Crypto Caselaw Minute #56–10/04/19
By: Stephen Palley
Tags: Crime, Bitcoin Mining, Bitcoin, Blockchain, Law

This week’s CCM includes some black letter law on a bitcoin mining equipment delivery failure, goes down memory lane (OK March 2019) to check on a bad bitcoin escrow case, and then leaves you in prison in a case involving pre-trial detention orders and public ledgers.

Disclaimer: Crypto Caselaw Minute is provided for educational purposes only by Nelson Rosario and Stephen Palley. These summaries are not legal advice. They 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”. Our Image credit: https://pixabay.com/photos/pit-mine-hole-open-quarry-mining-984037/(Pixabay license).

Columbia River Techs. 1, LLC v. Blackhawk Grp. LLC, 2019 U.S. Dist. LEXIS 169939 (W.D. Wisc. 2019) [SDP]

This new federal court opinion comes out of a breach of contract lawsuit relating to the alleged failure to timely deliver Bitcoin mining equipment. Plaintiff also makes claims for unjust enrichment and alleged violation of the Washington Consumer Protection Act. The opinion is a mixed bag — it dismisses some of the claims against some of the parties in the lawsuit and keeps a couple of them alive. (It also uses lots of contractions, which I’m a big fan of in judicial opinions — why not make ’em readable? — but which is a source of some disagreement among lawyers).

So, the plaintiff sued a company called Blackhack for alleged failing to deliver mining equimpment. Blackhawk responded by saying, whelp, it may be true that you didn’t get your equipment or that we got paid, but you didn’t have a contract with us — it was with a company called Coin Miner. As a result it said that the Court should dismiss the breach of contract claim against it.

One of the things you learn about in law school is something called Principal/Agent law. The basic idea is that you can act on behalf of someone else and even bind them to contractual agreements if you have the actual or apparent authority to do so. Here, the court says that the allegations in the lawsuit were solid enough that the breach of contract claim could precede on the theory that Coin Miner was acting as an agent of Blackhawk. If it later turns out from the evidence that there’s no agency relationship, the court can dismiss the case then.

(This is one of the nuances that exists in federal court in the US, by the way — a lawsuit will survive a motion to dimiss if the allegations state a claim under the law and give the other side enough details to “present a story that holds together[.]” That’s a lay explanation and an over-simplification but the general gist is right).

The Court also rejected an argument that the defendant didn’t plead an unjust enrichment allegation well enough to survive a motion to dismiss. Unjust enrichment is what’s known as an equitable cause of action, as opposed to one arising at law like a breach of contract claim. There are some FASCINATING historical reasons for this but I’ll short circuit that and tell you that as a practical matter unjust enrichment claims are often added to lawsuits as an alternative to a breach of contract claim. You don’t have to show a contract, just that Plaintiff conferred a benefit upon the Defendant, that Defendant knew it and appreciate it and that it would be unfair under the circumtances to let the plaintiff keep it without paying. Here, the defendant allegedly got $400,000 from the plaintiff for the equipment that it ordered and the court said, look, at the very least it’s premature to dismiss the case gien that so I’ll let the case proceed for now.

Anyhoo — honestly, pretty standard stuff as lawsuits and judicial opinions go. What I was kinda hoping for from this opinion was something interesting on damages — like what’s the measure of damages for late delay or non-delivery of mininq equipment. Do you get to claim lost profits from the lack of ability to mine? And if so, how would you go about making an arguing that such losses were provable, and non-speculative? No such precedent now, but this case isn’t dead yet, so maybe we’ll see some interesting precedent in the future from this one in the future.

GSR Markets Limited v. Diana McDonald, et al., №1:19-cv-1005-MLB, D.D.Ga, 6/13/2019 [SDP]

link to opinion: https://www.scribd.com/document/428789914/Gsr

Back in March we wrote about one of a number of bitcoin escrow deals that went complete south. The thing that caught my eye was that it involved a lawyer who (judging from the pleadings and exhibits) maybe was in slightly deeper waters than she should have been.

In short, she was supposed to be an intermediary for a bitcoin transaction and got sent cash, which she forwarded to a third party, but … never … got … the bitcoin. This of course made the buyer really not very happy, and they filed a not very happy lawsuit in federal court in Georgia.

You can read a slighly more detailed account of this case here [https://www.theblockcrypto.com/post/15155/gsr-markets-missing-2m-in-bitcoin-after-poor-escrow-tricks] but I thought I’d check back with our friends and see where, if anything this case had gotten and as far as I can tell it’s still winding its way through the litigation process.

There have been multiple discovery fights and there’s a motion to dismiss that is pending. Now what caught my eye about this case is one of the arguments in the motion to dismiss pleadings where I think the plaintiff (that is, the people who paid their money but got no bitoin) made an argument about why their securities fraud claim shouldn’t be dismissed.

They argue that their contract to purchase bitcoin was an investment contract under the Howey Test in part because it “was based on the efforts of Valkyrie to mine or otherwise obtain the Bitcoin for sale to GSR Markets for investment purposes.” They aso note that “Bitcoin” changes in value quickly, “unlike a commodity such as money” (which doesn’t actually make sense, I don’t think).

The facts are bad enough in this case that if they’re as alleged I imagine that the Court will find the defendants liable without having to fit a bitcoin escrow contract gone bad into an investment contract. There’s a saying among lawyers that bad cases make bad law — one hopes that the waters don’t get so muddy that the Court here decides that bitcoin is an investment contract or that a bitcoin escrow is an investment contract but, whelp, one of the funny things about a common law system of judge made law is … sometimes you never know until the motion is decided.

US v. Le, Cr. №19–10199-RWZ ( D. Mass. filed Sept. 24, 2019) [NMR]

Link to order

This is an order on a motion challenging the pre-trial detention of a defendant in a criminal case. Yep, another criminal case of someone allegedly using crypto to conduct their criminal enterprise. Will criminals learn? Sure, I don’t know. Probably, not? I mean, these networks are all public ledgers. As in, the transactions are open. I mean... Okay, enough ranting. What’s going on here?

According to the criminal complaint Binh Thanh Le, Steven McCall, and Allante Pires were charged with conspiracy to manufacture, distribute, and possess with intent to distribute controlled substances such as MDMA, Ketamine, and Xanax. In particular, the government alleges “that the defendants, primarily operating out of an office space in Stoughton, MA, sold drugs via the Dark Web in exchange for Bitcoin, and shipped the drugs to customers using the United States Postal Service.”

Do people know that the US Postal Service has a law enforcement arm? It’s called the United States Postal Inspection Service, and I assure you that the Inspection Service is no joke. They have a particular focus on illegal narcotics and the dark web. To quote their website “[a]s part of this effort, the Inspection Service has developed tools to identify those who attempt to hide behind the secrecy of the dark web and cryptocurrency to misuse the postal network.” I mean, “these networks are all public ledgers. As in, the transactions are open. I mean…” Okay, I’m really done ranting now.

All three of the defendants were detained pre-trial. Each defendant filed motions to revoke their pre-trial detention. McCall and Pires’s pre-trial motions were granted. This order relates to Le’s motion to revoke his detention, that was ultimately denied. Why was Le’s motion denied and not his alleged co-conspirators?

According to the Court the “strength of the evidence against Le and his apparent role as the leader of this sophisticated conspiracy distinguish him from McCall and Pires.” Le is allegedly the ringleader, and the Court felt that Le was both a public safety risk, and a flight risk.

As to Le’s ringleader status, allegedly, everything is in Le’s name, he told an undercover cop that he had “people working for him,” he delegated tasks via text message, and the authorities found ammunition and drug residue outside the business address. That was sufficient to find Le a public safety risk.

Furthermore, the Court determined that Le was a flight risk, because Le “was arrested while attempting to exchange $200,000 worth of Bitcoin for U.S. currency and may have access to additional drug proceeds if released,” and allegedly there were drug shipments from Switzerland and Canada.

I guess the lesson here is that if you’re arrested on allegations of running a drug ring and you’ve got hundreds of thousands of dollars worth of bitcoin that you’re attempting to exchange for dirty fiat, and you have international contacts, the authorities are probably not going to let you out on bail.