Kleiman v. Wright: a review of the long-running bitcoin lawsuit to date

A lot of digital ink has been spilled about the lawsuit between Ira Kleiman's estate, W&K, LLC and Craig Wright. But what is this case actually about? And what is likely to happen?

The current lawsuit was filed nearly two years ago, on February 14, 2018. It’s in federal court in Florida. The lawsuit (or “Complaint” as it’s called in U.S. federal courts) has since been amended twice. (You can find a copy of the original complaint here).

There are two Plaintiffs. The first one is the estate of David Kleiman, through his Ira Kleiman, who is the estate’s “personal representative.” Over-simplifying a little bit: after you die, your property (and your debts) are managed by a personal representative. That’s Ira’s role here. Presumably, as David’s brother, he would receive some, most or all, of any judgment that the estate receives.

The other Plaintiff is a company called W&K Info Defense Research, LLC, which was allegedly a Florida entity through which Wright and Kleiman collaborated, mined "hundreds of thousands of bitcoin and created valuable blockchain intellectual property." W&K plays an important part of the narrative in this case for procedural reasons, which I will cover in slightly greater detail below.

At issue is ownership of bitcoin and related intellectual property. The total value of that bitcoin in dollars obviously depends on current price. If you assume that 1.1 million bitcoin is at issue (which seems to be the approximate claim) and further assume that Plaintiffs prove (as they claim) a right to half of them, that’s about $4.5 billion at current prices. 

There are two U.S. federal judges involved in this case, Judge Bloom and Judge Reinhart. Judge Bloom is a U.S. District Court judge, also known by lawyer types as an Article III judge (a reference to the U.S. Constitution).  Judge Reinhart is a U.S. Magistrate Judge. Article III Judges have lifetime appointments and are appointed by the President, with approval from the Senate.  Magistrate Judges are appointed by District Court judges for eight-year terms. (A nice overview can be found here, courtesy of the federal judiciary).

In this case, Judge Reinhart is responsible for managing discovery in the case, subject to oversight/review from Judge Bloom, who also remains involved in deciding certain key motions and will preside over the trial (if the case goes to trial). In U.S. Courts, discovery includes document production, exchanges of written questions and depositions, which involve questions and answers under oath, before trial. 

It’s been misreported once or twice that this case is about who Satoshi actually was. Not really. The case mostly skirts that question, though it’s undeniably in the penumbra of facts at issue. Plaintiff alleges that while Dave Kleiman and Craig Wright were "involved in Bitcoin from its inception" that it is not clear whether either or both of him created Bitcoin. 

In short, the lawsuit does not ask for a determination about the true identify of Satoshi Nakamoto. At the same time, plaintiff says that "[f]rom their collaboration in 2008 until Dave's death in 2013, Craig and Dave would go on to mine over a million of the initial bitcoins." Alleged timing and quantum overlaps notwithstanding, the case will likely end with Satoshi’s identity never being specifically resolved.

After being sued, Wright filed a Motion to Dismiss. He argued that (1) the Court didn't have jurisdiction over him, (2) prior judgments entered by courts in Australia had already resolved the issue, (3) it would be inconvenient to try this case and Australian courts were better suited to do so, (4) that the claims in the lawsuit were each legally insufficient and (5) generally that this was nothing more than a shakedown by Ira Kleiman. I am necessarily over-simplifying, but that was the gist. 

Kleiman then filed an Amended Complaint that added W&K as a party.  Plaintiffs paint a picture of perjury and persistent deception by Wright, even going so far as to describe this in their Amended Complaint:

Plaintiffs moved to dismiss the Amended Complaint largely on the same grounds as they had the original Complaint. A little over a year ago, the Court granted in part and dismissed that motion, in an Order dated December 27, 2018.

The Court dismissed two claims for "misappropriation" but let stand claims for Conversion, Unjust Enrichment, Breach of Fiduciary Duty, Breach of Partnership Duties, Fraud and for a Permanent Injunction. These claims remain live today. 

If you boil the lawsuit down to its most basic elements, these legal theories are all different ways of saying that David Kleiman owned half of roughly 1.1 million bitcoin mined with Craig Wright and, as a consequence, that bitcoin is the property of the estate. 

One of the key defenses that Wright raised is that the claims were barred by statutes of limitation. What does that mean? Lawsuits generally have to be filed within certain time frames. If you don't file suit within that limitations period, your case has to be dismissed. 

On the one hand, the Court agreed that a three-year statute of limitations applied to the misappropriation claims because Plaintiffs "became aware of the Australian Judgments when an [Australian tax] auditor contacted Ira Kleiman on April 15, 2014 – which is well beyond the three-year statute of limitations period for Plaintiffs misappropriation claims."

On the other hand, while the Defendant said that a four-year statute of limitations applied to the other claims, Plaintiff successfully argued that under the doctrine of "fraudulent concealment" the statute was "tolled" (that is, it stopped running). 

As the Court explains:

"Here, Plaintiffs have alleged that the Defendant engaged in a fraudulent scheme to take control of assets belonging to the Estate and W&K by initiating lawsuits in Australia without giving any of the Plaintiffs notice that the suits were underway. In order to procure the Plaintiffs’ property, the Plaintiffs claim that the Defendant forged several contracts to make it seem like Dave had willingly given the Defendant W&K’s intellectual property and bitcoins."

If defendant is able to establish that Plaintiffs "became aware of the Defendant’s conduct more than four years before the filing of the instant action, Defendant may raise the statute of limitations issue again in a motion[.]” 

While I don’t have access to all of the discovery in this case it is certainly possible that we will see a motion on these grounds. Notably, perhaps, it’s a defense that doesn’t necessarily turn on witness credibility, which is (arguably) a good thing for the defendant.

Following the Motion to Dismiss Order, Defendant filed an Answer with Affirmative Defenses. After that was filed, early in 2019 the Plaintiffs filed a Second Amended Complaint, which adds a claim for civil theft. An interesting tidbit from that filing is a demand letter from Plaintiffs’ counsel seeking damages of $81 Billion USD.  

This demand was made for procedural purposes, presumably. In other words, Pliaintiffs had to ask for a number in order to make a claim for civil theft under Florida law. I imagine that nobody expected to receive a wire for $81 Billion USD the next day. Still, this gives you perhaps an idea of the outside limit of damages at issue in this case.  (This presumably doesn’t include prejudgment and post judgment interest). The parties have since been engaged in discovery and motion practice, with a brief and ill-fated attempt to settle the case.

Defendant answered the Second Amended Complaint but also filed something called a Motion for Judgment on the Pleadings. Without giving you a civil procedure lesson, Wright argued that the Court couldn’t exercise jurisdiction over the case without knowing who all of the members of W&K, LLC were and that (per Wright) there were actually three members who had not been disclosed by Plaintiff whose membership would destroy jurisdiction.  (This has to do with satisfying something called the Federal Diversity Jurisdiction statute, which is explained in more detail in the Court’s Order).

Judge Bloom denied Wright’s Motion for Judgement on the Pleadings. This kept the case alive in federal court. It’s also potentially important because she didn’t think Wright was being truthful. Her opinion actually quotes Sir Walter’s Scott’s “Oh! What a tangled we weave when [first] we practice to deceive.” Among other things, the Court observed that the “the Defendant has made several conflicting statements regarding even his own ownership of W&K.”

In short, the Court ended up denying the motion for judgment on the pleadings, finding that “the Defendant … failed to present any credible evidence showing that any of the parties he suggests are members of W&K.” If Plaintiffs had lost this Motion, they would have probably had to refile the lawsuit in state court in Florida and start over, which would have been a big loss.

Motions to Dismiss aside, much of what has happened publicly in the last year has involved an ongoing discovery dispute regarding identification of Wright’s bitcoin holdings. Wright was ultimately ordered by Judge Reinhart to "produce a complete list of all bitcoin that he mined prior to December 31, 2013."

I am not going to summarize the entire sordid discovery dispute here.  If you want a good outline of the history of this dispute, take a look at Judge Bloom's order of January 10, 2020, which you can find here.  Suffice it to say that he didn’t comply with Judge Reinhart's order, having been given many chances to comply, and was sanctioned.

In short, Judge Reinhart on August 15, 2019 sanctioned Wright by ordering that he pay plaintiffs' legal fees associated with litigating the issue of whether a list of bitcoin holdings could be produced and also entered an order deeming certain facts to be true and striking many of Wright's defenses. It was close to a case-ending result, though there was still a narrow window for the Plaintiff to crawl out of and survive. (This was also misreported as an Order requiring Wright to transfer bitcoin to the Plaintiffs or to pay a money judgment. The case hadn't actually ended yet. No final judgment was entered).

He also said that Wright’s testimony was “intentionally misleading”, “intentionally false”, “belligerent and evasive”, and “perjurious” and included a long analysis of his credibility which he found wanting:  "The evidence establishes that he has engaged in a willful and bad faith pattern of obstructive behavior, including submitting incomplete or deceptive pleadings, filing a false declaration, knowingly producing a fraudulent trust document, and giving perjurious testimony at the evidentiary hearing."

The remedy contained in Reinhart’s Order was a terrible outcome for Wright and he appealed it to the District Court, Judge Bloom. It seemed like the case might be nearly over as a result of this extremely onerous sanctions order but a part of it was just vacated.

Judge Bloom left the monetary sanctions in place but found that there was an insufficient connection between the discovery sanction and the deemed facts, so the worst part of the sanctions order had to be vacated.  It’s a strange Order in that most seems to agree with Judge Reinhart that Wright had been abused the discovery process and deferred to his credibility assessment and monetary sanctions award. But then, in a brief couple paragraphs, the worst part of the sanctions order was vacated.   

The bottom line seems to be (per two federal judges) that Wright had a half dozen chances to say that it was impossible to comply with this discovery request and identify his bitcoin holdings, offered a variety of explanations why he wasn't going to, and it was only when he was staring down the barrel of Contempt of Court that he claimed compliance was impossible. Still, the law’s the law, and Judge Bloom says that Judge Reinhart overreached his authority. So the case will be allowed to poodle forward to trial, with no facts determined and Wright’s defenses intact.

But, wait, there's more! In one of the many truly bizarre strands of this story, Wright had argued that the reason why he couldn't comply with the discovery request or the Court's order is that a "bonded courier" was scheduled to arrive in January 2020 and would provide a "key slice" that would unlock an encrypted file with the relevant information. 

What is a bonded courier, by the way? And why you need one to deliver a slice of a key to unlock a list of bitcoin addresses (not keys)? A courier company delivers thing, right?  So in theory, the “bond” would cover the amount of the loss if the courier didn’t show up with the delivery. So. Who wrote that bond?  What was the face amount? $4.5 billion USD? Also, where are the keys to the addresses? And how does one know which key matches which address? Is there another bonded courier?

I mean, it certainly raises some questions. 

Judge Bloom gave Wright until February 3, 2020 to file a notice indicating whether the bonded courier had arrived with the key: "The Court will permit the Defendant through and including February 3, 2020, to file a notice with the Court indicating whether or not this mysterious figure has appeared from the shadows and whether the Defendant now has access to the last key slice needed to unlock the encrypted file."

A mere four days after Judge Bloom's Order, Wright filed a notice with the court saying that "a third party has provided the necessary information and key slice to unlock the encrypted file, and Dr. Wright has produced a list of his bitcoin holdings." No bonded courier is referenced and, well, a cynic might say that the timing is surprisingly convenient. Also, there are no private keys apparently. It’s just a list of addresses. Why would someone go to the trouble of encrypting a list of addresses and breaking the key into multiple pieces and giving them to multiple parties? It’s not entirely clear. Maybe we will learn more.

Almost immediately after this notice was filed, the Plaintiffs filed a motion asking for the ability to take more discovery from Wright on this issue and, additionally for an extension of time to prepare for trial. The Court mostly granted this motion and, in particular, said that the Plaintiffs would be entitled to ask seven interrogatories (written questions that have to be answered under oath) about the so-called "bonded courier". 

The trial itself is now set for July 6, 2020. Here’s how the court imposed schedule looks between now and then:

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Still with me? This is a complicated case, factually and procedurally. Tons of paper have been exchanged. I have left out tons of detail, some of which might be important, depending on your view of the case. At this point in the case, what’s most important is that the Defendant just caught a break and a case that seemed like it might be unlikely to go to trial has a better shot of that now. 

What does this all mean from an outcome prediction standpoint? Who is going to win? Who is going to lose?

I don’t have a crystal ball that predicts the future, but I can make a couple of observations.

First, if you agree with the old adage that time is money, the defendant has managed to keep this case alive and away from trial for two years without paying any money to the Plaintiffs, much less Bitcoin.

Second, and on the other hand, it’s strange to think of Judge Bloom’s Order as a victory of any kind. Wright has an established history in this case of (according to the Court, not according to me) making inconsistent statements and his credibility and truthfulness have been called into question by both judges. It strikes me as unlikely that this will change now. 

Third, the whole “bonded courier” argument was risky if it was a gambit and turns out there was no such thing or person. I suppose it’s possible but it seems unlikely that when asked to identify this person that Wright is going to identify a courier company, much less one that had a surety bond as a guarantor. Note that the compliance notice doesn’t actually mention a courier. This is entirely subjective but the detail seems like an odd grace note that rings strange and that if it turns out to be untrue will not go over well with the Court.  If this happens, there’s a non-trivial way that one of these two federal judges will find a way to enter more serious, and potentially case-ending sanctions – this time ones that stick.

Fourth, is Wright going to be held in contempt of court/why wasn't he already? I have been asked this a couple of times and it seems unlikely to me. If you read Judge Bloom's January 10 order, you will notice that she mentions a procedural issue related to the sanctions imposed by the magistrate court – while he found that civil contempt might have been provable, he wasn't going to certify facts to the District court for that purpose:

"While Judge Reinhart found that there was clear and convincing evidence that would support a civil contempt certification, he determined that the sanctions imposed pursuant to Rule 37 and referenced above, were sufficient to sanction the Defendant for his conduct.  In exercising his discretion, Judge Reinhart, therefore, did not certify facts to this Court for civil contempt proceedings. The Magistrate Judge also noted that while he found that the record evidence could support a civil contempt certification, he did not find the record evidence rose to the level of proof beyond a reasonable doubt needed to support a certification of facts for criminal contempt proceedings."

Why didn't the magistrate hold Wright in civil contempt? The remedy is used for coercive purposes – basically, it's a method that court have to compel compliance with orders, as opposed to criminal contempt, which is punitive in nature. It’s also a way of providing a person aggrieved by the contumacious behavior with a remedy. 

Given the sanction that Judge Reinhart imposed, which was close to case-ending and the monetary award ordered, there would have been little benefit in or need to impose a civil contempt sanction which would have also involved more court time in front of the District Court.

Furthermore, this observation, in particular, from Judge Reinhart’s August 2019 Sanctions Order remains un-rebutted"

I mean, that reads like a closing argument for the plaintiffs as much as a judicial opinion. It’s not a good place to start from if you are the Defendant, preparing for trial. This was only a win in the sense that the case isn’t basically over now. Judge Bloom vacated part of Judge Reinhart’s order not because she likes Wright or thinks he is a truth-telling upstanding citizen, but because she thought that the remedy was not authorized, beyond the scope of Judge Reinhart’s authority and subject to reversal by the 11th Circuit. 

It’s not all incense and peppermints for the Plaintiffs, though. This is still a hard case from an evidentiary and a collections standpoint. If this case does get to trial, which is possible, the Plaintiffs have an evidentiary hurdle to overcome in that Dave Kleiman passed away and the living person who arguably has the most knowledge about W&K and the arrangements between Wright and Kleiman is none other than Craig Wright.

With that said, a jury will have the same opportunity to assess Wright’s credibility as the Court did. To the extent that any part of the resolution of this case turns on truthfulness or credibility, the deck is heavily stacked against Wright. Still, there’s more after that: if Plaintiffs do win, they will face an appeal in the 11th Circuit – assuming Defendants can post a bond in the required amount – and a challenge in collecting the judgment that could take a really, really long time and never be fully satisfied. (See, one thing people forget is that after you win a case, you have to get paid – that can take time, and more so if the judgement debtor is outside the country.)

Anyway: my crystal ball is not giving me a clear view of the future. What I can say is that there’s a decent chance that the case will be resolved in whole or part by a sanctions order of some kind, either before or during trial. 

If I had to bet money on a side winning, I’d put it on the Plaintiffs. But anything can happen in a trial – it’s a closed narrative universe and there are no guarantees.  The better result for Plaintiffs is a negotiated resolution because, even if they win, it may take years for them to get paid, assuming a successful appeal.