The concept of “property of the estate” is important in bankruptcy because it determines what property can be used or distributed for the benefit of the debtor’s creditors. Defined by section 541 of the Bankruptcy Code, “property of the estate” broadly encompasses the debtor’s interests in property, with certain additions and exceptions provided for in the Code. See 11 U.S.C. § 541. Difficult questions can arise in a contractual relationship between a debtor and a counterparty about whether an entity actually owns a particular asset or merely has some contractual right.
In a provocative demonstration that it scrutinizes all types of transactions, no matter their origin, the Committee on Foreign Investment in the United States (“CFIUS”) has reportedly been vetting the proposed $1 billion sale of bankrupt crypto lender Voyager Digital’s assets to Binance.US. Voyager Digital filed for Chapter 11 bankruptcy in July 2022, and, after an initial agreement to sell its assets to FTX crumbled, Binance.US provided Voyager Digital with the winning offer for its assets in December 2022. But, after the sale’s announcement on December 30, 2022, the U.S.
In 2022, there were several high-profile crypto bankruptcy filings. A big question in these cases is whether there will be any money to satisfy unsecured creditor claims. If there are funds to distribute, then the creditors’ claims will become more valuable, and the cases will become even more interesting.
Earlier this month, the SDNY Bankruptcy Court answered one of the gating questions at the center of Celsius Network’s Chapter 11 bankruptcy regarding the ownership of the approximately $4.2 billion in crypto assets.
When a company files for bankruptcy protection, Section 541 of the Bankruptcy Code creates an estate comprised of "all legal and equitable interest of the debtor in property." On July 15, 2022, Celsius Network LLC filed for relief under Chapter 11 of the United States Bankruptcy Code. At the time, it had approximately 600,000 accounts in its "Earn Program" which allowed account holders to earn interest on certain cryptocurrency deposits. These "Earn Accounts" held over $4 billion in cryptocurrency assets.
When a company files for bankruptcy protection, Section 541 of the Bankruptcy Code creates an estate comprised of "all legal and equitable interest of the debtor in property." On July 15, 2022, Celsius Network LLC filed for relief under Chapter 11 of the United States Bankruptcy Code. At the time, it had approximately 600,000 accounts in its "Earn Program" which allowed account holders to earn interest on certain cryptocurrency deposits. These "Earn Accounts" held over $4 billion in cryptocurrency assets.
When a court-appointed trustee or liquidator is tasked with liquidating an entity, they need to gain possession of all of the entity’s assets. In crypto cases, this task can prove difficult when trying to identify and control all of the entity’s different digital assets and obtain cooperation from the entity’s former operators. Unfortunately, in the case of Three Arrows Capital (“3AC”), the two founders have refused to cooperate with recovery efforts and have absconded to unknown foreign countries.
Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York issued a ruling last week in the Celsius Network bankruptcy case addressing whether customer deposits on a cryptocurrency exchange or platform are property of the debtor or property of the customer. The answer, not surprisingly, depends on the Terms of Use governing the account in question. In this case, the Court found that the terms clearly and unambiguously provided that ownership of cryptocurrency assets deposited into “Earn Accounts” resides with Celsius.
We are again reminded that the clear terms of a written contract—even if they might yield a surprising result—will govern. For those who don’t bother to read the “clickwrap” terms and conditions when, for example, signing up for the new online game or entrusting millions in crypto currency, those controlling terms may surprise. Parties in any transaction cannot just assume that the “boilerplate”—whether a make-whole in a note, a subordination provision in a credit agreement, or terms and conditions in a customer agreement—will be acceptable.
Cryptocurrency in Celsius’ Earn Accounts belongs to the bankruptcy estate, and not to the depositors who placed it there, according to a January 4 memorandum opinion from Judge Martin Glenn of the U.S. Bankruptcy Court in the Southern District of New York.