Jeong v. Nexo Financial LLC

Background

Nexo operates a website offering a “Crypto Credit” service, through which users pledge cryptocurrency as collateral for cash loans. Users must agree to Nexo’s non-negotiable Borrow Terms. Those terms require users to maintain a specified loan-to-value ratio and allow Nexo, after notice, to sell collateral when the ratio rises above a threshold.

After the Securities and Exchange Commission announced an action against Ripple Labs and two executives concerning XRP, the price of XRP fell. Nexo suspended users’ ability to use XRP as collateral or to pay down loans, without notifying users. Jeong alleged that Nexo then sold XRP held as customer collateral. He alleged that Nexo breached the implied covenant of good faith and fair dealing, violated California’s Unfair Competition Law through deceptive advertising and allegedly unlicensed lending, and charged liquidation fees despite advertising “#ZeroFees.” Jeong sought to represent three proposed classes.

Nexo’s Motion

Nexo moved under Federal Rules of Civil Procedure 12(b)(6), 12(f), and 23(d) to dismiss or strike Jeong’s class allegations. Nexo argued that the Borrow Terms contained a class-action waiver, that Jeong’s counsel could not adequately represent a class, and, alternatively, that Jeong lacked standing to assert claims for people who did not live in California. Jeong opposed the motion, arguing that the waiver was unconscionable and unlawfully barred public injunctive relief. He also argued that the challenges to class counsel and non-California class allegations were premature or incorrect.

Class-Action Waiver

The Borrow Terms state that dispute-resolution proceedings must be conducted only on an individual basis and not as a class, consolidated, or representative action. Applying California’s three-part test for an unconscionable class-action waiver, the court found that the Borrow Terms were a consumer contract of adhesion because Nexo presented them on a “take it or leave it” basis without negotiation.

The court nevertheless found that Jeong did not satisfy the second part of the test: he did not show that disputes under the Borrow Terms predictably involved small damages. Jeong sought more than $100,000 for liquidated collateral and related fees. The court used the total amount he sought, rather than isolating his $1,607.01 in liquidation fees or amounts associated with individual claims. Because Jeong failed to satisfy this part of the test, the court did not decide whether Nexo had allegedly carried out a scheme to cheat large numbers of consumers out of individually small sums.

Public Injunctive Relief and Severance

The court separately considered California’s rule against contractual provisions that waive the right to seek public injunctive relief. Public injunctive relief is an order primarily intended to stop unlawful conduct that threatens future injury to the general public. The court found that Jeong’s requested injunctions—concerning Nexo’s lending license and advertising—qualified as public injunctive relief.

The court held that the Borrow Terms’ sentence stating that “[a]ny relief awarded cannot affect other Clients of Nexo” improperly precluded that relief. But the court found the sentence severable under the Borrow Terms’ severability clause. It therefore removed the offending sentence, cured the violation, and upheld the remaining class-action waiver. Jeong could pursue the public-injunction claims in his individual capacity.

Disposition

The court stated that Nexo’s challenge to the adequacy of class counsel was moot under its ruling and noted that the issue was premature and ordinarily would be considered at class-certification. The court did not reach Nexo’s alternative argument concerning non-California class allegations.

The order provides: “Nexo’s motion to strike class allegations is GRANTED.” The court did not state that the motion was granted with or without prejudice.