{"id":24311,"date":"2022-12-08T23:51:12","date_gmt":"2022-12-08T23:51:12","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=24311"},"modified":"2022-12-09T20:47:36","modified_gmt":"2022-12-09T20:47:36","slug":"celsius-hearing-december-7-custody-and-withhold-accounts-and-a-partial-ruling","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2022\/12\/08\/celsius-hearing-december-7-custody-and-withhold-accounts-and-a-partial-ruling\/","title":{"rendered":"Celsius hearing, December 7: Custody and Withhold accounts, and a partial ruling"},"content":{"rendered":"<p><i>By <\/i><b><i>Amy Castor<\/i><\/b><i> and <\/i><b><i>David Gerard<\/i><\/b><\/p>\n<ul>\n<li aria-level=\"1\">Send us money! Our work is funded by our Patreons \u2014 here\u2019s<a href=\"https:\/\/www.patreon.com\/amycastor\"> Amy\u2019s<\/a>, and here\u2019s<a href=\"https:\/\/www.patreon.com\/davidgerard\"> David\u2019s<\/a>. Your contributions help greatly!<\/li>\n<\/ul>\n<p>The Celsius Network bankruptcy hearing on December 7 dealt with the Custody and Withhold accounts. Do they belong to Celsius as part of the debtor\u2019s estate, or do they belong to the customers? [<a href=\"https:\/\/cases.stretto.com\/public\/x191\/11749\/PLEADINGS\/1174912062280000000017.pdf\"><i>Agenda<\/i><\/a><i>, PDF<\/i>]<\/p>\n<p>To spoil the ending for you: Judge Martin Glenn decided that if any assets clearly belong to individual creditors, then these should go back to them ASAP. But the details have to be worked out.<\/p>\n<p>Celsius filed a motion in September asking the court to reopen withdrawals for certain Custody and Withhold customers \u2014 so that they could withdraw cryptos that were theirs and not the company\u2019s. Phase I of this proceeding deals with any objections to the motion. [<a href=\"https:\/\/cases.stretto.com\/public\/x191\/11749\/PLEADINGS\/1174909012280000000022.pdf\"><i>Doc 670<\/i><\/a><i>, PDF<\/i>]<\/p>\n<p>Phase II looks at what the bankruptcy estate can claw back from customers. In a bankruptcy, the trustee or the debtor has the ability to demand the return of some payments in a 90-day period prior to the date the petition was filed. These are also referred to as \u201cpreference demands\u201d or \u201cclawbacks.\u201d <span class=\"css-901oao css-16my406 r-poiln3 r-bcqeeo r-qvutc0\">In Phase II, Celsius&#8217; lawyers Kirkland &amp; Ellis will have to decide whether they want to reach out and clawback 50,000 users who withdrew their funds in the 90 days before Celsius declared bankruptcy.<\/span><\/p>\n<p>Phase I and Phase II are spelled out in the schedule, which the parties agreed to in October. [<a href=\"https:\/\/cases.stretto.com\/public\/x191\/11749\/PLEADINGS\/1174910132280000000074.pdf\"><i>Scheduling<\/i><\/a><i>, PDF<\/i>]<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/07\/07\/crypto-collapse-exchange-troubles-binances-friends-with-machine-guns\/scrooge-mcduck-money-bin\/\" rel=\"attachment wp-att-23380\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-23380\" src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/07\/scrooge-mcduck-money-bin.jpg\" alt=\"\" width=\"510\" height=\"315\" srcset=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/07\/scrooge-mcduck-money-bin.jpg 680w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/07\/scrooge-mcduck-money-bin-300x185.jpg 300w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/07\/scrooge-mcduck-money-bin-348x215.jpg 348w\" sizes=\"auto, (max-width: 510px) 100vw, 510px\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<h3>Earn, Custody and Withhold accounts<\/h3>\n<p>Earn was Celsius\u2019 main product. You put cryptos into Earn and you were paid interest.<\/p>\n<p>Regulators were turning up the heat on Celsius. So on April 15, 2022 \u2014 just 89 days before the company filed for bankruptcy \u2014 Celsius launched Custody for US customers, replacing Earn. New customer deposits to Earn after this date went into Custody accounts. [<em><a href=\"https:\/\/celsiusnetwork.medium.com\/important-celsius-update-to-our-us-clients-6df471420cc7\">Celsius blog<\/a>, <a href=\"https:\/\/archive.ph\/la2lE\">archive<\/a><\/em>]<\/p>\n<p>In nine states where Celsius could not legally offer Custody accounts, Earn deposits were moved to Withhold accounts. These Withhold accounts were just supposed to be Celsius holding the coins for customers to take out later. Earn deposits after April 15 in these states also went into a Withhold account.<\/p>\n<p>Celsius didn\u2019t consider Withhold to be a product as such, so it didn\u2019t create terms of service for Withhold. This would become a problem in the bankruptcy.<\/p>\n<p>As of September 2022, there were $220 million in Custody accounts and $15 million in Withhold accounts. About $44 million of this was \u201cPure Custody\u201d and $702,000 was \u201cPure Withhold,\u201d which means the funds had never been in an Earn account. [<a href=\"https:\/\/cases.stretto.com\/public\/x191\/11749\/PLEADINGS\/1174909012280000000022.pdf\"><i>Doc 670<\/i><\/a><i>, PDF, p. 13<\/i>]<\/p>\n<p>Compared to the billions of dollars that Celsius owes its creditors, these are paltry sums \u2014 but they\u2019re important to the people who want their money back.<\/p>\n<h3>Custody, pure or not<\/h3>\n<p>There\u2019s no dispute with respect to \u201cpure\u201d Custody account holders, whose cryptos never touched an Earn account. Celsius, the Unsecured Creditors\u2019 Committee (UCC), and the ad-hoc account holders all agree that the title to the contents of pure Custody accounts is held by the customers.<\/p>\n<p>In this hearing, Judge Glenn verbally authorized Celsius to release pure Custody accounts back to customers. He also said that Custody customers, pure or impure, who held less than $7,575 \u2014 the statutory cap for clawbacks under rule 547(c)(9) \u2014 would get all their funds back.<\/p>\n<p>\u201cThere is no preference,&#8221; he said. &#8220;There is no good faith argument of an avoidable preference against them. There is no dispute as to their having title, and the assets should be returned to them.\u201d<\/p>\n<p>The judge told Celsius\u2019 lawyers at Kirkland and the UCC&#8217;s lawyers at White &amp; Case to work out the details, and directed Celsius lawyer Chris Koenig to prepare a suitable order for him.<\/p>\n<p>Aaron Colodny, for the UCC, noted that there were fewer assets in Custody than total liabilities \u2014 a shortfall of about 6%, mostly bitcoin. This was an artifact of Celsius\u2019 terrible reconciliation process, <a href=\"https:\/\/amycastor.com\/2022\/11\/21\/crypto-collapse-celsiuss-interim-examiner-report\/\">as noted by the examiner.<\/a><\/p>\n<p>Judge Glenn asked Celsius and the UCC to work out which cryptos did not have a shortfall, and submit a proposed order on how to deal with these.<\/p>\n<p>While some Custody account holders will get their funds back in short order, others will remain in limbo until other details are ironed out down the road.<\/p>\n<h3>Clawbacks on Custody accounts<\/h3>\n<p>Customer deposits into Earn <a href=\"https:\/\/amycastor.com\/2022\/12\/07\/celsius-hearings-december-5-whose-stablecoins-are-these-kerp-bonuses-new-deadline-for-restructuring-plan\/\">probably legally belonged to Celsius<\/a>, who then had a liability to the depositor. Because Earn funds were moved to Custody within 90 days, Celsius can claw back anything that left the Earn program.<\/p>\n<p>These preference claims will be litigated in Phase II. [<a href=\"https:\/\/cases.stretto.com\/public\/x191\/11749\/PLEADINGS\/1174910132280000000074.pdf\"><i>Scheduling<\/i><\/a><i>, PDF<\/i>]<\/p>\n<p>Celsius has two years after its initial bankruptcy filing to bring preference actions.<\/p>\n<p>Everyone agrees that preference issues are complex and difficult. So this needs to be sorted out.<\/p>\n<p>\u201cHow much the Custody holders get back is largely going to be determined by the preference issue,\u201d the judge said.<\/p>\n<h3>Withhold<\/h3>\n<p>Judge Glenn said that he struggles with the fact that there were no terms of service for Withhold accounts. \u201cWhat I have puzzled about is that in the absence of a written contract with the Withhold issues. What is the contract construct? How do I determine what are the rules? Is it an implied contract?\u201d<\/p>\n<p>Deborah Kovsky-Apap from Troutman Pepper Hamilton Sanders, for the Withhold ad-hoc group, wanted the Withhold group to be treated the same as Custody.<\/p>\n<p>Kovsky-Apap noted that Withhold assets are sitting in an aggregated wallet, which Celsius <a href=\"https:\/\/amycastor.com\/2022\/11\/21\/crypto-collapse-celsiuss-interim-examiner-report\/\">was using as investment capital<\/a> \u2014 even as they claimed these were customer assets and not company assets. Celsius didn\u2019t even segregate Withhold accounts from their large general pool of cryptos.<\/p>\n<p>Kovsky-Apap asked if at least some of these coins could be set aside. Judge Glenn told her to confer with Celsius&#8217; lawyers at Kirkland to see about separating these out.<\/p>\n<p>Celsius and the Withhold ad-hoc group agreed that pure Withhold cryptos should go back to the account holders.<\/p>\n<p>Colodny, for the UCC, <i>did not<\/i> agree \u2014 he argued that because Celsius commingled the Withhold cryptos and treated them as assets to invest, the assets should now be treated as part of the general bankruptcy estate.<\/p>\n<p>\u201cTo take the assets and distribute them now would take them away from other Earn holders who may have an equal entitlement to those assets,\u201d he told the judge.<\/p>\n<p>You might think that Celsius\u2019 bad practices wouldn\u2019t just destroy someone else\u2019s property rights \u2014 but the UCC\u2019s interest is to make the general estate as large as possible, and minimise carve-outs.<\/p>\n<p>Judge Glenn told Koenig for Celsius to work with Kovsky-Apap and the UCC on what could be returned immediately. \u201cI would like whoever can get their property back now, to get it back now.\u201d<\/p>\n<p>The judge did not grant an order on Pure Withhold or Transferred Withhold: \u201cI don\u2019t have anything decided today.\u201d<\/p>\n<h3>Next up<\/h3>\n<p>The December 8 hearing covered the proposed sale of GK8, the Israeli crypto custody company that Celsius bought in November 2021, to Galaxy Digital. We\u2019ll be covering that next.<\/p>\n<p><span class=\"css-901oao css-16my406 r-poiln3 r-bcqeeo r-qvutc0\">Phase II is not scheduled as yet, but it should be a doozy.<br \/>\n<\/span><\/p>\n<p>Send Amy money for eardrops! Strong drink is also welcomed!<\/p>\n<br><br><div align=\"center\"><p><a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\"><img src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2021\/10\/become_a_patron_button.svg\" alt=\"Become a Patron!\" title=\"Become a Patron!\" width=217 height=51><\/a><br><p style=\"align:center;\" class=\"patreon-badge\"><i>Your subscriptions keep this site going. <a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\">Sign up today!<\/a><\/i><\/p><\/div>","protected":false},"excerpt":{"rendered":"<p>Some assets belong to individual creditors, not to the bankruptcy estate. But the details have to be worked out.<\/p>\n","protected":false},"author":1,"featured_media":23380,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[3338,916,3335,3337,3084,3079,3339,3267],"class_list":["post-24311","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorised","tag-aaron-colodny","tag-celsius","tag-chris-koenig","tag-deborah-kovsky-apap","tag-kirkland-ellis","tag-martin-glenn","tag-troutman-pepper-hamilton-sanders","tag-white-case"],"jetpack_featured_media_url":"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/07\/scrooge-mcduck-money-bin.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/24311","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/comments?post=24311"}],"version-history":[{"count":20,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/24311\/revisions"}],"predecessor-version":[{"id":24331,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/24311\/revisions\/24331"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media\/23380"}],"wp:attachment":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media?parent=24311"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/categories?post=24311"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/tags?post=24311"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}