Teed v. Chen

Background

Richard Burden Teed alleged that James “Jimmy” Chen and Chen Trading Management, LLC mismanaged Teed’s money and Bitcoin. Teed alleged that, beginning in or around September 2019, Chen represented that he had substantial cryptocurrency-management expertise, earned 400% returns, used a “magic box” algorithm, and expected to partner with Bill Barhydt. Teed alleged that he transferred 90 Bitcoins and an additional $250,000, worth about 45 Bitcoins at the time, to Chen for investment and trading.

Teed alleged that Chen delayed purchasing Bitcoin, did not return Teed’s funds after Teed demanded repayment, and later entered into two agreements with Teed. The March 2021 Investment Management Agreement authorized Chen to manage 94 Bitcoins in a separate wallet and required Chen to deliver at least 106 Bitcoins by June 15, 2021. After that agreement expired without payment, Chen allegedly acknowledged that he was in default. The parties later entered into a September 2021 Settlement and Release Agreement establishing a Bitcoin repayment schedule, but Teed alleged that Chen made no payments. Teed alleged that Chen owed 136.5 Bitcoins as of April 2022.

Teed asserted eleven causes of action. The motion challenged claims for breach of contract, fraud, conversion, claim and delivery, a violation of the Commodity Exchange Act and related regulation, and violations of the Securities Act. The motion did not challenge the claims for breach of fiduciary duty, violation of 17 C.F.R. § 1.20(a), or negligence.

Legal standard

Chen moved under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally recognized claim supported by enough facts to make liability plausible. At this stage, the court generally accepts the complaint’s factual allegations as true and draws reasonable inferences for the nonmoving party. Fraud claims also must satisfy Rule 9(b), which requires particular details about the alleged misconduct, including who made the statements, what was said, when and where it was said, and how it was false.

Contract claims

The court denied the motion as to both breach-of-contract claims. For the March 2021 Investment Agreement, Chen argued that the agreement was not enforceable because Teed had not signed it and because the attached document was labeled a draft. The court held that the lack of Teed’s signature did not defeat the claim at the pleading stage because Chen had not identified a provision requiring both parties to sign before mutual assent could exist. The exchange of a draft agreement was also sufficient to allege the existence of a contract at this stage.

For the September 2021 Settlement Agreement, Chen argued that it lacked consideration, contained unlawful penalties, involved an uncertain timeframe, and was unconscionable. The court rejected those arguments. It found that the payment schedule was clear and precise, that Teed plausibly alleged consideration through the parties’ mutual release of legal claims, and that the unconscionability issue went beyond what could be resolved on a motion to dismiss. The court also held that the alleged penalty provisions did not justify dismissal because the gradual increase in Bitcoin installments alone did not establish an unlawful penalty. In any event, the court stated that those provisions would be severable even if they were later found unlawful.

Fraud claims

The court granted the motion to dismiss both fraud claims, with leave to amend. Teed alleged that Chen fraudulently induced him to invest and later fraudulently induced him to enter the Investment and Settlement Agreements. The court found that Teed alleged facts corresponding to the elements of fraud, but did not provide the particularity required by Rule 9(b).

For the investment-related fraud claim, Teed did not explain the contexts in which Chen made the statements, where Chen communicated them, or why the statements were false when made. The allegation that the statements were made “[i]n and throughout September of 2019” was not sufficiently specific. For the agreement-related fraud claim, Teed alleged that Chen promised to make him whole and described plans to do so, but did not explain why those statements were false when made. The court granted leave to amend so Teed could provide those missing facts.

Conversion and claim-and-delivery claims

The court denied the motion as to conversion. Teed alleged that he owned or had the right to possess 136.5 Bitcoins, that Chen wrongfully interfered with that property by commingling it, failing to return it after demand, or diverting it for Chen’s exclusive use, and that Teed suffered damages. The court found those allegations more than conclusory at the pleading stage.

The court granted the motion as to claim and delivery without leave to amend. It explained that claim and delivery is a provisional remedy allowing recovery of specific property or immediate possession; it is not an independent cause of action. The court concluded that amendment would be futile.

Commodity Exchange Act claim

The court granted the motion to dismiss the Commodity Exchange Act claim, with leave to amend. Teed alleged that Chen’s handling of Bitcoin violated Section 6(c)(1) of the Act and Regulation 180.1(a), which address manipulative or deceptive conduct involving certain transactions. Teed’s theory depended on Bitcoin qualifying as a “swap.” The court held that this theory was insufficient because Teed had not alleged the more basic requirement that Bitcoin was a commodity in interstate commerce. The court allowed amendment to plead nonconclusory facts supporting the elements of the claim.

Securities Act claim

The court granted the motion to dismiss the Securities Act claim, with leave to amend. Teed alleged that Chen offered or sold unregistered Bitcoin and that Bitcoin was a security. The court applied the three-part test for an “investment contract,” which requires an investment of money in a common enterprise with an expectation of profits produced by the efforts of others.

The court found that Teed alleged an investment of money and an expectation of profits from Chen’s efforts, but did not allege facts showing a common enterprise. Teed did not allege that the parties pooled investments and divided profits and losses, and the Investment Agreement instead provided for a separate wallet. Teed also did not allege facts linking his fortunes with Chen’s, including facts about Chen’s compensation; the agreement stated that Chen Trading Management, LLC would not receive compensation or fees for its services other than Teed’s release of claims. The court allowed amendment to allege facts concerning a common enterprise.

Disposition

Judge Charles R. Breyer’s order granted in part and denied in part Chen’s motion to dismiss. The court granted the motion as to fraud claims 3 and 4, the Commodity Exchange Act claim 9, and the Securities Act claim 10, with leave to amend. It granted the motion as to claim and delivery claim 6, without leave to amend. It denied the motion as to breach-of-contract claims 1 and 2 and conversion claim 5. Teed could file an amended complaint within 21 days.