...it often makes the most sense in a case such as the Celsius bankruptcy ... to, at least at the start, pursue a strategy built upon a collaborative approach to securing value...
On July 13, 2022, Celsius Network LLC and affiliated debtors filed voluntary petitions for Chapter 11 bankruptcy protection 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 matter proceeds with novel crypto business and currency related issues before the Bankruptcy Court. Crypto business and cryptocurrency market participants – even without a stake in this case – will also be well served paying close attention to the Celsius bankruptcy to witness the crypto legal and regulatory framework continue taking shape in real time.
The Celsius bankruptcy filing came less than one week after KeyFi, Inc. commenced an action against Celsius Network Limited and Celsius KeyFi LLC alleging that the defendants “were, in fact, operating a Ponzi-scheme[,]” and approximately one month after Celsius paused account holder withdrawals. The KeyFi, Inc. complaint further asserts that the defendants "grossly mismanaged … customer funds, failed to perform basic internal auditing to account for its obligations, and manipulated crypto-assets to the benefit of itself and its principals.”
A creditors' committee will ensure that a soup to nuts investigation and exploration of all avenues of value recovery are identified and pursued...
With such serious allegations having been launched – and counsel to the United States Trustee requesting further disclosure by Celsius on the regulatory actions it is currently facing during the July 18, 2022 First Day Hearing in the bankruptcy case – Celsius creditors and account holders will want to participate in and monitor 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 nuts investigation and exploration of all avenues of value recovery are identified and pursued. Often, it is a creditors' committee that is well positioned to identify and add value as a check and balance to a debtors' existing management.
For those who do not themselves serve on the Celsius Creditors' Committee, the Bankruptcy Code requires that such Committee "provide access to information for creditors who (i) hold claims of the kind represented by that committee; and (ii) are not appointed to the committee" and "solicit and receive comments from … creditors[.]" 11 U.S.C. § 1102(b)(3)(A)&(B). Creditors and account holders should utilize this right.
Collaboration on asset sales or other business strategies often yields better returns for all stakeholders than litigation early in a Chapter 11 case...
While the KeyFi, Inc. allegations warrant a full vetting, careful strategy at the outset of a Chapter 11 case is key to maximizing returns. It often makes the most sense in a case such as the Celsius bankruptcy for the debtors, their creditors, and account holders to, at least at the start, pursue a strategy built upon a collaborative approach to securing value to the fullest extent possible.
For example, here, there may be significant avenues of recovery that the debtors and other stakeholders agree upon, such as determining whether to sell or integrate Celsius' GK8 business, a secure institutional digital assets self-custody technology platform acquired by Celsius in 2021. Collaboration on asset sales or other business strategies often yields better returns for all stakeholders than litigation early in a Chapter 11 case.
Furthermore, the debtors, their creditors and account holders, and indeed other crypto market participants, may find themselves aligned, or at least collectively looking for clarity, on still developing legal and regulatory issues wherein a cooperative approach to the extent possible yields value for all in the face of unsettled authority from lawmakers, regulators and the courts.
...litigation and the answers that come from it will also ultimately add clarity that many industry participants welcome.
For example, would the crypto marketplace and most of its participants benefit from guidance coming out of 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 commingled accounts with account holders left with nothing more than an I.O.U.? What rights do account holders have when there is a lack of clarity in disclosures or advertising by a crypto business? Are withdrawals from Celsius accounts within the 90 days before Celsius' bankruptcy was filed recoverable by the Celsius bankruptcy 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 businesses when investing or lending pooled digital assets? What constitutes impairment of digital assets under Section 1124 of the Bankruptcy Code? What is the date upon which crypto claims are valued in a bankruptcy case? When does a crypto holding become a security?
As these and other questions arise and advance in the Celsius bankruptcy case, there will be forks in the road where parties-in-interest will wrestle – and litigate – over the appropriate answers, but that wrestling or litigation and the answers that come from it will also ultimately add clarity that many industry participants welcome.
An example of an issue that is often contentious in cases such as this one, and sometimes early in the case, is whether there are viable causes of action belonging to the bankruptcy estate stemming from certain historical business activities, transactions, and insider conduct, including internal controls or lack thereof.
...crypto market participants that actively participate in the Celsius bankruptcy case are likely to impact the nascent crypto industry legal and regulatory landscape.
With the Celsius bankruptcy filing coming during the dynamic "crypto winter" and on the heels of the earlier July filings by Voyager Digital Holdings, Inc. and its debtor affiliates for relief under Chapter 11 of the Bankruptcy Code and by Three Arrows Capital, Ltd. to recognize a foreign proceeding under Chapter 15 of the Bankruptcy Code, crypto market participants that actively participate in the Celsius bankruptcy case are likely to impact the nascent crypto industry legal and regulatory landscape. With respect to individual account holders of Celsius specifically, serving on the Celsius Creditors' Committee (if selected by the United States Trustee) provides a great opportunity for that participation.
At a minimum, Celsius account holders and creditors, and digital asset industry players generally, will want to take advantage of the benefits that monitoring the Celsius bankruptcy case offers with respect to advancing novel crypto business issues as they are raised and vetted, and move toward resolution.
Robert Schechter is a principal of Porzio, Bromberg & Newman and a member of the firm’s Corporate, Commercial, and Business Law Department. Connect with him on LinkedIn.