Customers of bankrupt crypto platforms who have been locked out of withdrawing from their accounts for months, are learning the hard way that U.S. bankruptcy court judges in New York and Delaware have little sympathy for their plight. Instead, there has been an uncanny propensity to side with big corporate law firms like Kirkland & Ellis and Sullivan & Cromwell.
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December 11, 2019 report from the Congressional Research Service cited a study that found that “60% of large business debtors filed for bankruptcy” in just two venues – the U.S. Bankruptcy Court for the District of Delaware and the Southern District of New York – despite the fact that the businesses did not maintain their principal place of business there. The report further notes that “when debtors have substantial flexibility to choose the jurisdiction in which they file for bankruptcy, self-interest encourages those debtors to file in courts that favor debtors and their attorneys to the detriment of creditors and other stakeholders.”
This month we’ve witnessed two shocking examples of what appears to be judge bias favoring the debtors and their Big Law attorneys. Last Friday, despite a
mountain of conflicts of interest involving pre-bankruptcy-petition work performed by law firm Sullivan & Cromwell for collapsed crypto firm, FTX, the Delaware Bankruptcy Court Judge, John Dorsey, signed a ruling granting Sullivan & Cromwell’s aggressive desire to be named lead counsel in the matter. The more than two dozen conflicts belatedly admitted to by the law firm – only after prodding by the U.S. Trustee — included having previously provided personal legal representation to the company’s now indicted CEO, Sam Bankman-Fried. The personal legal representation involved Bankman-Fried’s purchase of half a billion dollars in stock in the discount brokerage firm, Robinhood. The Department of Justice seized those shares this month. According to Congressional testimony by the newly appointed CEO of FTX, more than $8
billion of customer funds are missing.
Equally stunning, Chief Judge of the Bankruptcy Court for the Southern District of New York, Martin Glenn,
issued an opinion on January 4 in the bankruptcy proceedings of another crypto company, Celsius, that found that customers did not own their
own deposits that had been made into an interest-earning program called “Earn.” The Judge wrote:
“…the Court concludes, based on Celsius’s unambiguous Terms of Use, and subject to any reserved defenses, that when the cryptocurrency assets (including stablecoins, discussed in detail below) were deposited in Earn Accounts, the cryptocurrency assets became Celsius’s property; and the cryptocurrency assets remaining in the Earn Accounts on the Petition Date became property of the Debtors’ bankruptcy estates (the ‘Estates’).”
Glenn’s opinion sided with Big Law firm, Kirkland & Ellis, which is representing the debtors estate, and is a devastating development to the approximate 600,000 account holders in the Earn program. The combined value of those accounts was roughly $4.2 billion shortly before the Celsius bankruptcy filing in July. Instead of getting the contents of their accounts returned, the opinion means that these customers become unsecured creditors along with a multitude of others.
Judge Glenn pointed to the Terms of Use that customers click on when they open an “Earn” account with an app. The most recent version 8 of the Celsius Terms reads as follows, according to the Judge:
“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:
- You will not be able to exercise rights of ownership;
- 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
- 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.”
State securities regulators in numerous states filed objections in advance of the opinion being handed down. The State of New Jersey argued that Celsius was operating in violation of New Jersey’s securities laws by selling unregulated securities. It noted that an investigation by the official Examiner had yet to be concluded, thus any such ruling by the court was premature. The State takes the position that the assets in the Earn accounts are the property of the customers.
Other objectors noted that the Celsius Terms of Use had also used the term “loan” to describe what would be happening with customer deposits. The Judge dismissed that premise.
