Junhan Jeong v. Nexo Fin.

• Decision Date: 19 January 2022
• Docket Number: 21-cv-02392-BLF
• Court: U.S. District Court — Northern District of California
• Parties: JUNHAN JEONG, Plaintiff, v. NEXO FINANCIAL LLC, et al., Defendants.

JUNHAN JEONG, Plaintiff,
v.
NEXO FINANCIAL LLC, et al., Defendants.

No. 21-cv-02392-BLF

United States District Court, N.D. California, San Jose Division

January 19, 2022

ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS

[Re: ECF No. 27]

BETH LAB SON FREEMAN UNITED STATES DISTRICT JUDGE

Before the Court is Defendants Nexo Financial LLC, Nexo Financial Services Ltd., Nexo Services OÜ, Nexo AG, and Nexo Capital Inc.'s (collectively, “Nexo”) Motion to Dismiss under Rules 12(b)(1), 12(b)(2), and 12(b)(6) in this class action for breach of contract, declaratory judgment, and violations of California's Consumer Legal Remedies Act (“CLRA”) and Unfair Competition Law (“UCL”).

As alleged in the Complaint, Nexo runs an online cryptocurrency platform, which allows users to post cryptocurrency assets as collateral and borrow against those assets up to a particular loan-to-value (“LTV”) ratio through a program called Nexo Crypto Credit. Plaintiff Junhan Jeong had a loan through Nexo Crypto Credit against assets in the cryptocurrency Ripple (“XRP”). Plaintiff alleges that in response to an SEC action against the issuer of XRP that caused its price to precipitously drop on December 23, 2020, Nexo improperly suspended the use of XRP to stake or pay down loans without notice to users, then proceeded to liquidate users' XRP collateral without notice when users' LTV ratios cratered due to the dropping XRP price. As a result, Plaintiff, who had posted collateral of 598, 384.6188 XRP at a market value of approximately $269, 300 for a loan of approximately $169, 400, alleges that he was unable to maintain his LTV ratio despite using other cryptocurrency assets to pay down his loan, leading to Nexo's liquidation of his collateral.

1

Accordingly, Plaintiff alleges that he suffered losses of approximately (1) $100, 000 in XRP assets and (2) $11, 000 in other cryptocurrency assets that he would have retained had he been able to pay off his Nexo loan with his XRP collateral at the time of Nexo's suspension of XRP. Plaintiff brings claims on behalf of various classes of users of the Nexo Crypto Credit program for (1) breach of contract, (2) declaratory judgment, (3) violation of the CLRA, and (4) violation of the UCL. Nexo moves to dismiss (1) all claims for lack of subject matter jurisdiction based on a lack of Article III standing under Rule 12(b)(1); (2) all Defendants other than Nexo Capital Inc. for lack of personal jurisdiction under Rule 12(b)(2); (3) all claims for failure to state a claim under Rule 12(b)(6); and (4) Plaintiff's breach of contract and declaratory judgment claims under the forum non conveniens doctrine. Plaintiff opposes, and in response to Nexo's 12(b)(2) motion, requests in the alternative that the Court grant him leave to pursue jurisdictional discovery.

Based on the reasoning outlined below, the Court (1) GRANTS IN PART and DENIES IN PART Nexo's 12(b)(1) motion WITH LEAVE TO AMEND; (2) GRANTS Nexo's 12(b)(2) motion WITHOUT LEAVE TO AMEND; and (3) GRANTS IN PART and DENIES IN PART Nexo's 12(b)(6) motion WITH LEAVE TO AMEND as to certain claims. The Court further DENIES Plaintiff's request for jurisdictional discovery.

I.BACKGROUND

Defendant Nexo Capital Inc. is a Cayman Island corporation with its principal place of business in London, England. See Complaint, ECF No. 1 ¶ 21. Defendant Nexo Financial LLC is a Delaware corporation with a registered agency address in Delaware, which is registered as a money services busines for activity in all fifty states and operates through branches in at least 24 states, including California. See Id. ¶ 17. Defendant Nexo Financial Services Ltd. is based in London, England. See Id. ¶ 18. Defendant Nexo Services OÜ is an Estonian corporation with operations in both Estonia and Bulgaria. See Id. ¶ 19. Defendant Nexo AG is a Swiss corporation with its listed address in Switzerland. See Id. ¶ 20. Plaintiff alleges that Defendants collectively operate and maintain the Nexo website and offer the Nexo services advertised on that website and in a whitepaper, including through the Nexo Crypto Credit. See Id. ¶ 22. Plaintiff is a California resident who took out a loan through the Nexo Crypto Credit. See Id. ¶ 16.

2

According to Plaintiff, Nexo maintains and operates a website through which customers can use cryptocurrency assets as collateral to borrow cash via a program called Nexo Crypto Credit. See Id. ¶ 45. Nexo Crypto Credit is governed by Nexo's Borrow Terms, which users agree to in order to borrow using the Nexo Crypto Credit. See Id. ¶ 46. Plaintiff alleges the Borrow Terms is an adhesion contract. See Id. Nexo allows customers to borrow as much cash as they want as long as they maintain a certain loan-to-value (“LTV”) ratio. See Id. ¶ 48. The value of the collateral fluctuates with the price of the cryptocurrency assets staked as collateral. See Id. Customers can maintain the requisite LTV ratio by staking more cryptocurrency assets or paying back their loan. See Id. ¶ 49. If a customer's LTV ratio rises above an 83.3% threshold, Nexo will-after providing notice to the customer-liquidate the collateral. See Id. ¶¶ 50-51. Plaintiff alleges that as of December 23, 2020, Nexo accepted XRP as collateral. See Id. ¶ 2. As of December 23, 2020, Plaintiff had staked approximately 600, 000 XRP as collateral at a market value of approximately $269, 300 and had borrowed approximately $169, 400 against those assets. See Id. ¶ 16. Plaintiff alleges that on December 22, 2020, the Securities and Exchange Commission (“SEC”) announced an action against Ripple Labs Inc. and two of its executives alleging that they had raised over $1.3 billion through their unregistered, ongoing securities offering of Ripple. See Id. ¶ 52. This announcement caused the price of Ripple to drop from approximately $0.45 to $0.21 on December 23, 2020. See Id. ¶ 52. According to Plaintiff, the price of Ripple continued to drop over the following days, reaching $0.17 on December 29, 2020. See Id. ¶ 94. Plaintiff alleges that in response to the drop in the price of Ripple, Nexo suspended customers' ability to use Ripple as collateral or to pay down their loans. See Id. ¶ 53. Plaintiff alleges that Nexo did not provide notice of the suspension. See Id. Plaintiff alleges that Nexo initiated the suspension because it did not want to be left holding Ripple at its decreased value. See Id. ¶ 54.

According to Plaintiff, the dropping price of XRP caused his LTV ratio to increase, but he was prevented from paying off his loan with his XRP collateral to keep his LTV ratio down because of Nexo's suspension of XRP. See Id. ¶¶ 8, 10, 16, 58, 89, 90, 135-36. Plaintiff alleges that he attempted to keep his LTV ratio down by using “47, 190.47043 XLM (Lumen) (market value of approximately $6, 000), 0.009255 BTC (bitcoin) (market value of approximately $215), 6.1673 ETH

3

(Ether) (market value of approximately $3, 600), and 168.18851 LNK (Link) (market value of approximately ($1, 800)” to pay down the loan. See Id. ¶¶ 135-36. But he ultimately failed, and Nexo liquidated his XRP collateral without notice. See Id. ¶ 9-10, 89-90, 93-94, 135-37.

Plaintiff alleges that in a December 30 statement, Nexo sought to justify its suspension of XRP on several grounds. First, Nexo invoked a provision of its Borrow Terms allegedly giving it “sole and absolute discretion” to, for example, “suspend the provision of the Nexo Crypto Credit or of all or part of the other Nexo services[.]” Id. ¶¶ 65-69 (citing Borrow Terms § III.3). Plaintiff alleges that if this provision applied, any contractual rights that Nexo customers have regarding Nexo Crypto Credit would be illusory. See Id. ¶ 69. Second, Nexo argued that it acquires “ownership” over users' collateral, so when Nexo liquidates collateral, it is liquidating its own assets. See Id. ¶¶ 72, 97-100. In support of this position, Nexo cited a provision of the Borrow Terms stating that “[u]nless prohibited by any Applicable Law, by virtue of this Agreement Nexo acquires the ownership of the Collateral while the Nexo Crypto Credit is outstanding.” See Id. ¶¶ 99-100 (citing Borrow Terms § IV.4). Plaintiff alleges that this provision is unconscionable, unenforceable as ambiguous, and was likely to mislead customers in light of Nexo's advertising that it does not own users' collateral. See Id. ¶¶ 99-133.

Plaintiff alleges that Nexo breached its Borrow Terms by (1) suspending the use of XRP collateral to pay down loans, (2) doing so without notice, and (3) liquidating users' XRP collateral without notice. See Id. ¶¶ 83-84, 177-73. Plaintiff further alleges that Nexo breached the duty of good faith and fair dealing under the Borrow Terms based on its conduct. See Id. ¶¶ 55, 60, 66-81, 169. Plaintiff further seeks declaratory judgment that (1) Nexo is not authorized to suspend XRP under its Borrow Terms; (2) Nexo does not possess various unfettered rights under the Borrow Terms, including to (a) suspend the provision of the Crypto Credit; (b) change, suspend, disable, or discontinue any features or content of the Crypto Credit; or (c) do so without providing notice to customers; and (3) Nexo does not acquire ownership of users' collateral. See Id. ¶¶ 174-89. Moreover, Plaintiff alleges that Nexo's actions were violations of the “unlawful” and “unfair” prongs of California's UCL, including based on Nexo's other violations, its unconscionable contractual provisions, and its deceptive or misleading advertising indicating that Nexo did not

4

acquire “ownership” over users' collateral. See Id. ¶¶ 190-205. Additionally, Plaintiff alleges that Nexo violated the California CLRA by offering a “service” pursuant to unconscionable contractual provisions. See Id. ¶¶ 206-214. Plaintiff seeks damages under the breach of contract and UCL claims, see Id. at 52; id. ¶ 173; restitutionary disgorgement under the UCL claim, see Id. ¶¶ 198-99; attorneys' fees...