Jeong v. Nexo Financial LLC

Background

Junhan Jeong sued Nexo Capital Inc. over Nexo’s Crypto Credit service, which lets users borrow cash or other cryptocurrencies by pledging cryptocurrency as collateral. Jeong alleged that, after the Securities and Exchange Commission announced an action involving XRP, Nexo suspended users’ ability to use XRP as collateral or to make loan payments with XRP. He alleged that the suspension caused XRP-backed borrowers to be unable to maintain their loan-to-value ratios and led to liquidation of collateral.

Jeong alleged that Nexo breached the implied duty of good faith and fair dealing in its Borrow Terms. He also alleged violations of California’s Unfair Competition Law based on the alleged contract breach, lending without a California Finance Lender license, unfair business practices, and advertising about customers’ rights, ownership of collateral, and fees. He sought damages, restitution, declaratory relief, injunctive relief, and proposed class claims.

Nexo moved to dismiss the three claims in the Second Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. Nexo also moved under Rule 12(f) to strike the class allegations, arguing that a class-action waiver in the Borrow Terms barred the proposed classes and that the allegations were otherwise insufficient.

Court’s Analysis

Breach of contract

The court concluded that Jeong adequately alleged that Nexo breached the duty of good faith and fair dealing. Jeong added allegations that the Borrow Terms would be illusory—meaning not an enforceable contract—if Nexo could suspend XRP and other repayment options without notice while retaining unrestricted discretion to change those options. He also alleged facts supporting an inference that Nexo acted in bad faith, including its alleged offer to sell his collateral back to him after suspending XRP and its alleged suspension of XRP for international customers.

The court also rejected dismissal based on the contractual limitation-of-liability provision. That provision capped Nexo’s liability at the fees paid for use of the services during the preceding 12 months. The court held that the provision limited damages but did not show that Jeong’s claims were facially implausible. The court deferred deciding the provision’s enforceability and applicability until a later stage. The motion to dismiss the breach-of-contract claim was therefore denied.

Declaratory judgment

Jeong sought declarations that Nexo did not have an unrestricted right to change material conditions of the Crypto Credit service or suspend it without notice, and that Nexo did not acquire ownership of customer collateral while the loan remained outstanding.

The court granted Nexo’s motion as to the declaration about Nexo’s alleged unrestricted contractual rights. The court found that, because Jeong had adequately pleaded a breach-of-contract claim based on the need for the implied duty to prevent the contract from being illusory, the rights-related declaratory claim was duplicative. The court denied the motion as to the declaration about Nexo’s ownership of customer collateral because that issue remained relevant to Jeong’s adequately pleaded advertising claim under the Unfair Competition Law.

California Unfair Competition Law claim

The court denied Nexo’s motion to dismiss the Unfair Competition Law claim. It held that Jeong plausibly alleged an unlawful-practices claim based on the alleged contract breach and Nexo’s alleged lack of a California Finance Lender license. The court rejected Nexo’s argument that Jeong had to allege that his loan was made in government-issued currency rather than a cryptocurrency or stablecoin.

The court also held that Jeong plausibly alleged an unfair-practices claim under a theory connecting Nexo’s conduct to the California Finance Law. Finally, the court allowed Jeong’s advertising claim to proceed based on allegations that Nexo advertised that customers retained ownership of their digital assets while later invoking ownership to justify liquidating collateral. The court did not reach Jeong’s other advertising theories.

Class allegations

The court found that the Borrow Terms’ class-action waiver applied to the litigation and was not shown to be ambiguous. The court also found that Jeong had not adequately pleaded that the waiver was unconscionable, meaning unfairly imposed or unfair in substance. The court further concluded that the injunctive relief Jeong sought was private rather than public relief, so the California rule limiting waivers of public injunctive relief did not make the waiver unenforceable. Jeong had also stated at a hearing that he was not seeking injunctive relief based on the misleading-advertising claim.

The court therefore granted Nexo’s motion to strike the class allegations with leave to amend. Because the class allegations were stricken on the basis of the waiver, the court did not decide whether the proposed classes satisfied Rule 23’s requirements or whether Jeong had standing to assert claims for customers outside California.

Disposition

The court ordered that Nexo’s motion to dismiss the breach-of-contract claim was denied; the motion to dismiss the declaratory judgment claim was granted as to Nexo’s alleged unrestricted rights and denied as to ownership of customer collateral; and the motion to dismiss the Unfair Competition Law claim was denied. Nexo’s motion to strike the class allegations was granted with leave to amend. Jeong was ordered to file any amended complaint within 30 days. Judge Beth Labson Freeman signed the order.