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The “crypto winter” of 2022 brought a bear market and a recent wave of bankruptcies to the crypto industry, leaving some retail customers of crypto exchanges frozen out of their accounts. As the bankruptcy filings mounted from Voyager Digital and Celsius Network (“Celsius,” or the “Company”) to FTX US and BlockFi, lawyers, industry experts, market participants and retail customers wondered alike – who owns the cryptocurrency stored on a debtor’s platform in the event of a bankruptcy? Although limited to the specific terms of the customer agreements at issue in Celsius, Judge Martin Glenn issued a ruling in the Celsius bankruptcy proceedings giving an initial indication as to how this inquiry may be assessed.1
Judge Glenn’s 45-page decision agreed with the Company, and overruled objections supported by hundreds of individual Depositors, as well as the objections of a number of governmental entities, including the Texas State Securities Board and the United States Trustee. Judge Glenn determined that the $4.2 billion in cryptocurrency deposited by customers into the Earn Accounts belongs to the Company – not the depositors. As a result, the Company can sell or exchange the stablecoins held in Earn Accounts in the ordinary course of business to fund the Company’s operations and pay the expenses of the bankruptcy case.
On September 15, 2022, the Company filed a motion seeking authority to, among other things, sell a portion of the cryptocurrency held in the Earn Accounts (the “Stablecoin Sale Motion”) to fund its bankruptcy case, which lead to a spate of objections falling into two broad categories:
Assets using the Earn Service . . . and the use of our Services, you grant Celsius … all right and title to such Eligible Digital Assets, including ownership rights, and the right, without further notice to you, to hold such Digital Assets in Celsius’ own Virtual Wallet or elsewhere, and to pledge, re-pledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer or use any amount of such Digital Assets, separately or together with other property, with all attendant rights of ownership, and for any period of time, and without retaining in Celsius’ possession and/or control a like amount of Digital Assets or any other monies or assets, and to use or invest such Digital Assets in Celsius’ full discretion. You acknowledge that with respect to Digital Assets used by Celsius pursuant to this paragraph:
Judge Glenn’s decision makes clear, however, that the Depositors have not been left empty-handed:
To be clear, this finding does not mean holders of Earn Assets will get nothing from the Debtors. Account Holders have unsecured claims against the Debtors in dollars or in kind (depending on the terms of any confirmed plan). The amount of allowed unsecured claims is subject to later determination in this case (through the claims allowance process) and may potentially include damages asserted by Account Holders, including breach of contract, fraud or other theories of liability. . . .
The Court takes seriously potential violations of state law and non-bankruptcy federal law, as well as the litany of allegations including, but not limited to, fraudulent inducement into the contract, fraudulent conveyance, breach of contract, and that the contract was unconscionable. These allegations may (or may not) have merit, and the creditors’ rights with respect to such claims are explicitly reserved for the claims resolution process. But importantly, as a prerequisite to those claims, the Court first must establish that a contract was formed and must interpret the contract terms.
After his findings on ownership, Judge Glenn held that the Company had made a sufficient showing to sell the stablecoins held in the Earn accounts. Judge Glenn’s decision on this point seemed premised on the fact that time is not a luxury the Company possesses:
A rare point of agreement among all parties is that the Debtors’ liquidity is precipitously running out. The Debtors need to generate liquidity to fund these Chapter 11 cases and continue down the path either of a standalone plan [of] reorganization, a section 363(b) sale, or even a liquidation plan. The Debtors project that additional liquidity will be needed in early 2023. The Debtors demonstrate a sound business justification for selling stablecoins, and the Court agrees that it is appropriate to [grant] authority to do so.
Thus, the Company will be permitted to sell stablecoins held in the Earn Accounts to continue funding the bankruptcy cases.
Although Judge Glenn’s decision is specifically limited to the customer agreements in Celsius, he continues to blaze judicial trails in the crypto bankruptcy space.7 Participants, customers and others in the crypto industry should take note of how Judge Glenn analyzed the Terms and Conditions in Celsius, as careful analysis of contractual language will be critical to the outcome of future crypto ownership disputes. It is clear that other substantial issues remain to be resolved in the crypto “winter of our discontent.”
1 In re Celsius Network LLC, Case No 22-10964(MG), 2023 WL 34106 (Bankr. S.D.N.Y. Jan. 4, 2022).
2 An examiner was appointed in the Celsius case to investigate various issues arising from the Company’s prepetition operations such as: (i) where the cryptocurrency was stored, (ii) whether the cryptocurrency was commingled, (iii) the procedures for paying taxes and complying with other non-bankruptcy law, and (iv) the status of utility obligations relating to the Company’s mining operations.
3 See Plazza v. Airbnb, Inc., 289 F. Supp. 3d 537, 548 (S.D.N.Y. 2020) (“Clickwrap agreements are generally defined by the requirement that Account Holders ‘click’ some form of ‘I agree’ after being presented with a list of terms and conditions”).
4 Celsius, 2023 WL 34106, at * 4.