Category Archives: Uncategorized

Cryptocurrency Litigation on the Rise

The third quarter of 2022 has seen a dramatic uptick in incidences of federal cryptocurrency litigation. The common questions that are being asked of the courts are whether certain cryptocurrency assets are to be treated as a commodity and/or a security? Investment groups, the Commodity Futures Trading Commission (CFTC), and the Securities Exchange Commission (SEC) have begun filing a host of lawsuits across the federal district courts, five major lawsuits alone in the months of September 2022 and October 2022. Perhaps, this is indicative of an uptick in cases being filed across other jurisdictions.

What are Securities?

Before diving further, we should look to the Securities Exchange Act’s definition of what a “security” is, and it is defined broadly to include, among other things, stocks, bonds, debentures, investment contracts, a variety of other instruments, or, “in general, any instrument commonly known as a ‘security.’” 15 U.S.C. § 78c(a)(10). Yet, the definition of security expressly excludes “currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.” 15 U.S.C. § 78c(a)(10).

In general, all securities offered in the United States must be registered with the SEC or must qualify for an exemption from the registration requirements. Securities which are generally exempt include government bonds, agencies, municipal bonds, commercial paper, and private placements. If a broker or dealer is going to be effecting transactions in securities for an account or others, or for their own accounts, they are generally required to register with the SEC and join a “self-regulatory organization.” 15 U.S.C. § 78o. Like with registering securities, the law does have exemptions for brokers and dealers who do not have to register.

This appears to be where selling and marketing cryptocurrency assets skates a very skewed line and raises questions for both investors and regulators as to whether cryptocurrency assets should in fact be considered a security and be registered with the SEC.

The SEC Laws at issue

In general, issues have arisen with cryptocurrency assets in the context of whether investment contracts exist. The United States Supreme Court in the Howey decision, and its subsequent case law, found that investment contracts exist when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). The Howey analysis applies to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities. https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets#_ednref6. Depending on the facts or circumstances surrounding an individual case, it is possible for a cryptocurrency asset to be considered a security by virtue of it being an investment contract.

If a cryptocurrency asset is deemed to be a security, a broker or dealers trading of an unregistered asset could lend itself to potential liability. Section 10(b) of the Securities Exchange Act of 1934  makes it unlawful to “use or employ, in connection with the purchase or sale of any security” a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b). Further, SEC Rule 10-b5, makes it unlawful for any person to defraud or deceive someone, including through the misrepresentation of material information, with respect to the sale or purchase of a security.

Taking the fraud liability further, the offer and sale of securities, by the use of the means and instrumentalities of interstate commerce, directly or indirectly have: (a) employed devices, schemes and artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or by omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, practices, or courses of business that operated or would operate as a fraud or deceit upon the purchasers of such securities under Section 17(a) of the Securities Exchange Act. 15 U.S.C. § 77q.

Section 5(b) of the Securities Exchange Act makes it unlawful for any person to directly or indirectly: (a) make use of means or instrumentalities of transportation or communication in interstate commerce or of the mails to sell, through the use or medium of a prospectus or otherwise, securities as to which no registration statement was in effect; (b) for the purpose of sale or delivery after sale, carry or cause to be carried through the mails or in interstate commerce, by means or instrumentalities of transportation, securities as to which no registration statement was in effect; and (c) make use of means or instrumentalities of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy, through the use or medium of a prospectus or otherwise, securities as to which no registration statement had been filed. 15 U.S.C. § 77e(a) and (c).

Recent SEC Cases

Securities and Exchange Commission v. Chicago Crypto Capital LLC et al

In the Northern District of Illinois, the SEC has brought a civil action against Chicago Crypto Capital LLC (“Chicago Crypto”), its president and sole owner Brian B. Amoah, and two of its salesman, Darcas Oliver Young and Elbert G. Elliott. The allegations were that Crypto Capital, it’s owner, and salespeople conducted an unregistered offering of cryptocurrency assets called BXY, which the SEC contends was a security, illegally raising $1.5M in proceeds through unregistered offers and sales of the securities to about 100 individuals, many of whom were cryptocurrency novices. The allegations are that the BXY offering was not registered with the SEC and did not meet any exemption from registration.

Adding to the issues, none of the defendants were registered with the SEC as brokers, and the allegations are that the defendants effected transactions in BXY for Chicago Crypto customers’ accounts, advised prospective investors about the merits of investing in BXY, and received transaction-based compensation. There were also allegations of fraud in that the defendants misled investors about the custody and delivery of BXY, and made false and misleading statements about the markup charged by Chicago Crypto, the delivery of account statements, Chicago Crypto’s liquidation of an investor’s BXY, their personal investments in BXY, and the financial and management problems occurring at BXY’s issuer, Beaxy Digital Ltd., in late 2019. This resulted in the SEC seeking relief under 5 counts in their complaint for violations of Sections 5(a), 5(c), 10(b), 15(a), and 17(a) of the Securities Exchange Act.

U.S. Securities and Exchange Commission v. The Hydrogen Technology Corporation et al

In the Southern District of New York, the SEC brought another civil action. This time it was against The Hydrogen Technology Corporation (“Hydrogen Tech”), its President and CEO Michael Ross Kane, and Tyler Oster, President and CEO of Moonwalkers Trading Limited (“Moonwalkers”). The allegations are that during January 2018 and April 2019, Hydrogen Tech and Kane offered and sold cryptocurrency asset securities called Hydro tokens, and hired Ostern and Moonwalkers to fraudulently manipulate the price and volume of Hydro tokens traded on cryptocurrency asset trading platforms so that Hydrogen Tech could sell its own Hydro tokens at a greater profit.

The allegations state that Ostern and Moonwalkers used a customized trading bot through Kane’s and Hydrogen Tech’s trading accounts to sell Hydro tokens. It resulted in $2.2M in profits for Hydrogen Tech. Among other manipulation tactics, Ostern allegedly placed and canceled both buy and sell orders at random increments to artificially inflate the Hydro token’s trade volume and price, thereby enabling sales of the company’s Hydro to be more profitable.

The SEC contends that Hydro tokens distributed by Hydrogen Tech and Kane through the bounty programs, employee compensation, and sales in the crypto asset trading market, including through Ostern, were offered and sold as investment contracts, and therefore were securities whose offer or sale required registration with the SEC unless an exemption from registration was available. Ultimately the SEC brought this suit seeking relief under 6 counts in their complaint for violations of Sections 5(a), 5(c), 9(a), 10(b), 15(a), 17(a) and 20(b) of the Securities Exchange Act.

What are Commodities and What are the Laws at Issue?

The CFTC defines a commodity as (1) those articles including agricultural commodities enumerated in Section 1a(4) of the Commodity Exchange Act, 7 USC 1a(4), and all other goods and articles, except onions as provided in Public Law 85-839 (7 USC 13-1), a 1958 law that banned futures trading in onions, and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in; and (2) physical commodities such as an agricultural product or a natural resource as opposed to a financial instrument such as a currency or interest rate.

The CFTC has posted on its website that virtual currencies, such as Bitcoin and other cryptocurrencies have been determined to be commodities under the Commodity Exchange Act. Further, per the CFTC, the CFTC’s jurisdiction in cryptocurrency assets is implicated when a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.

The Commodity Exchange Act generally requires intermediaries in the derivatives industry to register with the CFTC.  An “intermediary” is a person or firm who acts on behalf of another person in connection with trading futures, swaps, or options.  Depending on the nature of their activities, they may also be subject to various financial, disclosure, reporting, and recordkeeping requirements. Intermediaries include: Associated Persons (AP), Commodity Pool Operators (CPO), Commodity Trading Advisors (CTA), Floor Brokers (FB), Floor Traders (FT), Futures Commission Merchants (FCM), Introducing Brokers (IB), Principals Retail Foreign Exchange Dealers (RFED), and Swap Dealers (SD).

Recent CFTC Cases

Commodity Futures Trading Commission v. Todd et al

In the Southern District of Florida, the CFTC brought an action against Adam Todd, Digitex LLC, Digitex Limited, Digitex Software Limited, and Blockster Holdings Limited Corporation (d/b/a Digitex Futures). The allegations are such that Adam Todd purportedly owned, built, and operated an asset derivatives trading platform through a common enterprise of corporate entities, including Digitex LLC, Digitex Limited, Digitex Software Limited, and Blockster Holdings Limited Corporation (all referred to in the complaint as “Digitex Futures” collectively). The pleadings argued that Digitex Futures accepted customer funds as margin collateral and matched customer orders for digital asset derivatives, such as bitcoin futures contracts and ether futures contracts. In connection with its offering of digital asset futures contracts, Digitex Futures allowed users to trade with leverage of up to 100 to 1. The CFTC is arguing that through the operation of their exchange platform, Digitex Futures became subject to the requirements under Section 4 of the Act, 7 U.S.C. § 6, to register with the Commission as a designated contract market (“DCM”) or foreign board of trade (“FBOT”), as well as the requirement under Section 4d of the Act, 7 U.S.C. § 6d, to register as a futures commission merchant (“FCM”). The CFTC contended that neither Digitex Futures nor Todd had ever been registered with the Commission in any capacity and therefore violated 7 U.S.C. §§ 6 and 6d.

Because of the CFTC’s argument that Digitex Futures also met the statutory definition of an FCM, Regulation 42.2, 17 C.F.R. § 42.2 (2021), it required Digitex Futures to comply with the  applicable provisions of the Bank Secrecy Act (“BSA”), including requirements to implement effective know-your-customer (“KYC”) procedures and a customer information program (“CIP”). However, the CFTC believes that Digitex Futures did not have effective KYC procedures at any time and it believes that Digitex Futures did not implement an effective CIP, thus violating 17 C.F.R. § 42.2. Lasty, the CFTC sought relief for a purported attempt by Todd to manipulate the price of the Digitex Futures native currency, DGTX, by engaging in non-economic trading activity on third-party digital asset trading platforms with the intent to artificially inflate the price of DGTX and increase the value of the DGTX tokens held by Todd and Digitex Futures for their benefit. This resulted in the pleading having counts for violations of Section 6(c)(1), 6(c)(3), and 9(a)(2) of the Act, 7 U.S.C. §§ 9(1), 9(3), and 13(a)(2), and Regulations 180.1(a)(1) and 180.2, 17 C.F.R. §§ 180.1(a)(1), 180.2 (2021).

Commodity Futures Trading Commission v. Ooki DAO

In the Northern District of California, the CFTC brought an action against Ooki DAO. The company bZeroX, LLC (“bZeroX”) designed, deployed, marketed, and made solicitations concerning a blockchain-based software protocol (the “bZx Protocol”) that accepted orders for and facilitated margined and leveraged retail commodity transactions. The allegations are that the bZx Protocol permitted users to contribute margin to open leveraged positions whose ultimate value was determined by the price difference between two virtual currencies from the time the position was established to the time it was closed. Additionally, the CFTC alleged the bZx Protocol purportedly offered users the ability to engage in the transactions in a decentralized environment. Further, bZeroX, having never registered with the Commission, purportedly engaged in unlawful activities that could only lawfully be performed by a registered designated contract market (“DCM”) and other activities that could only lawfully be performed by a registered futures commission merchant (“FCM”) under the Commodity Exchange Act, 7 U.S.C. §§ 1-26, and Commission Regulations, 17 C.F.R. pts. 1-190 (2021).

In addition, the CFTC alleged that bZeroX failed to conduct KYC diligence on its customers as part of a CIP as required of FCMs by the Regulations. In August 2021, bZeroX transferred control of the bZx Protocol to the bZx DAO, which was later renamed and currently doing business as Ooki DAO. Ooki DAO is an unincorporated association comprised of holders of Ooki DAO Tokens who vote those tokens to govern the bZx Protocol (renamed the “Ooki Protocol”). The CFTC alleged that bZeroX transferred the bZx Protocol to bZx DAO, in an effort to circumvent the Commodities Exchange Act and other Regulations. The CFTC brought the action violation of Sections 4(a) and 4d(a)(1) of the Act, 7 U.S.C. §§ 6(a), 6d(a)(1), and Regulation 42.2, 17 C.F.R. § 42.2 (2021), and is seeking relief.

Specifically, the pleading states that Ooki DAO operated, marketed, and made solicitations concerning the Ooki Protocol, accepting orders for and facilitating margined and leveraged retail commodity transactions. Further allegations purported that Ooki DAO existed for the exact same purpose as bZeroX in running a business, and specifically, operating and monetizing the Ooki Protocol. The Ooki DAO allegedly did so via the votes of Ooki Token holders who, through their votes, chose to participate in running the business. Just like the bZx Protocol, the Ooki Protocol allegedly permitted, and continued to permit, users to contribute margin collateral to open leveraged positions whose value was determined by the price difference between two virtual currencies from the time the position was established to the time it was closed. The Ooki Protocol purportedly offered users the ability to engage in the transactions in a decentralized environment. In so doing, the unregistered Ooki DAO was purportedly engaging in unlawful activities that can only lawfully be performed by registered DCMs and other activities that can only lawfully be performed by registered FCMs under the Commodities Regulations. In addition, the CFTC argued that Ooki DAO does not conduct KYC diligence on its as part of a CIP, as required of FCMs by the Commodities Regulations.

Investment Group Class Action

Laffoon v. Coinbase Global, Inc. et al

In District Court of New Jersey, a group of disgruntled investors brought a class action lawsuit against Coinbase Global (“Coinbase” or the “Company”), Brian Armstrong, Alesia J. Haas, and Emilie Choi for securities violations. The allegations are that Coinbase misrepresented and/or failed to disclose (1) crypto assets Coinbase held as a custodian on behalf of its customers could qualify as property of a bankruptcy estate—and not the Company’s customers—in the event Coinbase filed for bankruptcy; (2) Coinbase allowed Americans to trade crypto assets that the Company knew or recklessly disregarded should have been registered as securities with the SEC; (3) Coinbase had plans to, and did in fact, engage in proprietary trading of crypto assets; and (4) as a result, Defendants’ made statements about the Company’s business, operations, and prospects lacking a reasonable basis and misled investors regarding material risks attendant to Coinbase’s operations. The main issue setting up this cause of action was the untimely disclosure that “because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets [the Company] hold[s] in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.” Later, Defendant Brian Armstrong, who was the CEO and co-founder of Coinbase, told investors on Twitter that Coinbase “should have updated [its] retail terms sooner” and acknowledging that the Company “didn’t communicate proactively.” News of this broke and purportedly caused media attention and diminution of Coinbase’s common stock, causing investors to take action for damages. The complaint pled two counts for violations of Sections 10(b) and 20(a) of the Securities Exchange Act.

Conclusion

As the new year approaches, we anticipate that these filings will continue to become more and more prevalent. Investors and the Federal Commissions themselves are becoming wiser regarding the exact nature of crypto assets and crypto asset schemes. The firm has begun to see issues here in the State of Florida where brokers and dealers are failing to register with the SEC and/or the CFTC in trading of articles that under the statutory definitions are securities and/or commodities that should also be subject to registration. The firm is monitoring these dockets closely as the cases continue to progress. If you or any person you know has suffered damage in trading or purchasing unregistered securities or commodities without proper disclosures, please do not hesitate to contact us to discuss your options.

Francisco J. Barreto, Esq.

ASSOULINE & BERLOWE, P.A.

Miami Tower

100 SE 2nd Street, Suite 3105

Miami, Florida 33131

Main: 305.567.5576

Fax: 305.567.69343

Email: fjb@assoulineberlowe.com

http://www.assoulineberlowe.com/

Leave a comment

Filed under Uncategorized

COPYRIGHT CASE OF FIRST IMPRESSION IN 11TH CIRCUIT

Eleventh Circuit clarifies its position on the “Second Scienter” Requirement for a willful violation of the Digital Millennium Copyright Act (“DMCA”). Full fascinating opinion pulled on Westlaw from today below:

VICTOR ELIAS PHOTOGRAPHY, LLC, Plaintiff-Appellant, v. ICE PORTAL, INC., Defendant-Appellee.

No. 21-11892 – Date Filed: 08/12/2022 Appeal from the United States District Court for the Southern District of Florida

D.C. Docket No. 0:19-cv-62173-RS

Before NEWSOM and MARCUS, Circuit Judges, and COVINGTON,* District Judge.

Opinion of the Court

COVINGTON, District Judge:

*1 In 2016, commercial photographer Victor Elias discovered infringing uses of his copyrighted images on the internet. Instead of pursuing the infringing parties, Mr. Elias brought a lawsuit against Ice Portal, Inc. – now a division of Shiji (US), Inc. (“Shiji”) – which acts as an intermediary between the hotels that licensed Mr. Elias’s photographs and online travel agents (“OTAs”) like Expedia and Travelocity.1 In optimizing the photographs for use by the OTAs, Shiji’s software allegedly removed certain copyright-related information that Mr. Elias had embedded within the metadata of the photographs. Mr. Elias, through his company Victor Elias Photography, LLC (“Elias LLC”), claimed that Shiji therefore violated the Digital Millennium Copyright Act (“DMCA”).

The district court correctly granted summary judgment to Shiji because Elias LLC did not show an essential element of its claim – namely, that Shiji knew, or had reasonable grounds to know, that its actions would induce, enable, facilitate, or conceal a copyright infringement. Accordingly, we affirm.

I

A. Mr. Elias’s photographs and their CMI

Mr. Elias is a professional photographer who specializes in taking photographs of hotels and resorts throughout the United States, Mexico, and the Caribbean. He is the sole owner and operator of Elias LLC. Mr. Elias registers his photographs with the Copyright Office, and Elias LLC holds those copyrights by written assignment.

Between 2013 and 2017, Mr. Elias took photographs for hotels owned by Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”)2 and Wyndham Hotels & Resorts (“Wyndham”) (collectively, the “Hotels”). Mr. Elias claims that the following information was inserted into the metadata within the image files that he sent to the Hotel properties:

Creator Victor Elias

Creator’s Job Title Owner/Photographer

Copyright Notice @Victor Elias

Creator’s Contact Info USA, 5301 N. Commerce Ave. Suite 4, 805-265-5421

Rights Usage Terms Rights Managed

This information was embedded in IPTC format3 in all the images at issue.

This information is commonly referred to as copyright management information (“CMI”).4 Because CMI is embedded within the image file, an individual must make several “clicks” on the file to access this information. Specifically, the person viewing the file would have to right-click on the image file and then open the “properties” or “more info” field to access the information.

*2 After Mr. Elias took the photographs at issue, Elias LLC would extend broad licenses to the Hotels, allowing them to use the photographs to promote their properties in unlimited quantities, for an unlimited time, and in any format – without a restriction on how the photographs’ CMI could be manipulated or removed.5 The Hotels were licensed to use the photographs at issue to market their properties on their own websites and on third-party travel booking websites or OTAs. The parties do not dispute that, as they were displayed on the Hotels’ own websites, the at-issue photographs included Elias LLC’s CMI embedded within the metadata.

B. Shiji’s role

Shiji acts as an intermediary between hotel chains, like Starwood and Wyndham, and OTAs by receiving copies of photographs from the hotels and making them available to OTAs. From 2013 to 2018, Shiji housed approximately 1.5 million different hotel images in its system. During the relevant time periods, Starwood and Wyndham contracted with Shiji to make images for thousands of their properties available to OTAs. Of the more than 9,400 images that Shiji processed for the Hotels, 220 were taken by Elias.

Between 2013 and 2018, Shiji processed photos collected from the Hotels in the following manner. First, Shiji’s software would download copies of image files from the Hotels’ respective servers and store them on Shiji’s server. Each image file provided to Shiji came with a separate spreadsheet file containing pertinent information about the image that would be displayed on the OTA websites, such as room type or a caption. After receiving the image files, Shiji’s software would then convert the files into JPEG format, making copies of the photos in various industry-standard sizes. The conversion to JPEG format optimized the image files for faster display on OTA websites, but it came at a cost – sometimes the metadata on the image file, such as the CMI, would be erased. Finally, the JPEG copies of the photographs would be saved on Shiji’s server, along with the accompanying spreadsheet file, and made available to OTAs.

C. Mr. Elias discovers photographs missing his CMI

Protecting his copyrights is important to Mr. Elias. He claims that he embedded the CMI within his photographs because the CMI’s text is fully searchable, allowing him to patrol the internet and find instances of copyright violations. As the district court succinctly summarized, Elias employs six methods by which he searches for his images and ensures that his copyright is not being violated:

(1) Elias visits OTA websites, types in the names of locations where he has shot photos of a hotel, then looks for the hotels he shot, and then looks for the images; (2) Elias Googles the hotel name plus “Victor Elias”; (3) Elias uses ImageRights software, which searches for visual image matches on the internet; (4) Elias uses TinEye which searches for copies of images he uploads; and (5) Elias uses Google images to search for copies of the photos. According to Elias, he also uses Google to search using keywords such as “Victor Elias” and “Victor Elias Photography,” which can result in the return of pages containing keywords in the embedded metadata.

*3 In September 2016, using the methods described above, Mr. Elias discovered unauthorized copies of his photographs posted on non-party, non-OTA websites without his CMI. Although some of these photographs included visible credits, the photographs credited someone other than Mr. Elias. He admits that he has no actual knowledge of where these non-party websites obtained the images. Mr. Elias then discovered that on OTA websites, his CMI was stripped out of the images at issue.

D. Procedural History

Based on the foregoing facts, Elias LLC filed suit against Shiji in August 2019. In its amended complaint, it alleged in a single count that Shiji violated two sections of the DMCA – 17 U.S.C. §§ 1202(a) and 1202(b) – through its stripping of the CMI in Elias LLC’s copyrighted photos.6

Following discovery, Shiji moved for summary judgment, and Elias LLC sought partial summary judgment. The district court ruled in favor of Shiji, finding that Elias LLC could not satisfy the “second scienter requirement” of the statute, a concept we will explain further below. Relying on the Ninth Circuit Court of Appeals’ decision in Stevens v. Corelogic, Inc., 899 F.3d 666 (9th Cir. 2018), the district court held that Elias LLC could not satisfy the second scienter requirement because it had not established that Shiji “knew or had reason to know that its actions would induce, enable, facilitate, or conceal infringement” and had failed to present any evidence “demonstrating that [Shiji] was aware or had reasonable grounds to be aware of the probable future impact of its actions.”

The district court reasoned that Elias LLC had failed to make its showing for two reasons. First, it had not shown that Shiji’s removal of CMI “is the reason, or even the likely reason, for the infringing use of the images [Mr. Elias] has found on the internet.” Second, Elias LLC had not shown that Shiji was even aware that searching for terms embedded in the extended attributes was a method used by copyright holders to find infringement on the internet. The district court also dismissed Elias LLC’s argument that a prior arbitration gave Shiji the requisite awareness because (1) it had failed to show that “mere familiarity” with the DMCA gave Shiji reason to know that removal of CMI from the photos it copied would induce, enable, facilitate, or conceal infringement; and (2) the arbitration panel ruled in Shiji’s favor, finding that the other party “had not shown that [Shiji’s] removal of CMI would result in infringement.”

Because the district court concluded that Elias LLC could not, as a matter of law, show that Shiji knew, or had reasonable grounds to know, that its actions would “induce, enable, facilitate, or conceal infringement,” the court entered summary judgment in favor of Shiji. This appeal followed.

II

We review a district court’s grant of summary judgment de novo, employing the “same legal standards that bound the district court.” Bonanni Ship Supply, Inc. v. United States, 959 F.2d 1558, 1561 (11th Cir. 1992).

Summary judgment is proper where “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). A fact is “material” only if it has the potential to affect the outcome of the case, and a dispute is “genuine” only if a reasonable jury could return a verdict for the non-moving party. Shaw v. City of Selma, 884 F.3d 1093, 1098 (11th Cir. 2018). When the non-moving party has failed to prove an essential element of its case, summary judgment is appropriate. Am. Fed’n of Labor & Congress of Indus. Orgs. v. City of Miami, 637 F.3d 1178, 1186–87 (11th Cir. 2011) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)).

III

A. The DMCA and Section 1202(b)’s second scienter requirement

*4 Congress enacted the DMCA in 1998 “to strengthen copyright protection in the digital age.” Mango v. BuzzFeed, Inc., 970 F.3d 167, 170–71 (2d Cir. 2020). The DMCA provision pertinent to this case provides as follows:

(b) Removal or alteration of copyright management information. – No person shall, without the authority of the copyright owner or the law –

(1) intentionally remove or alter any copyright management information, [or]

(3) distribute, import for distribution, or publicly perform works, copies of works, or phonorecords, knowing that copyright management information has been removed or altered without authority of the copyright owner or the law,

knowing, or … having reasonable grounds to know, that it will induce, enable, facilitate, or conceal an infringement of any right under this title.

17 U.S.C. § 1202(b).7

Interpretation of Section 1202(b) is an issue of firstimpression in this Circuit. We start, as always, with the language of the statute. Harris v. Garner, 216 F.3d 970, 972 (11th Cir. 2000) (en banc) (“We begin our construction of [a statutory provision] where courts should always begin the process of legislative interpretation, and where they should often end it as well, which is with the words of the statutory provision.”). If the statute’s language is plain, then the sole function of the court is to enforce the statute according to its terms. Gonzalez v. McNary, 980 F.2d 1418, 1420 (11th Cir. 1993). A statute should be construed to give effect to all its provisions, “so that no part of it will be inoperative or superfluous, void or insignificant.” Calzadilla v. Banco Latino Internacional, 413 F.3d 1285, 1287 (11th Cir. 2005).

By its plain terms, the statute requires proof that the defendant knew, or had reasonable grounds to know, that its conduct “will” induce, enable, facilitate, or conceal an infringement. Use of the word “will” indicates a degree of likelihood or certainty. See Spokane Cnty. v. Dep’t of Fish & Wildlife, 430 P.3d 655, 662 (Wash. 2018) (canvassing multiple dictionaries for definitions of the term “will,” and explaining that it “can be a statement of future tense, of strong intention or assertion about the future, or a probability or expectation about something,” although it can also mean “inevitability” or “probability” (citations and quotation marks omitted)). The statute does not state that a violation occurs if a defendant knows, or has reason to know, that its actions “may” or “might” enable infringement. As we explain further below, the statute requires more than that.

To assist in interpreting the statute, we may also look to the opinions of our sister Circuits. The Second Circuit has held that, to establish a violation of Section 1202(b)(3), a plaintiff must prove: (1) the existence of CMI in connection with a copyrighted work; and (2) that a defendant “distribute[d] … works [or] copies of works”; (3) while “knowing that copyright management information has been removed or altered without authority of the copyright owner or the law”8; and (4) while “knowing or … having reasonable grounds to know” that such distribution “will induce, enable, facilitate, or conceal an infringement.” Mango, 970 F.3d at 171. The last two of these elements comprise a “so-called ‘double-scienter requirement.’ ” Id. “[T]he defendant … must have actual knowledge that CMI ‘has been removed or altered without authority of the copyright owner or the law,’ as well as actual or constructive knowledge that such distribution ‘will induce, enable, facilitate, or conceal an infringement.’ ” Id. (quoting 17 U.S.C. § 1202(b)(3)); see also Stevens, 899 F.3d at 673 (explaining that both Section 1202(b)(1) and (3) “require the defendant to possess the mental state of knowing, or having a reasonable basis to know, that his actions ‘will induce, enable, facilitate, or conceal’ infringement”).

*5 We agree with our sister Circuits’ interpretation of the plain language9 of Section 1202(b)(1) and (3) and with their formulation of the scienter requirement necessary to prove a violation thereof. As the Ninth Circuit explained in Stevens:

To avoid superfluity, the mental state requirement in Section 1202(b) must have a more specific application than the universal possibility of encouraging infringement; specific allegations as to how identifiable infringements “will” be affected are necessary.

[W]e hold that a plaintiff bringing a Section 1202(b) claim must make an affirmative showing, such as by demonstrating a past “pattern of conduct” or “modus operandi,” that the defendant was aware [of] or had reasonable grounds to be aware of the probable future impact of its actions.

Stevens, 899 F.3d at 674.

Elias LLC urges this Court to adopt a standard by which a defendant that knowingly removes CMI without consent can be held liable so long as the defendant knows, or has reasonable grounds to know, that its actions “make infringement generally possible or easier to accomplish.” By contrast, Shiji argues, as the district court held, that the defendant must know, or have reasonable grounds to know, that removing CMI would likely lead to future infringement.

The Ninth Circuit in Stevens, facing a similar fact pattern to the one now before us, rejected the statutory interpretation favored by Elias LLC. The plaintiffs there, also photographers whose CMI had allegedly been removed by an intermediary software provider, argued that “because one method of identifying an infringing photograph has been impaired, someone might be able to use their photographs undetected.” 899 F.3d at 673 (emphasis in original). The court explained that such a general approach to statutory interpretation “won’t wash.” Id. Citing the text of the statute and the legislative history of Section 1202, the Ninth Circuit concluded that plaintiffs must “provide evidence from which one can infer that future infringement is likely, albeit not certain, to occur as a result of the removal or alteration of CMI.” Id. at 675.

B. Whether Shiji knew, or had reasonable grounds to know, that its actions would induce, enable, facilitate, or conceal infringement

Before the district court and on appeal, Elias LLC points to three pieces of evidence that, it claims, create a genuine dispute of material fact as to whether Shiji knew or had reason to know that its actions “will induce, enable, facilitate, or conceal infringement” of copyrighted works. We examine each in turn.

1. The Leonardo arbitration

In urging us to reverse the district court’s grant of summary judgment, Elias LLC’s principal piece of evidence is a 2016 arbitration proceeding between Shiji and a competitor in the OTA photo distribution business, Leonardo Worldwide Corporation.10 The dispute began when two of Leonardo’s clients were looking to switch photo management services to Shiji (at the time, ICE Portal). In the arbitration, Leonardo accused Shiji of corporate infiltration and theft. It claimed that Shiji improperly accessed Leonardo’s image database, downloaded multiple images from the database without Leonardo’s consent, processed those images through Shiji’s own software (thereby scrubbing the images of CMI inserted by Leonardo), and then re-published the images on Shiji’s own website for financial gain. According to Leonardo, Shiji’s actions of removing CMI from the images or distributing the images knowing they were cleansed of CMI violated Section 1202(b) of the DCMA because they “induced, enabled, facilitated, or concealed [Shiji’s] infringement of the copyrighted images.” Importantly, the DMCA claim rested on Leonardo’s insertion of its own CMI into images that were owned by third-party hotels, not Leonardo.

*6 The arbitration panel dismissed the DMCA claim on multiple grounds: (1) “Leonardo has not shown the essential ingredient of a DMCA claim that any allegedly improper actions regarding CMI would result in an infringement of a copyright”; (2) the panel construed Section 1202(b) as requiring that a DMCA claimant be both the owner of the copyright and the party who inserted the wrongly removed CMI, and Leonardo was not both because it was not the copyright owner; (3) Shiji’s removal of Leonardo’s CMI did not result in an infringement of any hotel copyrights; and (4) Leonardo lacked standing because the DMCA is intended to protect copyright holders that have employed CMI, and Leonardo had no copyright in the stolen images.

According to Elias LLC, Leonardo’s claims in the arbitration “put [Shiji] on notice and imbued [Shiji] with the necessary mental state to violate § 1202 in the future where, as here, [Shiji’s] metadata stripping system was challenged by [a] copyright owner.” In other words, while Leonardo’s lack of copyright ownership may have left its DMCA claim dead in the water, it was reasonably foreseeable to Shiji that another litigant (who is a copyright owner) could assert similar claims against Shiji in the future. This is a tempting inference to make, but it is insufficient to raise a genuine issue of material fact as to the second scienter requirement for several reasons.

First, the facts of the Leonardo arbitration are distinguishable. There, Shiji went farther than simply running images through its automated software and making those optimized images available on its server. Rather, it allegedly accessed, knowingly and without permission, a competitor’s database of copyrighted images, put those images through the scrubber, and then re-published them for direct financial gain. Therefore, “Leonardo allege[d] that [Shiji’s] actions induced, enabled, facilitated, or concealed [Shiji’s own] infringement of the copyrighted images.” (emphasis added). The Leonardo arbitration had nothing to do with whether Shiji’s role as an intermediary image optimizer might induce or enable infringement by a third party.

Second, and more importantly, the record before us does not indicate that the Leonardo arbitration adduced any facts that would give Shiji reason to know that its software’s effects on CMI would make copyright infringement “likely, albeit not certain” to occur. At most, the 2016 Leonardo arbitration gave Shiji knowledge that its software was scrubbing CMI from some of the extended attributes of the images – and, in fact, different extended attributes than the ones at issue here. But there is no evidence that Shiji learned, for example, that copyright owners routinely rely on embedded CMI to police infringements of their works on the internet or that would-be infringers prefer to utilize images from OTAs because they have already been cleansed of CMI.

Third, it may have been reasonable for Shiji to presume, in the wake of the Leonardo arbitration, that the next DMCA lawsuit it faced would come from a copyright owner. But it does not follow that Shiji must have also known that it was engaging in conduct that violated the law. We do not hold here that prior litigation or arbitration of a DMCA claim can never give a defendant the requisite knowledge under Section 1202(b). We limit our holding to an affirmation of the district court’s conclusion that Leonardo’s particular accusations in this case did not give Shiji reasonable grounds to know that its software’s removal of CMI, and the subsequent distribution of photographs stripped of CMI, would induce, enable, facilitate, or conceal the infringement of Elias LLC’s copyrighted works.

For these reasons, the Leonardo arbitration fails to create a genuine issue of material fact as to whether Shiji knew, or had reasonable grounds to know, that its actions of stripping CMI and distributing those stripped images would “induce, enable, facilitate, or conceal an infringement.” See Stevens, 899 F.3d at 676 (“Because the [plaintiffs] have not put forward any evidence that [the defendant] knew its software carried even a substantial risk of inducing, enabling, facilitating, or concealing infringement, let alone a pattern or probability of such a connection to infringement, [the defendant] is not liable for violating [the DMCA].”).

2. Mr. Elias’s purposeful insertion of CMI into images

*7 Elias LLC claims that, unlike the photographer-plaintiffs in Stevens, Mr. Elias did use the CMI contained within the images’ extended attributes to police copyright infringement on the internet. This also fails to clear the summary judgment bar.

There is no indication in the record that Shiji knew at the relevant time that copyright owners use CMI in this manner. Elias LLC therefore cannot show that Shiji knew or had reason to know that removal of CMI could conceal an infringement. And Elias LLC cannot explain how it could police copyright infringement if an infringer can just as easily remove CMI metadata from an image as it could download an image from an OTA website. See Stevens, 899 F.3d at 676 (explaining that “a party intent on using a copyrighted photograph undetected can itself remove any CMI metadata, precluding detection through a search for the metadata. … [Thus,] one cannot plausibly say that removal by a third party ‘will’ make it easier to use a copyrighted photograph undetected”).

Elias LLC argues that the district court read requirements into Section 1202(b) that do not exist – namely, that it prove “keyword searches” are an effective method for finding infringement and/or that Shiji be aware that copyright owners will search for keywords embedded in the metadata to find infringement on the internet. Elias LLC misunderstands the district court’s order. The district court did not impose additional, extra-statutory requirements; rather, it was explaining why Elias LLC’s method of proving knowledge was ineffective. Similarly, neither the district court nor the Ninth Circuit imposed an additional requirement that the plaintiff show evidence of a pattern of conduct or modus operandi. Consistent with Stevens, the district court explained that demonstrating past patterns of conduct or modus operandi are examples of ways in which plaintiffs can meet their burden of proof. See Stevens, 899 F.3d at 675 (“There are no allegations, for example, of a ‘pattern of conduct’ or ‘modus operandi’ involving policing infringement by tracking metadata.”). Elias LLC could have provided different evidence to show that Shiji possessed the requisite level of knowledge to satisfy the second scienter requirement, but it did not.

3. Instances of infringement on the internet

According to Elias LLC, Shiji allegedly has a modus operandi of removing a photographer’s CMI “knowing that CMI [being removed] has likely directly resulted in infringement of the Elias Images.” In support of this argument, Elias LLC pointed to the infringing images that Mr. Elias found on non-party websites that had been stripped of his CMI.

There is a fundamental problem with this argument – there is no evidence linking Shiji’s actions of removing the photographs’ CMI with the instances of infringement Mr. Elias uncovered on the internet. See Stevens, 899 F.3d at 675 (explaining that to prevail, a plaintiff must “provide evidence from which one can infer that future infringement is likely, albeit not certain, to occur as a result of the removal or alteration of CMI” (emphasis added)). Elias LLC argues that the at-issue photographs on the OTA websites have been stripped of CMI, and the infringing images he found on non-party websites have also been stripped of CMI; therefore, the infringing parties must have pulled the images from OTA websites. But this argument rests on speculative and unsupported assumptions. For example, the argument presumes that infringing parties would go to an OTA website (instead of the Hotels’ or Elias LLC’s own website) to copy the image. It also presumes that an infringing party would download the image, as opposed to taking a screenshot or screengrab11 of the image. Yet nothing in the record substantiates these inferences. For example, Mr. Elias admitted that he did not know from which website the third-party infringers copied the images. It is also unclear how the infringing parties copied the images – anyone with a smart phone could simply take a screenshot of the photograph from a website, which process inherently does not preserve the photograph’s embedded CMI. Similarly, Mr. Elias acknowledged that unscrupulous infringers could easily remove CMI themselves.

*8 Here, Elias LLC produced evidence, essentially, that his CMI-cleansed photographs appeared in at least two places on the internet: OTA websites and certain non-party websites that are unaffiliated with the OTAs. We do not believe that Congress meant to impose liability under the DMCA based on such a tenuous connection. See Stevens, 899 F.3d at 673 (rejecting liability when an infringer “might” be able to use copyrighted works undetected because such an assertion “simply identifies a general possibility that exists whenever CMI is removed”). The district court was correct to grant summary judgment in the face of such speculation. See Josendis v. Wall to Wall Residence Repairs, Inc., 662 F.3d 1292, 1318 (11th Cir. 2011) (“At the summary judgment stage, such ‘evidence,’ consisting of one speculative inference heaped upon another, [is] entirely insufficient.”).

Elias LLC argues that this reasoning requires a Section 1202(b) plaintiff to show a specific and identifiable infringement. Not so. What the statute requires is a showing that a defendant took certain actions, such as wrongly removing CMI or distributing images wrongly scrubbed of CMI, (1) knowing that the CMI has been wrongly removed or altered, and (2) knowing or having reason to know that such removal or distribution “will induce, enable, facilitate, or conceal an infringement.” See17 U.S.C. § 1202(b)(3); see also Mango, 970 F.3d at 171 (setting forth the elements of a Section 1202(b)(3) claim).

What’s more, we agree with the Ninth Circuit that the statute’s use of the future tense does not require a plaintiff to show that any specific infringement has already occurred and does not “require knowledge in the sense of certainty as to a future act.” Stevens, 899 F.3d at 674 (citation omitted) (emphasis added). Elias LLC is thus incorrect that the district court required it to show that Shiji’s CMI removal “be directly linked to a particular infringement.” Elias LLC chose to frame its DMCA claim in terms of proving that actual infringement occurred (and therefore that infringement was allegedly induced or enabled). We, and the district court before us, therefore, grapple with the evidence presented by Elias LLC to determine whether Shiji was the inducer or enabler. Elias LLC cannot make that showing because the evidence indicates that the infringing parties could have purloined these images from any number of sources, and Elias LLC has identified no evidence indicating that Shiji’s distribution of these photographs ever “induce[d], enable[d], facilitate[d], or conceal[ed] an infringement.”

In short, the statute’s plain language requires some identifiable connection between the defendant’s actions and the infringement or the likelihood of infringement. To hold otherwise would create a standard under which the defendant would always know that its actions would “induce, enable, facilitate, or conceal” infringement because distributing protected images wrongly cleansed of CMI would always make infringement easier in some general sense. See Stevens, 899 F.3d at 673, 674 (finding that a mere showing of CMI removal, leading to the possibility that an infringer could use the photos undetected, is insufficient to meet Section 1202(b)’s second scienter requirement because “it simply identifies a general possibility that exists whenever CMI is removed” and “Section 1202(b) must have a more specific application than the universal possibility of encouraging infringement”). This reading would effectively collapse the first and second scienter requirements. Congress enunciated the double scienter requirement for a reason, and we must interpret the statute to effectuate that intent. See CBS Inc. v. PrimeTime 24 Joint Venture, 245 F.3d 1217, 1222 (11th Cir. 2001) (“The rule is that we must presume that Congress said what it meant and meant what it said.” (quotation marks omitted)).

IV

*9 For the reasons stated, we conclude that the district court properly granted summary judgment to Shiji on Elias LLC’s claim under the DMCA. Elias LLC did not meet its burden of coming forward with sufficient evidence demonstrating Section 1202(b)’s second scienter requirement, and judgment in Shiji’s favor was therefore appropriate. Accordingly, we affirm.

AFFIRMED.

All Citations

— F.4th —-, 2022 WL 3330350

Footnotes

*

Honorable Virginia M. Covington, United States District Judge for the Middle District of Florida, sitting by designation.

1

During the relevant time periods, ICE Portal, Inc. was the company acting as the intermediary between the hotels and OTAs. Shiji (US), Inc. acquired Ice Portal in February 2019, at which time ICE Portal merged into Shiji and became a division of the larger company. This opinion will refer to the companies collectively as Shiji.

2

Starwood merged with Marriott International, Inc. in September 2016. See Starwood Acquisition & Historical Information, available at https://marriott.gcs-web.com/starwood.

3

IPTC format is named for the International Press Telecommunications Council, which developed metadata standards to facilitate the exchange of news, and typically includes the title of the image, a caption or description, keywords, information about the photographer, and copyright restrictions. See Stevens v. Corelogic, Inc., 899 F.3d 648, 671 (9th Cir. 2018).

4

CMI metadata is specifically copyright identifying information manually added to the image by the photographer or editor. Shiji also refers to this information as “extended attributes.” At least in the context of this case, “extended attributes” and “CMI” are interchangeable terms.

5

Elias LLC claims that it reserved this right by including a disclaimer in the agreements with the Hotels that it reserved “[a]ll rights not specifically granted in writing, including copyright” as the “exclusive property of [Elias LLC].” But Elias LLC does not explain how this language prevents the Hotels (or their agents) from removing CMI. Moreover, Elias LLC’s argument that it reserved this right by requiring proper attribution of the photographs also does not establish that Elias LLC desired to preserve its CMI. Finally, while Elias LLC cites the license for the Marriott Casa Magna Resort, which provided that “[a]ll metadata information included within the images shall remain intact,” Shiji argues that Elias LLC slyly inserted that term into a new version of the licenses sent to Marriott upon request, without revealing that the term did not appear in the original licensing agreement. Elias LLC does not respond to this argument in its reply brief. And, in any event, Shiji never received files from Marriott or made images of Marriott hotel properties available to OTAs.

6

On appeal, Elias LLC does not present any arguments pertaining to its Section 1202(a) claim. It has therefore waived any such argument, and we will focus on the Section 1202(b) claim. See Lind v. United Parcel Serv., Inc., 254 F.3d 1281, 1283 n.2 (11th Cir. 2001).

7

The statute also defines “copyright management information,” and Shiji does not contest that the CMI here falls within the statutory definition.

8

Shiji maintains that it did not intentionally or knowingly remove the CMI from the photographs. We need not address this first scienter requirement because we can affirm the district court’s grant of summary judgment for failure to demonstrate the second scienter requirement.

9

The Ninth Circuit in Stevens cogently explained why its interpretation of the statute is also supported by the legislative history of Section 1202. See Stevens, 899 F.3d at 674–75. We need not repeat that legislative history here. See Harris, 216 F.3d at 976 (explaining that “[w]hen the import of words Congress has used is clear … we need not resort to legislative history”).

10

The record on appeal included an interim dispositive order issued by the arbitration panel and certain deposition excerpts, but no other underlying evidence. Thus, we will present the facts and holdings as set forth in the arbitration order.

11

A screengrab or screenshot is essentially a digital picture of the image on the screen. When an individual takes a screenshot of the picture, the metadata of the underlying picture is not carried through with the screenshot.

Assouline & Berlowe

Leave a comment

Filed under Uncategorized

MIAMI IS THE TALK OF THE TOWN (REALLY THE ENTIRE COUNTRY)

Miami Tower – Headquarters for Miami Business Law Firm Assouline & Berlowe

What a time to be in Miami. To think, with all the bad things going on in the world, Miami seems like it is a magical place.

Yesterday, history was made with the confirmation of Judge Ketanji Brown Jackson to the United States Supreme Court, making her the first black female justice in history and only the 8th Justice out of 116 on the High Court who was not a white male. But here in Miami we are extra proud, as Justice Jackson is the first Floridian on the Supreme Court and Her Honor was born and raised in Miami. Justice Jackson graduated from Palmetto High School and was a classmate of Assouline & Berlowe name partner Peter Berlowe. In fact their names, Berlowe and Brown, are so close in the alphabet that they appear on opposite pages of the high school yearbook.

Justice Jackson’s father, Johnny Brown, was also a graduate of the University of Miami School of Law, as were the two named partners of Assouline & Berlowe.

Miami is also going through a transformation to become a hub of technology and innovation. This month is Miami Tech month, with last week being Miami NFT Week, and this week kicked off Bitcoin 2022, a conference in Miami Beach with 30,000 attendees, the largest Bitcoin conference in the world.

In the professional basketball department, the Miami Heat have locked in 1st place in the NBA Playoffs. In the professional hockey department, the Florida Panthers have locked in 1st place in the NHL playoffs. In the professional football department, the Miami Dolphins have acquired six time pro bowl wide receiver Tyreek Hill, possibly the most high profile trade ever made for the team. And today is opening day for the Miami Marlins, who have also made a few high profile off season trades to be more competitive.

Up the road, today is another historic day in Florida in that it is the first time that the United States has sent up a space mission to the International Space Station with four civilian passengers.

Miami and Florida has seen an incredible growth in population and popularity over the past several years and in the midst of all the bad in the world has stood out as a beacon of hope.

For all of us to be here in Miami at this time, we should be exceptionally grateful and appreciate what we are a part of and cherish it.

Eric N. Assouline, Esq., Managing Partner, Assouline & Berlowe

Leave a comment

Filed under Uncategorized

HAPPY ANNIVERSARY – Two Us, 19 Years!

Litigation Partners Eric N. Assouline and Peter E. Berlowe making the University of Miami sign

Nineteen years ago today, two guys, both graduates from the University of Miami School of Law, who both served on the University of Miami Law Review, left the comforts of big law life at the international powerhouse law firm Weil, Gotshal & Manges, LLP and started their own law firm Assouline & Berlowe.

Hundreds of cases later, and literally tens of thousands of manpower hours later, the firm has established a name for itself as a South Florida business law firm with excellent lawyers and a strong reputation for legal advocacy for its clients.

Congratulations to Assouline & Berlowe, and all of its attorneys, staff, clerks, and their families on this impressive accomplishment.

Eric N. Assouline, Esq. – Managing Partner

@assoulineberlowe

Leave a comment

Filed under Uncategorized

BANKRUPTCY LAW UPDATE – 11th Circuit Clarifies Case of First Impression, as to Whether a Roth IRA is exempt, Yes, In Georgia.

The BUSINESS LAW Firm – Assouline & Berlowe, Headquarters, Miami Tower, Miami, Florida

The Eleventh Circuit, in a case of first impression, clarified that in Georgia, which may have similar exemptions for garnishments in other states in the circuit (including Florida), a Roth IRA is exempt from the bankruptcy estate.

The 11th Circuit held:

As noted above, a debtor’s property is excluded from his bankruptcy estate pursuant to federal law if: (1) the debtor has “a beneficial interest in a trust”; (2) the interest has a restriction on transfer; and (3) the restriction is enforceable under either state or federal law. See § 541(c)(2); Upshaw, 542 B.R. at 622. Roth IRAs meet all three requisite elements. No one contests that, just like a traditional IRA’s corpus, a Roth IRA’s corpus qualifies as a beneficial interest in a trust. And, pursuant to both the 2006 and the 2016 amendments to the exemptions provision, Roth IRAs have a restriction on transfer that is enforceable under state law. The Bank offers no viable reason why Roth IRAs should not be treated like traditional IRAs in the context of bankruptcy estate exclusion.
In re: TIMOTHY RUSSELL HOFFMAN, Debtor. TIMOTHY RUSSELL HOFFMAN, Plaintiff-Appellant, v. SIGNATURE BANK OF GEORGIA, Defendant-Appellee., No. 20-12823, 2022 WL 203415, at *4 (11th Cir. Jan. 24, 2022)

Eric N. Assouline, Esq.

ASSOULINE & BERLOWE

Full opinion downloaded from Westlaw below:

2022 WL 203415

Only the Westlaw citation is currently available.

United States Court of Appeals, Eleventh Circuit.

In re: TIMOTHY RUSSELL HOFFMAN, Debtor.

TIMOTHY RUSSELL HOFFMAN, Plaintiff-Appellant,

v.

SIGNATURE BANK OF GEORGIA, Defendant-Appellee.

No. 20-12823

|

01/24/2022

Appeal from the United States District Court for the Northern District of Georgia D.C. Docket No. 3:19-cv-00095-TCB

Before WILSON, LAGOA, and ED CARNES, Circuit Judges.

Opinion

WILSON, Circuit Judge:

*1 Appellant-Debtor Timothy Hoffman appeals the district court’s affirmance of the bankruptcy court’s order granting Appel-lee-Creditor Signature Bank of Georgia’s (the Bank) objection to Hoffman’s claimed bankruptcy estate exemptions. The Bank ob-jected to Hoffman’s claimed exemptions of various retirement accounts. The bankruptcy court granted the Bank’s objections as to Hoffman’s Roth Individual Retirement Accounts (IRA), concluding that Roth IRAs—unlike traditional IRAs and 401(k) accounts—are not excluded from bankruptcy estates. The district court affirmed the bankruptcy court’s order.

This appeal presents an issue of first impression for this court: Are Roth IRAs excluded from Georgia debtors’ bankruptcy estates pursuant to federal law? Because we answer the question in the affirmative, we reverse the district court’s affirmance of the bankruptcy court’s order and remand for further proceedings con-sistent with this opinion.

I.

Timothy Hoffman is a retired U.S. Air Force Colonel and private pilot. Hoping to help his son-in-law pursue his dream of opening a restaurant, Hoffman guaranteed a loan of approximately $432,000 with the Bank. The restaurant ultimately failed, resulting in Hoffman defaulting on his loan from the Bank and filing for Chapter 7 bankruptcy.

In his bankruptcy schedules, Hoffman disclosed an interest in the following retirement accounts: (1) Traditional IRA, (2) Roth Conversion IRA, (3) Roth Contributory IRA, and (4) Fidelity 401(k). Hoffman claimed all of the accounts as exempt on his bankruptcy Schedule C.1

The Bank filed an objection in the bankruptcy court to Hoffman’s claimed exemptions, asserting that his retirement accounts either were not qualified retirement plans or did not otherwise qualify as exempt. In reply, Hoffman maintained that all of his retirement accounts are legally exempt. Specifically regarding the Roth IRAs, Hoffman asserted that they either were excluded from the estate pursuant to 11 U.S.C. § 541(c)(2), or, if not excluded, were exempt under O.C.G.A. § 44-13-100(a)(2)(E).2 As to exclusion, Hoffman argued that Georgia’s revised garnishment statute applies to Roth IRAs. Accordingly, Hoffman contended that the court should revisit precedent analyzing a prior version of Georgia’s garnishment statute—a version that applied only to traditional IRAs.

The bankruptcy court entered a final order overruling the Bank’s objections as to Hoffman’s traditional IRA and 401(k) account but sustaining the objections as to Hoffman’s two Roth IRAs. Regarding Hoffman’s Roth IRAs, the bankruptcy court acknowl-edged that Georgia’s garnishment statute underwent an expansive overhaul but noted that there appeared to be no recent authority addressing the contention that Roth IRAs should be excluded under § 541(c)(2).3

*2 Hoffman appealed the bankruptcy court’s ruling that the un-distributed funds in his Roth IRAs are not excluded from his bankruptcy estate. The district court agreed with the bankruptcy court’s assessment, declining to rule otherwise on an issue of first impression. Hoffman timely appealed.

This appeal requires us to determine what is properly included in, and excluded from, the property of a bankruptcy estate. After a careful review of the record and with the benefit of oral argument, we reverse the ruling of the district court. Statutory interpretation as well as the development of caselaw in this area con-vince us that IRAs—whether they be traditional IRAs or Roth IRAs—are excluded from the bankruptcy estates of Georgia debtors pursuant to the Bankruptcy Code and Georgia’s garnishment statute. This conclusion follows naturally from the applicable law and statutory amendments, an overview of which we provide be-low.

II.

We act as a second court of review in bankruptcy appeals, independently examining the factual and legal determinations of the bankruptcy court and applying the same standard of review as the district court. In re Brown, 742 F.3d 1309, 1315 (11th Cir. 2014). When, as here, the district court affirms the bankruptcy court’s order, we consider the bankruptcy court’s decision directly. Id. Because the sole issue in this case is a pure question of law—the proper construction and interpretation of the Bankruptcy Code—we conduct a de novo review. See In re Meehan, 102 F.3d 1209, 1210 (11th Cir. 1997).

III.

The Bankruptcy Code provides that property of a bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). The Code, however, “excludes from the bankruptcy estate property of the debtor that is subject to a restriction on transfer enforceable under ‘applicable nonbankruptcy law.’ ” Patterson v. Shumate, 504 U.S. 753, 755 (1992) (quoting § 541(c)(2)). “[A]pplica-ble nonbankruptcy law” has been interpreted to include “any relevant nonbankruptcy law”—whether it be federal or state law. Id. at 759.

On appeal, Hoffman contends that his Roth IRAs should be excluded from his estate pursuant to 11 U.S.C. § 541(c)(2). Section 541(c)(2) provides that “[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” Thus, a debtor’s property is excluded from his bankruptcy estate pursuant to § 541(c)(2) if three elements are met: (1) the debtor has “a beneficial interest in a trust”; (2) the interest has a restriction on transfer; and (3) the restriction is enforceable under either state or federal law. See id.; see also In re Upshaw, 542 B.R. 619, 622 (Bankr. N.D. Ga. 2015).

The relevant state law here is the exemptions provision of Georgia’s garnishment statute, O.C.G.A. § 18-4-6 (exemptions provision). Georgia’s current exemptions provision provides that “[c]ertain earnings or property” may be exempt from the process of garnishment. Id. § 18-4-6(a)(1). One such example of exempt property concerns funds from an IRA: “Funds or benefits from an individual retirement account or from a pension or retirement program shall be exempt from the process of garnishment until paid or otherwise distributed to a member of such program or beneficiary thereof.” Id. § 18-4-6(a)(2).

*3 We have found that the prior version of the exemptions provision, § 18-4-22(a),4 “clearly constitutes ‘applicable nonbankruptcy law’ ” and that the prohibition on garnishment is an enforceable restriction on transfer for the purposes of 11 U.S.C. § 541(c)(2). See Meehan, 102 F.3d at 1211–12. We therefore concluded that an IRA established under 26 U.S.C. § 408—a traditional IRA—is excluded from a debtor’s estate under § 541(c)(2) because it is exempt from garnishment pursuant to Georgia law. Id. at 1211–14.

At the time that we decided Meehan, traditional IRAs were the only type of IRAs in existence. It was not until the following year, 1998, that Roth IRAs were created with the enactment of 26 U.S.C. § 408A. Section 408A(a) instructs us that “a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement plan.”

In 2005, eight years after Meehan and seven years after the creation of Roth IRAs, the Bankruptcy Court for the Northern District of Georgia considered whether Meehan’s reasoning should extend to a Roth IRA. See In re Bramlette, 333 B.R. 911, 914 (Bankr. N.D. Ga. 2005). The Bramlette court declined to extend Meehan’s reasoning, finding that Roth IRAs should be included in a debtor’s bankruptcy estate when they were not statutorily exempt from garnishment. Id. The court reasoned that the exemptions provision “applies only to an individual retirement account within the mean-ing of 26 U.S.C. § 408 and Georgia law provides no similar protec-tion for a Roth IRA established under 26 U.S.C. § 408A.” Id.

However, in April 2006—the year after Bramlette was decided—the Georgia Assembly amended the exemptions provision to include IRAs listed under 26 U.S.C. § 408 or § 408A. The amended statute stated that “funds or benefits from an individual retirement account as defined in Section 408 or 408A … shall be exempt from the process of garnishment.” O.C.G.A. § 18-4-22(a) (amended 2016) (current version at § 18-4-6).

A decade later, in 2016, the Georgia Assembly further amended the exemptions provision, now codified at § 18-4-6, to state that “[f]unds or benefits from an individual retirement account … shall be exempt from the process of garnishment.” O.C.G.A. § 18-4-6(a)(2). Georgia’s current exemptions provision thus no longer differentiates between a traditional IRA and a Roth IRA, referring solely to “an individual retirement account.” See id.

IV.

We find that the development of the caselaw in this area and the subsequent amendments to the Georgia Code reflect the Georgia Assembly’s intention to clarify that both traditional IRAs as defined in 26 U.S.C. § 408 and Roth IRAs as defined in § 408A are exempt from garnishment, thus subjecting IRAs to a restriction on transfer by state statute, see Meehan, 102 F.3d at 1211–12, and mak-ing both types of IRAs eligible for exclusion under the Bankruptcy Code. The current version of the exemptions provision compels this result. By no longer listing the kinds of retirement accounts that are exempt from garnishment, and instead exempting “individual retirement account[s],” there is no basis for us to conclude that Georgia intended to treat traditional IRAs differently than Roth IRAs for the purpose of garnishment. It is undisputable that a Roth Individual Retirement Account, by its very name and defini-tion, is “an individual retirement account.” See O.C.G.A. § 18-4-6(a)(2); see also 26 U.S.C. § 408A(a) (noting that Roth IRAs shall be treated “in the same manner” as IRAs for the purposes of this title).

*4 As noted above, a debtor’s property is excluded from his bankruptcy estate pursuant to federal law if: (1) the debtor has “a beneficial interest in a trust”; (2) the interest has a restriction on transfer; and (3) the restriction is enforceable under either state or federal law. See § 541(c)(2); Upshaw, 542 B.R. at 622. Roth IRAs meet all three requisite elements. No one contests that, just like a traditional IRA’s corpus, a Roth IRA’s corpus qualifies as a beneficial interest in a trust. And, pursuant to both the 2006 and the 2016 amendments to the exemptions provision, Roth IRAs have a restriction on transfer that is enforceable under state law. The Bank offers no viable reason why Roth IRAs should not be treated like traditional IRAs in the context of bankruptcy estate exclusion.

V.

We accordingly now hold that Roth IRAs are excluded from a Georgia debtor’s bankruptcy estate pursuant to federal law. The judgment of the district court is therefore reversed, and the case is remanded so that the district court may reverse the order of the bankruptcy court.

REVERSED and REMANDED.

All Citations

— F.4th —-, 2022 WL 203415

Footnotes
1One of the many forms a debtor has to complete when filing for bankruptcy is Schedule C: The Property You Claim as Exempt. Schedule C is where debtors list all of the legally exempt property that they want to keep.
2Pursuant to 11 U.S.C. § 522(b)(2), Georgia has opted out of the federal bankruptcy estate exemptions, and O.C.G.A. § 44-13-100 governs the exemptions available to a debtor in bankruptcy in Georgia.
3The bankruptcy court also found that a Roth IRA is exempt under O.C.G.A. § 44-13-100(a)(2)(E), but only to the extent that it is reasonably necessary for the support of the debtor and his dependents. The court concluded that Hoffman’s Roth IRAs were not exempt under state law, and thus properly included in the estate, because the funds were not reasonably necessary to support him and his wife. Hoffman does not take issue with this alternative finding on appeal. Instead, Hoffman argues only that his Roth IRAs should be excluded from the bankruptcy estate pursuant to federal law (11 U.S.C. § 541(c)(2))—not that they should be exempt under state law (O.C.G.A. § 44-13-100(a)(2)(E)).
4The prior version of the exemptions provision provided that “funds or benefits from an individual retirement account as defined in Section 408 of the United States Internal Revenue Code of 1986, as amended, shall be exempt from the process of garnishment until paid or otherwise transferred to a member of such program or beneficiary thereof.” O.C.G.A. § 18-4-22(a) (amended 2006) (current version at § 18-4-6).
End of Document© 2022 Thomson Reuters. No claim to original U.S. Government Works.

Leave a comment

Filed under Uncategorized

JUDICIAL NOTICE – EXPANDING TO WEBSITES?

FLORIDA RULES OF EVIDENCE TO BE AMENDED

The Florida Senate is considering a bill 634, which would allow a court to take judicial notice of information contained in certain mapping websites, subject to objections, which must be overruled unless the court finds, by a preponderance of evidence, “that the material sought to be admitted does not fairly and accurately portray what it is being offered to prove or that it otherwise should not be admitted into evidence under the Florida Evidence Code.

The text of the bill is proposed is currently as follows:

1                        A bill to be entitled                      
    2         An act relating to judicial notice; creating s.
    3         90.2035, F.S.; authorizing courts to take judicial
    4         notice of certain information taken from web mapping
    5         services, global satellite imaging sites, or Internet
    6         mapping tools upon request of a party; requiring
    7         parties who intend to offer such information into
    8         evidence to file a notice of intent containing
    9         specified information; authorizing parties to object
   10         to the admissibility of such information; requiring
   11         courts to overrule such objection unless certain
   12         findings are made; providing construction; providing
   13         an effective date.
   14          
   15  Be It Enacted by the Legislature of the State of Florida:
   16  
   17         Section 1. Section 90.2035, Florida Statutes, is created to
   18  read:
   19         90.2035 Judicial notice of information taken from web
   20  mapping services, global satellite imaging sites, or Internet
   21  mapping tools.—
   22         (1)(a) Upon request of a party, a court may take judicial
   23  notice of an image, map, location, distance, calculation, or
   24  other information taken from a web mapping service, a global
   25  satellite imaging site, or an Internet mapping tool, if such
   26  image, map, location, distance, calculation, or other
   27  information indicates the date on which the information was
   28  created.
   29         (b) A party intending to offer such information in evidence
   30  at trial or hearing must file notice of such intent within a
   31  reasonable time, or as defined by court order, which notice must
   32  include a copy of the information and specify the Internet
   33  address where such information may be inspected.
   34         (2)(a) A party may object to the admissibility of the
   35  image, map, location, distance, calculation, or other
   36  information taken from a web mapping service, a global satellite
   37  imaging site, or an Internet mapping tool within a reasonable
   38  time or as defined by court order.
   39         (b) The court shall overrule the objection unless the court
   40  finds by a preponderance of evidence that the material sought to
   41  be admitted does not fairly and accurately portray what it is
   42  being offered to prove or that it otherwise should not be
   43  admitted into evidence under the Florida Evidence Code.
   44         (c) If the court overrules the objection, the court must
   45  take judicial notice of the information and admit the
   46  information into evidence.
   47         (3) This section does not affect, expand, or limit
   48  standards for any matters that may otherwise be judicially
   49  noticed.
   50         Section 2. This act shall take effect July 1, 2022.

Eric N. Assouline, Esq.
ASSOULINE & BERLOWE, P.A.
Miami - Ft. Lauderdale - Boca Raton
www.assoulineberlowe.com

Leave a comment

Filed under Uncategorized

FLORIDA LAW UPDATE – TORTIOUS INTERFERENCE LAW CODIFIED

The Florida House of Representatives has a bill pending that may codify the common law tort of tortious interference. The body of the bill is as follows:

 1                        A bill to be entitled                      
    2         An act relating to unlawful activities under the
    3         Uniform Commercial Code-Sales; creating s. 672.617,
    4         F.S.; defining the terms “business relationship” and
    5         “person”; specifying that it is unlawful for a person
    6         to cause a breach or violation of, or the refusal or
    7         failure to perform, a lawful contract or intentionally
    8         and unjustly interfere with or disrupt a business
    9         relationship; authorizing an injured person to bring a
   10         civil cause of action; authorizing injunctive relief
   11         and specified damages; prohibiting causes of actions
   12         from being brought for specified contracts; providing
   13         an effective date.
   14          
   15  Be It Enacted by the Legislature of the State of Florida:
   16  
   17         Section 1. Section 672.617, Florida Statutes, is created to
   18  read:
   19         672.617 Unlawful activities; cause of action; damages.—
   20         (1) As used in this section, the term:
   21         (a) “Business relationship” has the same meaning as in s.
   22  825.101.
   23         (b) “Person” has the same meaning as in s. 61.503.
   24         (2) It is unlawful for any person, by inducement,
   25  persuasion, misrepresentation, intimidation, or other means, to:
   26         (a) Cause the breach or violation of, or the refusal or
   27  failure to perform, a lawful contract by any party thereto; or
   28         (b) Intentionally and unjustly interfere with or disrupt a
   29  business relationship.
   30         (3) Any person injured as a result of a violation of this
   31  section may bring a civil cause of action for treble damages,
   32  injunctive relief, or any other appropriate relief in law. The
   33  court may issue a temporary or permanent injunction to prevent a
   34  violation of this section. The issuance of an injunction does
   35  not affect the availability of damages under this section. The
   36  court shall award a prevailing plaintiff reasonable attorney
   37  fees and costs.
   38         (4) A civil cause of action may not be brought under this
   39  section for the enforcement of a contract under s. 542.335.
   40         Section 2. This act shall take effect July 1, 2022.

Notably, the statue provides for treble damages and attorneys’ fees, but only for a prevailing plaintiff.

Eric N. Assouline, Esq.

ASSOULINE & BERLOWE, PA.

Miami – Ft. Lauderdale – Boca Raton

http://www.assoulineberlowe.com

Leave a comment

Filed under Uncategorized

FLORIDA APPELLATE LAW UPDATE – The Florida Supreme Court Has Ordered that Punitive Damages Motion May be Immediately Appealed

On Thursday, January 6, 2022, the Florida Supreme Court Ordered the Florida Rules of Appellate Procedure be amended to allow a party to immediately appeal a order granting or denying a motion to allow a party to assert a claim for punitive damages.

The Court recognized that this may cause delays in trial proceedings but the delay was outweighed by the importance in properly framing this issue in a case.

Eric N. Assouline

ASSOULINE & BERLOWE

Leave a comment

Filed under Uncategorized

HAPPY HOLIDAYS – From The BUSINESS LAW Firm

Assouline & Berlowe Headquarters at the Miami Tower in Miami, Florida

To all of our friends, family, and colleagues, near and far, we wish you the happiest of holiday seasons.

Leave a comment

Filed under Uncategorized

SECURED TRANSACTIONS IN FLORIDA – 11th Circuit Refers Critical Questions to Florida Supreme Court

On Friday, the Eleventh Circuit Court of Appeals, analyzed several issues relating to defectively registered UCC-1 filings, especially in light of two conflicting bankruptcy decisions from the Middle and the Southern District that issued inconsistent rulings.

The 11th Circuit referred to the Florida Supreme Court the following certified questions for discretionary review and resolution:

These issues are important to creditor practitioners statewide, and especially for bankers and private lenders.

Eric N. Assouline, Esq. (ena@assoulineberlowe.com)

(1) Is the “search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic,” as provided for by Florida Statute § 679.5061(3), limited to or otherwise satisfied by the initial page of twenty names displayed to the user of the Registry’s search function?
(2) If not, does that search consist of all names in the filing office’s database, which the user can browse
Article V, section 3(b)(6) of the Florida constitution provides that the Florida Supreme Court “[m]ay review a question of law certified by the Supreme Court of the United States or a United States Court of Appeals which is determinative of the cause and for which there is no controlling precedent of the supreme court of Florida.” Florida Rule of Appellate Procedure 9.150 establishes the procedure governing those discretionary proceedings to review such certified questions.
(3) If the search consists of all names in the filing office’s database, are there any limitations on a user’s obligation to review the names and, if so, what factors should courts consider when determining whether a user has satisfied those obligations?

www.assoulineberlowe.com

Bankruptcy and Business litigation

ASSOULINE & BERLOWE

Miami – 305-567-5576

Voted as a Super Lawyer for 2021

Leave a comment

Filed under Uncategorized