc. , 250 Ga.App. 356, 551 S.E.2d 765, 769 (2001) (citing Jennette v. Nat. Community Dev. Svcs. , 239 Ga.App. 221, 520 S.E.2d 231 (1999) ; William Goldberg & Co. v. Cohen , 219 Ga.App. 628, 466 S.E.2d 872 (1995) ; Jones v. Turner Broadcasting System , 193 Ga.App. 768, 389 S.E.2d 9 (1989) ).
Kleiman v. Wright , No. 18-CV-80176, 2018 WL 6812914, 2018 U.S. Dist. LEXIS 216417 (S.D. Fla. Dec. 27, 2018) addressed whether bitcoins were "money" and thus incapable of being the subject of a conversion action under Florida law. The Court held that bitcoins could be the subject of a conversion action, because in "regards to the bitcoin's specificity and identity, Plaintiffs have alleged that the bitcoin blockchain is a giant ledger that tracks the ownership and transfer of every bitcoin in existence and that every bitcoin wallet and the number of bitcoin inside that particular wallet can be identified on the blockchain by referring to its public key." Id. , 2018 WL 6812914, at *15–16 (internal quotations omitted). The Court agrees with Kleiman that bitcoins are sufficiently identifiable to be considered "specific intangible property" subject to an action for conversion. The next question is whether a conversion claim is applicable to this set of facts.
As explained above, BDI's bitcoin purchases through CampBX were cash sales, as opposed to margin sales. Under Georgia law governing stockbrokers, "[a] cash customer, as distinguished from one who has purchased stock on margin, is entitled to the delivery of stock purchased for him, and in the absence of an agreement or instructions to the contrary, the broker undertakes and agrees to deliver the stock to the customer either immediately or in such time as is necessary to effectuate the transfer and is reasonable under the circumstances ... If a broker refuses to make delivery upon demand ... he is liable for conversion." Drexel Burnham Lambert, Inc. v. Chapman , 174 Ga.App. 336, 329 S.E.2d 595, 600 (1985) (quoting E.F. Hutton & Co. v. Weeks , 166 Ga.App. 443, 304 S.E.2d 420 (1983) (internal quotations omitted)). The Georgia appellate courts would likely extend the logic of Drexel Burnham Lambert to Bitcoin in this circumstance. As such, a claim for conversion exists, and several genuine, material disputes of fact exist, such as: (1) whether or when the demands for possession were made; (2) Defendants' intent; (3) whether Defendant's explanation for failing to respond promptly to the letter sent by Plaintiff's counsel on December 6, 2017 is a factually and legally justifiable defense; and, (4) as noted in the section on unjust enrichment below, whether the purported CampBX Terms of Service apply to this case and if so, whether they limit Plaintiff's damages.
Bitcoin Forks
As noted above, BDI has contended throughout this lawsuit that CampBX is unlawfully retaining Bitcoin "forked currency" which occurred "within the period during which CampBX admits to having possession of BDI's 14.86155791 Bitcoin" (Doc. 48 at 3). Specifically:
On August 1, 2017, Bitcoin forked at block 478558 (in the Blockchain) resulting in the creation of Bitcoin Cash. For each Bitcoin held on that date, an equal number of Bitcoin Cash was created which BDI contends became tied or linked to the respective Bitcoin owner's wallet;
On October 24, 2017, Bitcoin forked at block 491407 (in the Blockchain) resulting in the creation of Bitcoin Gold. For each Bitcoin held on that date, an equal number of Bitcoin Gold was created which BDI contends became tied or linked to the respective Bitcoin owner's wallet; and
On February 18, 2018, Bitcoin forked at block 511346 (in the Blockchain) resulting in the creation of Bitcoin Private. For each Bitcoin held on that date, an equal number of Bitcoin Private was created which BDI contends became tied or linked to the respective Bitcoin owner's wallet.
(Doc. 3 at 4–5). Pending the resolution of this suit, Plaintiff counsel is holding $8,128.98 representing the value of these "forked currencies" as of November 12, 2018.
A bitcoin "fork" is the creation of a new virtual currency based on the blockchain ledger of an existing virtual currency. Kleiman contains a discussion on Bitcoin forks (based on allegations made in that plaintiff's complaint):
Since its beginning, Bitcoin has inspired the creation of over one thousand other digital currencies. These new currencies often borrow from the initial Bitcoin program but make changes to the model in an attempt to create a new cryptocurrency with distinct functions or more suited to a specific market or niche. In other cases, Bitcoin has been modified by individuals in a way they believed would improve the Bitcoin itself, such as by allowing more transactions into a single block of blockchain. In these situations, the supporters of the new Bitcoin, have created a "fork" through which the original Bitcoin blockchain/ledger is divided into two distinct, but identical, copies, (i) the original Bitcoin, and (ii) the new Bitcoin. The result is that any individual who owned the original Bitcoin now owns an identical amount of the new Bitcoin.
Kleiman , No. 18-CV-80176, 2018 WL 6812914, at *2 (citations omitted).
A bitcoin exchange's duties with respect to a bitcoin fork presents a case of first impression in the truest sense of the word. Commentators have struggled to place bitcoin forks into an existing legal framework. For example, "[i]t has been suggested, and disputed, that the hard fork represents a scenario similar to a stock split[,] ... like a two-for-one stock split, a unit was doubled by the hard fork; holders of Bitcoin received an equal amount of [forked currency] Bitcoin Cash." Nick Webb, Comment, A Fork in the Blockchain: Income Tax and the Bitcoin/bitcoin Cash Hard Fork , 19 N.C.J.L. & Tech. On. 283, 299 (2018) (footnotes omitted). However, "the divergence of the network and the creation of two entirely separate blockchains do not sound like a stock split. Stock splits do not result in the construction of an entirely separate entity." Id. at 299–300.
It appears that lawsuits against exchanges arising from cryptocurrency forks have been filed in China and Japan. Kevin Helms, Lawsuit Brewing Against Crypto Exchanges in Japan Over Withheld Forked Coins , Bitcoin.com (June 1, 2018), https://news.bitcoin.com/lawsuit-crypto-exchanges-japan-withheld-forked-coins/; Stephen O'Neal, Can Crypto Exchanges Be Trusted With Hard Forks? , Cointelegraph.com (Aug. 9, 2019), https://cointelegraph.com/news/can-crypto-exchanges-be-trusted-with-hard-forks. As of the entry of this Order, the Court was unable to ascertain the outcome of these lawsuits, if any.
Forked currency does not simply appear in a bitcoin wallet. To access the forked coins, the holder of the bitcoins must download software which supports the forked currency. Accordingly, commenters have noted an important distinction between bitcoin owners who hold the coins in their own private wallets and those who hold their bitcoins on an exchange (as BDI did in this case). Writing in the context of when forked currency constitutes taxable gain, one commentator wrote:
ABA Section on Taxation, supra note 4, at 4–5 ("When an owner holds a cryptocurrency wallet directly (rather than through a custodial wallet), the owner does not actually receive anything new in a Hard Fork. Instead, the owner — once he or she has taken the necessary steps (as described below) — is able to use the same private key to transact on each of the ledgers. If the owner uses his or her private key to transact in the original cryptocurrency, the network participants verifying transactions on the original ledger will add it to that ledger, but the network participants verifying transactions on the forked ledger will not recognize it."). In other words, after the fork, the same private key may be used to transact on the forked ledger without affecting the original ledger, and visa versa.
Id. at 5 ("An owner that holds the original coin in a basic wallet (whether hardware or software), generally must download new software to a computer to use the forked coin.").
Investors who own private keys to their digital wallets have likely constructively received the forked coins at the time of the hard fork because they only need to download a new software that is compatible with the forked coins to receive them... However, many third-party exchanges take no action to claim the forked coins until the security risks have been evaluated and mitigated. Since these investors' receipt of forked coins is subject to substantial limitations, that is, the third-party exchange's decision to download the software and support the forked coins, their accession to wealth is not "clearly realized" at the time of the hard fork.
Danhui Xu, Comment, Free Money, but Not Tax-Free: A Proposal for the Tax Treatment of Cryptocurrency Hard Forks , 87 Fordham L. Rev. 2693, 2701 (2019) (footnotes omitted).
Forks can happen for numerous reasons. "Because the software that runs the ledger generally is open-source, and the network of computers that verify transactions generally operates via consensus, the software can be modified if enough participants on the network agree to do so." This open-source nature has resulted in all kinds of forks.
"For example, one reason for Hard Forks is that users of the network agree that a fundamental upgrade to the ledger software is required. .... In contrast, some forks are a response to user mistrust in the original coin." ABA Section on Taxation, supra note 4 at 5.
ABA Section on Taxation, supra note 4 at 4.
Other examples include "bitcoin gold in October 2017, bitcoin diamond in November 2017, and superbitcoin, bitcoin hot, and lightning bitcoin in December 2017." Id. at 5 n.6. Programmers have also created strange and fanciful alternative cryptocurrency, known as "altcoins," such as Coinye West, which was not endorsed by Kanye West and led to litigation in the Southern District of New York. See West et al v. 0Daycoins.com et al. , No. 1:14-cv-00250-AT (S.D.N.Y. filed Jan. 14, 2014). Further examples abound: one altcoin, Dogecoin, sponsored a NASCAR driver. Wow. Doge At ‘Dega: Dogecoin Sponsors Race Car , NPR Morning Edition, May 1, 2014, available at https://www.npr.org/sections/alltechconsidered/2014/05/01/308569803/doge-at-dega-dogecoin-sponsors-race-car; see also Kevin Roose, Is There a Cryptocurrency Bubble? Just Ask Doge , N.Y. Times, Sept. 16, 2017, at B1, available at https://www.nytimes.com/2017/ 09/15/business/cryptocurrency-bubble-doge.html.
As noted above, in order for a bitcoin owner who holds her virtual currency in an exchange (or other type of shared wallet) to access the forked currency, the exchange must take some affirmative action. The Court would be imposing a major new duty on all cryptocurrency exchanges operating in Georgia to affirmatively honor every single bitcoin fork. Bitcoin investors are aware they are operating in an unregulated market, and therefore it seems more reasonable to place the burden to ensure access to forked currency on the investors themselves. There is no requirement that investors keep their coins in exchanges; they can always withdraw the coins to their own private wallets. In the unregulated cryptocurrency market, potential investors are well advised to ensure that the terms of service of the exchange they are using clearly spell out what the exchange's obligations are with respect to forked cryptocurrency, if any.
ABA Section on Taxation, supra note 4, at 6 ("It is generally possible for an owner to transfer the original coin from one wallet that will not support a Hard Fork and into another wallet that will support the Hard Fork prior to the occurrence of the Hard Fork. In that manner, the owner generally should be able to go through the processes necessary to claim the forked coin, at least if the owner is aware that a Hard Fork is going to occur.").
Even if Defendants were not required to support the currency forks, BDI implies that Defendants should have warned its users about the impending fork. In Mr. Daniel's declaration, he states that "exchanges or trading platforms provide notices sufficiently in advance of the date of individual forks, that the trading platform or exchange will not be making a specific forked currency available so that the customer could withdraw Bitcoin to the customer's own wallet to take advantage of a particular fork." (Daniel Decl. ¶ 21). BDI points to no Georgia law on point that would require such notice.
Under Georgia law, a stockbroker is under no duty to advise clients of a pending stock split or dividend before processing a sale order. Drexel Burnham Lambert, Inc. v. Chapman , 174 Ga. App. 336, 339, 329 S.E.2d 595, 599 (1985) (holding that there is not "any legal support" for a duty of a stockbroker to advise clients that "when they ordered sales, that the result would be that they would not be entitled to the dividend stocks."). The Court assumes that the Georgia appellate courts would extend this logic to the context of Bitcoin forks. Accordingly, the Court holds that Defendants were not under any affirmative obligation to warn BDI in advance that it would not be supporting forked cryptocurrency.
This holding does not mean that cryptocurrency forks are ripe for theft. If an exchange, trading platform, or other shared wallet affirmatively undertakes to support forked currency, they have voluntarily assumed the obligation of holding these coin forks for their respective owners. At this point, they must account for the forked currencies upon demand by their rightful owner. However, BDI has not submitted any evidence that CampBX at any point undertook to support the forked currency at issue. The only evidence BDI provides in opposition to Defendants' summary judgment motion is Mr. Daniel's declaration, which in turn simply states that "[t]he dates of the respective forks are all within the period during which CampBX admits to having possession of BDI's 14.86155791 Bitcoin." (Daniel Decl. ¶ 18). This is not sufficient circumstantial evidence to create an inference that CampBX voluntarily undertook to support the forked currency during that period. In fact, Mr. Daniel's declaration goes on to state that
"[n]one of the information available on the CampBX website made any mention of Defendant's current position that they would attempt to retain the forked currencies as they [sic] own, that they would restrict access to the forked currencies, or would prevent customers such as BDI from extracting those forked currencies themselves as property born from the Bitcoin held in BDI's account."
(Id. ¶ 19). Mr. Daniel makes several allegations about CampBX's public statements but does not allege that it ever made any statement that it would voluntarily undertake to support the forked currency at issue. Accordingly, there is no genuine, material factual dispute as to this issue, and Defendants are entitled to summary judgment on BDI's conversion claim as to the forked cryptocurrency. Plaintiff may continue to hold the $8,128.98 representing the value of the forked currency pending final judgment of this case and termination of all rights of appeal. However, in the event that the Court's ruling that Defendant is not liable for conversion of the forked currency becomes final, the Court will award Defendants interest on the $8,128.98 at the judgment rate from the date of entry of this Order, unless the $8,128.98 is returned to Defendants within fourteen days of the date of entry of this order.
None of this is to say that the value of the cryptocurrency forks are not recoverable as compensatory damages for conversion of the Bitcoin. Under O.C.G.A. § 51-10-6, in an action for civil theft, a "property owner may recover compensatory damages which may include, in addition to the value of the personal property, any other loss sustained as a result of the willful damage or theft offense." If the jury finds that some or all of the forks occurred during a period of time where Defendants were willfully retaining the Bitcoin in the face of a valid demand for possession, it may determine that the value of the forked currency constitutes loss sustained as a result of the theft. See Grant v. Newsome , 201 Ga. App. 710, 711, 411 S.E.2d 796, 798 (1991) ("[C]onsequential damages, which are generally recoverable in tort actions under OCGA § 51-12-3(b), can also be recovered in a conversion action."). The Court will take up this issue closer to trial.
C. Unjust Enrichment
The Court next turns to BDI's claim for unjust enrichment. Defendants claim that "the only benefit that CampBX received from the BDI account was the $614.00 in trading fees that it collected as a result of BDI's trades." (K. Mithawala Decl. ¶ 36). BDI alleges that "[b]y delaying the return of BDI's Bitcoin, and in fact substituting different Bitcoin acquired at a much lower value, Defendants were able to enjoy the use of BDI's higher value Bitcoin for their own purposes while at the same time depriving BDI of the use of benefit of own property." (Resp. at 13, citing Daniel Decl. ¶ 23). To the extent that BDI seeks the difference in value between the Bitcoin at the time of demand and at the time of return, this essentially duplicates the measure of damages of the conversion claim, which the Court has held is not subject to summary judgment except as to the forked currency. To the extent that BDI contends that CampBX used the bitcoins to profit in the marketplace before returning them, there is a factual dispute about whether CampBX received any such benefit above and beyond the $614 in trading fees.
Furthermore, under Georgia law, " ‘[t]he theory of unjust enrichment applies when there is no legal contract and when there has been a benefit conferred which would result in an unjust enrichment unless compensated.’ " Clark v. Aaron's, Inc. , 914 F.Supp.2d 1301, 1309 (N.D. Ga. 2012) (quoting Smith Serv. Oil Co. v. Parker , 250 Ga.App. 270, 549 S.E.2d 485, 487 (2001) ). A party can only recover for a claim of unjust enrichment if there is not an express contract that governs the dispute. See Fed. Ins. Co. v. Westside Supply Co. , 264 Ga.App. 240, 590 S.E.2d 224, 232 (2003) ("Recovery under [the theory of unjust enrichment] presupposes the absence of a contractual agreement.").
Defendants attached the purported CampBX User Agreement ("Agreement") as Exhibit 8 to the Motion for Summary Judgment. (Doc. 75-10). The Agreement states that "CampBX makes no assurances or warranties about the value, performance, or integrity of Bitcoins or the CampBX platform" (Agreement ¶ 3) and that "CampBX accepts no responsibility for the accurate maintenance of the trading platform, information, calculation, or valuation. The Client bears the entire risk of loss, including, but not limited, for data, calculation, and valuation of Bitcoins and Bitcoin transactions." (Id. ¶ 8). The Agreement also purports to limit CampBX's liability to "one month's charges to client by CampBX." (Id. ¶ 13).
There is a factual dispute in this case about whether the terms of service apply as between the parties. (Pl.'s RSUMF ¶ 17 ("Disputed. The CampBX User Agreement advanced by Defendants does not apply as no User Agreement or ‘terms of service’ was ever presented to BDI when BDI opened its account with CampBX or later used the CampBX site ....", citing Daniel Decl. ¶¶ 5, 21; Dep. Daniel. 72:16-74:14). Accordingly, Defendants are not entitled to summary judgment on this claim.
D. Fraudulent and Negligent Misrepresentation
Counts 3 and 4 of the Amended Complaint are for fraudulent and negligent misrepresentation respectively. (Am. Compl. ¶¶ 56–62). The counts do not contain specific instances of misrepresentations, but rather incorporate by reference preceding allegations. (Id. ). In response to Defendant's motion for summary judgment, BDI states that it has "set forth sufficient admissible evidence showing representations made by Defendants that later proved to be incorrect to create issues of fact for determination by a jury." (Resp. at 12, citing Daniel Decl. ¶ 6.) BDI does not otherwise indicate anywhere in the record where such representations exist. Defendant's Statement of Material Facts contains two statements of fact arguably on point. Number 36 states, "[n]one of the Defendants ever tried to mislead the Defendants." (Def.'s SUMF ¶ 36, citing K. Mithawala Decl. ¶ 25). In denying this statement, BDI states, "[f]or instance, Defendant misled BDI regarding KYC compliance and access to withdrawals, and as to whether forked currencies attributable to BDI's Bitcoin would be available to BDI." (Pl.'s RSUMF ¶ 38, citing Daniel Decl. ¶¶ 6, 14–25). Number 38 states that "[n]either K. Mithawala nor CampBX ever spoke to anyone at BDI before it began using the CampBX platform." (Pl.'s SUMF ¶ 38, citing K. Mithawala Decl. ¶ 27). In response, BDI states, "[n]ot disputed though also not alleged as a basis for the written representations made by CampBX on its website regarding the availability of Bitcoin withdrawals that turned out to be false." (Pl.'s RSUMF ¶ 38, citing Daniel Decl. ¶ 6).
So in original. Should likely read Plaintiff.
As paragraphs 14–24 of the Daniel Declaration concern Bitcoin forks, of which the Court has held Defendants were under no obligation to inform BDI, the sole piece of evidence that BDI submits in response to summary judgment on its misrepresentation claims is paragraph 6 of the Daniel Declaration, set forth below:
At the time BDI established its account with CampBX, the statements made by CampBX on its website were to the effect that it would provide a stable and reliable exchange platform without the limits on withdrawals or trading activity that CampBX later imposed. For instance, KYC [Know Your Customer] compliance was not required for transactions under $1000.00. After BDI completed its KYC requirements in December 2013, BDI was supposed to be able to perform transactions between $1000.00 and $5,000.00 per day. BDI reasonably relied on CampBX's statements to this effect, and as referenced in BDI's Verified Complaint, when making the decision to open and maintain its account with Defendants. Beginning in July 2017, CampBX was unilaterally and without explanation limiting BDI's transactions at all levels despite BDI's KYC approval.
(Daniel Decl. ¶ 6).
The proffered CampBX Agreement contains several provisions in tension with these supposed misrepresentations. For example, Paragraph 3 states, "CampBX makes no assurances or warranties about the value, performance, or integrity of Bitcoins or the CampBX platform." (Agreement ¶ 3, Doc. 75-10). Paragraph 6 states, "CampBX reserves the right, in its sole discretion, to at any time, change any transaction limit and or policy." (Id. ¶ 6). Paragraph 8 states that "CampBX accepts no responsibility for the accurate maintenance of the trading platform, information, calculation, or valuation." (Id. ¶ 8). Paragraph 13 states, "[t]o the extent permitted by applicable law, the CampBX trading platform and any and all CampBX services are provided "as is" and without express or implied warranty of any kind .... No covenants, warranties, representations, or indemnities of any kind are provided to client or any end user." (Id. ¶ 13).
If the Agreement in fact is binding in this case, reliance on the supposed misrepresentations provided in Mr. Daniel's declaration are precluded by the Agreement's express terms. However, as the Court has held that a fact dispute exists over whether this agreement was in fact presented to and agreed to by BDI when its account was created, the Court will deny summary judgment on this Count.
E. Attorney's Fees
BDI seeks attorney's fees under O.C.G.A. § 13-6-11. Because the Court has not entered summary judgment on all of BDI's claims, the issue of BDI's entitlement to attorney's fees is premature. Under that statute, entitlement to fees and expenses for bad faith is an issue for the jury. Trade AM Int'l, Inc. v. Cincinnati Ins. Co. , No. 1:08-CV-3711-ECS, 2012 WL 12957383, at *1 (N.D. Ga. Jan. 18, 2012).
IV. CONCLUSION
BDI is correct that, even though it lacks documentary evidence of its earlier attempts to withdraw its Bitcoin, Mr. Daniel's sworn statement that BDI made such attempts precludes summary judgment. United States v. Stein , 881 F.3d 853, 854 (11th Cir. 2018) (holding that "an affidavit which satisfies Rule 56 of the Federal Rules of Civil Procedure may create an issue of material fact and preclude summary judgment even if it is self-serving and uncorroborated."). It is not the Court's role to weigh evidence on summary judgment. However, before proceeding to trial, BDI should seriously consider how the loss of all records of its earlier attempts to withdraw the Bitcoin and the lack of any documentary evidence on Defendants' end will be received by a jury. On the other hand, Defendants should give serious thought to whether a jury will find Mr. Mithawala's justification for disregarding the letter from BDI's counsel credible. The Court is aware that the Parties were not able to successfully mediate this case before. (Doc. 67). It is in the interest of all Parties to try again.
Accordingly, Defendants' Motion for Summary Judgment [Doc. 75] is GRANTED IN PART and DENIED IN PART . Plaintiff's Motion to Strike [Doc. 83] is DENIED , but the embedded request to file the sur-reply is GRANTED . The Clerk is DIRECTED to file the proposed sur-reply (Doc. 83-1, Pages 9–14).
The Court ORDERS the parties to attend a second round of mediation to be completed within 40 days of the entry of this Order. The parties may use the same mediator they used before, or alternatively may request for the Court's appointment of a private mediator. The parties should notify the Court within seven (7) days of the date of entry of this Order if they request that the Court appoint a new private mediator. The parties are DIRECTED to file a status report within 5 days of the conclusion of the mediation indicating whether this matter is resolved.
If this case is not settled in mediation, the parties are DIRECTED to submit a consolidated pretrial order within 20 days of the filing of their status report. The Clerk is DIRECTED to submit this matter to the undersigned if there is no activity in this case within 70 days of the date of entry of this Order
IT IS SO ORDERED this 11th day of March, 2020.