Teed v. Chen

Background

Richard Burden Teed sued James “Jimmy” Chen and Chen Trading Management, LLC, together referred to as “Chen,” over the alleged mismanagement of Teed’s Bitcoin. Teed asserted eleven causes of action, including breach of two agreements, fraud, negligent misrepresentation, conversion, replevin, breach of fiduciary duty, violations of federal commodities and securities laws, and negligence.

Teed alleged that Chen represented he was skilled at cryptocurrency trading and had achieved substantial returns using an algorithm. Teed then transferred 90 Bitcoin and an additional $250,000 to Chen for investment and trading. The parties later entered into a March 2021 Investment Management Agreement concerning the custody and management of Teed’s Bitcoin. That agreement allowed Teed to withdraw assets with one business day’s written notice and restricted transfers without his written consent.

After the investment agreement expired, Chen allegedly had not returned Teed’s Bitcoin. Chen later acknowledged being in default and said he intended to repay Teed. In September 2021, the parties entered into a Settlement and Release Agreement establishing a repayment schedule. Teed alleged that Chen made no payments and owed 136.5 Bitcoin as of November 2022.

The court had previously granted Chen’s motion concerning fraud and certain federal commodities and securities claims, allowing amendment; granted the motion concerning claim and delivery without allowing amendment; and denied the motion concerning breach of contract and conversion. Teed filed an amended complaint and added negligent misrepresentation and replevin.

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 relief plausible. The court generally accepts factual allegations as true at this stage but does not accept unsupported legal conclusions. The court also considered Federal Rule of Civil Procedure 9(b), which requires fraud-based claims to identify the basic details of the alleged misconduct, including who made the statement, what was said, when and where it was said, and why it was false.

When a court dismisses a claim, it ordinarily may allow amendment. But amendment is not automatic, particularly when the plaintiff previously had an opportunity to correct the problem or amendment would be futile.

Fraud

Teed alleged that Chen made false statements to induce him to invest and to sign the Investment and Settlement Agreements. The court had previously found that Teed did not plead the alleged fraud with enough detail and had instructed him to provide the circumstances of the alleged statements and explain why they were false when made.

The amended complaint did not materially add the required detail. It did not specify when the statements were made or provide the context showing why Chen’s statements were false at the time. The court therefore held that Teed had not adequately pleaded the required details of fraud and granted Chen’s motion to dismiss the fraud claim without leave to amend.

Negligent Misrepresentation

The court struck Teed’s negligent-misrepresentation claim because the prior order gave him permission to amend the fraud claim only for specified purposes and did not authorize him to add a new cause of action. Teed added the claim without the court’s permission or Chen’s written consent.

The court also stated that, even if Teed had been allowed to add the claim, it would fail the particularity requirement because it did not specify when Chen made the alleged false representations or why they were false when made. The court therefore struck the negligent-misrepresentation claim.

Replevin

Replevin is a claim seeking the return of specific personal property rather than its monetary value. Teed alleged that Chen wrongfully detained 136.5 Bitcoin and sought its immediate return.

The court first held that Teed added the replevin claim beyond the scope of the permission to amend granted in the prior order and therefore struck the claim. The court also held that the claim would fail even if it had been properly added. Under the court’s description of California law, replevin requires allegations that the defendant possessed the property at the beginning of the action or had the power to deliver it. Teed alleged that Chen had sent the Bitcoin to “Max,” who was in China and refused to return it. Based on those allegations, the court found that Chen did not possess the Bitcoin and did not have the power to deliver it. Teed’s assertion that Chen was personally detaining the Bitcoin was speculative and did not satisfy the elements of replevin.

Securities Act Claim

Teed alleged that Chen violated Sections 5 and 12(a)(1) of the Securities Act by failing to register the offer and sale of Bitcoin under an investment contract. Chen argued that Teed had not alleged a “common enterprise,” an element of an investment contract under the test discussed by the court.

The court had previously allowed Teed to amend this claim to allege facts establishing a common enterprise. In the amended complaint, Teed alleged that Chen pooled the assets instead of keeping them in a separate wallet. But Teed did not allege that he and Chen split net profits. The court also found insufficient facts showing that their financial fortunes were linked. In particular, the complaint did not explain Chen’s compensation, and the Investment Agreement stated that Chen Trading Management, LLC was not entitled to compensation or fees for its services other than Teed’s release of claims.

The court concluded that Teed had not alleged that the Bitcoin transactions constituted an investment contract under the Securities Act and granted Chen’s motion to dismiss the Securities Act claim without leave to amend.

Disposition

The court granted Chen’s motion to dismiss Teed’s claims for fraud, negligent misrepresentation, replevin, and under the Securities Act. The fraud and Securities Act claims were dismissed without leave to amend. The negligent-misrepresentation and replevin claims were struck. The order did not rule on the claims that Chen did not challenge in this motion, including breach of contract, conversion, breach of fiduciary duty, the claim under 17 C.F.R. § 1.20(a), the commodities-law fraudulent-solicitation claim, and negligence.

Judge Charles R. Breyer signed the order on February 28, 2023.