We have previously written about the requirements that must be met by a party seeking a particular type of injunction known as a “Mareva injunction.”  This is a court order that prohibits dissipation of a defendant’s assets.  The issue recently arose in a proposed class action involving allegations of fraud and fraudulent misrepresentations in the context of selling a non-fungible token (“NFT”) collection.

What are NFT’s?

As the Ontario Superior Court of Justice explained in McRae-Yu v. Profitly Inc. et al, NFTs are “cryptocurrency-based assets.”  They are a form of digital token recorded on “blockchains.” Blockchains, in turn, are unchangeable digital public ledgers that record transactions and are used to track ownership of digital assets, each such record being referred to as a “block” in the chain.  NFTs themselves are anything that can be “digitally tokenized,” though they often take the form of “digital art” (per McRae-Yu).   As the Court explained in McRae-Yu, they can be developed within a collection and offered for sale to the public in a process called “minting.”

When purchasers buy an NFT, they own the “original copy of the digital file,” akin to owning a piece of original art.  Its value then becomes “market-driven,” for consumers determine its price if it is offered for secondary sale.

Plaintiff Alleges Broken Promises By the Developers and Marketers of an NFT Collection

In this case, the defendants alleged to have been involved in developing and marketing an NFT collection by a group called themselves “Boneheads.”  The representative plaintiff alleged that in 2021, he came across an NFT collection offered by the Boneheads, whose art he found to be “distinctive and visually appealing.”  The Boneheads’ website set out various future benefits in relation to the NFTs, including “physical collectibles, exclusive drops of new NFTs, and a lifetime membership to a digital Cabana.”  Before the Boneheads collection was offered for public sale, it was also allegedly promised that everyone purchasing a Boneheads NFT would “get an opportunity to participate in a secondary credit sale for the chance to win $1M” and that “one lucky randomized token holder would get a monetary mystery box valued at a quarter million dollars, ‘revealed instantly at the end of the mint.’”

The plaintiff alleged that the Boneheads mint occurred in August 2021, when the collection was sold out in less than 40 minutes and generated value equivalent to more than approximately $4 million.  The plaintiff himself purchased 36 NFTs from the Boneheads collection.  However, the plaintiff further alleged that, once the mint closed, there was no “monetary mystery box” winner and no “opportunity to participate in a secondary credit sale for a chance to win one million dollars.”  The plaintiff alleged that his NFTs subsequently became worthless.

Court Considers Whether to Continue a Mareva Injunction Against the Defendants

A Mareva injunction was issued in June of 2023, temporarily freezing the bank and cryptocurrency accounts of all defendants.  The issue before the court was whether the freeze should remain in place until trial or further court order.

The defendants argued that, in seeking the original Mareva injunction, the plaintiff had failed to make “full and frank disclosure” of the facts such that the original order should be set aside.

The Court reviewed the legal principles surrounding the issuance of Mareva injunctions and noted that where fraud is alleged (as it was here), courts have found it appropriate to issue such an injunction “without notice” to the defendants “to ensure an order is obtained before those purportedly responsible for the fraud become aware of the action.”  The intent is to ensure that any further dissipation of assets can be addressed through the court’s contempt powers.  As a corollary to this, however, “the law imposes an exceptional duty” on the party seeking the injunction “to make a balanced presentation of the facts,” which is referred to as “full and frank disclosure.”  If this fails, the injunction can be set aside later.

Court Finds Plaintiff Did Not Fail to Make Full and Frank Disclosure

In this case, the defendants alleged that the plaintiff had made various “material misstatements and/or omissions” in relation to the original motion for an injunction, including wrongly characterizing the future benefits that had been marketed in relation to the Boneheads collection as promises when they were no such thing and failing to advise the court that the “giveaways” had not themselves been publicized on the Boneheads’ website and did not form part of the smart contract for the NFTs.  However, the Court noted that the evidence put before the Court on the original motion had been “voluminous,” complete with website screenshots and other communications, such that the Court had not been misled.

Court Addresses Issue of Whether or Not to Continue the Mareva Injunction

On the issue of whether it was appropriate to continue the injunction, the Court reviewed the five-part test that applies and which we have previously written about.  Specifically, a plaintiff must show:

• The plaintiff has a strong prima facie case;
• The defendants have assets in Ontario;
• There is a “serious risk” that the defendants will dissipate those assets “before judgment can be obtained;”
• Without the injunction, the plaintiff will suffer “irreparable harm;” and
• The balance of convenience favours continuing the injunction.

The Court noted that requiring a plaintiff to prove a strong prima facie case means convincing the court that “there is a substantial likelihood” that the plaintiff will ultimately succeed.  The Court referenced the Boneheads marketing material and noted that the benefits listed “were promised to Boneheads NFT holders.”  Further, while the promise of revealing a mystery box winner was advertised through social media postings rather than on the Boneheads’ webpage, the Court noted that “social media posts are representations that can have legal consequences.”  Accordingly, the first requirement of the 5-part test was satisfied.  Likewise, there was no question the defendants had assets in the province.

The Risk of Asset Dissipation Can Be Inferred For the Purpose of Seeking A Mareva Injunction

The Court focused more heavily on the third part of the test.  The defendants argued that while cryptocurrency is “easy to instantly and anonymously dissipate,” this was insufficient to ground the conclusion that the defendants would dissipate their assets.  They referred to the earlier case of Kirshenberg v. Schneider, in which the Court stated that the proper question was not whether cryptocurrency can be easily dissipated but rather “whether there is a risk that it will be dissipated to avoid judgment.”

In response, the plaintiff argued that the risk of asset dissipation could be “proven by inference.”  Specifically,  the plaintiff noted previous comments of the Court in Sibley & Associates LP v. Ross, to the effect that “in cases of fraud … the Mareva requirement that there be a risk of removal or dissipation can be established by inference, as opposed to direct evidence, and that inference can arise from the circumstances of the fraud itself, taken in the context of all the surrounding circumstances.”  

Ultimately, the Court agreed and noted that the plaintiff was not required to produce direct evidence “showing the defendants [were] actively dissipating their assets.”  A “serious risk” of such dissipation was sufficient and could be inferred.  Since there was a strong prima facie case “of fraudulent misrepresentation,” the Court made such an inference.

The Court noted that the size of the Boneheads mint meant many potential customers might wish to participate in the litigation.  This, in turn, meant there was little chance the defendants would be held accountable in the event of a fraud finding.  Further, since only $500,000 of the $4 million generated by the mint had been frozen, the argument put forward by the defendants that they could not continue to develop the Boneheads project without additional funds was rejected, absent further evidence as to how the other $3.5 million was being used.  The Court, therefore, found the proposed class would suffer irreparable harm without the injunction, and the balance of convenience favoured continuing it.

Ultimately, the Court issued an Order continuing the Mareva injunction against the defendants except one in respect of whom there was no direct evidence of personal involvement in the launch of the Bonehead collection. 

Contact the Toronto Lawyers at Milosevic & Associates for Experienced Representation in Commercial Litigation and Class Action Matters

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