Junhan Jeong v. NEXO Fin.

JUNHAN JEONG, Plaintiff, v. NEXO CAPITAL INC., Defendant.

No. 21-cv-02392-BLF

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

August 22, 2022

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT NEXO CAPITAL INC.'S MOTION TO DISMISS SECOND AMENDED COMPLAINT

[RE: ECF NO. 56]

BETH LAB SON FREEMAN UNITED STATES DISTRICT JUDGE

Before the Court is Defendant Nexo Capital Inc.'s (“Nexo”) motion to dismiss Plaintiff Junhan Jeong's second amended complaint in this breach of contract and consumer protection case regarding Nexo's Crypto Credit service, which allows users to take out loans against cryptocurrency collateral. Plaintiff alleges in response to an action filed by the Securities and Exchange Commission (“SEC”) targeting the cryptocurrency Ripple (“XRP”), Nexo limited the use of Ripple on its platform in response to its cratering price, causing customers to default on loans taken out against XRP collateral. Plaintiff alleges that Nexo's conduct breached the duty of good faith and fair dealing related to its contracts with customers and constituted a violation of California's Unfair Competition Law (“UCL”). Plaintiff further seeks declaratory judgment on issues related to the contract between Nexo and its customers. Nexo moves to dismiss Plaintiff's second amended complaint (“SAC”). See Motion, ECF No. 56; SAC ECF No. 55. This is Nexo's second effort to dismiss Plaintiff's pleadings after the Court granted in part and denied in part Nexo's motion to dismiss Plaintiff's initial complaint with leave to amend. See Order on Motion to Dismiss Initial Complaint, ECF No. 48. Nexo argues that Plaintiff's claims should be dismissed for failure to plead sufficient facts and that Plaintiff's class claims should be stricken, including under a class action waiver provision in Nexo's contract with customers. See Motion, ECF No. 56; Reply, ECF No. 62. Plaintiff opposes. See Opposition, ECF No. 59.

Based on the below reasoning, the Court GRANTS IN PART and DENIES IN PART Nexo's motion.

I. BACKGROUND

A. Factual Background

Nexo is a Cayman Islands corporation with its principal place of business in England. See SAC, ECF No. 55 ¶ 18. Nexo offers cryptocurrency services via its website throughout the United States. See id. Plaintiff is a California resident who allegedly obtained a loan through Nexo's website. See id. ¶ 17.

Nexo offers a website on which users can transact loans in any of several cryptocurrencies, including XRP. One feature of the website is the Nexo Crypto Credit service, which allows users to stake any of a variety of cryptocurrencies to serve as collateral for loans in cash or other cryptocurrencies. See id. ¶ 35. Users can also fund a “Savings Wallet” to serve as backup collateral. See id. Users can take out loans up to a loan-to-value (“LTV”) ratio of 83.3%-i.e., the loan can only be approximately five-sixths (83.3%) of the value of the collateral. See id. ¶¶ 36-39. If a user's LTV ratio rises above 83.3%, then Nexo will, after providing notice to the user, liquidate the collateral to the extent necessary to bring the LTV ratio back within the 83.3% threshold. See Id. ¶ 38. Users can keep their LTV ratios low by staking additional collateral or using their existing collateral to pay down part of the outstanding loan. See id. ¶ 4. A user's LTV ratio on the Nexo platform fluctuates with the price of the underlying collateral. See id. ¶ 3.

On December 22, 2020, the SEC announced its action against Ripple Labs Inc.-the issuer of XRP-and two of its executives, alleging that XRP constituted an unregistered securities offering. See id. ¶ 47. In response to the news, over the course of a few hours on December 23, 2020, the price of XRP dropped from $0.45 to $0.21. See id. Plaintiff alleges that Nexo, seeing the price drop, suspended users' ability to use XRP as collateral or to pay down loans (the “Suspension”)- to ensure that Nexo would not be left holding the bag. See id. ¶¶ 48-49. The Suspension remains in place to this day. See id. ¶ 48. Nexo provided no notice of the Suspension to users. See id. As a result of the suspension, users with loans based on XRP collateral were “effectively locked out” of maintaining their LTV ratios, since they could neither use their XRP to pay down their loans nor sell their XRP on the open market, since this would require withdrawing XRP collateral and further raising the LTV ratio. See id. ¶ 90. Users whose XRP collateral was not entirely liquidated on December 23 were “foreseeably locked into unfavorable LTV ratios” in the days that followed, since the process of converting digital assets into cash and using that cash to pay down loans on the Nexo platform can take as much as a week. See id. ¶ 91. Meanwhile, the price of XRP continued to fall over the days following December 23, 2020-reaching a price of $0.17 on December 29, 2020. See id. Within hours of the Suspension, Nexo proceeded to sell “massive quantities” of XRP held as customer collateral, including U.S.-based customers and customers outside the U.S. See id. ¶ 49.

Plaintiff alleges that at the time of the Suspension, he had staked collateral of 598,384.6188 XRP-approximately $269,300-for a loan of $169,400 from Nexo. See id. ¶ 139. As a result of Nexo's conduct around December 20, 2020, Plaintiff alleges that he lost his entire XRP collateral, in addition to the following digital assets that he liquidated in an unsuccessful attempt to pay down his loans as his LTV value rose: 47,190.47043 Lumen (approximately $6,000); 0.009255 Bitcoin (approximately $215); 6.1674 Ether (approximately $3,600); and 168.18851 Link (approximately $1,800). See id. ¶ 139. Additionally, Plaintiff alleges he was assessed an undisclosed 1.26% fee for each liquidation, costing him approximately $1,607.01. See id.

Plaintiff alleges that the Suspension breached the Nexo Borrow Terms & Conditions, which users must sign to use the Nexo Crypto Credit service. See Borrow Terms, ECF No. 56-1. The Borrow Terms allow users to provide collateral in the form of “Digital Assets,” which the Borrow Terms define as “any digital assets (such as cryptocurrencies, stablecoins and tokenized assets), accepted by Nexo.” See Borrow Terms, ECF No. 56-1 §§ IV.1, II.2; see also id. § X.1(b) (providing that a user has an “obligation to maintain Digital Assets with Nexo considered by Nexo to be acceptable and adequate pursuant to these General Terms”). The Borrow Terms indicate that “such Digital Assets are indicated on the Nexo Platform and in the Nexo Account and are subject to revision from time to time.” See id. § IV.2. The Borrow Terms further provide that users “shall at all times maintain the necessary Collateral” in accordance with the LTV threshold, and, “[i]f the LTV increases above certain thresholds, as indicated on the Nexo Platform, [users] shall, at [Nexo's] request, provide additional Collateral and/or make the required repayments” to lower their LTV below the threshold. See id. §§ IV.2-3, VI.1. Additionally, the Borrow Terms state that “[i]f the LTV increases above the maximum payment threshold, as indicated on the Nexo Platform, Nexo shall, after notifying you, liquidate the necessary amount of Collateral to rebalance your Nexo Crypto Credit.” See id. § VI.2.

The Borrow Terms also contain provisions that purport to provide Nexo with various rights.

First, there is a provision granting Nexo broad rights under its “sole and absolute discretion” (“Discretion Provision”):

At any time, at our sole and absolute discretion, without liability to you, we can: (i) refuse your request for granting of a Nexo Crypto Credit; (ii) change the conditions for entering into the Agreement or use of the Nexo Crypto Credit; (iii) suspend the provision of the Nexo Crypto Credit or of all or part of the other Nexo services; or (iv) change, update, remove, cancel, suspend, disable or discontinue any features, component, content, incentive or referral plan of the Nexo Crypto Credit.”

Id. § III.3. Second, there is the following “ownership” provision of the Borrow Terms (“Ownership Provision”):

Unless prohibited by any Applicable Law, by virtue of this Agreement Nexo acquires the ownership of the Collateral while the Nexo Crypto Credit is outstanding.

Id. § IV.4. Third, the Borrow Terms contain the following limitation of liability provision (“Limitation of Liability Provision”):

IN NO EVENT WILL OUR AGGREGATE LIABILITY FOR ANY LOSS OR DAMAGE ARISING IN CONNECTION WITH THE NEXO CRYPTO CREDIT EXEED THE FEES YOU PAID TO NEXO FOR YOUR USE OF THE SERVICES DURING THE 12 MONTH PERIOD IMMEDIATELY PRECEDING THE EVENT GIVING RISE TO THE CLAIM OR LIABILITY. THE FOREGOING LIMITATIONS OF LIABILITY SHALL APPLY TO THE FULLEST EXTENT PERMITTED BY ANY APPLICABLE LAW.

Id. § XII.5.

Plaintiff alleges that Nexo breached the Borrow Terms by breaching the implied covenant of good faith and fair dealing through the Suspension. Specifically, Plaintiff alleges that Nexo breached the covenant by (1) removing XRP as an accepted Digital Asset while indicating on the Nexo platform that XRP was accepted, Id. ¶¶ 54-55 and (2) doing so without notice, Id. ¶ 56- thereby excusing Nexo customers of the contractual obligation to maintain their LTV ratios, Id. ¶ 57. Plaintiff asserts that Nexo's conduct was not allowed under the Discretion Provision or any other such provision of the Borrow Terms since that would render the contract illusory. See id. ¶¶ 59-66, 93-97. Further, Plaintiff asserts that Nexo's conduct was not allowed under the Ownership Provision, since it is unconscionable and “completely ambiguous,” given the Borrow Terms' failure to define “Applicable Law.” See id. ¶¶ 104-14. Additionally, Plaintiff alleges that Nexo's conduct shows it acted in bad faith and dishonestly. First,...