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Read the Fine Print – Bankruptcy Court Holds Cryptocurrency in Interest Bearing ‘Earn Accounts’ to be Property of the Estate | Nelson Mullins Riley & Scarborough LLP

When a company files for bankruptcy protection, Section 541 of the Bankruptcy Code creates an estate comprised of “all legal and equitable interest of the debtor in property.” On July 15, 2022, Celsius Network LLC filed for relief under Chapter 11 of the United States Bankruptcy Code. At the time, it had approximately 600,000 accounts in its “Earn Program” which allowed account holders to earn interest on certain cryptocurrency deposits. These “Earn Accounts” held over $4 billion in cryptocurrency assets. Celsius took the position that its “Terms of Use” vested it with ownership of the cryptocurrency assets in these accounts and sought approval of the United States Bankruptcy Court for the Southern District of New York to sell certain stablecoins in these Earn Accounts consistent with the requirements of Section 363 of the Bankruptcy Code.

A number of parties objected to this sale, including account holders who argued that the cryptocurrency in the Earn Accounts was their personal property and not property of the estate. Specifically, account holders argued that the Terms of Use were ambiguous by referring to deposits of cryptocurrency assets as loans and that various statements on the company website, social media and by its former CEO constituted oral modifications of any contract. Customers also argued that Celsius was in breach of any contract created by its Terms of Use. In addition, certain states objected to the motion arguing, among other things, that Celsius may have been operating in violation of state securities laws and that a dispute over ownership should be resolved through an adversary proceeding instead of a sale motion. Certain parties, including the United States Trustee argued that the motion was premature.

In considering the Motion to Sell, the court focused on Celsius’ Terms of Use and concluded that those terms were unambiguous and not modified by any statements outside of the four corners of the document. On the Petition Date, Terms of Use Version 8 was in effect. The court found that Terms Version 8 was a valid and enforceable clickwrap contract (an online contract that users agree to by clicking a button or checking a box) governed by New York Law as all of the elements to an enforceable contract were present – offer, acceptance and consideration. In addition, the contract had been validly modified each time the Terms of Use were updated. The Terms of Use consistently provided that Celsius could unilaterally modify the terms and continued use of the platform constituted consent to any amendments.

Importantly, beginning with Terms Version 6, Celsius required each user to affirmatively agree to updated terms before continuing to use its platform. Users were encouraged to read the updated Terms of Use in a pop-up screen that stated, “[i]t’s tempting to skip reading Terms, but it’s important to establish what you can expect from continuing to use our product…” Users were then required to mark boxes indicating that they read and accepted the new terms. Celsius submitted evidence that 99.86% of account holders accepted Terms of Use Version 6 or later. Thus, while earlier versions of the Terms of Use did not include specific language vesting ownership in Celsius, Terms of Use Version 5 introduced a transfer of title clause which vested Celsius with ownership rights and on the petition date, Terms of Use Version 8 provided that Celsius held “all right and title to such Eligible Digital Assets, including ownership rights.” The court found that certain references to loan or lending in the document did not contradict the plain language or create any ambiguity.

The court also concluded that any claims by the customers for breach of contract would be adjudicated during the claims objection process in bankruptcy, then granted authority to Celsius to sell stablecoins outside the ordinary course of business.

The Celsius decision represents a cautionary tale not just for those involved in cryptocurrency transactions but for everyone who clicks through an update to their favorite app’s Terms of Use. In the event of a bankruptcy filing, those terms may be critical to one’s rights and remedies.

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