Johnson v. Maker Ecosystem Growth Holdings, Inc.

Background

Peter Johnson alleged that Maker Ecosystem Growth Holdings, Inc., now known as Metronym, Inc., and Maker Ecosystem Growth Foundation operated and managed the Maker Ecosystem, a cryptocurrency platform. The platform used the Maker Protocol to create and transact in DAI, a cryptocurrency backed by collateral in other digital assets, primarily Ethereum. Users could deposit Ethereum into collateralized debt positions and withdraw DAI. If the collateral fell below the required ratio, the protocol could liquidate it through an auction.

Johnson alleged that he was an early Ethereum investor, a Vault Holder, and among the users affected on March 12, 2020, referred to in the complaint as “Black Thursday.” He claimed that the Maker Foundation and third-party user interfaces represented that liquidation would result in a 13% penalty and return of the remaining collateral. Instead, he alleged, users lost all their collateral after Ethereum’s price fell rapidly. He attributed the losses to inaccurate price information from the protocol’s oracles and to limits on participation in the liquidation auctions, which allegedly allowed two bots to win hundreds of auctions with bids of zero.

Johnson asserted three claims: negligence, intentional misrepresentation, and negligent misrepresentation. He brought the claims for himself and a proposed class.

Claims Against Maker Growth

The defendants argued that Maker Growth had been dissolved before Johnson filed the Second Amended Complaint and therefore lacked capacity to be sued. Under Federal Rule of Civil Procedure 17(b)(2), a corporation’s capacity to sue or be sued is determined by the law under which it was organized. Maker Growth was incorporated in the Cayman Islands. Johnson initially sought limited discovery to determine whether it had actually been dissolved, but withdrew that request after the defendants submitted additional evidence.

The court found there was no dispute that Maker Growth had been dissolved and held that all claims against it were subject to dismissal.

Misrepresentation Claims Against Metronym

The court evaluated the intentional and negligent misrepresentation claims under Federal Rule of Civil Procedure 9(b), which requires fraud allegations to describe the circumstances of the alleged misconduct in particular detail. The required detail generally includes what was said, when and where it was said, who said it, and how it was misleading.

The court held that the Second Amended Complaint did not identify the specific content of the alleged false or misleading statements. Instead, it used loosely paraphrased statements and conclusory assertions that the defendants knowingly made false statements or knew about problems in the Maker Protocol. The court also found impermissible group pleading because the complaint referred collectively to “Defendant” rather than identifying which defendant made or participated in each alleged misrepresentation. The court did not consider statements added in Johnson’s opposition declaration because a complaint cannot be amended through briefing on a dismissal motion.

The court therefore found the intentional and negligent misrepresentation claims subject to dismissal.

Negligence Claim Against Metronym

The court held that Rule 9(b) also applied to the negligence claim because the complaint combined alleged fraudulent representations with the negligence allegations without clearly separating the two types of conduct. The court found that the claim failed to meet that heightened pleading requirement.

The court further held that, even if Johnson had pleaded a separate negligence claim, the claim did not satisfy the ordinary pleading standard under Rule 8. The complaint alleged that “Defendant” owed Vault Holders a duty to manage the Maker Protocol and platform as advertised and in a reasonable manner, but it did not identify the source of that duty. The court also found that the collective references to the defendants constituted improper group pleading under Rule 8 as well as Rule 9(b).

Finally, the court held that the negligence claim, as pleaded, was barred by California’s economic-loss doctrine. That doctrine generally prevents recovery in tort for financial losses unaccompanied by physical or property damage. Although Johnson argued that a special-relationship exception applied, the court found that he had not pleaded facts sufficient to support that exception.

Disposition

The court granted the defendants’ motion to dismiss the Second Amended Class Action Complaint. Because the court found no showing that the deficiencies could not be cured, it also granted leave to amend. The court ordered that any Third Amended Complaint be filed by March 17, 2023, and continued the further case-management conference to April 28, 2023.