Cryptoturbulence causes account holders and creditors in the Celsius network to travel through unknown Chapter 11 bankruptcy waters | Legal issues

by Arthur · July 19, 2022

… it often makes the most sense in a case like the Celsius bankruptcy … to, at least in the beginning, follow a strategy built on a collaborative approach to secure values …

On July 13, 2022, Celsius Network LLC and related debtors filed voluntary Chapter 11 bankruptcy protection petitions in the United States Bankruptcy Court for the Southern District of New York. If you are a creditor, account holder or interested in Celsius’ assets, it is important to know your rights as this case continues with new cryptocurrencies and currency related issues for bankruptcy law. Participants in cryptocurrencies and cryptocurrency markets – even without an ownership stake in this case – will also benefit from following the Celsius bankruptcy closely to see the legal and regulatory cryptocurrency framework continue to take shape in real time.

The Celsius bankruptcy filing came less than a week after KeyFi, Inc. filed a lawsuit against Celsius Network Limited and Celsius KeyFi LLC alleging that the defendants “actually operated a Ponzi scheme[,]”And about a month after Celsius stopped the account holder’s withdrawal on pause. The KeyFi, Inc. complaint further alleges that the defendants “grossly mismanaged customer funds, failed to perform a fundamental internal audit to account for their obligations, and manipulated cryptocurrencies for the benefit of themselves and their clients.”

A creditors’ committee will ensure that a soup-to-nut investigation and exploration of all avenues for value recovery is identified and pursued …

With such serious allegations being made – and advisers to the US executor requesting further disclosure from Celsius about the regulatory actions it is currently facing during the first hearing on 18 July 2022 in the bankruptcy case – Celsius creditors and account holders will want to participate in and oversee the formation of an official committee of unsecured creditors, which is expected to be formed by the United States Trustee on or shortly after July 21, 2022.

A creditors’ committee will ensure that a soup-to-nut investigation and exploration of all avenues of value recovery is identified and pursued. Often there is a creditors’ committee that is well positioned to identify and add value as a check and balance to a debtor’s existing management.

For those who do not themselves serve on the Celsius Creditors Committee, the Bankruptcy Code requires that such a committee “provide access to information for creditors who (i) have claims of the type represented by that committee and are not appointed to the committee” and “request about and receive comments from … creditors[.]”11 USC § 1102 (b) (3) (A) & (B). Creditors and account holders should exercise this right.

Collaboration on the sale of assets or other business strategies often provides a better return for all stakeholders than lawsuits early in a Chapter 11 case.

While the KeyFi, Inc. claims guarantee a full investigation, careful strategy at the beginning of a Chapter 11 case is the key to maximizing returns. It often makes the most sense in a case like the Celsius bankruptcy for debtors, their creditors and account holders to, at least initially, follow a strategy built on a collaborative approach to secure value as much as possible.

Here, for example, there may be significant avenues for recovery that debtors and other stakeholders agree on, such as deciding whether to sell or integrate Celsius’s GK8 business, a secure institutional digital assets self-storage technology platform acquired by Celsius in 2021. Collaboration on The sale of assets or other business strategies often provides a better return for all stakeholders than litigation early in a Chapter 11 case.

Furthermore, debtors, their creditors and account holders, and indeed other crypto-market participants, may find themselves in line, or at least united in the pursuit of clarity, in the continuing development of legal and regulatory issues where a collaborative approach, to the extent possible, provides value. for all in the face of tie authority from legislators, regulators and the courts.

… lawsuits and the answers that come from there will also ultimately provide clarity that many industry players welcome.

For example, the crypto marketplace and most of its participants will benefit from guidance emerging from the Celsius bankruptcy case that leads to the development of a unified standard and clarity on when digital assets belong to or are held in trust for account holders, or alternatively, hold in mixed accounts with account holders who have no more than one IOU? What rights do account holders have when there is a lack of clarity in disclosures or advertising from a crypto company? Are withdrawals from Celsius accounts within the 90 days before Celsius’ bankruptcy was filed recoverable by the Celsius bankruptcy estate? In which currency will Celsius account holders receive distributions (Celsius has expressed a desire to make distributions in the same digital assets as account holders)? What controls are or should be imposed on crypto companies when investing or lending total digital assets? What is the impairment of digital assets under section 1124 of the Bankruptcy Code? What is the date when cryptocurrencies are valued in a bankruptcy case? When does a cryptocurrency become a security?

As these and other questions arise and advance in the Celsius bankruptcy case, there will be crossroads where interested parties will fight – and sue – for the right answers, but the wrestling or trial and the answers that come from it will also ultimately add clarity. which many industry participants welcome.

An example of an issue that is often disputed in cases like this, and sometimes early in the case, is whether there are viable lawsuits belonging to the bankruptcy estate that originate from certain historical business activities, transactions and insider behavior, e.g. internal control or lack thereof.

… crypto market participants actively involved in the Celsius bankruptcy case are likely to influence the emerging legal and regulatory landscape of the crypto industry.

With the Celsius bankruptcy filing coming during the dynamic “crypto winter” and on the heels of the previous July filings from Voyager Digital Holdings, Inc. and its debtor affiliates for relief under Chapter 11 of the Bankruptcy Code and by Three Arrows Capital, Ltd . In order 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 influence the emerging legal and regulatory landscape of the emerging crypto-industry. For individual Celsius account holders specifically, serving on the Celsius Creditors Committee (if elected by the United States Trustee) provides a great opportunity for this participation.

At a minimum, Celsius account holders and creditors, and players in the digital assets industry in general, will want to take advantage of the benefits that monitoring the Celsius bankruptcy case provides in terms of advancing new crypto business issues as they are addressed and considered, and moving against Decisions.

Robert Schechter is the Rector of Porzio, Bromberg & Newman and a member of the firm’s Corporate, Commercial and Business Law Department. Contact him on LinkedIn.