Mohsin Y. Meghji v. Compound Labs, Inc.

Background

Mohsin Y. Meghji, the litigation administrator representing the post-effective-date Celsius debtors, brought an adversary proceeding against Compound Labs, Inc., Compound DAO, Robert Leshner, and Geoffrey Hayes. The claims arise from Celsius’s use of the Compound Protocol to borrow and lend cryptocurrency assets. Celsius alleges that Compound’s 2019 Whitepaper represented that asset prices on the Protocol would be tied to ten pricing sources, while the prices were actually linked to Coinbase Pro alone. Celsius alleges that an incorrect increase in the reported value of DAI caused its borrowing position to be treated as undercollateralized and valuable collateral to be liquidated.

The amended complaint asserts a federal securities-fraud claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5, along with negligence, negligent misrepresentation, professional malpractice, and breach of fiduciary duty. The claims were pending in the Southern District of New York Bankruptcy Court as part of Celsius’s Chapter 11 bankruptcy proceedings. The defendants had also filed a motion to dismiss the amended complaint, but that motion had not been decided.

Motion to Withdraw the Bankruptcy Reference

The defendants moved under 28 U.S.C. § 157(d) to withdraw the bankruptcy reference, meaning they asked the district court to take the adversary proceeding from the Bankruptcy Court. Section 157(d) allows permissive withdrawal for cause and requires withdrawal when resolving a proceeding requires substantial and material consideration of federal law outside the Bankruptcy Code.

Federal Securities Claim

Judge Rochon held that withdrawal of the federal securities claim was mandatory. Resolving that claim would require determining whether digital assets distributed through the Compound Protocol, including cTokens and COMP tokens, are “securities” under federal securities law. That inquiry would involve the Supreme Court’s investment-contract test, which asks whether there was an investment of money in a common enterprise with profits expected to come from the efforts of others.

The court found that applying this test to the assets and circumstances alleged in the case would require significant interpretation rather than a routine application of settled law. The court identified unresolved questions about whether receiving COMP or cTokens was an investment of money, whether purchasers expected investment returns, and whether any expected profits would come from others’ efforts rather than market forces or the users’ own lending and borrowing activity. The court therefore ordered withdrawal of the bankruptcy reference for the securities claim. It emphasized that this decision did not express an opinion on the merits of the pending motion to dismiss.

Common-Law Claims

The court also held that permissive withdrawal was warranted for the negligence, negligent-misrepresentation, professional-malpractice, and breach-of-fiduciary-duty claims. Applying the factors used to decide permissive withdrawal, the court found that the Bankruptcy Court lacked constitutional authority to enter final judgment. The claims involved private rights, the defendants had not filed proofs of claim in the bankruptcy case, and the defendants had not consented to final judgment by the Bankruptcy Court.

The court further held that the claims were non-core because they arose from pre-bankruptcy conduct, did not depend on bankruptcy law, and did not invoke rights created by the Bankruptcy Code. The court found that efficiency favored withdrawal because the claims arose from the same alleged misrepresentation as the securities claim and could be handled in one proceeding. The case was still at an early stage: the motions to dismiss were unresolved, discovery had not begun, and no case-management plan had been adopted. Although the defendants’ jury-trial position favored withdrawal, the court gave that factor limited weight because it was unclear whether the case would reach trial. The court found no indication that the defendants were seeking withdrawal merely to shop for a favorable forum.

Disposition

Judge Jennifer L. Rochon granted the defendants’ motion to withdraw the bankruptcy reference. The court declined to remand the matter to the Bankruptcy Court for pretrial proceedings because the Bankruptcy Court’s familiarity with Celsius’s bankruptcy proceedings would not necessarily make resolution of these claims more efficient.