…it often makes more sense in a case like the Celsius bankruptcy…to pursue, at least initially, a strategy based on a collaborative approach to securing value…
On July 13, 2022, Celsius Network LLC and affiliated debtors filed voluntary petitions for Chapter 11 bankruptcy protection with the United States Bankruptcy Court for the Southern District of New York. If you are a creditor, account holder, or have an interest in Celsius assets, it is important to know your rights as this case continues with new issues related to crypto and currency activities in court. bankruptcies. Crypto and cryptocurrency market participants – even without a stake in this case – will also be well served by paying close attention to the bankruptcy of Celsius to see the legal and regulatory framework for crypto continue to take shape in real time.
Celsius’ filing for bankruptcy came less than a week after KeyFi, Inc. filed a lawsuit against Celsius Network Limited and Celsius KeyFi LLC alleging that the defendants were “in fact operating a Ponzi scheme.”[,]” and about a month after Celsius suspended withdrawals from account holders. The KeyFi, Inc. complaint further alleges that defendants “grossly mismanaged…client funds, failed to perform basic internal auditing to account for their obligations, and manipulated crypto-assets for the benefit of of themselves and of their principals”.
A creditors’ committee will ensure that a hazelnut soup investigation and the exploration of all avenues of valuation are identified and pursued…
With such serious allegations having been thrown around – and the United States Trustee’s attorney asking Celsius to further disclose the regulatory action it is currently facing at the July 18, 2022 day one hearing in the case of Bankruptcy – Celsius’ creditors and account holders will want to participate in and oversee the formation of a formal Unsecured Creditors’ Committee, which is expected to be formed by the United States Trustee on or soon after July 21, 2022.
A creditors’ committee will ensure that a nitty-gritty investigation and exploration of all avenues of value recovery are identified and pursued. Often it is a creditors’ committee that is well placed to identify and add value as a check and balance to a debtor’s existing management.
For those who do not themselves sit on Celsius’s creditors’ committee, the Bankruptcy Code requires that this committee “provide access to information to creditors who (i) hold claims of the type represented by this committee; and are not named to the committee” and “solicit and receive comments from … creditors[.]” 11 USC § 1102(b)(3)(A)&(B). Creditors and account holders must use this right.
Collaborating on the sale of assets or other business strategies often yields better returns for all stakeholders than litigation at the start of a Chapter 11 case.
While KeyFi, Inc.’s allegations warrant full scrutiny, careful strategy early in a Chapter 11 case is essential to maximizing returns. In a case like the Celsius bankruptcy, it often makes more sense for debtors, their creditors and account holders to pursue, at least initially, a strategy based on a collaborative approach to securing value to the greatest extent possible.
For example, here there may be important avenues of recovery that debtors and other stakeholders agree on, such as determining whether to sell or integrate Celsius’ GK8 business, a platform secure technological form of self-custody of institutional digital assets acquired by Celsius in 2021. Collaborating on asset sales or other business strategies often yields better returns for all stakeholders than early litigation. a Chapter 11 matter.
In addition, debtors, their creditors and account holders, and indeed other crypto market participants, may find themselves aligned, or at least collectively seeking clarity, on still-developing legal and regulatory issues. where a cooperative approach wherever possible generates value for all. in the face of the uncertain authority of legislators, regulators and courts.
…litigation and subsequent responses will also add to the clarity that many industry players welcome.
For example, would the crypto market and most of its participants benefit from guidance from the Celsius bankruptcy case that leads to the development of a uniform standard and clarity on when digital assets belong to or are held in trust for account holders, or alternatively, are in mixed accounts with account holders who have nothing more than an IOU? What rights do account holders have if there is a lack of clarity in a crypto firm’s disclosures or advertising? Are withdrawals from Celsius accounts within 90 days of Celsius filing for bankruptcy recoverable by Celsius’ estate? In what currency will Celsius account holders receive distributions (Celsius has expressed a desire to make distributions in the same digital assets held by account holders)? What controls are or should be imposed on crypto firms when investing in or lending pooled digital assets? What constitutes impairment of digital assets under Section 1124 of the Bankruptcy Code? What is the date crypto claims are valued in a bankruptcy filing? When does a crypto holding become a security?
As these and other questions arise and progress in the Celsius bankruptcy case, there will be forks in the road where interested parties wrestle – and argue – over the appropriate answers, but this fight or litigation and the resulting responses will also ultimately add clarity that many industry participants welcome.
An example of an issue that is often contentious in cases such as this, and sometimes at the outset of the case, is whether there are viable causes of action pertaining to the bankruptcy estate arising from certain historical business activities, transactions and insider conduct, including internal controls or lack thereof.
… crypto market players actively involved in Celsius’ bankruptcy case are likely to impact the nascent legal and regulatory landscape of the crypto industry.
With Celsius filing for bankruptcy during the dynamic “crypto winter” and on the heels of July filings by Voyager Digital Holdings, Inc. and its debtor affiliates seeking relief under Chapter 11 of the Bankruptcy Code and of Three Arrows Capital, Ltd. to recognize a foreign proceeding under Chapter 15 of the Bankruptcy Code, crypto market participants actively involved in the Celsius bankruptcy case are likely to impact the nascent legal and regulatory landscape of the crypto industry. With specific regard to individual Celsius account holders, serving on the Celsius Creditors’ Committee (if selected by the US Trustee) provides an excellent opportunity for such participation.
At a minimum, Celsius account holders and creditors, and digital asset industry players in general, will want to take advantage of the benefits that monitoring the Celsius bankruptcy case offers with respect to the advancement of new issues. crypto trades as they are raised and reviewed, and move toward resolution.
Robert Schechter is a director of Porzio, Bromberg & Newman and a member of the firm’s corporate, commercial and business law department. Connect with him on LinkedIn.