In the past six months, four major players in the crypto space have filed for chapter 11 bankruptcy protection: Celsius Network, Voyager Digital, FTX, and BlockFi, and more may be forthcoming.ย Together, the debtors in these four bankruptcy cases are beholden to hundreds of thousands of creditors.ย The bulk of the claims in these cases are customer claims related to cryptocurrency held on the debtorsโ respective platforms.ย These customer claimants deposited or โstoredโ fiat currency and cryptocurrencies on the debtorsโ platforms.ย Some of these funds allegedly were commingled or rehypothecated, leaving customer accounts severely underfunded when liquidity crunches arose at the various entities.ย The total amount of such claims is estimated to be in the billions โ that is, if these claims ultimately are measured in United States Dollars (โUSDโ).
Crypto-watchers and bankruptcy lawyers alike have speculated how customer claims based on digital assets such as cryptocurrencies should be valued and measured under bankruptcy law.ย Given the volatility of cryptocurrency prices, this determination may have a significant effect on recoveries, as well as the viability of the โpayment-in-kindโ distribution mechanics proposed in Voyager, Celsius, and BlockFi.ย A number of creditors appearingย pro seย in these proceedings have expressed a desire to keep their mix of cryptocurrencies through these proposed โin-kindโ distributions.
However, a crypto-centric approach to valuing claims and making distributions raises a number of issues for consideration.ย For example, measuring customer claims in cryptocurrency and making โin-kindโ distributions of these assets could lead to creditors within the same class receiving recoveries of disparate USD value as the result of the fluctuation in cryptocurrency prices. Moreover, as has been discussed in the Celsius proceedings, the administrative burden associated with maintaining, accounting for, and distributing a wide variety of cryptocurrencies as part of a recovery scheme would likely prove complex.ย Equity holders also might challenge the confirmability of a plan where valuations and recoveries are based on cryptocurrency rather than USD, as a dramatic rise in cryptocurrency values could return some value to equity.
Like most issues at the intersection of insolvency and cryptocurrency, there is little precedent to guide creditors through the uncertainties, but a recent dispute in the Celsius bankruptcy proceedings as to whether a debtor is required to schedule claims in USD, or whether cryptocurrency claims can be scheduled โin-kind,โ may serve as a preview of things to come.
I.ย ย ย ย ย ย ย ย ย General Background
Celsius Network (โCelsiusโ and, together with its affiliated debtors and debtors in possession, the โDebtorsโ), self-described as one of the โlargest and most sophisticatedโ cryptocurrency-based finance platforms and lenders that claimed over 1.7 million users worldwide,1ย filed petitions under Chapter 11 of the Bankruptcy Code on July 13, 2022.2ย On October 5, 2022, the Debtors filed their schedules of assets and liabilities (โSchedulesโ).ย Each Debtorโs schedule of unsecured creditorsโ claims (Schedule E/F) lists the claims of the Debtorsโ customers by the number of various forms of cryptocurrency coins and account types, rather than in USD.3
On October 25, 2022, a group of beneficial holders, investment advisors, and managers of beneficial holders (collectively, the โSeries B Preferred Holdersโ) of the Series B Preferred Shares issued by debtor Celsius Network Limited filed a motion seeking entry of an order directing the Debtors to amend their Schedules to reflect customer claims valued in USD, in addition to cryptocurrency coin counts.4
II.ย ย ย ย ย ย ย ย Arguments
a.ย ย ย ย ย ย ย ย Series B Preferred Holders
Broadly, pursuant to Bankruptcy Rule 1009(a),5ย the Series B Preferred Holders sought to have the Debtors amend their Schedule E/F to โdollarizeโ creditorsโ claims,ย i.e., value customer claims in their dollar value as of the petition date.ย As filed, the Series B Preferred Holders asserted that the Debtorsโ schedules were โimproper, misleading, and fail[ed] to complyโ with the Bankruptcy Rules โbecause they schedule[d] customer claims in cryptocurrency coin counts, rather than in lawful currency of the United States as of the Petition Date.โ6ย The Series B Preferred Holders asserted that such amended schedules are essential to the Debtorsโ ability to structure, solicit, and confirm a plan of reorganization under the requirements of Section 1129, including whether โ(i) claims are impaired or unimpaired, (ii) holders of similarly situated claims are receiving the same treatment, and (iii) the plan meets the requirements of the โabsolute priority rule.โโ7ย In support of their arguments that USD valuation of a customerโs claim should be required, the Series B Preferred Holders relied on provisions of the Bankruptcy Rules, Bankruptcy Code, and Official Forms.ย The Series B Preferred Holders stressed that the motion โtakes no position regarding the form of distribution customersโ should receive under the Debtorsโ plan, but rather that the Debtors must โadd the [USD] amount of each customer claim in Schedules E/F to the cryptocurrency coin counts.โ8
The Series B Preferred Holders also asserted that the requirement to denominate claims in USD is consistent with Section 502(b) of the Bankruptcy Code, which provides that when a debtor or party-in-interest objects to a claim, the court determines the amount of the claim in USD as of the debtorโs petition date.
b.ย ย ย ย ย ย ย ย Debtorsโ Response
The Debtors had previously indicated that they were not seeking to dollarize its customersโ claims; rather, the Debtors represented that they intend to return cryptocurrency assets to its customers โin kind.โ9ย The Debtors stated that they interpreted Bankruptcy Rule 9009(a)(1)-(2) and General Order M-386, dated November 24, 2009 (the โGeneral Order M-386โ) to allow the Debtors to remove the dollar symbol when scheduling claims regarding cryptocurrency coin counts.10ย This approach, the Debtors argue, lessens confusion for its customer case and decreases administrative expense for the estate.11
Further, the Debtors argued that the Series B Preferred Holdersโ reliance on Section 502(b) was misplaced because the application of such section is inapplicable at this stage of the proceedings where no claims objection has taken place.12
The Committee of Unsecured Creditors (โUCCโ) agreed with the Debtorsโ approach, stating that it โmakes senseโ for account holders to validate their scheduled claims by cryptocurrency type and that it wished to be consulted on the petition date prices used by the Debtors if they filed an amendment to the schedules.13
III.ย ย ย ย ย ย ย Analysis
a.ย ย ย ย ย ย ย ย Bankruptcy Code & Rules & Forms
Bankruptcy Rule 1007(b)(1) requires that a debtorโs schedules of assets and liabilities must be โprepared as prescribed by the appropriate Official Forms.โ14ย The relevant official form that a debtor must use to prepare its schedule of assets and liabilities is Official Form 206, which contains a USD symbol to denote the amount of liabilities that a debtor must list.15ย Specifically, Official Form 206 provides:
As seen above, Official Form 206 does โhardwireโ a dollar sign (โ$โ) into the boxes provided for claim amounts.ย Bankruptcy Rule 9009 states that the official forms are to โbe used without alteration, except as otherwise provided in the rules, [or] in a particular Official Form.โ16ย Bankruptcy Rule 9009 permits โcertain minor changes not affecting wording or the order of presenting information,โ including โexpand[ing] the prescribed areas for responses in order to permit complete responsesโ and โdelet[ing] space not needed for responses.โ17ย Lastly, General Order M-386 permits โsuch revisions as are necessary under the circumstances of the individual case or cases.โ18ย The introduction to General Order M-386 states that standard forms were adopted to โexpedite court review and entry of such ordersโ and that courts will expect use of the standard forms โwith only such revisions as are necessary under the circumstances of the individual case or cases.โ19
b.ย ย ย ย ย ย ย ย Section 502(b)
Bankruptcy Code Section 502(b) provides that if there is an objection to a claim, the court โshall determine the amount of such claim in lawful currency of the United States as of the [petition] date .ย .ย .ย .โ20ย This โprevents the value of a claim from fluctuating by setting the claim as of the petition date and converting it to the United States dollars.โ21ย Acknowledging the โnovel phenomenonโ of dollarizing claims in cryptocurrency, the Series B Preferred Holders analogize this to cases where courts have required claims asserted in or based on in foreign currency or amounts of gold should be valued in USD.ย However, these cases were decided in the context of a claims objection. The Celsius Debtors argued that these cases have limited utility in the context of a motion for an order directing the Debtors to amend their schedules pursuant to Bankruptcy Rule 1009(a).22
IV.ย ย ย ย ย ย ย The Courtโs Order
Ahead of the hearing regarding the motion for an order directing the Debtors to amend their schedules, the Debtors and the Series B Preferred Holders were able to consensually resolve the motion and filed a revised proposed order prior to the hearing on the motions on November 15.23ย The Debtors agreed to amend their schedules by filing a conversion table within three days of the entry of the order, in consultation with the UCC and Series B Preferred Holders, that reflects the Debtorsโ view of the rate of conversion of all cryptocurrencies listed in the Debtorsโ schedules to USD as of the petition date.ย The idea is that the conversion table could be used by customers as a reference for calculating the USD value of their claim, to the extent needed for filing a proof of claim.ย The conversion table is not binding โ the order preserves the rights of all parties to contest the conversion rates and does not require a party-in-interest to file an objection that is not stated in USD โsolely on the basis that such claims should be reflected in [USD].โ24ย The order also requires the Debtors to file updated schedules โdollarizingโ its account holdersโ cryptocurrency holdings to the extent required by any future court order or judicial determination.
On November 17, 2022, the court entered the revised proposed order.25
V.ย ย ย ย ย ย ย ย Cash Is Still King?
Other bankruptcy courts have taken similar approaches as theย Celsiusย court in this issue.ย An earlier cryptocurrency case,ย Inย re Cred Inc., the debtors did not schedule cryptocurrency claims in USD, but included a conversion table in their filed schedules, which set forth a conversion rate to USD as of the petition date.26ย Debtors in other cases, such asย Voyager Digital, scheduled the amounts of their customer claims as โundeterminedโ and listed them in Schedule F in cryptocurrency.27ย BlockFi, which filed for bankruptcy on November 28, 2022, already has filed a proposed plan that would distribute its cryptocurrencies to its customers in-kind in exchange for their claims against the BlockFi debtors.28ย To date, neither BlockFi nor FTX have filed their schedules, and it remains to be seen whether they will follow the pattern established inย Celsiusย andย Voyager.
For creditors and equity holders, whether claims are measured in USD or the applicable cryptocurrency is only the beginning of what will likely be a long and contentious road to recovery.ย It remains to be seen whether any of these debtors will be able to confirm a viable restructuring plan that relies on any sort of โin-kindโ distribution of cryptocurrencies.ย Further issues are likely to arise in the claims resolution process even further down the road as claimants and liquidation trustees (or plan administrators) wrestle with how to value claims based on such a volatile asset, subject to ever-increasing regulatory scrutiny.ย However, for the time being, the bankruptcy process continues to run on USD.
FOOTNOTES
1ย Declaration of Alex Mashinsky, CEO of the Debtors ยถยถ 1, 9, 20,ย In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 23].
2ย Id.ย at ยถ 131.
3ย Debtorsโ Schedules of Assets and Liabilities and Statements of Financial Affairs,ย In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 974]; see also Schedule E/F, Case No. 22-10967 [Docket No. 5]; Case No. 22-10970 [Docket No. 5]; Case No. 22-10968 [Docket No. 5]; Case No. 22-10965 [Docket No. 6]; Case No. 22-10966 [Docket No. 7]; Case No. 22-10964 [Docket No. 974]; Case No. 22-10969 [Docket No. 5]; Case No. 22- 10971 [Docket No. 5].
4ย Series B Preferred Holders Motion to Direct Debtors to Amend Schedules,ย In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1183].
5ย โOn motion of a party in interest, after notice and a hearing, the court may order any . . . schedule . . . to be amended and the clerk shall give notice of the amendment to entities designated by the court.โ Fed. R. Bankr. P. 1009(a).
6ย Series B Preferred Holders Motion to Direct Debtors to Amend Schedules ยถ 1.
7ย Id.ย ยถ 3 (citing 11 U.S.C. ยงยง 1123(a)(2)-(4), 1129(a)(1), 1129(b)).
8ย Series B Preferred Holdersโ Reply ยถ 10,ย In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1334].
9ย Seeย 8/16/22 Hrโg Tr. at 35:5-7 (โThe company is not seeking to dollarize claims on the petition date and give people back a recovery in fiat.โ); id. at 42:11-16 (โ[The UCC is] pleased that the company is not focused on dollarization of claims . . . an in-kind recovery is absolutely critical.โ).
10ย General Order M-386 is a resolution of the Board of Judges for the Southern District of New York, which provides for โa standard form for orders to establish deadlines for the filing of proofs of claim . . . in chapter 11 casesโ to โthereby expedite court review and entry of such orders.โ
11ย Debtorsโ Objection to Series B Preferred Holdersโ Motion ยถ 9,ย In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1304].
12ย Id.ย ยถ 12 (citingย In re Mohr, 425 B.R. 457, 464 (Bankr. S.D. Ohio)).
13ย Id.ย at 42:12-16 (โWe are pleased to hear that the company is not focused on dollarization of claims . . . receiving an in-kind recover is 16 absolutely critical.โ); UCC Statement and Reservation of Rights ยถ 6,ย In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1303].
14ย Fed. R. Bankr. P. 1007(b)(1).
15ย Seeย Official Form 206, Part 2, Line 4 (using the USD sign into Form 206 for scheduling the debtorโs liabilities).
16ย Fed. R. Bankr. P. 9009(a).
17ย Id.
18ย General Order M-386 ยถ 9.ย
19ย General Order M-386 ยถ 2 (unnumbered, preliminary statement).
20ย 11 U.S.C. ยง 502(b).
21ย In re Aaura, Inc., No. 06 B 01853, 2006 WL 2568048, at *4, n.5 (Bankr. N.D. Ill. Sept. 1, 2006).
22ย In re USGen New Eng., Inc., 429 B.R. 437, 492 (Bankr. D. Md. 2010) (using the exchange rate in effect on the petition date, in the context of a claims objection, to convert the claim to USD),ย aff'd sub nom.ย TransCanada Pipelines Ltd. v. USGen New Eng., Inc., 458 B.R. 195 (D. Md. 2011);ย Aaura, 2006 WL 2568048, at *5 (โSection 502(b) converts Aaura's obligation to repay the obligation in gold into a claim against the estate in dollars, but it makes this transformation only as of the petition date, not retroactive to the date on which Aaura first became liable.โ);ย Matter of Axona Intern. Credit & Com. Ltd., 88 B.R. 597, 608 n.19 (Bankr. S.D.N.Y. 1988) (noting Section 502(b) refers to the petition date as โthe appropriate date for conversion of foreign currency claimsโ),ย aff'd sub nom. In re Axona Intern. Credit & Com. Ltd., 115 B.R. 442 (S.D.N.Y. 1990);ย ABC Dev. Learning Ctrs. (USA), Inc. v. RCS Capital Dev., LLC (In re RCS Capital Dev., LLC), No. AZ-12-1381-JuTaAh, 2013 Bankr. LEXIS 4666, at *38-39 (B.A.P. 9th Cir. July 16, 2013) (same).
23ย Notice of Proposed Order,ย In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1342].
24ย Id.ย at ยถยถย 7, 8.
25ย Order Pursuant to Bankruptcy Rule 1099 Directing the Debtors to Amend Their Schedules in Certain Circumstances,ย In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1387].
26ย Schedules at 12,ย In re Cred Inc., Case No. 20-128336 (JTD) (Bankr. D. Del. 2021) [ECF No. 443].
27ย Schedules,ย In re Voyager Digital Holdings, Inc., Case No. 22-10943 (MEW) (Bankr. S.D.N.Y. Aug. 18, 2022) [ECF No. 311].
28ย Joint Plan of Reorganization ยง IV.B.1.a,ย In re BlockFi Inc., Case No. 19361 (MBK) (Bankr. D.N.J. 2022) [ECF No. 22].
ยฉ Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XII, Number 341