Coleman v. Nexo Capital: AI Hallucinations in Crypto Brief — Repealed Statute, Phantom 7th Circuit Case

Background: A Cryptocurrency Dispute and a Repeal-Blind Statute

Elbert Coleman III and Elbert Coleman IV — a father-and-son team proceeding pro se — brought suit against Nexo Capital Inc., a cryptocurrency lending platform, after Nexo liquidated their credit line accounts. The Colemans alleged that the liquidation occurred without prior notice in breach of the Credit Terms agreement. After the court screened the complaint and dismissed other claims, a single breach of contract claim survived to summary judgment.

Nexo moved for summary judgment with a properly supported factual record. The Colemans filed an opposition brief that violated local rules in multiple ways: they failed to include the required “Statement of Material Facts in Dispute,” failed to cite any record evidence, and relied instead on a series of informal “notices” filed over the prior year. The court noted these deficiencies and cautioned the Colemans to comply with local rules — but did not treat these deficiencies as independently dispositive.

On the merits, the Colemans advanced two breach theories: (1) that Nexo violated the Credit Terms by not providing notice before liquidation, and (2) that the Credit Terms were void because Nexo was selling unregistered securities in violation of SEC rules. Both theories failed.

The AI Issue: A Repealed Statute and a Phantom Circuit Court Case

In their opposition brief, the Colemans cited Indiana Code § 23-2-1-2 and Kramer v. Trans-Lux Corp., 24 F.3d 1001 (7th Cir. 1994) for the proposition that transactions involving unregistered securities are void ab initio. Both citations were inaccurate in fundamentally different ways.

The Indiana Code section had been repealed — a search of the current Indiana Code revealed it no longer exists. The Seventh Circuit case simply does not exist at that citation. There is a Kramer v. Trans-Lux Corp. case, but it is from the District of Connecticut: No. 3:11-cv-1424, 2012 WL 4444820 (D. Conn. Sept. 25, 2012). The Colemans had apparently fabricated or mixed up the circuit court citation entirely.

Judge Brookman noted that it was “unclear whether Plaintiffs’ citations are fabricated or erroneously cited” — but made clear that the distinction does not matter for Rule 11 purposes. The duty of reasonable inquiry applies equally whether a litigant types a wrong case name manually, copies an incorrect citation from a secondary source, or relies on an AI tool that generated a hallucinated citation. The court explicitly flagged AI as a likely contributing factor, citing the Seventh Circuit’s recent warning in Jones v. Kankakee County Sheriff’s Department (7th Cir. 2026): “As pro se litigants employ AI to assist with court filings, a basic reminder seems wise. Accuracy and honesty matter.”

Holdings

1. Summary judgment granted. The undisputed evidence showed the Colemans received notice before liquidation, defeating their breach of contract claim. The void-contract theory also failed because the SEC investigation concerned a different product (the Earn Interest Product, not the Credit Line Product at issue).
2. No sanctions imposed — warning only. In light of the case’s resolution on the merits, the court declined to impose Rule 11 sanctions for the inaccurate citations. However, it expressly cautioned all parties to comply with Rule 11’s verification requirements.
3. AI explicitly flagged. The court’s footnote is the operative holding on the AI issue: it identifies AI use as a plausible explanation for the inaccurate citations and reiterates the Seventh Circuit’s warning that accuracy and honesty are mandatory regardless of AI assistance.
4. Westlaw Editor’s Note. Westlaw added an Editor’s Note flagging that this decision contains discussion of citation references that are incorrect or do not actually exist, preserving the record for future judicial and practitioner reference.

“All parties, including those proceeding pro se, must conduct a reasonable inquiry to determine that all factual and legal allegations contained in court filings are supported as required by Federal Rule of Civil Procedure 11. A party’s failure to adhere to this rule authorizes sanctions, including the dismissal of the case… especially where artificial intelligence (‘AI’) may have been used to assist parties in preparing filings.”

— Judge Matthew P. Brookman, S.D. Indiana, March 31, 2026

India Angle: AI in Fintech Litigation and the Verification Duty

The Coleman v. Nexo Capital case is particularly relevant to Indian practitioners advising clients in cryptocurrency and fintech disputes — a rapidly growing area of Indian litigation following the Supreme Court’s reversal of the RBI cryptocurrency ban in Internet and Mobile Association of India v. Reserve Bank of India (2020). As Indian crypto investors turn to courts (consumer forums, DRAT, or civil courts) to resolve exchange disputes, AI-assisted brief drafting will become common. The Coleman pattern — citing a repealed statute without checking its current status — is entirely replicable in the Indian context.

Relevant Indian Law

• Repealed statutes in Indian AI hallucinations: India’s legislative landscape is complex, with multiple amendments, repeals, and replacements across codes. AI tools frequently cite superseded sections of statutes like the Companies Act 1956 (replaced by Companies Act 2013), the Consumer Protection Act 1986 (replaced by the 2019 Act), or the Prevention of Money Laundering Act as amended. Citing a repealed provision in Indian proceedings is a serious error that courts can treat as contempt or professional misconduct under Advocates Act 1961 Section 35.
• BCI Rules, Rule 14: An advocate must not act in a manner that is calculated to mislead the court. Citing a nonexistent or repealed statute — even without intent — when the advocate had means to verify it, falls within the scope of Rule 14’s prohibition.
• Order VI Rule 16 CPC: Courts may strike pleadings containing false statements of law; citing a nonexistent statute provision could ground such an application by opposing counsel.

Three Practical Tips for Indian Practitioners

1. Always verify statute currency before filing. Before citing any section of any Indian statute, verify it is in force using a current consolidated version on India Code (indiacode.nic.in) or SCC Online. AI tools frequently cite provisions from superseded Acts or pre-amendment text. A simple date check prevents what happened in Coleman.
2. For cryptocurrency and fintech cases, verify the regulatory framework is current. India’s crypto/fintech regulatory landscape is especially volatile. SEBI regulations, RBI circulars, PMLA amendments, and VDA taxation rules change frequently. Any AI-generated citation in this space must be cross-checked against the regulator’s current published circular or notification.
3. When a citation seems unusual, check independently. The Coleman citation — attributing a District of Connecticut case to the Seventh Circuit — is the kind of error that stands out on basic inspection. Indian advocates should develop a reflex: if a citation looks off (wrong jurisdiction, unusual reporter, very old case for a modern proposition), verify it before filing.

Quick Takeaways

• Citing a repealed statute and a nonexistent circuit court case in a brief is a Rule 11 violation — fabricated or merely mistaken, the reasonable inquiry duty applies the same way.
• Courts are now explicitly naming AI as a likely cause of citation errors even when the party does not admit to using AI.
• No sanctions were imposed here because the case was resolved on the merits, but the warning is clear: repeat this conduct in future filings and sanctions (including dismissal) are authorized.
• The Seventh Circuit’s Jones v. Kankakee warning — “accuracy and honesty matter” — is being actively cited as a standard in district court orders throughout the circuit.
• In India: citing a repealed law in a brief is professionally dangerous; AI tools are particularly prone to this error in the Indian multi-layer legislative context.

Deep Dive: The “Fabricated or Erroneously Cited” Distinction That Doesn’t Matter

One of the most instructive lines in Coleman v. Nexo Capital is Judge Brookman’s observation that “it is unclear whether Plaintiffs’ citations are fabricated or erroneously cited.” This is a legally significant point: courts are no longer requiring proof that a citation was AI-generated or deliberately fabricated before issuing a Rule 11 warning. The duty of verification applies regardless of how the error arose.

This approach resolves a difficult evidentiary problem. Courts cannot subpoena a litigant’s AI chat history. They cannot compel disclosure of which tool was used. They do not need to. Rule 11 imposes an objective reasonableness standard: would a reasonable person, after reasonable inquiry, have believed this citation was accurate? A repealed statute and a nonexistent circuit court case both fail that test — whether generated by AI, copied from a bad secondary source, or simply typed incorrectly.

For Indian practitioners, this has a direct implication: do not argue that an AI-generated error is not your fault because you didn’t know the tool was hallucinating. Indian courts applying contempt or professional misconduct standards will similarly apply an objective reasonableness test. The question is whether you took reasonable steps to verify — not whether you acted in bad faith.

The fintech dimension of this case is also worth noting. Cryptocurrency credit line agreements, liquidation notices, and account terms are highly technical documents. AI tools are particularly likely to hallucinate in specialized fintech legal contexts where relevant statute law is sparse, recent, or rapidly evolving. Indian advocates handling VDA disputes, P2P lending cases, or cryptocurrency exchange claims should treat every AI-suggested statutory citation as a candidate for independent verification.