crypto lender plausibly violated UCL via unlawfulness and deceptiveness

Jeong v. Nexo Capital Inc., 2022 WL 3590329, No. 21-cv-02392-BLF (N.D. Cal. Aug. 22, 2022)

Nexo’s Crypto Credit service allows users to take out loans against cryptocurrency collateral. Jeong alleged that, in response to SEC action targeting Ripple/XRP and the cratering price, Nexo limited the use of Ripple on its platform, causing customers to default on loans taken out against XRP collateral. This allegedly breached Nexo’s duty of good faith and fair dealing and constituted a violation of California’s UCL. The court partially granted/denied Nexo’s motion to dismiss.

The false advertising parts: Jeong alleged that Nexo advertised to consumers that it does not own users’ collateral (e.g., “Clients retain 100% ownership of their digital assets.... Nexo’s clients can enjoy their crypto wealth immediately, without having to sell their digital assets.”) while acting otherwise—eventually invoking its ownership right over users’ collateral to justify liquidation of that collateral (e.g. “Taking into consideration the fact that ... Nexo acquires the ownership of the collateral while the Nexo crypto credit is outstanding, when liquidations are effected, Nexo disposes of its own digital assets rather than rendering services to its clients, as it is the case with the repayments and the standard Nexo exchange service.”).

In addition, Jeong alleged that Nexo violated the unlawful prong of the UCL by offering loans in California despite lacking a California Finance Lender (CFL) License.

Previously, the court had dismissed a CLRA claim without leave to amend, finding that it was not plausible that Nexo offered “services” under the CLRA. However, it found that Jeong sufficiently pled misleadingness claims about “ownership.”

The court now found the breach of contract claim sufficiently pled.

UCL unlawful due to lack of license theory: Sufficiently alleged. Recall that the UCL’s “coverage is sweeping, embracing anything that can properly be called a business practice and that at the same time is forbidden by law.” The UCL “borrows violations of other laws and treats them as unlawful practices that the unfair competition law makes independently actionable.” While Nexo argued that the CFL only covered “money” loans, with money defined as “a medium of exchange that is authorized or adopted by the United States or a foreign government,” that argument was pointing to the wrong section of the law. The CFL provides that “[n]o person shall engage in the business of a finance lender or broker without obtaining a license from the commissioner”:

Nothing in this provision suggests that engaging in the “business of a finance lender or broker” requires lending “money” according to a particular statutory definition. Under the CFL, a “finance lender” includes “any person who is engaged in the business of making consumer loans or making commercial loans.” “Consumer loan” is defined as “a loan, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for personal, family, or household purposes”—which again provides no insight on whether a loan must be in fiat currency. The definition of “finance lender” indicates that “[t]he business of making consumer loans or commercial loans may include lending money,” (emphasis added), but this is an inclusive definition—it does not suggest that a loan must be in fiat currency.

In keeping with the CFL provision that it should be “liberally construed and applied to promote its underlying purposes and policies,” one of which is “[t]o protect borrowers against unfair practices by some lenders,” Jeong wasn’t required to plead that his loan was in fiat currency. And he sufficiently alleged that his injury was at least in part due to Nexo’s lack of licensure.

This also allowed a UCL unfairness claim to proceed.

UCL false advertising: “Plaintiff has plausibly pled that a reasonable consumer would have been deceived by Nexo’s public statements about lack of ownership over users’ collateral given its alleged invocation of ownership to liquidate that collateral[.]” Nexo argued that it didn’t claim to own any collateral if a user wasn’t in breach of the loan-to-value collateral requirements, and owning users’ collateral after an LTV breach was consistent with a “traditional understanding of collateral under U.S. law.” The court was unimpressed and found Nexo’s position to clash with the alleged conduct and the language of the contract, which did claim ownership while the loan was outstanding. The court thus didn’t reach plaintiff’s other theories of false advertising, including that Nexo allegedly advertised that there are “#ZeroFees” associated with its services, but Jeong allegedly was charged fees when Nexo liquidated his XRP collateral.

But Nexo succeeded in keeping its class action waiver intact.