RocketFuel Blockchain Company v. Ellenoff Grossman & Schole LLP

Background

Ellenoff Grossman & Schole LLP represented RocketFuel Blockchain Company in a reverse acquisition transaction. B4MC Gold Mines, Inc., later renamed RocketFuel Blockchain, Inc., acquired RocketFuel in exchange for a controlling interest in B4MC’s common stock. RocketFuel alleged that the law firm was retained partly to conduct due diligence, including reviewing five patent applications assigned to RocketFuel by co-founder Joseph Page. RocketFuel and RocketFuel Blockchain, Inc. later learned that the applications were legally deficient.

The plaintiffs asserted claims for legal malpractice, breach of the retainer agreement, breach of fiduciary duty, and declaratory relief concerning a general release in a settlement agreement. The law firm moved to dismiss, arguing that the claims were barred by the in pari delicto doctrine, that the malpractice claim was inadequately pleaded, that the contract and fiduciary-duty claims duplicated the malpractice claim, and that the declaratory-judgment claims did not present an actual controversy.

Court’s Analysis

The court rejected the in pari delicto defense at the motion-to-dismiss stage. That doctrine can prevent a claim between wrongdoers, but the adverse-interest exception applies when an agent’s conduct is directed against the corporation. Accepting the complaint’s allegations as true, the court concluded that Page’s alleged fraud was directed against RocketFuel and that his knowledge could not be attributed to RocketFuel or, indirectly, to RocketFuel Blockchain, Inc. The court also concluded that disputed questions about whether the patent assignments benefited the companies could not be resolved from the pleadings.

The court held that RocketFuel adequately stated a legal-malpractice claim under New York law. RocketFuel plausibly alleged that the law firm had a duty to investigate the validity of the patent applications as part of its pre-merger due diligence, even though the engagement agreement did not expressly mention the patents. The court also held that RocketFuel plausibly alleged causation because the firm’s disclosure of the patent deficiencies could have changed how the merger proceeded. Finally, RocketFuel adequately alleged actual damages based on shares allegedly transferred to Page that RocketFuel claimed would not otherwise have been transferred.

The court held that RocketFuel Blockchain, Inc. lacked standing to assert the malpractice claim because the firm did not owe it a duty of care for the pre-merger due diligence. The court rejected the plaintiffs’ argument that the near-privity doctrine supplied the necessary relationship. It also concluded that RocketFuel’s breach-of-contract and breach-of-fiduciary-duty claims arose from the same conduct and sought the same damages as the malpractice claim, making them duplicative under New York law. Those claims were dismissed. The declaratory-judgment claims were also dismissed because the law firm had not yet asserted the settlement release as a defense, so there was no concrete controversy for the court to decide.

Disposition

The court granted in part and denied in part the law firm’s motion to dismiss. RocketFuel Blockchain Company’s legal-malpractice claim survived. RocketFuel’s breach-of-contract, breach-of-fiduciary-duty, and declaratory-judgment claims were dismissed, and all claims by RocketFuel Blockchain, Inc. were dismissed. The court lifted the stay on discovery and scheduled a pretrial conference. Because this was a partial ruling on a motion under Rule 12(b)(6), which tests whether claims are adequately pleaded rather than finally deciding liability, this opinion is classified as a procedural order.