Wright v. Kleiman Enters Final Act — Document Reveal May Set Precedent

Some attorneys say the Kleiman v. Wright court case may set legal precedents that could impact the future of Bitcoin.

Another episode of the Kleiman v. Wright saga concluded Monday with District Court Judge Beth Bloom ordering Craig Wright to turn over the 11,000-plus documents that Wright had declared “privileged.”

Riveting the crypto world for more than two years, the case centers on 1.1 million Bitcoin that may or may not have been mined by Satoshi Nakamoto, Bitcoin’s founder, which may or may not be in a trust controlled by Craig Wright, who claims to be Satoshi Nakamoto himself. If any Bitcoins are retrieved, Wright may have to share them with the estate of his former business partner, the late David Kleiman.  

Judge Bloom’s order was no surprise. The standard to overrule a magistrate judge’s discovery orders is quite stringent, as Jason Gottlieb, partner of Morrison Cohen’s business litigation department and chair of its White Collar and Regulatory Enforcement Practice Group, told Cointelegraph, adding:

“Both Magistrate Judge Reinhart and Judge Bloom appear to have lost patience with Dr. Wright, with Reinhart referring to forged materials and perjured testimony, and Judge Bloom not challenging that finding (indeed appearing to accept it).” 

“A stark reminder”

“Judge Bloom has handed defendants a stark reminder of the risks of playing fast and loose with a federal judge,” added Bradford A. Patrick, an attorney based in Florida. “Judges are generally inclined to rule in line with their magistrates, and this objection is no different.” Patrick shared more with Cointelegraph: 

“Throwing the responsibility back to the court — here, the invitation to review 11,000 pages of discovery for privilege en camera — is almost never a good move. They had to know this was their last ditch effort.”

The case appears to be back on track now. Discovery should be concluded by the end of April, and unless there’s another unforeseen delay or a settlement, there is no reason the jury trial should not begin as scheduled on July 6, 2020 in Miami Division before Judge Bloom. “Whether the trial date will stick depends more on COVID-19 than it does on the parties,” said Gottlieb.

Meanwhile, if Wright fails to produce the documents requested of him, Kleiman’s team will likely ask for adverse inferences to be drawn, but if produced, the documents will prove their point about Wright, “and with this litigation’s history, it seems likely that Judge Bloom would consider that request favorably,” Gottlieb added.

What’s ahead?

Does the recent discovery order offer any hints on how the case might play out? Matthew Kohen, co-chair of law firm Carlton Fields’ digital currency and blockchain practice, told Cointelegraph, “Any time there’s an allegation of forged evidence or perjured testimony — that’s a significant thing.” He then added, “It happens on TV a lot, but it’s not common in the real world.” That said, Bloom’s discovery order was mostly “business as usual.” She basically stuck to the facts of the case and engaged in a calm discussion of evidentiary standards and practices. 

So, should one expect the case to go to trial in July as scheduled? Kohen noted that, “The case has been hotly contested on both sides up till now, and one or both sides may be set on having their day in court.” But most civil lawsuits don’t go to trial — they are settled beforehand — and that still can’t be ruled out here. 

“Covid-19 could bring the case to a grinding halt,” added Kohen. Come July, the Florida court will have difficulty convening a jury if the state is still in lockdown. Some have suggested that the plaintiff’s strategy all along has been to seek a settlement. This is because there’s an inherent contradiction in this case. 

“It appears obvious that Kleiman’s legal team does not believe Wright to be Satoshi,” wrote attorney Daniel Kelman, and their legal strategy seems to paint Wright as untrustworthy. They’ve called into account the existence of the blind trust that supposedly holds the 1.1 million Bitcoins. “On its face this is a somewhat peculiar strategy since Kleiman’s claim to damages largely disappears if the billions of USD worth of Bitcoin never existed and was just made up by Wright.”

What’s really going on? “I believe the real strategy pursued by Kleiman’s legal team may be to seek a confidential settlement from Wright for far less than the billions sought in court,” Kelman wrote.

“The plaintiffs are engaged in a delicate balancing act,” Kohen told Cointelegraph. “The whole case is premised on Wright being Satoshi,” or at least Wright having a plausibly close relationship to Nakamoto and the BTC he mined in 2009 and 2010, but meanwhile, the plaintiff’s lawyers are working hard to break down Wright’s credibility: 

“If they knock [Wright’s] credibility down too far, though, it could have unintended consequences in how a judge or jury views the claim. At some level, a judge or jury needs to draw the conclusion that Wright actually had or has control over the Bitcoin at issue in order to believe the plaintiff’s allegations.”

Moreover, attorneys are required to advocate for their client’s position, but rules prohibit them from advancing known falsehoods before the federal courts, said Kohen. “Technically, you don’t have to believe your client, you just can’t say things that you, as the lawyer, know to be false.”

The case’s larger significance

Given that the case may finally be heading toward resolution, is there anything of a lasting and significant nature that one can draw from Kleiman v. Wright? Some attorneys say the case may set some legal precedents — even though it is playing out in a district court rather than a higher tribunal such as an appeals court — particularly with regard to the somewhat arcane legal issue of conversion.

As noted by the court, “Conversion is an unauthorized act that deprives a person of his [personal, not real] property permanently or for an indefinite time.” The Kleiman estate alleges that Wright “converted” at least 300,000 Bitcoin upon David Kleiman’s death. The question of whether Bitcoin is considered “money” for the purposes of a claim of conversion in a civil context — or personal property — is still unsettled, but the Florida district court allowed the conversion claim to go forward anyway.

“Courts usually consider personal property to be non-fungible,” Kohen told Cointelegraph. BTC, by contrast, might be considered fungible, like money, but maybe not. “Given Bitcoin’s unique UTXO model, there theoretically might be a better argument for why Bitcoin can be converted as opposed to something like Ether.” Discussing Kleiman v. Wright in a Medium blog, attorney Stephen Palley, citing Carlton Fields attorney Drew Hinkes, noted: 

“Under Florida law, even if Bitcoin is money, if you can identify the UTXOs, you can probably make out a claim for conversion. So … maybe it doesn’t matter if bitcoin is or isn’t money. This lawsuit involves a substantial dispute and will be allowed to go forward. I’m confident we will see more caselaw and more precedent from it.”  

Kohen believes that the conversion issue is interesting, since it is unclear whether BTC is more like money in a bank account or a personal property like a rare painting, adding: “One can convert a rare painting, but perhaps not $500 worth of funds in a bank account otherwise containing $100,000, because the allegedly stolen $500 can’t be separated.” 

However, this is just a district court, so its findings on conversion or other matters like Shamir’s Secret Sharing algorithm — which can divide a private encryption key into multiple parts and is claimed to be inhibiting access to Wright’s BTC — would just be binding in Florida. But this is all so new that the court’s decision, should it come, could still have precedential effect, Kohen told Cointelegraph. 

“The saga continues”

Not all are convinced of Kleiman v. Wright’s lasting impact, as Gottlieb said: “I don’t see this case as being terribly important to the industry. The mystery of ‘Who is Satoshi?’ is indeed intriguing, but I don’t think anyone thinks Craig Wright is Satoshi (except for maybe Craig Wright).” Nobody expects this case to solve that mystery, adding:

“If anything, the most important lesson to draw from this case is that you always have to play it straight in litigation, because while good judges will always bend over backward to ensure that the parties’ due process rights are observed, and so will give them some latitude, playing games with a federal judge — even if ‘only’ about discovery issues — is destined to end poorly.”

Regarding Judge Bloom’s April 13 discovery order, Patrick noted that with yet another defendant’s legal arguments eviscerated and a new April 17 deadline to produce the documents, “The saga continues.”

The case has become something akin to an engrossing Netflix series. As Kohen observed, “Millions of people are involved in how this works out,” particularly in finding out the identity of Satoshi Nakamoto. “They have an emotional stake in this.”