Written by 3:23 pm Cryptocurrency

Quantifying Cryptocurrency Claims In Bankruptcy: Does The Dollar Still Reign Supreme? – Fin Tech

In the past six months, four major players in the crypto space
have filed for chapter 11 bankruptcy protection: Celsius Network,
Voyager Digital, FTX, and BlockFi, and more may be forthcoming.
Together, the debtors in these four bankruptcy cases are beholden
to hundreds of thousands of creditors. The bulk of the claims in
these cases are customer claims related to cryptocurrency held on
the debtors’ respective platforms. These customer claimants
deposited or “stored” fiat currency and cryptocurrencies
on the debtors’ platforms. Some of these funds allegedly were
commingled or rehypothecated, leaving customer accounts severely
underfunded when liquidity crunches arose at the various entities.
The total amount of such claims is estimated to be in the billions
— that is, if these claims ultimately are measured in United
States Dollars (“USD“).

Crypto-watchers and bankruptcy lawyers alike have speculated how
customer claims based on digital assets such as cryptocurrencies
should be valued and measured under bankruptcy law. Given the
volatility of cryptocurrency prices, this determination may have a
significant effect on recoveries, as well as the viability of the
“payment-in-kind” distribution mechanics proposed in
Voyager, Celsius, and BlockFi. A number of creditors appearing
pro se in these proceedings have expressed a desire to
keep their mix of cryptocurrencies through these proposed
“in-kind” distributions.

However, a crypto-centric approach to valuing claims and making
distributions raises a number of issues for consideration. For
example, measuring customer claims in cryptocurrency and making
“in-kind” distributions of these assets could lead to
creditors within the same class receiving recoveries of disparate
USD value as the result of the fluctuation in cryptocurrency
prices. Moreover, as has been discussed in the Celsius proceedings,
the administrative burden associated with maintaining, accounting
for, and distributing a wide variety of cryptocurrencies as part of
a recovery scheme would likely prove complex. Equity holders also
might challenge the confirmability of a plan where valuations and
recoveries are based on cryptocurrency rather than USD, as a
dramatic rise in cryptocurrency values could return some value to
equity.

Like most issues at the intersection of insolvency and
cryptocurrency, there is little precedent to guide creditors
through the uncertainties, but a recent dispute in the Celsius
bankruptcy proceedings as to whether a debtor is required to
schedule claims in USD, or whether cryptocurrency claims can be
scheduled “in-kind,” may serve as a preview of things to
come.

I. General Background

Celsius Network (“Celsius
and, together with its affiliated debtors and debtors in
possession, the “Debtors“),
self-described as one of the “largest and most
sophisticated” cryptocurrency-based finance platforms and
lenders that claimed over 1.7 million users worldwide,1
filed petitions under Chapter 11 of the Bankruptcy Code on July 13,
2022.2 On October 5, 2022, the Debtors filed their
schedules of assets and liabilities
(“Schedules“). Each
Debtor’s schedule of unsecured creditors’ claims (Schedule
E/F) lists the claims of the Debtors’ customers by the number
of various forms of cryptocurrency coins and account types, rather
than in USD.3

On October 25, 2022, a group of beneficial holders, investment
advisors, and managers of beneficial holders (collectively, the
Series B Preferred Holders“)
of the Series B Preferred Shares issued by debtor Celsius Network
Limited filed a motion seeking entry of an order directing the
Debtors to amend their Schedules to reflect customer claims valued
in USD, in addition to cryptocurrency coin counts.4

II. Arguments

a. Series B Preferred Holders

Broadly, pursuant to Bankruptcy Rule 1009(a),5 the
Series B Preferred Holders sought to have the Debtors amend their
Schedule E/F to “dollarize” creditors’ claims,
i.e., value customer claims in their dollar value as of
the petition date. As filed, the Series B Preferred Holders
asserted that the Debtors’ schedules were “improper,
misleading, and fail[ed] to comply” with the Bankruptcy Rules
“because they schedule[d] customer claims in cryptocurrency
coin counts, rather than in lawful currency of the United States as
of the Petition Date.”6 The Series B Preferred
Holders asserted that such amended schedules are essential to the
Debtors’ ability to structure, solicit, and confirm a plan of
reorganization under the requirements of Section 1129, including
whether “(i) claims are impaired or unimpaired, (ii) holders
of similarly situated claims are receiving the same treatment, and
(iii) the plan meets the requirements of the ‘absolute priority
rule.'”7 In support of their arguments that USD
valuation of a customer’s claim should be required, the Series
B Preferred Holders relied on provisions of the Bankruptcy Rules,
Bankruptcy Code, and Official Forms. The Series B Preferred Holders
stressed that the motion “takes no position regarding the form
of distribution customers” should receive under the
Debtors’ plan, but rather that the Debtors must “add the
[USD] amount of each customer claim in Schedules E/F to the
cryptocurrency coin counts.”8

The Series B Preferred Holders also asserted that the
requirement to denominate claims in USD is consistent with Section
502(b) of the Bankruptcy Code, which provides that when a debtor or
party-in-interest objects to a claim, the court determines the
amount of the claim in USD as of the debtor’s petition
date.

b. Debtors’ Response

The Debtors had previously indicated that they were not seeking
to dollarize its customers’ claims; rather, the Debtors
represented that they intend to return cryptocurrency assets to its
customers “in kind.”9 The Debtors stated that
they interpreted Bankruptcy Rule 9009(a)(1)-(2) and General Order
M-386, dated November 24, 2009 (the “General Order
M-386
“) to allow the Debtors to remove the
dollar symbol when scheduling claims regarding cryptocurrency coin
counts.10 This approach, the Debtors argue, lessens
confusion for its customer case and decreases administrative
expense for the estate.11

Further, the Debtors argued that the Series B Preferred
Holders’ reliance on Section 502(b) was misplaced because the
application of such section is inapplicable at this stage of the
proceedings where no claims objection has taken
place.12

The Committee of Unsecured Creditors
(“UCC“) agreed with the Debtors’
approach, stating that it “makes sense” for account
holders to validate their scheduled claims by cryptocurrency type
and that it wished to be consulted on the petition date prices used
by the Debtors if they filed an amendment to the
schedules.13

III. Analysis

a. Bankruptcy Code & Rules & Forms

Bankruptcy Rule 1007(b)(1) requires that a debtor’s
schedules of assets and liabilities must be “prepared as
prescribed by the appropriate Official Forms.”14
The relevant official form that a debtor must use to prepare its
schedule of assets and liabilities is Official Form 206, which
contains a USD symbol to denote the amount of liabilities that a
debtor must list.15 Specifically, Official Form 206
provides:

1259612a.jpg

As seen above, Official Form 206 does “hardwire” a
dollar sign (“$“) into the boxes provided for
claim amounts. Bankruptcy Rule 9009 states that the official forms
are to “be used without alteration, except as otherwise
provided in the rules, [or] in a particular Official
Form.”16 Bankruptcy Rule 9009 permits “certain
minor changes not affecting wording or the order of presenting
information,” including “expand[ing] the prescribed areas
for responses in order to permit complete responses” and
“delet[ing] space not needed for responses.”17
Lastly, General Order M-386 permits “such revisions as are
necessary under the circumstances of the individual case or
cases.”18 The introduction to General Order M-386
states that standard forms were adopted to “expedite court
review and entry of such orders” and that courts will expect
use of the standard forms “with only such revisions as are
necessary under the circumstances of the individual case or
cases.”19

b. Section 502(b)

Bankruptcy Code Section 502(b) provides that if there is an
objection to a claim, the court “shall determine the amount of
such claim in lawful currency of the United States as of the
[petition] date . . . .”20 This “prevents the
value of a claim from fluctuating by setting the claim as of the
petition date and converting it to the United States
dollars.”21 Acknowledging the “novel
phenomenon” of dollarizing claims in cryptocurrency, the
Series B Preferred Holders analogize this to cases where courts
have required claims asserted in or based on in foreign currency or
amounts of gold should be valued in USD. However, these cases were
decided in the context of a claims objection. The Celsius Debtors
argued that these cases have limited utility in the context of a
motion for an order directing the Debtors to amend their schedules
pursuant to Bankruptcy Rule 1009(a).22

IV. The Court’s Order

Ahead of the hearing regarding the motion for an order directing
the Debtors to amend their schedules, the Debtors and the Series B
Preferred Holders were able to consensually resolve the motion and
filed a revised proposed order prior to the hearing on the motions
on November 15.23 The Debtors agreed to amend their
schedules by filing a conversion table within three days of the
entry of the order, in consultation with the UCC and Series B
Preferred Holders, that reflects the Debtors’ view of the rate
of conversion of all cryptocurrencies listed in the Debtors’
schedules to USD as of the petition date. The idea is that the
conversion table could be used by customers as a reference for
calculating the USD value of their claim, to the extent needed for
filing a proof of claim. The conversion table is not binding
– the order preserves the rights of all parties to contest
the conversion rates and does not require a party-in-interest to
file an objection that is not stated in USD “solely on the
basis that such claims should be reflected in
[USD].”24 The order also requires the Debtors to
file updated schedules “dollarizing” its account
holders’ cryptocurrency holdings to the extent required by any
future court order or judicial determination.

On November 17, 2022, the court entered the revised proposed
order.25

V. Cash Is Still King?

Other bankruptcy courts have taken similar approaches as the
Celsius court in this issue. An earlier cryptocurrency
case, In re Cred Inc., the debtors did not
schedule cryptocurrency claims in USD, but included a conversion
table in their filed schedules, which set forth a conversion rate
to USD as of the petition date.26 Debtors in other
cases, such as Voyager Digital, scheduled the amounts of
their customer claims as “undetermined” and listed them
in Schedule F in cryptocurrency.27 BlockFi, which filed
for bankruptcy on November 28, 2022, already has filed a proposed
plan that would distribute its cryptocurrencies to its customers
inkind in exchange for their claims against the BlockFi
debtors.28 To date, neither BlockFi nor FTX have filed
their schedules, and it remains to be seen whether they will follow
the pattern established in Celsius and
Voyager.

For creditors and equity holders, whether claims are measured in
USD or the applicable cryptocurrency is only the beginning of what
will likely be a long and contentious road to recovery. It remains
to be seen whether any of these debtors will be able to confirm a
viable restructuring plan that relies on any sort of
“in-kind” distribution of cryptocurrencies. Further
issues are likely to arise in the claims resolution process even
further down the road as claimants and liquidation trustees (or
plan administrators) wrestle with how to value claims based on such
a volatile asset, subject to ever-increasing regulatory scrutiny.
However, for the time being, the bankruptcy process continues to
run on USD.

Footnotes

1. Declaration of Alex Mashinsky, CEO of the Debtors
¶¶ 1, 9, 20, In re Celsius Network LLC, Case No.
22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 23].

2. Id. at ¶ 131.

3. Debtors’ Schedules of Assets and Liabilities and
Statements of Financial Affairs, In re Celsius Network
LLC
, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No.
974]; see also Schedule E/F, Case No. 22-10967 [Docket No. 5]; Case
No. 22-10970 [Docket No. 5]; Case No. 22-10968 [Docket No. 5]; Case
No. 22-10965 [Docket No. 6]; Case No. 22-10966 [Docket No. 7]; Case
No. 22-10964 [Docket No. 974]; Case No. 22-10969 [Docket No. 5];
Case No. 22- 10971 [Docket No. 5].

4. Series B Preferred Holders Motion to Direct Debtors to
Amend Schedules, In re Celsius Network LLC, Case No.
22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No. 1183].

5. “On motion of a party in interest, after notice
and a hearing, the court may order any . . . schedule . . . to be
amended and the clerk shall give notice of the amendment to
entities designated by the court.” Fed. R. Bankr. P.
1009(a).

6. Series B Preferred Holders Motion to Direct Debtors to
Amend Schedules ¶ 1.

7. Id. ¶ 3 (citing 11 U.S.C. §§
1123(a)(2)-(4), 1129(a)(1), 1129(b)).

8. Series B Preferred Holders’ Reply ¶ 10,
In re Celsius Network LLC, Case No. 22-10964 (MG) (Bankr.
S.D.N.Y. 2022) [ECF No. 1334].

9. See 8/16/22 Hr’g Tr. at 35:5-7 (“The
company is not seeking to dollarize claims on the petition date and
give people back a recovery in fiat.”); id. at 42:11-16
(“[The UCC is] pleased that the company is not focused on
dollarization of claims . . . an in-kind recovery is absolutely
critical.”).

10. General Order M-386 is a resolution of the Board of
Judges for the Southern District of New York, which provides for
“a standard form for orders to establish deadlines for the
filing of proofs of claim . . . in chapter 11 cases” to
“thereby expedite court review and entry of such
orders.”

11. Debtors’ Objection to Series B Preferred
Holders’ Motion ¶ 9, In re Celsius Network LLC,
Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No.
1304].

12. Id. ¶ 12 (citing In re Mohr,
425 B.R. 457, 464 (Bankr. S.D. Ohio)).

13. Id. at 42:12-16 (“We are pleased to
hear that the company is not focused on dollarization of claims . .
. receiving an in-kind recover is 16 absolutely critical.”);
UCC Statement and Reservation of Rights ¶ 6, In re Celsius
Network LLC
, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022)
[ECF No. 1303].

14. Fed. R. Bankr. P. 1007(b)(1).

15. See Official Form 206, Part 2, Line 4 (using
the USD sign into Form 206 for scheduling the debtor’s
liabilities).

16. Fed. R. Bankr. P. 9009(a).

17. Id.

18. General Order M-386 ¶ 9.

19. General Order M-386 ¶ 2 (unnumbered, preliminary
statement).

20. 11 U.S.C. § 502(b).

21. In re Aaura, Inc., No. 06 B 01853, 2006 WL
2568048, at *4, n.5 (Bankr. N.D. Ill. Sept. 1, 2006).

22. In re USGen New Eng., Inc., 429 B.R. 437,
492 (Bankr. D. Md. 2010) (using the exchange rate in effect on the
petition date, in the context of a claims objection, to convert the
claim to USD), aff’d sub nom. TransCanada
Pipelines Ltd. v. USGen New Eng., Inc.
, 458 B.R. 195 (D. Md.
2011); Aaura, 2006 WL 2568048, at *5 (“Section 502(b)
converts Aaura’s obligation to repay the obligation in gold
into a claim against the estate in dollars, but it makes this
transformation only as of the petition date, not retroactive to the
date on which Aaura first became liable.”); Matter of
Axona Intern. Credit & Com. Ltd.
, 88 B.R. 597, 608 n.19
(Bankr. S.D.N.Y. 1988) (noting Section 502(b) refers to the
petition date as “the appropriate date for conversion of
foreign currency claims”), aff’d sub nom. In re Axona
Intern. Credit & Com. Ltd.
, 115 B.R. 442 (S.D.N.Y. 1990);
ABC Dev. Learning Ctrs. (USA), Inc. v. RCS Capital Dev., LLC
(In re RCS Capital Dev., LLC)
, No. AZ-12-1381-JuTaAh, 2013
Bankr. LEXIS 4666, at *38-39 (B.A.P. 9th Cir. July 16, 2013)
(same).

23. Notice of Proposed Order, In re Celsius Network
LLC
, Case No. 22-10964 (MG) (Bankr. S.D.N.Y. 2022) [ECF No.
1342].

24. Id. at ¶¶ 7, 8.

25. Order Pursuant to Bankruptcy Rule 1099 Directing the
Debtors to Amend Their Schedules in Certain Circumstances, In
re Celsius Network LLC
, Case No. 22-10964 (MG) (Bankr.
S.D.N.Y. 2022) [ECF No. 1387].

26. Schedules at 12, In re Cred Inc., Case No.
20-128336 (JTD) (Bankr. D. Del. 2021) [ECF No. 443].

27. Schedules, In re Voyager Digital Holdings,
Inc.
, Case No. 22-10943 (MEW) (Bankr. S.D.N.Y. Aug. 18, 2022)
[ECF No. 311].

28. Joint Plan of Reorganization § IV.B.1.a, In
re BlockFi Inc.
, Case No. 19361 (MBK) (Bankr. D.N.J. 2022)
[ECF No. 22].

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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