Wed 01/04/2023 16:15 PM
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The “unambiguous” language of Celsius’ terms of use established that cryptocurrency assets, including stablecoins deposited in Earn accounts, are presumptively property of the Celsius estate, as of the petition date, according to an opinion issued by Judge Martin Glenn today. The ruling was entered in connection with Celsius’ Earn account ownership dispute with Earn customers, several state regulators and the U.S. Trustee. Today’s ruling also authorizes the debtors to sell approximately $18 million worth of stablecoins on the debtors’ platform that are held in the Earn accounts.

The court held an evidentiary hearing on the matter in early December 2022, and took the matter under advisement. Today’s ruling does not determine the ownership status of assets in the debtors’ custody program, withhold accounts or borrow program, which remain subject to the outcome of “Phase II” of the consolidated customer account litigation. The court will consider in Phase II related issues such as defenses to preference claims. The court also notes that the findings of the opinion “do not decide” the rights of any state or its agencies regarding whether Celsius violated state securities laws by marketing unregistered securities and reserves all creditor rights to assert various defenses to the contract and contract-related claims.

The opinion examines whether under the debtors’ terms of use, complete title and ownership of account holders’ cryptocurrency transferred to Celsius upon its deposit into their Earn accounts, and if so, whether the debtors may sell stablecoins within or outside the ordinary course of business. The court also considers whether the terms of use constitute a binding contract.

Judge Glenn answers the questions in the affirmative, finding that the terms of use formed “a valid enforceable contract” between the debtors and account holders, with terms “unambiguously” transferring title and ownership from account holders to the debtors once cryptocurrency assets are deposited into Earn accounts. Stablecoins, like other Earn assets, constitute property of the estates, continues the judge, and the debtors may sell such stablecoins outside of the ordinary course of business to provide liquidity for the chapter 11 cases.

The decision clarifies that the court’s finding does not mean holders of Earn assets will “get nothing” from the debtors, but rather that such holders have unsecured claims “in dollars or in kind (depending on the terms of any confirmed plan).” The ruling adds that the amount of unsecured claims, subject to later determination through the claims allowance process, may “potentially” include damages including breach of contract, fraud or other theories of liability.

The court highlights that the debtors’ uncontroverted evidence shows that 99.86% of Earn account holders accepted the terms of use, a “clickwrap contract” providing that Celsius held “all right and title to such Eligible Digital Assets, including ownership rights” in cryptocurrency assets and stablecoins, while objecting parties did not submit evidence at the hearing. “The law in the Second Circuit is clear that clickwrap contracts” are “valid and binding,” writes the judge, holding that the debtors sufficiently showed the mutual assent element of contract formation, along with the other two elements for contract formation, consideration and an intent to be bound by the contract.

The opinion also addresses why subsequent updates to the terms of use constitute valid modifications, particularly with version five and later incorporating transfer of title language. The decision stresses that 90% of account holders representing 99% of Earn assets agreed to version six or later, which “unequivocally transferred” title and ownership of all Earn assets to the debtors.

As to creditors’ rights to assert defenses to contract formation and contract-related claims, the court finds that such issues are “explicitly reserved” for the claims resolution process. The court explains that it takes “seriously potential violations of state law and non-bankruptcy federal law, as well as the litany of allegations” including regarding fraudulent inducement, breach of contract and fraudulent conveyance raised by creditors and state agencies. Although the court acknowledges these parties “could have colorable defenses” as individuals and as a group, it points out that “as a prerequisite to those claims,” the court first must establish that a contract was formed and interpret those terms, which it does so here.

Because Earn assets are property of the estates, the judge further finds that “it follows that stablecoins, a type of cryptocurrency among Earn Assets, also belong to the estates.” The judge elaborates that the debtors have shown sufficient cause to permit the sale of stablecoins outside of the ordinary course of business, given the “rare point of agreement” among the parties that the debtors need to generate liquidity for their chapter 11 cases. As a result, the court notes, it does not need to reach the question of whether the debtors have shown the transaction is within the ordinary course of business.

In closing, the judge writes that it “does not take lightly the consequences of this decision on ordinary individuals, many of whom deposited significant savings into the Celsius platform,” emphasizing that creditors will have “every opportunity” for a full hearing on the merits of their defenses and claims during the claims resolution process.
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