Court rules that Earn Account Cryptocurrency is owned by Debtors and will not be returned

In our latest Bitblog update regarding the Celsius Network LLC, et al. (the “Debtors”) bankruptcy proceeding (Case No. Number: 22-10964 (MG), in the Bankruptcy Court for the Southern District of New York (the “Court”)),  we discuss the recent Court decision (i) confirming that the cryptocurrency assets held in Debtors’“ Earn Accounts” are property of the Debtors and (ii) permitting the Debtors to sell $18 million of stable coins, some of which were deposited by Earn Account holders. This ruling decides definitively that the only recourse for crypto holders in the Bankruptcy Court will be receiving payment as a creditor under a plan of reorganization. Although this ruling will disappoint many account holders, having hoped for a ruling that would require Celsius to return crypto deposited by account holders, even if at a discount, this ruling is not unexpected and comports with applicable bankruptcy statutes and case law.

As mentioned in our prior posts, one of the Debtors’ primary businesses was their Earn Account program, whereby cryptocurrency assets were deposited with Debtors, and depositors “earned” interest on the assets deposited.  As of July 10, 2022, there were approximately 600,000 accounts in the Earn program with a market value of about $4.2 billion in crypto assets.  These “Earn Assets,” when considered part of the Debtor’s estate, constitute a huge portion of its total assets. A grating central question from the start of the case has been whether or not ownership of these “Earn Assets” were transferred to the Debtors when cryptocurrency was placed in an Earn Account or if the assets are still owned by the depositors. Per the Court, once cryptocurrencies were invested in Earn Accounts, those coins became assets of the estate, turning the investors into unsecured creditors of the bankruptcy estates once the Debtors filed for bankruptcy. In this case, the Debtors would be allowed to sell the Earn Account assets (with the Court’s permission) in order to fund its bankruptcy operations.  

Procedural History and Case Discussion of the Terms of Service:

On September 15, 2022, the Debtors requested permission from the Court and the Unofficial Creditors Committee (the “UCC”), the official group appointed in the case to represent the interest of all creditors, to sell certain of the stable coins held by the Debtors. At this point, the Debtors had not asked for a ruling on the status of the Earn Accounts.

However, the Debtors received objections to this request which raised the issue of who owns the Earn Account assets. Following these objections, Debtors amended their motion to request a ruling from the Court as to the legal status of the Earn Accounts, as it was becoming clear that it would be difficult for the case to move forward until such a determination was made.

The key factor used by the Court in determining the ownership of the Earn Account assets is a contract question related to the terms of service for the Earn Accounts (the “Terms”). These Terms were agreed to by means of an online “clickwrap contract” by most Earn Account holders before their coins were deposited into Earn Accounts.  The Debtors argued, and the Court agreed, that the Earn Account Terms clearly granted the ownership of the Earn Assets to the Debtors:

Most notably, the Debtors pointed to the most recent version of the Terms, which state:

In consideration for the Rewards payable to you on the Eligible Digital

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:

1. You will not be able to exercise rights of ownership;

2. Celsius may receive compensation in connection with lending or

otherwise using Digital Assets in its business to which you have no

claim or entitlement; and

3. In the event that Celsius becomes bankrupt, enters liquidation or is

otherwise unable to repay its obligations, any Eligible Digital Assets

used in the Earn Service or as collateral under the Borrow Service

may not be recoverable, and you may not have any legal remedies

or rights in connection with Celsius’ obligations to you other than your rights as a

creditor of Celsius under any applicable laws.

Additionally, all prior Terms since 2020 included some similar language about losing the title to assets deposited and each version of the Terms allowed the Debtors to update the terms of service at any time.

Ruling:

Though it received a number of objections, the Court was not convinced by creditor and State arguments. In granting the Debtors’ motion, the Court decided that there was at least a presumption of a binding contract between the Earn Account holders and the Debtors and that this contract unequivocally gave title to the crypto deposited into the accounts to the Debtors. In this regard, the Court was moved by the Debtors’ uncontroverted evidence showing that 99.86% of the Earn Account holders accepted Terms Version 6 or a later version of the Terms. The Terms starting with version 6, clearly state that the account holder is losing their title to the deposited assets. Additionally, the court found that in New York State, it is settled law that agreeing to a contact via “clickwrap” such that one needs to click on something to proceed to the next page creates a valid contact, disregarding another argument that the onscreen click agreement wasn’t valid.

Additionally, regarding the original question that led to this ruling,  the Court allowed the Debtor to sell $18 million worth of stable coins, notwithstanding the many objections to such a sale. In the Court’s view, even if this sale would be considered outside the ordinary course, thus requiring permission of the Court, the Debtors’ reasons for wanting the sale are reasonable and thus should be given deference. In general, United States Bankruptcy Courts give Debtors a wide amount of deference to run their businesses, even under Chapter 11 protection.

Status of Creditors After these Rulings

While many of the creditors were disappointed by this ruling, it does not mean that creditors need to give up on obtaining a meaningful recovery. As the Court points out, this ruling is not the end of the case, and as unsecured creditors, the Earn Account holders are likely to receive at least a portion of their claim back as part of a plan of reorganization.   

It should be noted that, had the Debtors been forced to return the crypto tokens held by Earn Account holders, Celsius would not have had the chance to reorganize and remain in business, which is not off the table. Additionally, a return of crypto would have likely impeded the recovery of deposited collateral for the loans Celsius took out. Further, the current process ensures that all crypto holders will likely be treated equally under the reorganization.

This ruling states that there is a presumption of a valid contract. The ruling does not state that each party has a valid contract but rather that there is a presumption that there is a valid contract. This ruling does not prevent a creditor from claiming damages based on fraud or other problems in their contract. For example, if an Earn Account creditor did not believe that they were giving up title to their crypto assets, this ruling does not prevent them from arguing such to the Court. However, such claims must be filed or rights for such claims reserved prior to the claims bar date (which was just extended to February 7, 2023). This is one of the reasons why it is recommended that creditors file a proof of claim even if they are not mandated to do so.

Conclusion and Relevance to Other Cases:

While this ruling may not create a legal precedent, it is likely to be relevant in looking at other bankruptcies of entities holding crypto assets. Other Debtors with similar terms of service to the Celsius Terms are likely to find comfort here that title to the assets was effectively transferred to the Debtors’ bankruptcy estate.  In locations where “clickwrap contracts” are not accepted as a binding contract, there may be more reasons to differentiate from this ruling.

On the other hand, the fact that this ruling was so closely based on the wording of the Terms should hopefully provide some protection to holders of digital assets in other cases where similar terms do not exist.