Now that their bankruptcy filing is a few weeks behind us, we provide below an update on certain matters of interest in the case of Celsius Networks and its affiliates. Of course, it’s still very early in the bankruptcy case — and in cryptocurrency cases in general — but we have already heard from many distressed opportunity investors that are interested in identifying investment opportunities. Given the novel legal and difficult valuation issues involved, it will be important to keep a close eye on the developments in these proceedings.
- Like they have done in Voyager’s case (discussed here), customers of Celsius Networks have been filing letters en masse expressing their dismay at the extraordinarily difficult situation many of them now find themselves in. Many customers state that they were deceived by the debtors and their leadership, led to believe that their assets were safe, including in weekly YouTube videos posted by management right up to its bankruptcy filing. Some have pointed to provisions in earlier versions of the Terms of Use that, according to the customers, are inconsistent with the treatment they now expect to receive given the attention the cases have garnered. Indeed, recognizing that the debtor had posted a number of versions of its Terms of Use, the Bankruptcy Court has ordered it to file copies of all versions of the Terms of Use that have been in effect since February 1, 2018 by early August.
- A meeting of creditors (or Section 341 meeting) has been scheduled for August 19th at 9:00 a.m. ET. Section 341 meetings are held during the early stages of Chapter 11 cases, overseen by the Office of the United States Trustee, and provide creditors an opportunity to ask direct questions of a representative of the debtor while under oath. It goes without saying that Celsius Networks’’ Section 341 meeting will be colorful. Directions for joining the meeting can be found- here: Celsius Network LLC, et al. (stretto.com). The debtor’s counsel has also established a dedicated email address for customer’s questions at CelsiusCreditorQuestions@kirkland.com.
- The Office of the United States Trustee has appointed an Official Committee of Unsecured Creditors, consisting of seven creditors, presumably all customers. The committee has retained counsel and financial advisors.
- The debtor has filed a motion to approve certain bid procedures in an effort to attract interest in the purchase of its equity interests in GK8 Ltd. GK8 Ltd. is described as “a digital, self-custody platform for financial and crypto institutions to securely manage and store blockchain-based assets.” They have asked that initial bids be due by August 15th and binding bids be due by September 21st, with an auction occurring shortly thereafter if needed.
- The debtor also filed a motion seeking authority to “sell, pledge, transfer, assign, or otherwise monetize the Bitcoin generated from their mining activity” in the ordinary course of business. It explained that, as of the filing date, its mining subsidiary, Celsius Mining LLC, owned 43,632 operating rigs, generating approximately 14.2 Bitcoin/day. Before the filing, they used this Bitcoin to cover expenses, and expand, of the operation and to repay an intercompany loan to Celsius Network Limited. The debtor has already received interim approval to pay certain creditors as “critical vendors” to ensure completion of the mining operation build-out.
- In its statement in advance of the “first day” hearing, Celsius included among a list of key questions: “Can Celsius recover customer withdrawals or loan liquidations completed in the 90 days before filing as preferences?” We can expect much discussion regarding this question. A preferential transfer is subject to avoid and very generally includes any transfer made by the debtor during the 90 days prior to the filing, to or an account of antecedent debt, while the debtor was insolvent, and that allows the creditor to receive more than it would in a liquidation. The answer to the question will impact the recovery of all customers, but particularly those that received a return of their investments during the 90-day period during the case.
- Potential buyers of account holder bankruptcy claims are keenly focused on another key question that was posed by Celsius in its statement: “The amount of a crypto claim is determined as of what date (e.g., as of the petition date, effective date, distribution date)?” Given the volatility in the crypto market there is conceivably an opportunity for cryptocurrency values to significantly increase during the pendency of this bankruptcy case. The question of who will benefit from any upside in market price is an issue that may be litigated during plan confirmation process if the Debtor’s Chapter 11 plan fails to provide crypto-claim holders with the opportunity to benefit from an increase in their cryptocurrency values. We expect that bankruptcy claim traders may price in this upside in the future as the case develops.
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For further information, please contact:
Frederick (Rick) Hyman, Partner, Crowell & Moring
fhyman@crowell.com
