District Court Finds bZx DAO May Be General Partnership Under California Law | Practical Law

District Court Finds bZx DAO May Be General Partnership Under California Law | Practical Law

In Sarcuni v. bZx DAO, the US District Court for the Southern District of California partially denied motions to dismiss a putative class action lawsuit brought by users of the bZx DeFi platform, finding that plaintiffs had sufficiently alleged that a general partnership existed under California's Corporation Code among members of bZx DAO, a decentralized autonomous organization (DAO), and permitting them proceed with their negligence claim relating to the DAO's alleged failure to secure the platform.

District Court Finds bZx DAO May Be General Partnership Under California Law

Practical Law Legal Update w-039-0591 (Approx. 4 pages)

District Court Finds bZx DAO May Be General Partnership Under California Law

by Practical Law Finance
Published on 06 Apr 2023 • USA (National/Federal)
In Sarcuni v. bZx DAO, the US District Court for the Southern District of California partially denied motions to dismiss a putative class action lawsuit brought by users of the bZx DeFi platform, finding that plaintiffs had sufficiently alleged that a general partnership existed under California's Corporation Code among members of bZx DAO, a decentralized autonomous organization (DAO), and permitting them proceed with their negligence claim relating to the DAO's alleged failure to secure the platform.
On March 27, 2023, in a case of first impression, Judge Larry Burns of the US District Court for the Southern District of California, in Sarcuni et al v. bZx DAO et al., 3:22-cv-00618 (S.D. Cal. 2023), partially denied motions to dismiss a putative class action lawsuit brought by users of the bZx DeFi platform, finding that plaintiffs had sufficiently alleged that a general partnership existed under California's Corporation Code among the members of bZx DAO, a decentralized autonomous organization (DAO), and permitting them proceed with their negligence claim relating to the DAO's alleged failure to secure the platform.
On May 2, 2022, a class action lawsuit was filed in the US District Court for the Southern District of California against the following defendants:
  • Tom Bean and Kyle Kistner, the co-founders of the bZx protocol and members of the bZx DAO.
  • AGE Crypto GP, LLC (AGE Crypto) and Hashed International LLC (Hashed), investors in the bZx protocol and members of the bZx DAO.
  • bZx DAO.
  • Ooki DAO.
  • Leveragebox LLC, which operated the Fulcrum trading platform.
  • bZeroX LLC, which created the bZx protocol.
(Sarcuni et al v. bZx DAO et al. (S.D. Cal., May 2, 2022)).
Plaintiffs brought the action to recover $55 million in cryptocurrency losses suffered in a November 5, 2021, phishing attack of the bZx platform. Plaintiffs claim bZx DAO members are jointly and severally liable for damages resulting from negligence in failing to secure the DeFi platform, because bZx DAO is a general partnership.
Defendants, Kyle Kistner, Tom Bean, bZeroX LLC, Leveragebox LLC (collectively Leveragebox defendants), filed a motion to dismiss:
  • For failure to state a claim.
  • For lack of personal jurisdiction.
  • To strike the class allegations.
Hashed International LLC, and AGE Crypto GP, LLC (collectively Hashed defendants) joined in the Leveragebox defendants' motion and separately filed a motion to dismiss for:
  • Failure to state a claim.
  • Insufficient service.
  • Lack of subject matter jurisdiction.
Plaintiffs’ position is that a general partnership exists among all persons holding BZRX tokens, a cryptocurrency issued by bZx DAO.
In partially dismissing the motions, the district court found plaintiffs sufficiently pled facts to demonstrate bZx DAO is a general partnership under the California Corporations Code (Cal. Corp. Code § 16202(a)), which provides that a general partnership exists when there is:
  • An association of two or more persons. The district court found that bZx DAO is an association of two or more persons, including BZRX token holders and investors;
  • An association whose members operate as co-owners. The district court found that BZRX token holders have governance rights in the bZx DAO; and
  • A business for profit. The district court found that bZx DAO generates profits through its margin trading and lending products.
The district court granted Leveragebox defendants' motion to dismiss as to claims against:
  • bZeroX LLC and Leveragebox LLC. The district court found plaintiffs failed to allege that bZeroX and Leveragebox LLC were general partners of bZx DAO because the complaint did not suggest either party:
    • held BZRX tokens;
    • participated in the management of the bZx DAO; or
    • shared in the profits of the bZx DAO.
  • Tom Bean. The district court found plaintiffs failed to establish a prima facie case of personal jurisdiction over Bean.
The district court's order permits either party to file a motion requesting limited jurisdictional discovery to determine whether Hashed and AGE held BZRX tokens and therefore are general partners in bZx DAO.
In related actions, the CFTC instituted proceedings in:
For more information on these CFTC actions, see Legal Update, Updated: CFTC Charges Ooki with Failure to Register as FCM, Finds Members Personally Liable for DAO's Debts.