Johnson v. Maker Ecosystem Growth Holdings, Inc.

Opinion

PETER JOHNSON, Case No. 20-cv-02569-MMC

Plaintiff, ORDER GRANTING MOTION TO v. DISMISS SECOND AMENDED CLASS ACTION COMPLAINT HOLDINGS, INC., NKA METRONYM, INC., a foreign corporation; and MAKER ECOSYSTEM GROWTH FOUNDATION, a foreign corporation, Defendants.

Before the Court is defendant Maker Ecosystem Growth Holding, Inc., NKA Metronym Inc. (“Metronym”), and Maker Ecosystem Growth Foundation’s (“Maker Growth”) Motion, filed October 31, 2022, “to Dismiss Plaintiff’s Second Amended Class Action Complaint.” Plaintiff Peter Johnson has filed opposition, to which defendants have replied. Having read and considered the papers filed in support of and in opposition to the motion, the Court rules as follows.1 BACKGROUND Defendants are “two affiliated foreign companies” that, according to plaintiff, “collectively operate, run, and manage the Maker Ecosystem, a cryptocurrency platform” (see Second Amended Class Action Complaint (“SAC”) at 1, Dkt. No. 69), and, in the course thereof, committed acts constituting “neglect and malfeasance” (see SAC ¶ 3). In particular, plaintiff alleges the following events occurred. Defendants2 “developed a digital currency” called DAI (see SAC ¶ 13) and, in connection therewith, a “protocol and various applications necessary for minting, collateralizing, and transacting the DAI[,]” namely, the “Maker Protocol” (see SAC ¶ 13). The Maker Protocol “involves the collateralization of digital assets” to “create a stable coin—DAI—which is a decentralized, unbiased, collateral-backed cryptocurrency soft- pegged to the US Dollar.” (See SAC ¶ 14 (internal quotations omitted).) Once created, DAI “is a store of value, a medium of exchange, a unit of account and a standard of deferred payment” that is “meant to be exchanged digitally between peers in exchange for other digital assets or services, just like US Dollars may be exchanged for goods and services.” (See SAC ¶ 15.) Defendants also developed the Maker Decentralized Autonomous Organization (“MakerDAO”) which “enables holders of its governance token, MKR, to manage the MakerDAO organization through a system of scientific governance involving Executive Voting and Governance Polling to ensure its stability, transparency, and efficiency.” (See SAC ¶ 16 (internal quotation and alterations omitted).) In other words, MakerDAO “sets all of the rules and regulations” which rules and regulations are “‘codified’ as the Maker Protocol.” (See SAC at ¶ 18.) The Maker Protocol, in turn, governs transactions in DAI. (See SAC at ¶ 18.) A “distinguishing characteristic” of DAI is that, pursuant to the Maker Protocol, “it must be collateralized by another digital currency,” primarily, Ethereum (“ETH”). (See SAC ¶ 19.) In practice, this means “an individual or entity wishing to transact in or otherwise procure DAI” must take one of the following actions to obtain the currency: (1) “trade ETH (or other Ethereum tokens) directly for DAI through Maker’s ‘Oasis’ portal”; (2) “purchase DAI with USD via cryptocurrency exchanges”; or, as relevant to the instant action, (3) “create a collateralized debt position (‘CDP’), thereby becoming a Vault Holder.” (See SAC ¶ 19.) Where an individual seeks to obtain DAI through a CDP, they may “purchase $10,000 of ETH from an exchange, deposit that ETH into a CDP contract as collateral,” and then “borrow against their collateralized debt position by withdrawing DAI.” (See SAC ¶ 19.) The Maker Protocol requires Vault Holders to maintain a 150% collateral-to-debt ratio (the “Liquidation Ratio”). (See SAC ¶¶ 19-20.) When the value of a Vault Holder’s collateral drops, leaving the Vault Holder’s DAI undercollateralized under the Liquidation Ratio, a “liquidation event” is triggered (see SAC ¶ 22), whereby “the Vault Holder’s collateral . . . is auctioned off to settle the debt with the Maker Protocol, with the balance of the ETH being returned to the Vault Holder” (see SAC ¶ 23). Defendants use a “price feed mechanism” called “oracles” to “monitor the price of ETH and thereby inform the Maker Protocol at large whether a given Vault Holder’s DAI becomes undercollateralized.” (See SAC ¶ 23 (internal quotation omitted).) Plaintiff is an “early investor in ETH” who was “among a handful of early Maker adopters and evangelists” and a Vault Holder as of March 12, 2020, a date “now known as ‘Black Thursday.’” (See SAC ¶¶ 1, 4.) According to plaintiff, “[t]he Maker Foundation and other third-party user interfaces repeatedly advertised and represented to Vault Holders users that, because their CDPs would be significantly overcollateralized, liquidation events would only result in a 13% liquidation penalty applied against the drawn DAI amount, after which the remaining collateral would be returned to the user” (see SAC ¶ 24 (emphasis omitted)), but, instead, Vault Holders, including plaintiff, “lost 100% of their collateral” when, on Black Thursday, the price of ETH dropped “significantly and rapidly” (see SAC ¶¶ 26, 33). Plaintiff attributes his losses to two features of the Maker Protocol’s liquidation process. First, plaintiff alleges, “the Maker Protocol’s utilized oracles . . . failed to maintain accurate and updated prices, resulting in price reporting at levels much higher than the actual spot price of ETH.” (See SAC ¶ 30.) Second, plaintiff alleges, defendants “severely limited who could participate” in the auction process, limiting i.e., “‘persons’ who run . . . liquidation-specific” algorithms (“bots”) on the Maker Protocol. (See SAC ¶ 32.) Consequently, on Black Thursday, “only four Keepers (running multiple bots) were active[,]” and, after one “ran into technical issues and wasn’t able to operate” and “[t]he majority of the other[s] . . . quickly ran out of DAI liquidity and were frozen out of bidding for several hours,” two Keeper bots “were able to successfully place numerous $0 bids on liquidated ETH collateral” and “won hundreds of auctions at no cost.” (See SAC ¶ 32.) According to plaintiff, defendants “envisioned this very scenario” as early as 2017, but, “[d]espite that foresight . . . did little or nothing to sufficiently incentivize the creation and maintenance of adequate Keepers.” (See SAC ¶¶ 35-36.) Based on the above, plaintiff asserts, on behalf of himself and a putative class, three Claims for Relief, titled, respectively, “Negligence,” “Intentional Misrepresentation,” and “Negligent Misrepresentation.” By the instant motion, defendants seek an order dismissing the above-titled action in its entirety, on the asserted grounds that (1) Maker Growth is not a proper defendant because it has been dissolved, and therefore lacks capacity to be sued, and (2) plaintiff has failed to allege facts sufficient to support each of his claims for relief. The Court first turns to plaintiff’s claims against Maker Growth. A. Claims Against Maker Growth Defendants seek dismissal of all claims against Maker Growth, a company “incorporated in the Cayman Islands” (see Decl. of Steven Becker in Supp. of Defs.’ Mot. to Dismiss (“Becker Decl.”) ¶ 3), on the ground it was dissolved prior to the filing of the SAC (see Becker Decl. ¶ 4). “Capacity to sue or be sued is determined . . . for a corporation, by the law under which it was organized[.]” See Fed. R. Civ. P. 17(b)(2). Courts that have considered the question have found corporations organized under Cayman Islands law lack the capacity to be sued once it has been dissolved. See, e.g., In re Bos. Generating LLC, 617 B.R. LLC, 2021 WL 4150523 (S.D.N.Y. Sept. 13, 2021) (finding, where Cayman Islands corporation had been dissolved, such entity, under Cayman Islands law, “cannot be sued”); Dennis v. JPMorgan Chase & Co., 342 F. Supp. 3d 404, 409-10 (S.D.N.Y. 2018) (applying Rule 17(b)(2) to “Cayman Islands exempted company”; finding, under Cayman Islands law, “the dissolved company would have no capacity to sue”). Plaintiff cites no authority to the contrary. Rather, on the same date that he filed his Opposition, he filed a motion seeking discovery for the purpose of determining whether Maker Growth has, in fact, been dissolved. (See Mot. for Expedited and Ltd. Initial Jurisdictional Discovery (“Mot. for Discovery”), at 3:18-4:6, Dkt. No. 75.) In response, defendants provided additional evidence of Maker Growth’s dissolution (see Decl. of Steven Becker in Opp. to Plf.’s Mot. for Expedited and Ltd. Jurisdictional Discovery, Exs. A, B, Dkt. No. 76-1) and plaintiff, thereafter, withdrew his request for discovery (see Withdrawal of Pltf.’s Mot. for Expedited and Ltd. Jurisdictional Discovery, Dkt. No. 77). Accordingly, there being no dispute as to its dissolution, all claims against Maker Growth are subject to dismissal. B. Claims Against Metronym Defendants seek, pursuant to Rule 9(b) and Rule 12(b)(6) of the Federal Rules of Civil Procedure, dismissal of all claims alleged against Metronym. The Court first addresses plaintiff’s second and third claims for relief, namely, intentional misrepresentation and negligent misrepresentation. 1. Intentional and Negligent Misrepresentation To state a cause of action for intentional misrepresentation, a plaintiff must allege: “(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or scienter); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” See Engalla v. Permanente Med. Group, Inc., 15 Cal.4th 951, 974 (1997) (internal quotation and citation omitted). The elements of negligent misrepresentation are the same, with the exception that, rather than pleading reasonable ground for believing [the misrepresentation] to be true.” See Hutchins v. Nationstar Mortg. LLC, 2017 WL 2021363, at *3 (N.D. Cal. May 12, 2017). Further, Rule 9(b) requires a plaintiff to “state with particularity the circumstances constituting fraud[.]” See Fed. R. Civ. P. 9(b). In that regard, to plead a claim based on a fraudulent representation, the plaintiff must allege “the who, what, when, where, and how of the misconduct charged,” see Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (internal quotation and citation omitted), as well as “evidentiary facts” that establish the assertedly false or misleading statement was “untrue or misleading when made,” see Fecht v. Price Co., 70 F.3d 1078, 1082 (9th Cir. 1995) (internal quotation and citation omitted). Additionally, where, as here, the plaintiff has sued more than one defendant, such plaintiff must allege facts to “inform each defendant separately of the allegations surrounding his alleged participation in the fraud.” See Swartz v. KPMG LLP, 476 F.3d 756, 764-65 (9th Cir. 2007) (internal quotation and citation omitted). In the instant case, there is no dispute that plaintiff’s intentional misrepresentation and negligent misrepresentation claims are subject to Rule 9(b)’s heightened pleading requirement. The question remaining is whether plaintiff has pleaded those claims with the requisite particularity. As set forth below, the Court finds he has not. First, the SAC does not identify the specific content of any false or misleading statement, see Swartz, 476 F.3d at 764 (holding Rule 9(b) “requires ... an account of the time, place, and specific content of the false representations”) (internal quotation and citation omitted), and, instead, contains what are, at best, loosely paraphrased versions of statements allegedly made (see SAC ¶¶ 2, 24, 33, 43, 73, 79), which do not suffice, see Wenger v. Lumisys, Inc., 2 Fed. Supp. 2nd 1231, 1246-47 (N.D. Cal. 1998) (holding allegations “paraphras[ing]” statements asserted to be fraudulent “lack the specificity required by Rule 9(b)” (citing cases)).3 Likewise insufficient are plaintiff’s conclusory 3 Moreover, there should be no difficulty here in plaintiff’s setting forth the precise language on which he relies, given his allegation that the misrepresentations were assertions that “[d]efendant’s misrepresentations were knowingly false” and that “[d]efendant was aware of the problems that existed within the Maker Protocol and the potential for exploitation.” (See SAC ¶ 74); see Unico Am. Corp. v. Ins. Sys., Inc., 2016 WL 11506626, at *4 (C.D. Cal. May 2, 2016) (holding “vague allegations and conclusory statements . . . do not give rise to an inference of fraudulent intent”). Additionally, plaintiff fails to inform each of the defendants of its participation in the making of the alleged false statements. Instead, plaintiff attributes all such misstatements to “Defendant”, a collective reference to Metronym and Maker Growth (see SAC ¶ 7 (stating “[e]ach entity is collectively referred to herein as ‘Defendant’ or ‘The Maker Foundation’”)), and, indeed, attributes those statements to “third-party user interfaces” as well (see SAC ¶¶ 24, 43). Such group pleading is not permitted under Rule 9(b). See Swartz, 476 F.3d at 764 (holding “Rule 9(b) does not allow a complaint to merely lump multiple defendants together”).4 Lastly, although plaintiff, in connection with his Opposition, has submitted a declaration in which he further identifies the statements on which he seeks to base his intentional and negligent misrepresentation claims (see Decl. of Peter Johnson in Supp. of Pltf.’s Opp’n to Defs.’ Mot. to Dismiss SAC (“Johnson Decl.”) ¶¶ 5, 7, Dkt. No. 74-1), a “complaint may not be amended by the briefs in opposition to a motion to dismiss[,]” see Frenzel v. AliphCom, 76 F. Supp. 3d 999, 1009 (N.D. Cal. 2014) (internal quotation and citation omitted). Accordingly, the Court finds plaintiff’s intentional and negligent misrepresentation claims are subject to dismissal. 2. Negligence At the outset, the parties disagree as to whether Rule 9(b) applies to plaintiff’s first 4 Although, as noted, plaintiff alleges the two defendants “collectively operate, run, and manage the Maker Ecosystem” (see SAC at 1), such conclusory allegation, absent factual support, is unavailing, see Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (holding courts “are not bound to accept as true a legal conclusion couched as a factual claim for relief, negligence. Where a plaintiff chooses not to allege “a unified course of fraudulent conduct,” but rather to allege “some fraudulent and some non-fraudulent conduct,” the Ninth Circuit has held that “only the allegations of fraud are subject to Rule 9(b)'s heightened pleading requirements.” See Vess, 317 F.3d at 1104 (holding “[t]o require that non-fraud allegations be stated with particularity merely because they appear in a complaint alongside fraud averments ... would impose a burden on plaintiffs not contemplated by the notice pleading requirements of Rule 8(a)”). In the instant case, however, plaintiff’s negligence claim begins by “realleg[ing] and incorporat[ing] [t]herein by reference each and every allegation contained in the preceding paragraphs” (see SAC ¶ 67), which paragraphs, as discussed above, contain allegations of false representations. Moreover, the claim then continues with an allegation that “[d]efendant has a duty to Vault Holders to manage the Maker Protocol and its platform both as it has advertised and also in a reasonable, prudent, non- negligent manner” (see SAC ¶ 68 (emphasis added)). Although the next paragraph reads, “[b]y failing to prevent and/or actively allowing the events of the $0 bid exploit to continue for 36 hours straight during Black Thursday, as outlined in Paragraphs 27-40 above, [d]efendant breached that duty” (see SAC ¶ 69), one of the cited paragraphs alleges that, “in contrast with [d]efendant’s representations that in the event of liquidation there would be only a 13% penalty applied against the drawn DAI amount (with a return of all remaining collateral), Vault Holders lost 100% of their collateral” (see SAC ¶ 33 (emphasis added)). Under such circumstances, plaintiff has not clearly distinguished a negligence claim from a fraud claim. Consequently, Rule 9(b) applies, and, as set forth above, plaintiff has failed to meet its requirements. Further, even assuming, arguendo, plaintiff has pleaded a separate claim for negligence, a question remains as to whether plaintiff has satisfied the requirements of Rule 8. See Vess, 317 F.3d at 1105 (holding “[a]llegations of non-fraudulent conduct argue that the allegations in the SAC “fail to meet even the Rule 8 pleading standard” (see Defs.’ Mot. to Dismiss Pltf.’s SAC (“Mot.”) at 20:25-26, Dkt. No. 72), and, as set forth below, the Court agrees. Although, unlike Rule 9(b), Rule 8 “requires only 'a short and plain statement of the claim showing that the pleader is entitled to relief,’” see Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Fed. R. Civ. P. 8(a)(2)), “[t]o survive a motion to dismiss, a complaint must contain sufficient factual material, accepted as true, to 'state a claim to relief that is plausible on its face[,]’” see Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). “Factual allegations must be enough to raise a right to relief above the speculative level,” Twombly, 550 U.S. at 555, and, as noted, courts “are not bound to accept as true a legal conclusion couched as a factual allegation,” see Iqbal, 556 U.S. at 678 (internal quotation and citation omitted). To state a claim for negligence, a plaintiff must show: “(1) the defendant owed the plaintiff a duty of care, (2) the defendant breached that duty, and (3) the breach proximately caused the plaintiff's damages or injuries.” See Lueras v. BAC Home Loans Servicing, LP, 221 Cal. App. 4th 49, 62 (Cal. Ct. App. 2013). “Whether a duty of care exists is a question of law to be determined on a case-by-case basis.” See id. Here, plaintiff, as noted, alleges “Defendant” has “a duty to Vault Holders to manage the Maker Protocol and its platform as it has advertised and also in a reasonable, prudent, non-negligent manner.” (See SAC ¶ 68). Such allegation, however, fails to identify the source of the duty alleged, and, consequently, is insufficient. See Twombly, 550 U.S. at 555 (holding “plaintiff’s obligation to provide the grounds of his entitlement to relief requires more than . . . a formulaic recitation of the elements of a cause of action”) (internal quotation and citation omitted); Green Desert Oil Grp. v. BP W. Coast Prod., 2011 WL 5521005, at *5 (N.D. Cal. Nov. 14, 2011), aff'd sub nom. Green Desert Oil Grp. Inc. v. BP W. Coast Prod. LLC, 571 F. App'x 633 (9th Cir. 2014) (dismissing negligence claim for failure to identify source of duty of care; noting assumed by the defendant, or (c) a duty arising out of a preexisting relationship”). Moreover, in alleging negligence on the part of “Defendant,” without specifying Metronym or Maker Growth, plaintiff, as discussed above, engages in impermissible group pleading, which violates not only Rule 9(b), but also Rule 8(a). See Sollberger v. Wachovia Sec., LLC, 2010 WL 2674456, at *4 (C.D. Cal. June 30, 2010) (noting “[o]ne common theme of Rule 8(a) [and] Rule 9(b) . . . is that plaintiffs must give the defendants a clear statement about what the defendants allegedly did wrong”; characterizing as impermissible “shotgun pleading” plaintiff’s use of “omnibus term ‘[d]efendants’ throughout a complaint”). Further, as defendants argue, plaintiff’s negligence claim is, as currently pleaded, barred by the economic loss doctrine. (See Mot. at 20:22-21:1.) Under California law, the economic loss doctrine provides that “[i]n general, there is no recovery in tort for negligently inflicted purely economic losses, meaning financial harm unaccompanied by physical or property damage.” See Sheen v. Wells Fargo Bank, N.A., 12 Cal. 5th 905, 922 (2022) (internal quotation and citation omitted). The rule “is particularly strong when a party alleges commercial activities that negligently or inadvertently went awry,” see United Guar. Mortg. Indem. Co. v. Countrywide Fin. Corp., 660 F. Supp. 2d 1163, 1180 (C.D. Cal. 2009) (internal quotation, citation, and alteration omitted). The economic loss doctrine applies even where a plaintiff is not in privity of contract with the defendant. See Dubbs v. Glenmark Generics Ltd., 2014 WL 1878906, at *4 (C.D. Cal. May 9, 2014) (noting “to the extent [p]laintiff argues that the economic loss rule does not apply when a plaintiff lacks contractual privity with a defendant, that proposition is clearly belied by California law”). Here, although there is no dispute that plaintiff seeks to recover solely for economic losses (see SAC ¶ 4), plaintiff argues the doctrine is, for two reasons, inapplicable to the instant case. First, plaintiff contends the doctrine applies to cases that implicate “two policy considerations,” namely, when courts are “concerned about indeterminate class” (see Pltf.’s Opp’n to Defs.’ Mot. to Dismiss (“Opp’n”) at 19:18-20, Dkt. 74 (internal quotation and citation omitted)), and when courts seek to “bar claims in negligence for pure economic losses in deference to a contract between litigating parties” (see Opp’n at 20:1-2 (internal quotation and citation omitted)). Although plaintiff contends his negligence claim “implicates neither policy concern” (see Opp’n at 20:5), such that “the Court has no reason to even apply the [doctrine] . . . in the first place” (see Opp’n at 21:22-23), plaintiff cites no authority for the proposition that the analysis proceeds in such fashion, see S. California Gas Leak Cases, 7 Cal. 5th 391, 400 (2019) (holding, under California law, “liability in negligence for purely economic losses . . . is the exception, not the rule” (internal quotation and citation omitted)). Second, plaintiff argues that even if the economic loss doctrine presumptively applies to his negligence claim, he enjoys a “special relationship” with defendants, thereby justifying an exception to the rule. (See Opp’n at 22:17); see also S. California Gas Leak Cases, 7 Cal. 5th at 400 (noting “[t]he primary exception to the general rule of no-recovery for negligently inflicted purely economic losses is where the plaintiff and the defendant have a special relationship”) (internal quotation and citation omitted). Whether the special relationship exception applies, however, is a fact-intensive inquiry, see J'Aire Corp. v. Gregory, 24 Cal.3d 799, 804 (1979) (identifying six factors5 relevant to determination as to whether special relationship exists), and plaintiff has not pleaded facts sufficient to support a finding to that effect. Accordingly, the Court finds plaintiff’s negligence claim is subject to dismissal.

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5 The six J’Aire factors are: “(1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant's conduct and the injury suffered, (5) the moral blame attached to the defendant's conduct and (6) the policy of preventing future harm.” See J’Aire, 24 Cal.3d 2 For the reasons stated above, defendants’ motion is hereby GRANTED. As there 3 is no showing the deficiencies noted above cannot be cured, leave to amend is hereby 4 GRANTED, and plaintiff's Third Amended Complaint, if any, shall be filed no later than 5 March 17, 2023. 6 In light thereof, the Further Case Management Conference currently scheduled for 7 March 31, 2023 is hereby CONTINUED to April 28, 2023 at 10:30 a.m. 8 10 11 Dated: February 22, 2023 . MAKINE M. CHESNEY 12 United States District Judge

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