Celsius Network
Judge Glenn Questions Clarity of Early Celsius Terms of Use on Earn Asset Ownership, Likely to Approve Stablecoin Sales If Determined to Be Estate Property
Mon 12/05/2022 16:37 PM
Relevant Documents:
Hearing Agenda
Debtors Reply
Hearing Presentation
The Celsius Network debtors kicked off a week of critical hearings in their chapter 11 cases today with a hearing on the debtors’ motion to establish estate ownership of cryptocurrency assets in the company’s Earn rewards program. Through the same motion, the debtors also seek authority to sell approximately $18 million worth of stablecoins on the debtors’ platform that are held in Earn accounts. Judge Martin Glenn took the matter under advisement, saying he is unlikely to render a decision this week but repeatedly acknowledged the debtors’ need for a quick decision on Earn asset ownership.
The hearing on the Earn/stablecoin motion was originally scheduled to continue tomorrow, Tuesday, Dec. 6. However, the parties concluded evidentiary submissions and arguments today.
Judge Glenn expressed some doubts regarding the position of the debtors and official committee of unsecured creditors that each version of the Celsius terms of use clearly establish the debtors’ ownership of Earn assets. The judge focused today on changes to the terms of use as they relate to the ownership question. The terms of use have evolved over eight separate versions between 2018 and 2022 as summarized in the debtors’ hearing presentation. Although the judge appeared comfortable that more recent versions establish debtor ownership, he stated that earlier versions were “less clear” to him, though he has not “made up [his] mind” on that point.
Regarding the debtors’ request to sell stablecoins, Judge Glenn strongly suggested he is likely to grant the motion to the extent he decides in favor of the debtors on the ownership question. In addition, the court was unsympathetic to calls from certain objectors to delay consideration of the Earn ownership question pending further developments in the case, saying that “there’ll be a corpse left” if this key gating question in the case is put off.
Another two-day hearing in “Phase 1” of the litigation over ownership of digital assets in the company’s custody and withhold accounts is scheduled for Wednesday, Dec 7, and Thursday, Dec. 8.
Debtors’ counsel Pat Nash of Kirkland & Ellis framed the Earn ownership questions that were up for hearing today as whether the Celsius terms of use are an enforceable contract between the company and Earn depositors and, if so, whether they unambiguously provide that upon depositing crypto assets in the Earn program, users transferred title to the debtors.
On the contract formation question, Nash argued that the debtors have established the three requirements: offer, acceptance and consideration. The terms of use were the offer, he said, pointing to evidence that versions six through eight of the terms of use were accepted by over 90% of account holders representing over 99% of Earn coin deposits. As consideration, depositors received the right to earn rewards on their deposited crypto, he added.
When Nash turned to the language of the terms of use, Judge Glenn interjected to remark that versions one through five were “less clear to me on the issue of ownership,” and that the language regarding transfer of title became “clearer” beginning in version six. This prompted Nash to point out that 45% of Earn holders signed up for the program under version six or later.
Judge Glenn also noted that “arguably” the most significant changes to the terms of use as they related to ownership occurred between versions four and five and that there is no evidence in the record that Celsius ever highlighted those changes for customers.
Nash responded that each version of the terms, beginning with the first, clearly stated that Celsius had the right to use or pledge digital assets transferred into the Earn program, which he called the “price of admission in order to earn rewards.” He continued that versions two and onward explicitly stated that Celsius’ rights to use or pledge Earn assets came with “all attendant rights of ownership,” which he argued establishes Celsius’ ownership even though it was not until later that the company “clearly spelled out” that placing coins on the Earn platform “expressly constituted a transfer of title.”
Nash also made equitable arguments, reiterating that the debtors do not hold enough coins to return to each of their 600,000 customers the same kinds of coins they deposited or in the same amounts and that the debtors are continuing to work with the UCC to establish a framework for equitably distributing the coins held by the debtors to customers. Nash observed, “I don’t know where we go” if the court does not decide Earn deposits belong to the estates.
Judge Glenn cut Nash short when he turned to the proposed stablecoin sales, stating his view that if the court decides that the debtors own Earn assets, selling stablecoins on the Earn platform to generate cash to fund the cases “seems” to be a reasonable exercise of the debtors’ business judgment.
Aaron Colodny of White & Case, counsel to the UCC, echoed Nash’s equitable concerns and reiterated the UCC’s position that a finding that Earn assets are estate property would facilitate fair distributions to creditors. The opposite conclusion, he argued, would lead to miniscule distributions for customers claiming ownership of coins that are held in short supply on the debtors’ platform, such as stablecoins, and larger recoveries for creditors claiming ownership of coins held in large quantities by Celsius.
Colodny emphasized that a determination that the debtors own Earn assets does not mean that such assets will not be redistributed to account holders or that the company can “do whatever it wants” with them. He stressed that customers will have an opportunity to weigh in on any plan proposing to distribute the coins or any sale, and reiterated the UCC’s position that the debtors need to move quickly to exit bankruptcy.
In response, Judge Glenn noted the importance of equality of distribution in bankruptcy cases but added that it does nothing to resolve ownership issues. Colodny agreed, turning back to the terms of use, which he argued clearly established Celsius’ ownership dating back to version one, although it “may have gotten clearer” in later versions.
Regarding the proposed stablecoin sales, which the UCC likewise supports, Colodny noted that the UCC negotiated modifications to the proposed order providing that the debtors would use proceeds only for ordinary-course business expenses and only when they reach an unspecified “minimum liquidity” threshold.
Judge Glenn asked for an explanation of the debtors’ and UCC’s agreement that today’s proceedings preserves individual contract defenses for a later time. Specifically, the judge asked how it could affect the ongoing marketing process, wondering “what is someone bidding on?” if those issues are left open.
“We can manage that,” answered Nash, stating that the company is working with potential bidders who are aware of the carve-out for contract defenses. Explaining the reason for the carve-out, Nash said that the debtors need an answer to the “general” question of Earn ownership in the near term in order to move forward with the cases” but that his side is comfortable leaving individualized circumstances for another day. Colodny added that the carve-out intended to allow the parties to move quickly on the Earn ownership question in general while preserving “an element of due process” for customers.
The court heard objections from the U.S. Trustee, certain state regulators and numerous customers. Judge Glenn was unsympathetic to the UST’s and regulators’ stablecoin sale objections, adding that he is “mystified” about the UST’s opposition to the sale when it is taking no position on Earn ownership.
The judge also took issue with the argument from several regulators that the court should delay consideration of the motion until examiner Shoba Pillay files her final report in January 2023. Judge Glenn repeatedly highlighted that the debtors previewed the need to decide Earn ownership at the first day hearing, saying they did not “just spring this on anybody.” He further observed that whether or not the debtors own Earn assets will be critical to the ongoing sale process.
As to the regulators’ repeated allegations that Celsius violated state and federal securities laws, the judge noted that any buyer would have to comply with all applicable regulations. Judge Glenn added that whether Celsius previously failed to comply is “for another day and maybe for another court.”
About a dozen individual customers also appeared to voice objections. The customers generally argued that the terms of use are ambiguous, claiming to have been misled by statements from former CEO Alex Mashinsky, who they allege stated on multiple occasions that customers retain ownership of their coin deposits. Judge Glenn repeatedly reminded customers that Mashinsky’s statements are not in the evidentiary record and would not be considered.
The court heard testimony from Celsius’ three declarants in support of the motion: CRO and interim CEO Chris Ferraro, Robert Campagna of Alvarez & Marsal, the debtors’ financial advisor, and Chief Compliance Officer Oren Blonstein, who submitted two declarations focused on the Celsius terms of use.
Ferraro and Campagna testified that the debtors expect to run out of liquidity on a consolidated basis in late February or early March 2023. Ferraro explained that recent statements about a shortfall as early as January related to anticipated funding needs for the bitcoin mining business but that recently updated forecasts show that the mining business should not need additional funding until late February or early March. Ferraro noted that with a professional fee burn rate in the range of $15 million to $20 million per month, the sale of $18 million worth of stablecoin would give the debtors about one more month of liquidity.
Ferraro also testified that the debtors’ current liquidity forecast does not account for the pending sale of the GK8 cold storage business to winning bidder Galaxy Digital Trading, which bid $44 million in cash less certain trade payables and cure payments in unspecified amounts. The hearing on the proposed GK8 sale is scheduled for Thursday. Ferraro said if the GK8 sale closes, the debtors expect the proceeds would extend the debtors’ liquidity runway by an additional one and a half to two months.
Blonstein’s testimony focused on the terms of use, testifying that 90.06% of Celsius account holders accepted the terms of use “version 6 or later” by clicking “accept” on the Celsius platform. The accepting customers account for 99.86% of all Earn program liabilities, he added. The debtors summarized the timeline of the eight versions of the terms and total customer acceptance in their hearing presentation:
Hearing Agenda
Debtors Reply
Hearing Presentation
The Celsius Network debtors kicked off a week of critical hearings in their chapter 11 cases today with a hearing on the debtors’ motion to establish estate ownership of cryptocurrency assets in the company’s Earn rewards program. Through the same motion, the debtors also seek authority to sell approximately $18 million worth of stablecoins on the debtors’ platform that are held in Earn accounts. Judge Martin Glenn took the matter under advisement, saying he is unlikely to render a decision this week but repeatedly acknowledged the debtors’ need for a quick decision on Earn asset ownership.
The hearing on the Earn/stablecoin motion was originally scheduled to continue tomorrow, Tuesday, Dec. 6. However, the parties concluded evidentiary submissions and arguments today.
Judge Glenn expressed some doubts regarding the position of the debtors and official committee of unsecured creditors that each version of the Celsius terms of use clearly establish the debtors’ ownership of Earn assets. The judge focused today on changes to the terms of use as they relate to the ownership question. The terms of use have evolved over eight separate versions between 2018 and 2022 as summarized in the debtors’ hearing presentation. Although the judge appeared comfortable that more recent versions establish debtor ownership, he stated that earlier versions were “less clear” to him, though he has not “made up [his] mind” on that point.
Regarding the debtors’ request to sell stablecoins, Judge Glenn strongly suggested he is likely to grant the motion to the extent he decides in favor of the debtors on the ownership question. In addition, the court was unsympathetic to calls from certain objectors to delay consideration of the Earn ownership question pending further developments in the case, saying that “there’ll be a corpse left” if this key gating question in the case is put off.
Another two-day hearing in “Phase 1” of the litigation over ownership of digital assets in the company’s custody and withhold accounts is scheduled for Wednesday, Dec 7, and Thursday, Dec. 8.
Debtors’ counsel Pat Nash of Kirkland & Ellis framed the Earn ownership questions that were up for hearing today as whether the Celsius terms of use are an enforceable contract between the company and Earn depositors and, if so, whether they unambiguously provide that upon depositing crypto assets in the Earn program, users transferred title to the debtors.
On the contract formation question, Nash argued that the debtors have established the three requirements: offer, acceptance and consideration. The terms of use were the offer, he said, pointing to evidence that versions six through eight of the terms of use were accepted by over 90% of account holders representing over 99% of Earn coin deposits. As consideration, depositors received the right to earn rewards on their deposited crypto, he added.
When Nash turned to the language of the terms of use, Judge Glenn interjected to remark that versions one through five were “less clear to me on the issue of ownership,” and that the language regarding transfer of title became “clearer” beginning in version six. This prompted Nash to point out that 45% of Earn holders signed up for the program under version six or later.
Judge Glenn also noted that “arguably” the most significant changes to the terms of use as they related to ownership occurred between versions four and five and that there is no evidence in the record that Celsius ever highlighted those changes for customers.
Nash responded that each version of the terms, beginning with the first, clearly stated that Celsius had the right to use or pledge digital assets transferred into the Earn program, which he called the “price of admission in order to earn rewards.” He continued that versions two and onward explicitly stated that Celsius’ rights to use or pledge Earn assets came with “all attendant rights of ownership,” which he argued establishes Celsius’ ownership even though it was not until later that the company “clearly spelled out” that placing coins on the Earn platform “expressly constituted a transfer of title.”
Nash also made equitable arguments, reiterating that the debtors do not hold enough coins to return to each of their 600,000 customers the same kinds of coins they deposited or in the same amounts and that the debtors are continuing to work with the UCC to establish a framework for equitably distributing the coins held by the debtors to customers. Nash observed, “I don’t know where we go” if the court does not decide Earn deposits belong to the estates.
Judge Glenn cut Nash short when he turned to the proposed stablecoin sales, stating his view that if the court decides that the debtors own Earn assets, selling stablecoins on the Earn platform to generate cash to fund the cases “seems” to be a reasonable exercise of the debtors’ business judgment.
Aaron Colodny of White & Case, counsel to the UCC, echoed Nash’s equitable concerns and reiterated the UCC’s position that a finding that Earn assets are estate property would facilitate fair distributions to creditors. The opposite conclusion, he argued, would lead to miniscule distributions for customers claiming ownership of coins that are held in short supply on the debtors’ platform, such as stablecoins, and larger recoveries for creditors claiming ownership of coins held in large quantities by Celsius.
Colodny emphasized that a determination that the debtors own Earn assets does not mean that such assets will not be redistributed to account holders or that the company can “do whatever it wants” with them. He stressed that customers will have an opportunity to weigh in on any plan proposing to distribute the coins or any sale, and reiterated the UCC’s position that the debtors need to move quickly to exit bankruptcy.
In response, Judge Glenn noted the importance of equality of distribution in bankruptcy cases but added that it does nothing to resolve ownership issues. Colodny agreed, turning back to the terms of use, which he argued clearly established Celsius’ ownership dating back to version one, although it “may have gotten clearer” in later versions.
Regarding the proposed stablecoin sales, which the UCC likewise supports, Colodny noted that the UCC negotiated modifications to the proposed order providing that the debtors would use proceeds only for ordinary-course business expenses and only when they reach an unspecified “minimum liquidity” threshold.
Judge Glenn asked for an explanation of the debtors’ and UCC’s agreement that today’s proceedings preserves individual contract defenses for a later time. Specifically, the judge asked how it could affect the ongoing marketing process, wondering “what is someone bidding on?” if those issues are left open.
“We can manage that,” answered Nash, stating that the company is working with potential bidders who are aware of the carve-out for contract defenses. Explaining the reason for the carve-out, Nash said that the debtors need an answer to the “general” question of Earn ownership in the near term in order to move forward with the cases” but that his side is comfortable leaving individualized circumstances for another day. Colodny added that the carve-out intended to allow the parties to move quickly on the Earn ownership question in general while preserving “an element of due process” for customers.
The court heard objections from the U.S. Trustee, certain state regulators and numerous customers. Judge Glenn was unsympathetic to the UST’s and regulators’ stablecoin sale objections, adding that he is “mystified” about the UST’s opposition to the sale when it is taking no position on Earn ownership.
The judge also took issue with the argument from several regulators that the court should delay consideration of the motion until examiner Shoba Pillay files her final report in January 2023. Judge Glenn repeatedly highlighted that the debtors previewed the need to decide Earn ownership at the first day hearing, saying they did not “just spring this on anybody.” He further observed that whether or not the debtors own Earn assets will be critical to the ongoing sale process.
As to the regulators’ repeated allegations that Celsius violated state and federal securities laws, the judge noted that any buyer would have to comply with all applicable regulations. Judge Glenn added that whether Celsius previously failed to comply is “for another day and maybe for another court.”
About a dozen individual customers also appeared to voice objections. The customers generally argued that the terms of use are ambiguous, claiming to have been misled by statements from former CEO Alex Mashinsky, who they allege stated on multiple occasions that customers retain ownership of their coin deposits. Judge Glenn repeatedly reminded customers that Mashinsky’s statements are not in the evidentiary record and would not be considered.
The court heard testimony from Celsius’ three declarants in support of the motion: CRO and interim CEO Chris Ferraro, Robert Campagna of Alvarez & Marsal, the debtors’ financial advisor, and Chief Compliance Officer Oren Blonstein, who submitted two declarations focused on the Celsius terms of use.
Ferraro and Campagna testified that the debtors expect to run out of liquidity on a consolidated basis in late February or early March 2023. Ferraro explained that recent statements about a shortfall as early as January related to anticipated funding needs for the bitcoin mining business but that recently updated forecasts show that the mining business should not need additional funding until late February or early March. Ferraro noted that with a professional fee burn rate in the range of $15 million to $20 million per month, the sale of $18 million worth of stablecoin would give the debtors about one more month of liquidity.
Ferraro also testified that the debtors’ current liquidity forecast does not account for the pending sale of the GK8 cold storage business to winning bidder Galaxy Digital Trading, which bid $44 million in cash less certain trade payables and cure payments in unspecified amounts. The hearing on the proposed GK8 sale is scheduled for Thursday. Ferraro said if the GK8 sale closes, the debtors expect the proceeds would extend the debtors’ liquidity runway by an additional one and a half to two months.
Blonstein’s testimony focused on the terms of use, testifying that 90.06% of Celsius account holders accepted the terms of use “version 6 or later” by clicking “accept” on the Celsius platform. The accepting customers account for 99.86% of all Earn program liabilities, he added. The debtors summarized the timeline of the eight versions of the terms and total customer acceptance in their hearing presentation:
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2024 Reorg Research, Inc. All rights reserved.