Thu 08/04/2022 18:08 PM
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Voyager Digital Chapter 11 Case and Restructuring Update:

Relevant Documents:
Hearing Agenda
Debtors' Presentation

Key Points

  • Judge Michael Wiles today approved the Voyager Digital debtors’ bid procedures motion, with certain modifications, setting an expedited sale timeline that would culminate in an Sept. 8 sale hearing.

  • The court also approved the debtors’ motion to allow customers to withdraw cash from certain customer accounts and authorized the debtors to resume certain cryptocurrency activities, including “staking.”

  • Debtors’ counsel said their public sniping with Alameda over its July 22 “early liquidity proposal” is “water under the bridge to a certain extent,” and that the debtors will continue to engage with Alameda as a potential bidder.

At today’s second day hearing in the Voyager Digital chapter 11 cases, Judge Michael Wiles largely approved the debtors’ motion to establish bidding procedures for the sale component of their proposed dual path forward in the cases, with certain modifications. The judge declined to set the plan confirmation schedule as proposed by the debtors, directed slight modifications to the sale timeline (as discussed below) and denied the debtors’ request for pre-approval of bid protections for any eventual stalking horse bidder.

The court also approved Voyager’s customer withdrawals motion, which sought authority to honor withdrawals from “for the benefit of,” or FBO, accounts that the debtors say belong to customers, resume “staking” cryptocurrencies on behalf of customers and sweep cryptocurrency from negative cash balance accounts.

The debtors reported today that they resolved the limited objection of Alameda Research and Alameda Ventures, or Alameda, to the bid procedures by modifying certain bid deposit requirements and preserving certain of Alameda’s rights under the proposed order. The debtors announced Wednesday that they had resolved the objection lodged by Emerald Ocean Isle, Amando Global Holdings, Shingo Lavine and Adam Lavine by modifying the procedures to permit the debtors to consider bids in any form, including plan sponsorship bids.

The sole remaining objector was the Texas State Securities Board, which sought to slow down the sale process. The court largely overruled the objection, noting that the marketing process has been underway since before the petition date and accepting the debtors’ and official committee of unsecured creditors’ position that a prolonged sale process is likely to negatively affect the value of any transaction.

However, the court required the debtors to move the sale hearing forward one day to Sept. 8 from Sept. 7 and the sale objection deadline to Sept. 6 from Aug. 31. The court approved the balance of the proposed sale schedule, which provides for an Aug. 26 bid deadline and an auction on Aug. 29 at 10 a.m. ET.

In addition, Judge Wiles declined to set a plan objection deadline and confirmation hearing as requested by the debtors, stating that the confirmation timeline should wait for approval of a disclosure statement, which has yet to be filed. However, he permitted the debtors to retain the DS-related timeline in the bid procedures order, which provides that if the debtors file a DS by Aug. 12, the DS hearing will be held on Sept. 16.

The debtors had proposed that the bid procedures order establish a plan objection and voting deadline of Oct. 24 and a confirmation hearing on Oct 31. Debtors’ counsel Christopher Marcus of Kirkland & Ellis explained that the purpose of incorporating the confirmation schedule in the bid procedures order as proposed was to alert potential bidders to the case timeline to which the debtors are committed. Judge Wiles responded that the debtors can accomplish that by including the proposed confirmation timeline in the bid procedures themselves so long as it remains clear the timeline remains subject to court approval.

Debtors’ counsel Joshua Sussberg of Kirkland & Ellis provided an update on developments since the first day hearing. Noting a rise in cryptocurrency prices since the petition date, Sussberg said it is “super important” for customers to understand that the debtors are intending to put that value “right back in our customers’ pockets” and are not seeking to “dollarize” their crypto claims. Sussberg added that although there are numerous “interesting” legal issues related to crypto ownership, the debtors believe they are “irrelevant” under their proposed process and aim to avoid unnecessary litigation over such issues.

With respect to the ongoing marketing process, Sussberg said it is “working as designed,” explaining that the debtors have received multiple indications of interest and expect to receive several more. Referring to the proposed expedited sale timeline, Sussberg stressed that the faster the process moves, the more value currently held by the debtors will be distributed to their customers instead of case professionals.

Sussberg also addressed Alameda and FTX’s “early liquidity” proposal, saying that the debtors’ “back and forth” with them over the offer is “water under the bridge to a certain extent.” He elaborated that although the Alameda/FTX bid is the “lowest” proposal received to date, the debtors welcome their involvement as a potential bidder and hope to see their bid improved.

Sussberg added, however, that the “games and publicity campaign should stop,” noting that certain potential bidders have expressed worry that Alameda/FTX have “a leg up” in the bidding process by virtue of Alameda’s 10% equity stake in the company. Sussberg stressed that this is not the case - the debtors “will not stand for that” and will run an open and transparent sale process, he said.

Andy Dietderich of Sullivan & Cromwell, counsel for Alameda, took issue with his client being “portrayed unfavorably” for offering a “rescue deal” for Voyager’s customers, which he said Alameda continues to believe is the best approach for customers. He added that although his client’s bid procedures objection has been resolved, Alameda and the debtors continue to have a “difference of opinion” about how to best help Voyager’s customers. The debtors prefer to implement a sale through a plan, he continued, while Alameda believes it can and should be done more quickly.

In an apparent reference to the debtors’ and Alameda/FTX’s public sniping with respect to the proposal, Judge Wiles chimed in, “I have no intention of turning my court hearings into a sort of cable news show” with parties “slinging accusations at each other.” He warned the parties that such conduct is not appropriate for bankruptcy proceedings and it “ought to stop.”

Sussberg also addressed the Federal Deposit Insurance Corp.’s July 28 letter demanding that Voyager cease and desist from making false and misleading statements regarding its FDIC deposit insurance status. He clarified that although Voyager is not FDIC insured, Metropolitan Commercial Bank, or MCB, which maintains Voyager customer FBO accounts, is an FDIC-insured bank.

He explained that any prior representations regarding insurance were in reference to MCB and that Voyager never knowingly made misrepresentations about the existence or extent of deposit insurance. Nevertheless, he continued, Voyager is actively reviewing its prior media statements in this respect and remediating them to the extent they could be misconstrued.

UCC counsel Darren Azman of McDermott Will & Emery appeared in support of both the bid procedures motion and the customer withdrawal motion. With respect to the former, he explained that the UCC has pushed for a faster case timeline than the debtors originally proposed. With respect to the latter, he said that the UCC agrees that customer cash in the FBO accounts is not estate property and thus strongly supports approval of the motion.

Azman previewed for the court certain of the UCC’s objectives going forward in the case, which he said primarily involve returning to customers their property and running a process that distributes estate property to customers as quickly as possible. He emphasized that there is a significant amount of crypto assets in the estate and that customers should not have to wait “years” for distributions as is sometimes the case in chapter 11.

Azman added that the UCC will be conducting its own investigation alongside the debtors’ special committee and that the UCC expects there will be valuable litigation claims in this case.

With respect to the customer withdrawal motion, Judge Wiles said that the motion initially gave him some pause as he viewed it as essentially asking for a declaratory judgment that the cash in the FBO accounts are not estate property without an adversary to argue the other side. However, he said that the evidence and the applicable customer agreements satisfy him that the FBO account cash does in fact belong to the customers, while cautioning that parties wishing to use his ruling as precedent in another case should bear in mind that no party took the position that the funds are estate property.

The sole opposition to the motion came from a customer seeking to be treated as a “cash customer” by forcing the debtors to honor a prepetition cash withdrawal request that was not completed. The court overruled the objection, noting that it was coupled with a “cross motion” for the same relief, which is scheduled for hearing on Aug. 16 at 11 a.m. ET.

Judge Wiles also approved the balance of the relief sought in the customer withdrawal motion, including authorizing the debtors to resume “staking” cryptocurrencies on behalf of customers and to sweep cryptocurrency from negative cash balance accounts.

With respect to staking, Azman for the UCC said that although the UCC has not had time to get comfortable with all of the debtors’ staking activities, the UCC supports the request because the debtors agreed to grant the UCC consent rights over all of the debtors’ staking positions. He added that the UCC prefers that approach to delaying approval because staking generally generates revenue for the estate, and both the UCC and debtor do not wish to delay that source of income any further.

Judge Wiles said that although he does “not pretend to understand” staking, he is comfortable approving that part of the motion based on the UCC’s oversight and the lack of objection.

The debtors also highlighted today certain reservation of rights language included in various proposed orders at the request of the Securities and Exchange Commission, which provides that nothing in such orders “shall constitute a finding as to whether the Cryptocurrency Transactions are securities or comply with federal or state securities laws,” or “a finding under the federal securities laws as to whether crypto tokens or transactions involving crypto tokens are securities,” and reserving the SEC’s rights to challenge such transactions.

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