Judge: Elaine W. Mandel, Case: 22SMCV01367, Date: 2022-10-27 Tentative Ruling

Case Number: 22SMCV01367    Hearing Date: October 27, 2022    Dept: P

Tentative Ruling

Yu v. Rari Capital Infrastructure, et al. Case No. 22SMCV01367

Hearing date October 27, 2022

Defendants’ Demurrer and Motion to Strike

Plaintiff’s Motion for Preliminary Injunction

On August 12, 2022, plaintiff Yu sued defendants Rari Capital Infrastructure, LLC, Fei Labs and Longarzo alleging: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) conversion; and (4) violation of Penal Code § 496 .

Defendants Rari Capital and Fei developed cryptocurrencies and decentralized autonomous organizations (DOA). Rari Capital developed $RGT tokens which held value on the secondary market and conferred voting rights in the Rari Capital DOA. Fei Labs developed TRIBE tokens which hold value on the secondary market and confer voting rights in the Fei DOA. Holders of $RGT approved a merger of the Fei and Rari Capital DOAs. As part of that merger, $RGT holders could exchange $RGT tokens for TRIBE.

Plaintiff worked at Rari Capital, which compensated him with 70,000 $RGT subject to an allocation letter with a 24-month vesting schedule. In April of 2022, defendant chief executive Longarzo created Rari Capital Infrastructure to succeed Rari Capital. Plaintiff alleges Fei helped Rari Infrastructure convert plaintiff’s $RGT into TRIBE, which was transferred into PegExchanger, an account under Fei and Rari Infrastructure’s control. Despite plaintiff’s demand in June of 2022, his 70,000 $RGT allegedly remain in the PegExchanger account. Plaintiff alleges his 70,000 $RGT were valued at $1,000,000 when Fei and Rari Infrastructure converted the tokens. At that point 80%, or $800,000 of $RGT, had vested.

Plaintiff seeks a preliminary injunction whereby defendants would deposit $2.4M into a blocked account ($800,000 in actual damages, trebled). Defendants demur and move to strike prayers for punitive and treble damages.

Judicial Notice

Defendants ask the court to take judicial notice of: (1) the Delaware Certificate of Status for Rari Capital, Inc.; (2) the Delaware Certificate of Status for Rari Capital Infrastructure, LLC.; and (3) the Fei-Rari Capital Tribe Governance Unification agreement. “While courts take judicial notice of public records, they do not take notice of matters stated therein.” Herrera v. Deutsche Bank National Trust Co. (2011) 196 Cal.App.4th 1366, 1375 (citing Love v. Wolf (1964) 226 Cal.App.2d 378, 403). The court can take judicial notice that these documents exist, but not of the facts stated therein.

Evidentiary Objections

Defendants raise objections to the declarations of plaintiff Yu and his attorney Gura. Defendants’ objections to paragraphs 9 and 10 of the Yu declaration are sustained for lack of personal knowledge. The rest are overruled. Defendants’ objections to the statements in Gura’s declaration are sustained. The exhibits speak for themselves.

Plaintiff objects to the declarations of Longarzo and Grieco. The hearsay objection to paragraph 7 is sustained. Objections to paragraphs 11 and 12 and exhibit 4 of the Longarzo declaration are sustained. Plaintiff’s objections to the Grieco declaration are overruled.

Demurrer

Plaintiff argues the demurrer is defective because it was not filed and served 18 court days before the hearing. Plaintiff stipulated to the court hearing the demurrer on October 27, 2022. See 10/04/22 Order. This objection is waived.

On demurrer, courts read the allegations liberally. Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal. App. 4th 1216, 1228. “A demurrer tests the pleading alone, and not the evidence or facts alleged.” E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1315. The court assumes the truth of all factual allegations. Ibid. The issue is whether the complaint states a cause of action. Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747. The court must sustain a demurrer when the complaint fails to “state facts sufficient to constitute a cause of action.” Cal. Code Civ. Proc. § 430.10(e); Munn v. Briggs (2010) 185 Cal. App. 4th 578, 584.

“The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.” Cal. Civ. Code § 1641. A “contract must be construed as a whole and the intention of the parties must be ascertained from the consideration of the entire contract, not some isolated portion.” County of Marin v. Assessment Appeals Bd. (1976) 64 Cal.App.3d 319, 325.

Defendants argue the allocation letter absolves them of liability: “The Rari Capital team is in no way responsible for anything done with your tokens or the value associated with them. To Rari Capital, the $RGT can be regarded as a valueless token that is exclusively leveraged for governance and fee discount purposes.” Compl., Ex. 1 ¶ 8. However, the allocation letter states: “These $RGT are subject to the Rari Vesting Schedule which can be found here. The plan lasts twenty-four months. As highlighted in the attached chart, you are free to sell your tokens at any time. However, the sooner you sell, the more tokens you will burn.” Compl., Ex. 1 ¶ 4. This indicates the parties understood the tokens held monetary value on the secondary market. Further, the allocation letter intends to convey items of monetary value to plaintiff.

The letter seems to state Rari Capital is not responsible for decreases in $RGT’s value. However, it does not make sense that the letter allows Rari Capital to convert or refuse to convey plaintiff’s tokens at will. Such a reading would render the allocation letter meaningless.

Plaintiff alleges defendants refused to convey his agreed-upon compensation by holding the TRIBE tokens in a blocked account. Comp. ¶¶ 61, 71-74, 80. At the time of the alleged conversion, the 70,000 $RGT tokens held value on the secondary market. Determining the precise amount of damages is a factual inquiry, inappropriate on demurrer. For purposes of demurrer, allegations regarding damages must be accepted as true.

Breach of Contract

To state a cause of action for breach of contract, plaintiff must show (1) existence of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) breach, and (4) damages. Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, 821.

Plaintiff alleges existence of the allocation letter, a written agreement. Compl. ¶ 59. Ex 1. Plaintiff alleges he provided Rari Capital with an Ethereum address and consented to be a public holder of $RGT. ¶ 60; Ex. 1 ¶ 5. Plaintiff alleges Rari Capital Infrastructure, successor to Rari Capital, breached by preventing the vesting of plaintiff’s $RGT according to the vesting schedule. ¶ 61.

Defendants argue plaintiff brings this cause of action against Rari Infrastructure, but Rari Capital was the signatory to the allocation letter, and plaintiff fails to plead that Rari Infrastructure is a successor in interest to Rari Capital. Paragraphs 29-31 detail how defendant Longarzo took over Rari Capital and converted it to Rari Infrastructure.

Successors in interest are bound by construction reasonably applicable to original parties to contract. Spector v. National Pictures Corp. (1962) 201 Cal.App.2d 217, 222. Rari Infrastructure is bound by the letter signed by Rari Capital; plaintiff properly pled a cause of action for breach of contract against defendant Rari Capital Infrastructure. OVERRULED.

Breach of Good Faith and Fair Dealing

“A breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself and it has been held that bad faith implies unfair dealing rather than mistaken judgment.” Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal.App.3d 1371, 1394.

The cause of action for breach of the implied covenant of good faith and fair dealing is redundant, as the allegations are almost identical to the breach of contract allegations. See Compl. ¶¶ 64-67. Plaintiff does not plead facts beyond breach of contract. SUSTAINED.

Conversion

“Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are: (1) the plaintiff’s ownership or right to possession of the property; (2) the defendant’s conversion by a wrongful act or disposition of property rights; and (3) damages.” Lee v. Hanley (2015) 61 Cal.4th 1225, 1240.

Plaintiff alleges ownership of the $RGT according to the allocation letter. Compl. ¶ 71. Plaintiff alleges defendants Rari Infrastructure, Fei and Longarzo exchanged his $RGT tokens for TRIBE tokens and placed the TRIBE tokens outside of his control. Id. ¶ 72.

Defendants argue plaintiff expressly or implicitly agreed to the transfer because that is what members of the Rari DOA agreed to when they approved the merger with the Fei DOA. Since plaintiff, as a holder of $RGT, was a voting member of the Rari DOA, plaintiff agreed to exchange his $RGT tokens for TRIBE tokens.

Plaintiff alleges defendants control the TRIBE tokens. While $RGT holders may have agreed to exchange their $RGT for TRIBE, but $RGT holders (like plaintiff) did not agree to let defendants retain control of their newly acquired TRIBE tokens. Plaintiff adequately pleads a cause of action for conversion. While defendants offer purported merger agreements, the court cannot consider extrinsic evidence on demurrer. OVERRULED.

Violation of Penal Code § 496

Penal Code section 496(c) allows for a civil action against any “person who buys or receives any property that has been stolen.” “To prove theft, a plaintiff must establish criminal intent on the part of the defendant beyond mere proof of nonperformance or actual falsity.” Siry Inv., L.P. v. Farkhondehpour (2022) 13 Cal. 5th 333, 346-47.

Plaintiff fails to plead criminal intent. With respect to defendant Fei, plaintiff alleges Fei “had actual knowledge it was participating in theft.” Compl. ¶ 82(c). Plaintiff alleges Fei “should have known” it was involved in a theft. Ibid. This does not rise to the level of criminal intent.

Regarding Rari Infrastructure and Longarzo, plaintiff makes conclusory allegations that Longarzo had “actual knowledge he was participating in a theft” when he converted plaintiff’s $RGT into TRIBE and transferred those tokens into an account outside of plaintiff’s control. Id. ¶¶ 81(b), 82(b). These allegations are not sufficient to allege criminal intent. SUSTAINED WITH 10 DAYS LEAVE TO AMEND.

Defendants’ Motion to Strike Punitive Damages/Treble Damages/Attorneys’ Fees

Defendants seek to strike punitive damages (Civ. Code § 3294) and treble damages/attorneys’ fees under Penal Code section 496, pursuant to Code Civ. Proc. § 436.

The remaining causes of action are breach of contract and conversion, for which punitive damages are not awardable. Further, plaintiff makes no allegations of malice, oppression or fraud. GRANTED. The demurrer to the claim under Penal Code section 496 is sustained, so requests for treble damages and attorneys’ fees are stricken. GRANTED.

Plaintiff’s Motion for Preliminary Injunction (Deposit of $2.4 Million)

Plaintiff seeks an order requiring Rari Capital Infrastructure and Fei Labs to deposit $2,400,000 ($800,000 in alleged actual damages, trebled), alleging the companies are liquidating assets, which will make them potentially unable to satisfy a judgment.

A court may issue a preliminary injunction “[w]hen it appears, during the litigation, that a party

to the action is doing, or threatens, or is about to do, or is procuring or suffering to be done, some act in violation of the rights of another party to the action respecting the subject of the action, and tending to render the judgment ineffectual.” Code Civ. Proc. §526(a)(3). A trial court may grant a preliminary injunction if (1) the party seeking the injunction is likely to prevail on the merits, and (2) the “interim harm” to that party if an injunction is denied is greater than “the [interim] harm the [opposing party] is likely to suffer if the ... injunction is issued.” Integrated Dynamic Solutions, Inc. v. VitaVet Labs, Inc. (2016) 6 Cal.App.5th 1178, 1183. A “fail[ure] to satisfy either or both of the ‘interim harm’ and ‘likelihood of prevailing on the merits’ factors” is sufficient to deny the injunction. Cohen v. Bd. of Supervisors (1985) 40 Cal. 3d 277, 286.

Defendants offer evidence that plaintiff’s allocation of $RGT was treated the same as every other allocation. Longarzo Decl. ¶ 8. All allocations of $RGT were treated in accordance with the DOA merger agreement approved by $RGT holders. There are questions about when plaintiff left Rari Capital and how much of his $RGT had vested. Id. ¶ 9. Plaintiff has not shown a likelihood he will prevail on the merits.

Plaintiff offers scant evidence of irreparable harm/inability to collect a potential future judgment. He alleges defendants are ceasing operations but offers inadmissible evidence in support. He lacks personal knowledge, and the declaration of his lawyer is not admissible. Gura Decl. ¶¶ 5-9.

Defendants’ admissible evidence indicates they would suffer interim harm if required to deposit the funds. Executives state such a requirement would interfere with business operations and the ability to defend themselves in this suit. Longarzo Decl. ¶ 14; Grieco Decl. ¶ 9. Defendants’ actual interim harm outweighs plaintiff’s speculative inability to collect a potential future judgment. DENIED.