Honig v. Riot Blockchain, Inc.

Background

Barry C. Honig and GRQ Consultants, Inc. sued Riot Blockchain, Inc. The plaintiffs alleged that Riot breached Security Purchase Agreements by refusing to indemnify Honig for costs incurred defending several third-party legal proceedings. The agreements were governed by New York law.

The agreements required Riot to indemnify Honig for losses and expenses relating to certain actions brought by unaffiliated Riot stockholders concerning transactions covered by the agreements. The provision excluded actions based on Honig’s violations of securities laws or conduct constituting fraud, gross negligence, willful misconduct, or malfeasance. It also required Honig to notify Riot of an action for which indemnification might be sought and gave Riot the right to assume the defense.

The legal proceedings included a class action and five shareholder derivative actions. According to the amended complaint, those proceedings alleged securities-law violations and fraudulent conduct by Honig and others. The plaintiffs alleged that Honig had incurred more than $350,000 in legal fees. Riot denied Honig’s request for indemnification.

Parties’ Arguments

Riot moved to dismiss under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. Riot argued that the indemnification exclusion applied because the legal proceedings alleged securities-law violations and fraudulent conduct.

The plaintiffs argued that the exclusion applied only to actual violations or conduct ultimately determined to constitute fraud. Because the underlying proceedings were still pending and no finding of wrongdoing had been made, they argued that the agreements required Riot to advance their legal costs.

Court’s Analysis

The court found Section 4.8 unambiguous and interpreted it as a matter of law. It concluded that the agreement determined Riot’s indemnification obligation at the outset of an action, not after the underlying case reached a final decision. Therefore, the allegations in the underlying proceedings—not whether those allegations were ultimately proven—controlled the indemnification question.

The court read the phrase “such action” in the exclusion as referring to an action alleging securities-law violations or fraudulent conduct. Because the parties did not dispute that the proceedings were brought by unaffiliated Riot stockholders, concerned transactions covered by the agreements, and involved allegations of securities-law violations and fraudulent conduct, the exclusion applied.

The court also rejected the plaintiffs’ argument that the agreements required advancement of legal expenses. The word “advancement” did not appear in the agreements. The provision requiring periodic payments during an investigation or defense described when required indemnity payments would be made; it did not create a separate obligation to advance money for proceedings excluded from indemnification. The court also concluded that another provision concerning later invalidation or restoration of payments did not create a repayment mechanism for advances.

Disposition

The court held that Riot had no duty to indemnify the plaintiffs for expenses arising from the legal proceedings. It dismissed Count Two, the breach-of-contract claim. Count One, the declaratory-relief claim, was based on the same breach theory and therefore also failed. The opinion does not expressly state whether that count was dismissed using a separate disposition label.

The court granted Riot’s request for reasonable attorneys’ fees under the agreements’ prevailing-party provision. It stated that the parties could try to negotiate the amount; if they could not, Riot would need to support its fee motion with affidavits and contemporaneous records. The order resolved Riot’s motion and directed the Clerk of Court to close the case. The opinion does not state a fee amount or add a “with prejudice” or “without prejudice” designation.