Celsius bankruptcy case sees major developments

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The start of the new year came with two major developments to a story that NJBIZ extensively chronicled in 2022: the ongoing bankruptcy case involving Celsius Network LLC.

On Jan. 4, Judge Martin Glenn, chief justice of the U.S. Bankruptcy Court for the Southern District of New York, issued a ruling that will have enormous ramifications for Celsius customers who were locked out of accounts, as well as potentially setting precedent for future crypto sector bankruptcy cases.

The Hoboken-based crypto lender filed Chapter 11 last summer amid a broader downward spiral in the sector and served as something of a bellwether for what would come, with the subsequent fall of FTX followed by the November bankruptcy of Jersey City-based BlockFi.

In a 45-page decision, Glenn ruled that funds deposited into high-interest bearing Earn Accounts belong to the company’s bankruptcy estate — not Celsius customers.

As of July 2022, there were some 600,000 Earn Accounts, holding around $4.2 billion in value, including $18 million in stablecoins, which Glenn wrote that he believed Celsius should be able to sell in order to fund administrative costs for the next few months.

State regulators and the U.S. Trustees have opposed such a sale.

“The Court concludes, based on Celsius’s unambiguous Terms of Use, and subject to any reserved defenses, that when the cryptocurrency assets (including stablecoins, discussed in detail below) were deposited in Earn Accounts, the cryptocurrency assets became Celsius’s property; and the cryptocurrency assets remaining in the Earn Accounts on the Petition Date became property of the Debtors’ bankruptcy estates (the “Estates”),” Glenn wrote.

In explaining the ruling, Glenn described the issue of ownership of these assets as a contract law issue, and regarded these account holders as unsecured creditors in this bankruptcy process — meaning they are owed money, but just how much they will recover remains to be seen.

“The Court finds that there was a valid contract between Celsius Account Holders and Celsius and that the contract terms unambiguously transferred all right and title of digital assets to Celsius,” the verdict stated.

The ruling could dramatically shape future cases in how these types of interest-bearing accounts are viewed versus conventional wallets and accounts, as well as highlighting how central the Terms of Service of particular crypto platforms are to future bankruptcy proceedings.

Wallets have typically been treated by crypto platforms as belonging to its customers.

‘A path of financial ruin’

Meanwhile, on Jan. 5, New York Attorney General Leticia James announced a civil lawsuit against Alex Mashinsky, the embattled former CEO and co-founder of Celsius.

The lawsuit alleges that Mashinsky defrauded hundreds of thousands of investors – including more than 26,000 New Yorkers – out of billions of dollars worth of cryptocurrency, accusing him of repeatedly making false and misleading statements about the safety of Celsius to entice investors to deposit billions of dollars in assets onto the platform.

“As the former CEO of Celsius, Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” said James. “The law is clear that making false and unsubstantiated promises and misleading investors is illegal. Today, we are taking action on behalf of thousands of New Yorkers who were defrauded by Mr. Mashinsky to recoup their losses.”

James said she is seeking to:

• permanently bar Mashinsky from engaging in any business relating to the issuance, offer, or sale of securities or commodities in New York
• stop him from serving as a director or officer of any company doing business in New York
• secure disgorgement of any proceeds derived from Mashinsky’s “unlawful conduct,” as well as damages and restitution for investors

Mashinsky has not put out any statement or public comment in response to the lawsuit.

The former CEO was very much the public face of Celsius until he stepped down in late September. In his resignation letter, he reiterated his support to “provide the best outcome for all creditors.”

“I regret that my continued role as CEO has become an increasing distraction, and I am very sorry about the difficult financial circumstances members of our community are facing,” Mashinsky wrote at the time. “Since the pause, I have worked tirelessly to help the company and its advisors put forward a viable plan for the company to return coins to creditors in the fairest and most efficient way. I am committed to helping the company continue to flesh out and promote that plan, in order to help account holders become whole.”

A motion hearing will be held Jan. 10 to determine when Celsius creditors can submit their claims by.

Celsius was given an extension until Feb. 15 to submit a detailed Chapter 11 reorganization plan on how it will maximize the recovery and value for creditors and shareholders.