Celsius Bankruptcy Case Update: September 7, 2022

Tanya Behnam

September 07, 2022

As Celsius Network LLC, et al. Case Number: 22-10964 (MG) proceeds in the bankruptcy court for the Southern District of New York (the “Court”) here are some highlights as of September 7:

  • The Court has approved procedures proposed by the Debtor to govern the sale of “de minimis” assets, which are defined as assets with a fair market value of less than $4,000,000. This approval will not allow the company to sell any cryptocurrency, cryptocurrency tokens, or other digital assets. The Debtors would not need further permission from the bankruptcy court to sell these “de minimis” assets. Allowing the Debtor to run its business and sell “de minimis” assets is standard practice in a Chapter 11 bankruptcy.

  • The Court has approved bidding procedures for the potential sale of certain of Debtors’ assets, including the Debtors’ GK8 Ltd. assets. The final bid deadline is September 21, 2022, an auction (if necessary) will be held on September 23, 2022 (remotely, at 10:00 a.m.), and a sale hearing is scheduled for October 6, 2022.

  • The Court has appointed an Official Committee of Unsecured Creditors, represented by the law firm of White and Case LLP. This UCC is the official representative of the interests of the unsecured creditors with the fees and expenses of the UCC paid for by the Debtor. The UCC  pledged to be active in the Chapter 11 cases, including:

    • ensuring the Debtors are effectively safeguarding their account holders’ assets;

    • overseeing the Debtors’ efforts to develop a viable business plan that reduces overhead and preserves the Debtors’ limited cash reserves;

    • investigating the prepetition conduct of Alex Mashinsky and other Celsius insiders, including the problematic asset deployment decisions, prepetition transfers, and other issues;

    • exploring strategic options to reorganize or sell the business (or portions thereof) to maximize value for account holders and unsecured creditors;

    • balancing the need of transparency with protecting the confidentiality of information received from the Debtors and non-Debtor parties so that it has the information to efficiently protect its constituents’ rights.

  • The Court has approved Debtors’ request to continue mining cryptocurrency during the pendency of the Chapter 11 Case. The Debtors have stated that they will use any profits made via mining to support its restructuring efforts.  It appears that the Debtor has spent hundreds of millions on its mining operations which with energy prices is likely not consistently profitable. However, shutting down the mining business would preclude any ability to recoup this investment for the benefit of the creditors.

  • Debtors have received an extension of time to file their schedules and statement of financial affairs. Multiple extensions have been granted to-date and such is common practice in Chapter 11 Cases.

  • Debtors have requested permission to release nearly $56 million in cryptocurrency to its customers. This requested the release of cryptocurrency which are held in “Custody” and “Withhold” accounts. The Debtors state that it has determined these specific assets are free and clear of any claims by Celsius in its Chapter 11 case and do not constitute property of the bankruptcy estate. The Debtors contend that assets in the Earn Program and the Borrow Program are likely property of their estates, and that customers that transferred those assets to Custody or Withhold within a certain time period may be subject to preference claims.

  • Debtors have filed a motion for authorization to redact individual names from any documents filed publicly on the docket and implement an anonymized process by which to identify individuals in connection with account balances on any documents filed publicly on the docket. The Motion is still pending, and the Ad Hoc Group of Withhold Account Holders have filed a statement in support of the Debtors’ motion. Relatedly, in a recent hearing, Judge Glenn stated that he is not going to allow anonymous proofs of claim to be filed in the Case.

  • Under the Chapter 11 process the Court is given the power to adjudicate any litigation that relates to the Debtor this  includes  the following three cases filed to-date:

    • Ad Hoc Group of Custodial Account Holders v. Celsius Network LLC et al: Ad hoc group is seeking a declaratory judgment that the Custody Assets (cryptocurrency transferred into the Celsius Custody Service) are not property of the estate under section 541 of the Bankruptcy Code.

    • Celsius Network Limited et al v. Prime Trust, LLC: Celsius is seeking the turnover and transfer of crypto assets that are in the possession of Prime Trust worth approximately $17 million.

    • Celsius Network Limited et al v. Stone et al: Celsius seeks to require defendants Jason Stone and KeyFi, Inc. to turn over certain assets and coins to the Debtors, among other causes of action.

  • Next omnibus hearing is set for October 6 at 10:00 a.m. where many of these issues will be further discussed.