Judgment enforcement in the new age of digital assets

Three years ago, most people had never heard of a non-fungible token or “NFT.” Today, a one-minute clip of archived footage of Justice Ruth Bader Ginsburg’s White House swearing-in ceremony is for sale for nearly $1,000 on CNN’s website, and Tom Brady has launched an NFT platform company that sells digital replicas of sports memorabilia like his iconic 2000 NFL draft card. Seemingly overnight, and spurred by celebrity endorsements, NFTs have grown into a multi-billion dollar industry.

Perhaps inexorably, NFT-related litigation is burgeoning in U.S. courts. Since 2021, the U.S. District Court for the Southern District of New York has issued high profile decisions (1) denying a motion to dismiss trademark infringement claims by Hermés, the luxury fashion business, against the creator of NFTs depicting Hermés’s famed Birkin bags (branded MetaBirkins); and (2) granting Playboy’s request for an injunction against the unauthorized sale of NFTs featuring the Playboy bunny design (branded “Playboy Rabbitars”). See Hermes Int’l v. Rothschild, No. 22-CV-384 (JSR), 2022 WL 1564597 (S.D.N.Y. May 18, 2022) and Playboy Enterprises Int’l v. www.playboyrabbitars.app, No. 21 CIV. 08932 (VM), 2021 WL 5299231 (S.D.N.Y. Nov. 13, 2021). A case pending in the District of Nevada involves misappropriation of trade secrets claims based on the alleged theft of the plaintiff’s NFT-related technologies. See Complaint, Banq v. Scott Purcell, (D. Nev. May 16, 2022) (No. 22-cv-00773-MMD-VCF, ECF No. 1). In the limited number of NFT-related actions filed thus far in the United States, intellectual property issues are front and center.

An area that has yet to gain traction vis-à-vis NFTs (and digital assets, generally) is the prospect of litigants enforcing judgments against digital assets, and freezing those assets to protect against the risk of asset dissipation. Earlier this year, the High Court of Justice in London ruled that NFTs represent private property. See Osbourne v. Persons Unknown & Anor [2022] EWHC 1021 (Comm). U.S. courts are beginning to treat digital assets similarly, which will likely lead to the attachment of digital assets in satisfaction of civil judgments. The U.S. District Court for the Central District of California recently ordered a defendant to transfer to the U.S. Marshal all assets, including cryptocurrency, within the defendant’s possession, to secure the amount of attachment. With respect to the cryptocurrency assets, the court ordered the defendant to provide the digital wallet identification number and electronic access key to the officer executing the attachment, and to complete the transfer from cryptocurrency to cash deposited into a designated account. See Handley v. La Melza, 2022 WL 3137718, at *3 (C.D. Cal. July 13, 2022).

With the rise of NFTs and other digital assets, many plaintiffs seeking to secure pre- or post-judgment attachment of their adversaries’ assets, or to take other measures to enforce judgments, will have new targets to pursue. Under New York law, “[a] money judgment may be enforced against any property which could be assigned or transferred,” which on its face would include digital assets like NFTs. CPLR §5201(b). Accordingly, litigants should be aware of the tools that are available for tracking digital asset transactions, and the procedures for obtaining pre- or post-judgment attachment and related discovery, which could be leveraged to enforce judgments against digital assets. This article focuses on the procedures available under New York law, but similar enforcement procedures are available in other states.

Tracking digital assets and transactions

Digital assets are generally understood to facilitate anonymous transactions. However, it is possible to link digital wallets to their owners’ real identities and to track transactions to and from those digital wallets. A new industry has emerged of companies specializing in blockchain analytics services and forensic financial investigations of digital transactions. Plaintiffs who have reason to believe their adversaries may have substantial digital assets could consider using these types of services to obtain further information about the value of those assets and their adversaries’ transactional histories. This could prove fruitful, for example, if plaintiffs were to notice substantial sales of digital assets by their adversaries that might support an injunction or pre-judgment attachment of digital assets still within their adversaries’ possession. Tracking these transactions could also give plaintiffs a window into their adversaries’ business operations that they may not otherwise be able to obtain through discovery.

Pre-judgment attachment and restraint of digital assets

New York law allows for pre-judgment attachment of and discovery concerning defendants’ assets under certain circumstances, which typically requires some showing of a danger of asset dissipation or that the eventual judgment will not be satisfied. For example, in Morozov v. ICOBOX Hub, 2020 WL 5665639 (S.D.N.Y. May 5, 2020), the plaintiffs successfully sought under CPLR §5229 a restraining order and defendants’ testimony and documents concerning their finances and assets to be used to satisfy the final judgment, including specifically their digital assets (namely, Bitcoin). In support of their application for a restraining order against cryptocurrency transfers aimed at avoiding the judgment, the plaintiffs emphasized the decentralized and anonymous nature of such transactions. Indeed, the fact that digital assets are so readily transferred may weigh in favor of a restraining order against the transfer of those assets. Likewise, in Winklevoss Capital Fund v. Charles Shrem (S.D.N.Y. Oct. 26, 2018) (No. 18-cv-08250-JSR, ECF No. 30), the court granted plaintiff’s application for prejudgment attachment pursuant to Fed. R. Civ. P. 64 and CPLR § 6211, freezing “5,000 bitcoin or its equivalent value in … other virtual currencies.”

Plaintiffs seeking pre-judgment attachment under other provisions, such as CPLR §§6201 (pre-judgment attachment) or 7502(c) (attachment and injunction in aid of arbitration), should consider whether the defendants possess any digital assets that could be subject to pre-judgment attachment or a restraining order.

Post-judgment enforcement

CPLR Article 52 governs enforcement of monetary judgments, generally. One of the first things a judgment debtor may wish to do upon entry of a judgment is to freeze the judgment debtors’ assets. This is particularly true where the judgment debtors are believed to possess easily transferrable digital assets. CPLR §5222 provides for the issuance of restraining notices, which may be issued by the attorney for the judgment creditor, acting as an officer of the court.

Another step judgment creditors typically take immediately following entry of a judgment is to conduct discovery concerning the judgment debtors’ assets. CPLR §5223 provides, in part, that “[a]t any time before a judgment is satisfied or vacated, the judgment creditor may compel disclosure of all matter relevant to the satisfaction of the judgment.” Judgment creditors should consider using post-judgment discovery to determine: (1) whether the defendants own any digital assets; (2) the location of any such digital assets, including the identification information of any digital wallets defendants use to store their digital assets; and (3) the value of any such digital assets and the basis for the valuation. Judgment creditors may also consider using blockchain analytics and investigation services described above to supplement this post-judgment discovery.

Conclusion

As digital assets become more ubiquitous in the business world, litigants will need to be mindful of the extent to which their clients and adversaries hold such assets, and how that may impact judgment enforcement. On the one hand, digital assets can be transferred at the click of a button and these types of transactions may be conducted anonymously, which may create challenges for judgment creditors. Nevertheless, technology savvy litigants (and their legal counsel) will find ways to trace and analyze their adversaries’ digital transactions, no matter how surreptitious, including through the use of some of the specialized services and discovery procedures described above. With some NFTs selling for over $50 million, it is only a matter of time before a court orders the attachment of an NFT in satisfaction of a judgment.

This article was originally published by the New York Law Journal: https://www.law.com/newyorklawjournal/2022/12/09/judgment-enforcement-in-the-new-age-of-digital-assets/, and is published again with their permission.

Authored by Seth M. Cohen and Alan M. Mendelsohn.