Celsius Earn Depositors May Be Left Cold by Crypto Ownership Ruling | Cadwalader, Wickersham & Taft LLP

The “crypto winter” of 2022 introduced a bear market and a current wave of bankruptcies to the crypto business, leaving some retail prospects of crypto exchanges frozen out of their accounts.  As the chapter filings mounted from Voyager Digital and Celsius Network (“Celsius,” or the “Company”) to FTX US and BlockFi, attorneys, business consultants, market individuals and retail prospects puzzled alike ­– who owns the cryptocurrency saved on a debtor’s platform within the occasion of a chapter?  Although restricted to the particular phrases of the shopper agreements at subject in Celsius, Judge Martin Glenn issued a ruling within the Celsius chapter proceedings giving an preliminary indication as to how this inquiry could also be assessed.

On the date of its chapter submitting, Celsius had roughly 600,000 accounts in its “Earn” program (the “Earn Accounts”).  The Earn program allowed prospects (the “Depositors”) to deposit cryptocurrencies on the Celsius platform and obtain from the Company as a lot as 18% curiosity yearly.  The Earn Accounts at Celsius held roughly $4.2 billion in cryptocurrency belongings as of July 10, 2022, together with $23 million price of stablecoins.  From the start of the Celsius chapter proceedings, the Depositors advocated that cryptocurrencies held on the Celsius platform needs to be returned to them as rapidly as potential.  However, with respect to Earn Accounts, the Company took the place that the Celsius phrases of use (the “Terms of Use”) unambiguously present that every one rights to such cryptocurrencies, together with possession rights, belong to the Company.  The subject got here to a head when the Company introduced a movement looking for to promote sure of the stablecoins held within the Earn Accounts.

Judge Glenn’s 45-page choice agreed with the Company, and overruled objections supported by lots of of particular person Depositors, in addition to the objections of a variety of governmental entities, together with the Texas State Securities Board and the United States Trustee.  Judge Glenn decided that the $4.2 billion in cryptocurrency deposited by prospects into the Earn Accounts belongs to the Company – not the depositors.  As a end result, the Company can promote or change the stablecoins held in Earn Accounts within the atypical course of enterprise to fund the Company’s operations and pay the bills of the chapter case.

A Dispute over Ownership of Crypto-Assets

On September 15, 2022, the Company filed a movement looking for authority to, amongst different issues, promote a portion of the cryptocurrency held within the Earn Accounts (the “Stablecoin Sale Motion”) to fund its chapter case, which result in a spate of objections falling into two broad classes:

  • Several state regulators contended that any ruling on the possession of the Earn Assets ought to come after the Celsius chapter 11 examiner completes its report. The regulators argued that till then it’s not clear how possession of the Earn Assets might have been transferred to Celsius. Moreover, a number of state regulators argued that the Company is beneath investigation for advertising and marketing securities with out obligatory registrations and with out complying with state regulatory frameworks and federal regulation, and due to this fact can’t depend on the arguably illegal Terms of Use to find out the purported possession of those belongings.
  • The objecting Depositors argued, amongst different issues, that the Terms of Use relied on by Celsius had been really ambiguous, as they use the phrases “mortgage” and “lending” which might mislead a layperson to consider that title and possession remained with the shopper. The account holders additionally argued that they’ve defenses to contract formation and modification, in addition to breach of contract claims in opposition to Celsius that ought to prohibit the Company from claiming possession of the crypto deposited.

In assist of the Stablecoin Sale Motion, Celsius argued that 99.86% of Depositors accepted the Terms of Use by way of a “clickwrap contract”, and thereby agreed that Celsius held “all proper and title to such Eligible Digital Assets, together with possession rights” within the cryptocurrency in query.

The Celsius Terms of Use at subject present:

Assets utilizing the Earn Service . . . and the usage of our Services, you grant Celsius … all proper and title to such Eligible Digital Assets, together with possession rights, and the precise, with out additional discover to you, to carry such Digital Assets in Celsius’ personal Virtual Wallet or elsewhere, and to pledge, re-pledge, hypothecate, rehypothecate, promote, lend, or in any other case switch or use any quantity of such Digital Assets, individually or along with different property, with all attendant rights of possession, and for any time period, and with out retaining in Celsius’ possession and/or management a like quantity of Digital Assets or every other monies or belongings, and to make use of or make investments such Digital Assets in Celsius’ full discretion.  You acknowledge that with respect to Digital Assets used by Celsius pursuant to this paragraph:

  1. You will be unable to train rights of possession;
  2. Celsius might obtain compensation in reference to lending or in any other case utilizing Digital Assets in its enterprise to which you don’t have any declare or entitlement; and
  3. In the occasion that Celsius turns into bankrupt, enters liquidation or is in any other case unable to repay its obligations, any Eligible Digital Assets used within the Earn Service or as collateral beneath the Borrow Service might not be recoverable, and you might not have any authorized treatments or rights in reference to Celsius’ obligations to you apart from your rights as a creditor of Celsius beneath any relevant legal guidelines.

The Terms of Use Are a Valid, Enforceable Contract That Transferred Title and Ownership of the Assets within the Earn Accounts to Celsius

The chapter court docket famous that the necessities for contract formation aren’t any totally different for digital contracts than they’re for extra conventional pen-and-paper agreements, as courts have “tailored conventional ideas of contract formation to suit the digital period.”  This is the case even the place, as in Celsius, a “clickwrap” settlement doesn’t essentially require the account holder to really view the phrases of use, and will include provisions permitting for the corporate to unilaterally modify its phrases.

Using conventional contract evaluation, the Celsius court docket discovered that mutual assent, consideration, and intent to be sure—the weather of a sound, enforceable contract—had been current. The Court acknowledged that (i) the Depositors manifested assent and intent to be sure by clicking that they accepted the Terms of Use and (ii) that New York Courts overwhelmingly settle for such “clickwrap” agreements. As such, the court docket held that the Depositors unambiguously transferred title and possession of the Earn belongings to Celsius pursuant to the plain language of the Terms of Use, no matter how these phrases might have been understood.

The court docket additionally addressed the argument of sure objecting Depositors that the crypto belongings held within the Earn Accounts had been merely loaned to the Company. The court docket noticed that even when these belongings had been loaned to Celsius, such loans would create a conventional creditor-debtor relationship between the events the place Celsius maintains possession of the belongings, and the Depositor has a declare to fee.  Under such circumstances, Depositors would nonetheless be unsecured collectors except they held a perfected safety curiosity within the property.  However, the court docket acknowledged that digital belongings corresponding to crypto usually are thought to be a basic intangible upon which a lien could also be perfected solely by the submitting of a financing assertion.  Finding that “the Terms of Use. . .[make] it very clear that no possession curiosity or lien in favor of the Account Holders was supposed. . .[a]nd actually no lien in favor of the Account Holders was perfected,” the court docket held that the “clear and constant” Terms of Use granted Celsius all proper and title to the belongings within the Earn Accounts.

Judge Glenn’s choice makes clear, nevertheless, that the Depositors haven’t been left empty-handed:

To be clear, this discovering doesn’t imply holders of Earn Assets will get nothing from the Debtors. Account Holders have unsecured claims in opposition to the Debtors in {dollars} or in type (relying on the phrases of any confirmed plan). The quantity of allowed unsecured claims is topic to later willpower on this case (by way of the claims allowance course of) and will doubtlessly embody damages asserted by Account Holders, together with breach of contract, fraud or different theories of legal responsibility. . . .

The Court takes severely potential violations of state regulation and non-bankruptcy federal regulation, in addition to the litany of allegations together with, however not restricted to, fraudulent inducement into the contract, fraudulent conveyance, breach of contract, and that the contract was unconscionable. These allegations might (or might not) have benefit, and the collectors’ rights with respect to such claims are explicitly reserved for the claims decision course of. But importantly, as a prerequisite to these claims, the Court first should set up {that a} contract was fashioned and should interpret the contract phrases.

Stablecoin Sales & Chapter 11 Funding

After his findings on possession, Judge Glenn held that the Company had made a adequate displaying to promote the stablecoins held within the Earn accounts.  Judge Glenn’s choice on this level appeared premised on the truth that time just isn’t a luxurious the Company possesses:

A uncommon level of settlement amongst all events is that the Debtors’ liquidity is precipitously operating out.  The Debtors must generate liquidity to fund these Chapter 11 instances and proceed down the trail both of a standalone plan [of] reorganization, a piece 363(b) sale, or perhaps a liquidation plan. The Debtors venture that further liquidity might be wanted in early 2023. The Debtors exhibit a sound enterprise justification for promoting stablecoins, and the Court agrees that it’s acceptable to [grant] authority to take action.

Thus, the Company might be permitted to promote stablecoins held within the Earn Accounts to proceed funding the chapter instances.

Critical Crypto Ownership Issues Remain Open

Although Judge Glenn’s choice is particularly restricted to the shopper agreements in Celsius, he continues to blaze judicial trails within the crypto chapter house.  Participants, prospects and others within the crypto business ought to be aware of how Judge Glenn analyzed the Terms and Conditions in Celsius, as cautious evaluation of contractual language might be vital to the result of future crypto possession disputes.  It is evident that different substantial points stay to be resolved within the crypto “winter of our discontent.”

1   In re Celsius Network LLC, Case No 22-10964(MG), 2023 WL 34106 (Bankr. S.D.N.Y. Jan. 4, 2022).

2   An examiner was appointed within the Celsius case to analyze varied points arising from the Company’s prepetition operations corresponding to: (i) the place the cryptocurrency was saved, (ii) whether or not the cryptocurrency was commingled, (iii) the procedures for paying taxes and complying with different non-bankruptcy regulation, and (iv) the standing of utility obligations regarding the Company’s mining operations.

3   See Plazza v. Airbnb, Inc., 289 F. Supp. 3d 537, 548 (S.D.N.Y. 2020) (“Clickwrap agreements are usually outlined by the requirement that Account Holders ‘click on’ some type of ‘I agree’ after being offered with an inventory of phrases and circumstances”).

4   Celsius, 2023 WL 34106, at * 4.

5   There had been a number of variations of the Terms of Use (variations 1 by way of 8), although the court docket decided that 90% of account holders representing 99% of the belongings held in Earn Accounts had assented to model 6 or later.  The Terms of Use, starting with model 1, present that (1) the Company can unilaterally modify the Terms of Use with out discover, and (2) the account holders’ continued use of the platform following an replace constitutes consent to the amended Terms of Use.  Id. at *16.  Accordingly, the court docket discovered that the account holders had been sure by the language from model 8 of the Terms of Use, together with the excerpt above.  Id. at 17.

6   Judge Glenn’s choice famous that though a variety of objectors argued that Celsius modified the Terms of Use by way of ads and media uploaded to the Company’s social media channels, such media was not submitted to the court docket as proof.  Id.  The choice additional notes that even when this media was submitted as proof, ads and different related statements “usually don’t represent gives, and a proposal is a obligatory predicate for any ‘modification’ to the Terms of Use.”  Id.

7  https://www.cadwalader.com/resources/clients-friends-memos/quantifying-cryptocurrency-claims-in-bankruptcy-does-the-dollar-still-reign-supreme


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