Celsius Network bankruptcy hearing, Thursday 20 October 2022

By Amy Castor and David Gerard

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A hearing in the Celsius bankruptcy was held via Zoom at 10 a.m. Eastern on 20 October 2022. Anyone could listen in — so Amy did, and took copious notes. [Hearing agenda, PDF]


Judge Martin Glenn


Won’t someone please think of the shareholders?

The one-hour, 45 minutes hearing kicked off with a discussion of a motion for a committee of preferred equity holders.

WestCap and CDPQ are equity holders in Celsius Network LLC — that is, they’re part-owners of the company itself. They led a $400 million investment round in Celsius in 2021. WestCap already wrote their Celsius investment down to 15 cents on the dollar — not the usual zero for a bankrupt investment. [Bloomberg]

The equity holders feel they have been underrepresented, and they need their own official committee to represent their voices. And they want it paid for out of the dwindling bankruptcy estate.

They hold that their stakes in Celsius entitle them to money from Celsius’s crypto mining business and its loan book.

This is a novel theory. In a bankruptcy, equity investors conventionally get zero. When you play stupid games, you win stupid prizes.

The equity holders’ argument is that they invested in different legal entities to those named in the proceedings so far — and they “have not received a penny back on their investment. No dividend, no return of capital, not a cent,” said their counsel, Dennis Dunne of Milbank.

Dunne argued at length until Judge Martin Glenn finally cut him off. “Are you feeling slighted, Mr. Dunne? Your constituency is well represented, and may well prevail.”

Judge Glenn was not convinced of a need for another committee. Nor was the Unsecured Creditors’ Committee (UCC), the Trustee, or Celsius itself, who had all raised objections to this very stupid and bad motion. The judge will likely shoot it down. [Bloomberg Law, archive; motion, PDF]

An interruption in the hearing

As the Judge was about to move on, Dan Latona from Kirkland, who is representing Celsius, interrupted to say that he had received word that someone was live-streaming the hearing in a Twitter Spaces meeting.

This is, in fact, illegal. The public is allowed to listen in, and write notes — but not to record or broadcast the hearing.

Judge Glenn suddenly got very stern, bent forward, and glared directly into his camera to address the culprit. “You can be held in contempt for what you are doing,” he said, and told them to “stop streaming now.”

The threats worked. Latona reported that live streaming had promptly stopped.

Melting ice cubes

Celsius wants to sell its assets to a third party. We detailed the process previously and the objections to this going ahead.

On 29 September, Celsius filed bidding procedures that outlined steps to be followed by anyone interested in submitting a bid.

The objections that followed were:

  • The timing of the bids — the bankruptcy court has yet to sort out who owns what of various remaining Celsius assets, and whether they’re part of the general bankruptcy estate or belong to particular named creditors.
  • Everyone is still waiting on the examiner’s report. An interim report is due on 18 November and another report on 10 December.
  • Regulatory concerns. Several state regulators have proceedings in progress against Celsius, and over 40 states are investigating the company. Many of the tokens held by the bankruptcy estate are likely securities. Would the prospective buyer be able to comply with regulations?

Celsius’s counsel addressed the objections and filed a revised proposed order on 18 and 20 October. [Reply to objections, PDF, revised proposed order, PDF]

The revised proposal extends the timeline so that bidders would have legal clarity before submitting their bids. Bidders would also have to present their plans to meet regulatory requirements, such as securities laws. State regulators would be provided with bidders’ identities, and could listen in on the auction. Bidding would start November 20 at 4:00 p.m. ET; final bids would need to be in by December 12 at 4:00 p.m. ET.

The ever-skeptical US Trustee seemed to want to push the bidding out even further. Shara Cornell for the Trustee said that Celsius was “not a traditional melting ice cube situation” — yes, that’s standard bankruptcy jargon — and that there was as of yet, no “stalking-horse bidder,” meaning an initial bid agreed on in advance to set the low bar on the bidding.

Judge Glenn was concerned the company was going to run out of cash to keep its operations going come 2023. He wants to move the case forward as quickly as possible before the bankruptcy estate is completely drained by lawyers’ fees. If Celsius and the UCC are fine with preparations for a sale, then that’s fine with him too.

The US Trustee had also wanted to appoint a consumer privacy ombudsman. Judge Glenn was a big fan of this idea.

Layla Milligan, from the Texas Attorney General’s Office, said that the extension of deadlines and information on the bidders and their compliance plans would resolve Texas’ issues. Judge Glenn urged Milligan to confer with other state regulators and speak with a “unified voice.”

Dan Latona of Kirkland, on behalf of Celsius, said that Centerview, their investment banker, was talking to prospective bidders.

Judge Glenn said he would take the bidding procedures motion under submission and not rule on it in this hearing.

Cash management motion

The questions around “cash management” are not about actual cash — they’re about how to keep the crypto in the bankruptcy estate secure and how to transfer funds securely.

Section 345 of the Bankruptcy Code is about how to secure the estate’s cash, who it can be held with, and how. [LII]

It’s not clear if the cryptos are cash or securities for the purpose of Section 345 — but Celsius, the UCC, and the US Trustee agreed to waive the details, and Judge Glenn was happy with that as long as the funds were, in fact, secure.

Celsius is using Coincover to handle backing up the private keys. Coincover provides insurance and backup but doesn’t do custody services as such. Celsius is looking for someone to handle custody properly. [Coincover]

Celsius has also come to an agreement with the UCC on how cryptos should be transferred. First, any transfer has to be done pursuant to a court order. Second, the transfer has to be authorized by four individuals, three of whom must be from a particular group of US-based individuals. Third, the transfer has to be approved by the Celsius special committee. [Debtor’s reply, PDF]

Judge Glenn approved the motions the next day. [Final order, PDF]

Removal extension motion

In bankruptcy, you can apply to have civil actions against you removed to their local district court. There’s a deadline for this. Celsius asked to have the deadline extended from 11 October 2022 to 9 April 2023, and the other parties were fine with this, so Judge Glenn granted it. [Order, PDF]

Examiner motion for the examiner to conduct 2004 examinations

The US Trustee wanted an examiner appointed in this bankruptcy. Shoba Pillay was appointed and wanted to be able to conduct far-reaching “fishing expedition” examinations under Rule 2004. The motion was undisputed, so it was granted. The examiner’s interim report is due quite soon, and is apparently proceeding on schedule.

Equity committee sealing motion

This motion relates to two presentations that Celsius gave to the private equity investors. Should those be filed under seal or not? Judge Glenn is waiting on an affidavit from Celsius on how far the presentations were distributed — and whether any of the investors signed an NDA.

Adversary proceeding pretrial conferences

An adversarial proceeding in bankruptcy is when the bankrupt entity is suing or being sued. Adversarial proceedings will generally be a creditor objecting to a debt being discharged in bankruptcy. [Justia; Dave Burns LLC]

The proceeding is conducted in bankruptcy court, but the court resolves the dispute as a separate action. The bankruptcy can’t be finalised until the adversarial proceedings end with a settlement or a court decision.

Celsius Network vs Prime Trust

Celsius sued Prime Trust, a crypto custodian, on August 23, alleging that Prime Trust improperly withheld $17 million worth of cryptos when the two terminated their contract in June 2021.

Celsius and Prime Trust reached agreement that Prime Trust would return $17 million in crypto to a Celsius wallet, awaiting a decision from the court on how it would be distributed. [Coindesk]

Celsius will file a section 9019 motion for compromise and settlement. [LII] The judge wants both parties to confer with the US Trustee and the UCC before filing.

Celsius Network Ltd vs Stone and KeyFi Inc.

Jason Stone (known in DeFi as 0x_b1) of KeyFi was Celsius’ money man, playing the DeFi markets for them. Stone is suing Celsius, alleging they didn’t pay him. Celsius is countersuing Stone, alleging he stole crypto and NFTs from them.

Kyle Roche appeared for Stone and KeyFi. Mitchell Hurley of Akin Gump appeared for Celsius. Roche and Hurley both rambled a fair bit.

Judge Glenn told them that discovery in the claim and counterclaim need to go forward ASAP. “Let me make it clear to both of you, I expect discovery to go forward full-bore.” Any motions to dismiss would have no effect on discovery.

Fee examiner motion

Celsius, the committee, and the US Trustee all want to appoint a fee examiner, given the complexity of the case and the swingeing fees the professionals have charged so far. We detailed some of these previously — such as Kirkland & Ellis charging $2.5 million for two and a half weeks’ work for Celsius.

Judge Christopher Sontchi is the proposed fee examiner. Katherine Stadler, of Godfrey and Kahn, will be assisting Sontchi. She anticipates a core team of five to six people.

Judge Glenn is “not a fan of fee examiners” — but since the parties want one, he’ll grant it.

Adjourned motions

Two motions were adjourned and not heard on 20 October.

Bradley Condit brought a civil action against Celsius and its former CFO, Yaron Shalem, on 28 June 2022 — two weeks before Celsius went into Chapter 11 bankruptcy. This action was automatically stayed by the bankruptcy. Condit wants to be able to proceed. This motion will be heard as part of the hearing of 1 November. [Motion, PDF]

Core Scientific houses some Celsius bitcoin mining rigs. Core Scientific is paying for electricity for the bankrupt company, at ever-increasing prices, and they would like to be paid for this service and/or stop providing it — since they’re unlikely ever to be paid.

Celsius objects furiously, and has brought a contempt motion against Core Scientific for even trying to get out of this contract. This is part of a flurry of back-and-forth between Core Scientific and Celsius. Judge Glenn will hear various motions around this issue sometime after 9 November. [Motion, PDF; scheduling order, PDF]

The next scheduled hearing in Celsius is 1 November.


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