Regulation
Cryptocurrencies Offer Celsius Defendants Potential Lifeline in Recovery Lawsuits, Lawyer Says – DL News
- Celsius is suing thousands of former customers who withdrew their money before it went bankrupt.
- Some customers are considering retaliating.
- Their success may hinge on one key question: Who owned the cryptocurrency?
In an attempt to recoup money it could use to repay its creditors, bankrupt cryptocurrency lender Celsius is suing thousands of former customers who withdrew their assets from the platform in the 90 days before it filed for bankruptcy.
It’s a common but little-known element in bankruptcy proceedings. Yet the asset in question is a cryptocurrency, a fact that could be a potential lifeline for defendants, many of whom are being sued for small fortunes.
“There are some issues that are unique to cryptocurrency cases,” said Noah Weingarten, a bankruptcy attorney at Loeb & Loeb. DL News.
For example, were customer deposits the property of Celsius or the customers?
“If it is not the property of the [Celsius bankruptcy] “If people have assets, then they should be able to have a potentially good defense,” he said.
The lawsuits are the latest development for the troubled lender, which had $25 billion in assets at its peak.
Today, its founder and former CEO, Alex Mashinsky, faces criminal and civil charges for alleged market manipulation and violations of federal securities laws.
His trial is scheduled for this fall.
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Celsius declined to comment for this story.
“Unconscious investors”
Celsius was one of the most prominent crypto companies to go bankrupt in a wave of bankruptcies that rocked the industry in 2022.
According to a 46-page indictment filed last July, Mashinsky promoted Celsius as a “modern bank,” where customers could securely deposit crypto assets and earn interest.
In reality, Mashinsky ran the business like a “risky investment fund” and turned clients into “unwitting investors,” prosecutors said.
Last year, thousands of former Celsius customers voted on a business plan designed to redistribute $2 billion in crypto assets left at the bankrupt lender, or between 67% and 85% of the money stuck on the platform.
The plan included instructions to seek other ways to recover the money that Celsius could then distribute to its creditors.
“Leveling the playing field”
In January, the company began pursuing so-called preferential claims, which are all transfers from Celsius made in the 90 days before the bankruptcy and totaling $100,000.
“The goal is to potentially level the playing field among unsecured creditors,” Weingarten said.
Under U.S. law, companies are considered insolvent long before they officially file for bankruptcy.
Thus, any withdrawal made just before filing a bankruptcy petition allows some creditors to avoid the bankruptcy process at the expense of others.
“These lien claims are made in almost every bankruptcy. They’re very common,” Weingarten said. “In some ways they make sense, but in other ways they’re somewhat unfair.”
Customers who withdrew their cryptocurrencies just before Celsius filed for bankruptcy were initially offered the opportunity to settle out of court: first 27.5% of the value of the cryptocurrencies withdrawn during the 90-day period, and then 13.75%. These values were to be determined at the price of the customers’ cryptocurrencies on the transfer dates in 2022.
Celsius reached a settlement with some 1,500 customers who withdrew more than $100,000 in cryptocurrency 90 days before the company filed for bankruptcy, it said in a statement. Press release.
“Scare tactics”?
But since July 1, it has sued thousands of others who ignored, failed or refused to comply with the proposed agreement.
In these lawsuits, Celsius is now demanding that customers repay the full value of any cryptocurrency withdrawn in the 90 days prior to July 13, 2022, at prices on June 14, 2024.
The cryptocurrency market cap increased 164% to over $2.5 trillion between Celsius’ bankruptcy filing and June 14, according to CoinGecko.
During this period, Bitcoin and Ether increased by approximately 226% and 212%, reaching over $66,000 and $3,400, respectively.
This is a very different approach than the one taken by the bankruptcy team at FTX, the bankrupt cryptocurrency exchange once run by a convicted fraudster. Sam Bankman-Fried.
When detailing its plan to repay creditors earlier this year, FTX insisted that returning the value of crypto at the time of bankruptcy filing was a “foundation of bankruptcy law” and the only fair way to share recoveries.
In a video Shared on X, FTX creditor Louis Origny said he believed Celsius’s request was a “scare tactic.”
Defenses
Customers sued by Celsius have several defenses, besides arguing over who actually owns the assets.
For example, they may argue that the withdrawals were made in the normal course of business.
A landlord who receives a rent payment from a tenant who filed for bankruptcy less than 90 days later could assert a so-called ordinary course of business defense, Weingarten said.
The ability of this measure to protect Celsius’s legacy customers will depend on several factors.
These factors include “the language of the customer contract, the length of the relationship the customer has had with the debtor, and the nature and number of withdrawal transactions made by the customer,” Weingarten wrote in a statement. article in the New York Law Journal.
Another alternative is to rely on the protection of the bankruptcy code for certain securities transactions, which is ironic given the vehement opposition to this classification.
“Although some regulators have suggested that certain crypto assets are in fact securities, no court has ruled on the issue in this context,” Weingarten wrote. “Therefore, and for other reasons, the application of this defense is uncertain.”
Aleks Gilbert is DL News DeFi correspondent based in New York. You can contact him at aleks@dlnews.com.