Bankruptcy Court Issues Ruling on Ownership of Celsius Account Assets
The concept of “property of the estate” is important in bankruptcy because it determines what property can be used or distributed for the benefit of the debtor’s creditors. Defined by section 541 of the Bankruptcy Code, “property of the estate” broadly encompasses the debtor’s interests in property, with certain additions and exceptions provided for in the Code. See 11 U.S.C. § 541. Difficult questions can arise in a contractual relationship between a debtor and a counterparty about whether an entity actually owns a particular asset or merely has some contractual right. The question has high stakes in bankruptcy because a contractual right may simply entitle a counterparty to a general unsecured claim, with a recovery that may be only a fraction of the claim’s face value.
A recent decision from the United States Bankruptcy Court of the Southern District of New York illustrates such a situation. In re Celsius Network LLC, Case No. 22-10964 (MG), 2023 Bankr. LEXIS 2 (Bankr. S.D.N.Y. Jan. 4, 2023). Celsius Network LLC and its affiliates (“the Debtors”) provided certain financial services involving cryptocurrency, including offering deposit accounts for cryptocurrency assets (“Earn Accounts”). The Debtors filed for bankruptcy in July 2022, at which point there were approximately 60,000 such Earn Accounts. Initially, in September 2022, the Debtors sought authority to sell certain stablecoins (a kind of cryptocurrency) to fund operating expenses. Numerous objectors raised questions about the ownership of the stablecoins, so the Debtors filed an amended motion also seeking an order establishing that the Debtors owned the assets in the Earn Accounts (the “Earn Assets”).
The Court made clear that it was not ruling on individual contract defenses, including allegations of fraudulent inducement and arguments that the contract was void because it violated state securities laws. The Court stated that such claims could be raised in the claims resolution process. Finally, the Court approved the Debtors’ proposed sale of stablecoins, concluding that the sale had a sound business reason given the Debtors’ declining liquidity.