Judge: Daniel S. Murphy, Case: 23STCV21410, Date: 2024-03-06 Tentative Ruling

Case Number: 23STCV21410    Hearing Date: March 6, 2024    Dept: 32

BACKGROUND

            On September 6, 2023, Plaintiff George J. Gerro filed this action against Defendant Gemini Trust Company, LLC. Plaintiff filed the operative First Amended Complaint on November 9, 2023, asserting claims for (1) recovery of personal property, (2) conversion, (3) negligence, (4) receiving stolen property, (5) violation of corporate securities law, and (6) unfair competition. Plaintiff alleges that Defendant is wrongfully retaining his bitcoin.

            On January 9, 2024, Defendant filed the instant demurrer to the FAC. Plaintiff filed his opposition on February 22, 2024. Defendant filed its reply on February 28, 2024.

LEGAL STANDARD

A demurrer for sufficiency tests whether a pleading states a cause of action or defense. (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.) When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228.) In a demurrer proceeding, the defects must be apparent on the face of the pleading or by proper judicial notice. (Code Civ. Proc., § 430.30, subd. (a).) A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed. (Ibid.) The only issue involved in a demurrer hearing is whether the pleading, as it stands, unconnected with extraneous matters, states a cause of action or defense. (Hahn, supra, 147 Cal.App.4th at 747.)

MEET AND CONFER

Before filing a demurrer or a motion to strike, the demurring or moving party is required to meet and confer with the party who filed the pleading demurred to or the pleading that is subject to the motion to strike for the purposes of determining whether an agreement can be reached through a filing of an amended pleading that would resolve the objections to be raised in the demurrer. (Code Civ. Proc., §§ 430.41, 435.5.) The Court notes that Defendant has complied with the meet and confer requirement. (See Ferguson Decl.)

DISCUSSION

I. Collateral Estoppel

a. Governing Legal Principles

“Issue preclusion prohibits the relitigation of issues argued and decided in a previous case, even if the second suit raises different causes of action.” (DKN Holdings LLC v. Faerber (2015) 61 Cal.4th 813, 824.) “[I]ssue preclusion applies (1) after final adjudication (2) of an identical issue (3) actually litigated and necessarily decided in the first suit and (4) asserted against one who was a party in the first suit or one in privity with that party.” (Id. at p. 425.)

Federal courts are courts of competent jurisdiction whose decisions are given preclusive effect. (Kopp v. Fair Pol. Practices Com. (1995) 11 Cal.4th 607, 620.) “[A] bankruptcy court's allowance or disallowance of a claim is a final judgment and is binding and conclusive on all parties or their privies, and being in the nature of a final judgment, furnishes a basis for a plea of res judicata.” (Nathanson v. Hecker (2002) 99 Cal.App.4th 1158, 1163, internal citations omitted.) “Collateral estoppel may apply even where the issue was wrongly decided in the first action. An erroneous judgment is as conclusive as a correct one.” (Roos v. Red (2005) 130 Cal.App.4th 870, 887.)

b. Plaintiff’s Prior Claims

Here, Plaintiff had previously filed two lawsuits against BlockFi Lending, LLC, alleging that BlockFi took his bitcoin. (Def.’s RJN, Ex. 2, 8.) A bankruptcy court held that BlockFi did not violate California law or the contract by liquidating the bitcoin, based on the following findings. (Def.’s RJN, Ex. 16.) Plaintiff had obtained loans from BlockFi with his bitcoin as collateral. When the value of bitcoin dropped, Plaintiff failed to post additional bitcoin as collateral to maintain the proper loan-to-value ratio. Under the terms of the governing loan agreements, BlockFi was entitled to liquidate the bitcoin to maintain the ratio. In denying Plaintiff’s claim, the bankruptcy court concluded that BlockFi did not violate California Financial Code section 22009. (Ibid.)

c. Plaintiff’s Present Claims

In the instant action, “Plaintiff alleges that GEMINI knowingly undertook to receive and possess GERRO’s BITCOIN as BLOCKFI’s agent, to secure BLOCKFI’s loan to GERRO,” thereby aiding BlockFi’s violation of Section 22009. (FAC ¶¶ 11-12.) “Plaintiff alleges that BLOCKFI and GEMINI, in its capacity as BLOCKFI’s agent, violated the California Financing Law by using, possessing, and declaring a forfeiture of GERRO’s rights to GERRO’s BITCOIN.” (Id., ¶ 13.) In other words, Plaintiff’s claim against Gemini is based on the theory that Gemini assisted BlockFi’s improper disposition of the bitcoin, or acted as BlockFi’s agent in taking the bitcoin.

d. Application of Collateral Estoppel

But as the bankruptcy court found, BlockFi did not improperly dispose of the bitcoin. Gemini could not have unlawfully participated in or aided conduct that is lawful. Plaintiff has appealed the bankruptcy court’s ruling, but unless the ruling is reversed, it has preclusive effect. Plaintiff cannot file a separate action alleging that BlockFi acted improperly through Gemini when the bankruptcy court has already found that BlockFi did not act improperly.

Targeting a different defendant (Gemini) through this action does not resolve the defect. “[I]ssue preclusion can be raised by one who was not a party or privy in the first suit.” (DKN Holdings LLC, supra, 61 Cal.4th at p. 824.) “Only the party against whom the doctrine is invoked must be bound by the prior proceeding.” (Id. at p. 825, emphasis in original.) Plaintiff is bound by the bankruptcy court’s ruling even if he disagrees with it, and he cannot avoid the effect of collateral estoppel by suing a different defendant for the same conduct involving the same property.    

e. Public Policy Exception

“Even where minimum requirements for collateral estoppel are established, the doctrine will not be applied ‘if injustice would result or if the public interest requires that relitigation not be foreclosed.’” (Roos, supra, 130 Cal.App.4th at p. 886.) “Thus the court must also consider whether the application of collateral estoppel in a particular case will advance the public policies which underlie the doctrine. The purposes of the doctrine are to promote judicial economy by minimizing repetitive litigation, preventing inconsistent judgments which undermine the integrity of the judicial system and to protect against vexatious litigation.” (Ibid.) Collateral estoppel is fairly applied where it gives “credit to factual findings made by a competent court, acting within the scope of its jurisdiction, and in a forum where the parties were afforded a fair and full opportunity to present their evidence and arguments and appellate review of adverse rulings was available.” (Id. at p. 888.)

Plaintiff argues that for public policy reasons, collateral estoppel should not apply in this case because the bankruptcy court’s erroneous interpretation of California’s Financial Code would “deprive Gerro and many other California borrowers of the unwaivable rights and fundamental public policy of the California Financing Law.” (Opp. 12:9-11.) However, Plaintiff does not specify what unwaivable right or fundamental public policy is implicated or explain how it would be harmed. This is a private dispute between Plaintiff and Gemini/BlockFi concerning the disposition of Plaintiff’s property. Moreover, as discussed above, federal courts are as competent as state courts to issue rulings that have preclusive effect, and an erroneous ruling is just as conclusive as a correct one. The purported public interest here is not of a “quality and intensity” that justifies avoiding collateral estoppel. (See, e.g., Chern v. Bank of America (1976) 15 Cal.3d 866, 873; Kopp, supra, 11 Cal.4th at p. 622.) Courts decline to apply collateral estoppel only “in exceptional circumstances.” (Dailey v. City of San Diego (2013) 223 Cal.App.4th 237, 258.)

The policies behind collateral estoppel warrant its application here because Plaintiff had a full and fair opportunity to demonstrate the illegality of BlockFi’s handling of his bitcoin and can appeal the bankruptcy court’s findings. (See Roos, supra, 130 Cal.App.4th at p. 888.) It would be unjust and inefficient to allow Plaintiff to relitigate the legality of the same conduct under the same law by simply suing a different defendant, when that defendant (Gemini) is merely alleged to have acted on behalf of BlockFi and engaged in no independent wrongful conduct. Gemini cannot serve as a proxy for Plaintiff to attempt a “second bite at the apple” to demonstrate that BlockFi illegally disposed of his bitcoin.  

Therefore, Plaintiff is collaterally estopped from arguing that his bitcoin was improperly disposed of. This necessarily bars the claims asserted against Gemini, which are based on the allegation that Gemini aided BlockFi’s disposition of the bitcoin. Plaintiff has not alleged any conduct by Gemini that is independent of BlockFi’s actions which were deemed legal. Because collateral estoppel bars all of Plaintiff’s claims, the Court does not reach Gemini’s remaining arguments on the merits of each specific claim.    

CONCLUSION

            Defendant’s demurrer is SUSTAINED without leave to amend.