Court Refuses to Dismiss Counterclaim in ‘First Impression’ Crypto Property Suit

In a ruling issued on Monday, Judge William H. Orrick said he could not dismiss an unjust enrichment counterclaim brought by defendant ICON Foundation in a cryptocurrency lawsuit

The suit was affirmatively filed by a man who created ICON blockchain network crypto-assets while allegedly taking advantage of an unintentional error in ICON’s protocols, earning him more than 13 million ICX tokens, then valued at nearly $9 million. Subsequently, plaintiff Mark Shin says he was frozen out accounts he transferred the funds to, after ICON told the transferee platforms that Shin was a malicious hacker who had stolen the assets.

The plaintiff alleged that ICON committed conversion based on the frozen ICX tokens in his ICON wallet, trespass to chattel based on the same, and trespass to chattel based on the frozen crypto-assets in his accounts on exchange platforms. In his decision on the motion to dismiss, Judge Orrick permitted the claims to move forward, except the plaintiff’s bid for punitive damages.

This week’s ruling considered whether ICON’s counterclaims of money had and received, unjust enrichment, and restitution, and declaratory relief were inadequately pleaded or barred as a matter of law. 

The court first ruled that “the unique circumstances here support unjust enrichment as an appropriate cause of action—as pleaded, Shin knowingly took advantage of a software defect to arrogate to himself over 13 million ICX tokens, to the detriment of others in the ICON Community.” The court explained that by obtaining millions of ICX tokens, Shin diluted the value of other ICX token holders’ property, rendering ICON’s unjust enrichment claim viable.

Next, Judge Orrick found that ICON failed to sufficiently plead ownership of the cryptocurrency tokens at issue, requisite for its money had and received claim. “The distinction between a claim for money had and received and one for unjust enrichment, as I see it, is that the former requires one person to receive money ‘which belongs to another,’” the opinion said. ICON reportedly argued, without legal support, that the tokens belonged to the “ICON Community,” falling short of showing a possessory interest.

Finally, Judge Orrick permitted ICON’s claim for declaratory relief to proceed, as it offered a remedy, the destruction of the currency at issue, distinguishable from the surviving substantive claim.

Mark Shin is represented by Roche Freedman LLP and ICON by Manatt Phelps and Phillips and Morrison Cohen.