Regulation
Cryptocurrencies Offer Celsius Defendants Potential Lifeline in Collection Cases, Lawyer Says – DL News
- Celsius is suing thousands of former customers who withdrew their money before the bankruptcy.
- Some customers are planning to fight back.
- Their success may depend on one key question: Who owned the cryptocurrency?
In an effort to recoup money it can use to repay its creditors, failed cryptocurrency lender Celsius is suing thousands of former customers who withdrew their assets from the platform within 90 days of the company filing for bankruptcy.
This is a standard but little-known move in bankruptcy proceedings. However, the asset in question is a cryptocurrency, a fact that could represent a potential lifeline for the defendants, many of whom have been sued for small fortunes.
“There are a couple of issues that are unique to cryptocurrency cases,” said Noah Weingarten, a bankruptcy attorney at Loeb & Loeb DL News.
For example, were customer deposits owned by Celsius or by the customers themselves?
“If it is not owned by the [Celsius bankruptcy] assets, then people should be able to have a potentially good defense,” he said.
The lawsuits represent the latest development for the troubled lender, which at the height of its power boasted assets of $25 billion.
Now 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.
Join the community to receive our latest stories and updates
Celsius declined to comment officially on this article.
‘Unaware Investors’
Celsius was one of the most notable cryptocurrency companies to fail during a series 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 safely deposit cryptocurrency and earn interest.
In reality, Mashinsky ran the firm as a “risky investment fund” and turned clients into “unwitting investors,” prosecutors said.
Last year, thousands of former Celsius customers voted for a business plan designed to redistribute $2 billion in cryptocurrency left in the failed lender, or between 67% and 85% of the money trapped on the platform.
The plan also included instructions to seek other avenues to recover money that Celsius could then distribute among its creditors.
“Making the playing field more equal”
In January, it began pursuing so-called preferential credits, or all transfers from Celsius made within 90 days of the bankruptcy totaling $100,000.
“The intention is to potentially level the playing field among unsecured creditors,” Weingarten said.
In U.S. law, companies are presumed to be insolvent long before they officially file for bankruptcy.
Therefore, any withdrawal made just before a bankruptcy filing effectively allows some creditors to evade bankruptcy proceedings at the expense of others.
“These preferential claims are made in almost every single bankruptcy. They’re very common,” Weingarten said. “In some ways, they make sense, but in other ways, they’re a little unfair.”
Customers who had withdrawn their cryptocurrencies just before Celsius filed for bankruptcy were initially offered the opportunity to settle: first, 27.5% of the value of the cryptocurrencies withdrawn during the 90-day lookback window, then 13.75%. Those values were to be determined based on the price of the customers’ cryptocurrencies on the 2022 transfer dates.
Celsius has reached a settlement with about 1,500 customers who withdrew more than $100,000 in cryptocurrency 90 days before the company filed for bankruptcy, it said in a Press release.
“Scare tactic”?
However, since July 1, it has filed lawsuits against thousands of others who ignored, neglected or backed out of the proposed settlement.
In the lawsuits, Celsius is now asking customers to refund the full value of any cryptocurrency withdrawn in the 90 days prior to July 13, 2022, at June 14, 2024 prices.
According to CoinGecko, the cryptocurrency market capitalization increased by 164%, surpassing $2.5 trillion, between Celsius’ bankruptcy filing and June 14.
In that time frame, Bitcoin and Ether have increased by 226% and 212%, respectively, topping $66,000 and $3,400, respectively.
This is a very different approach than the one taken by the failed team at FTX, the collapse of the cryptocurrency exchange once led by a convicted fraudster. Sam Bankman-Fritto.
When detailing its plan to repay creditors earlier this year, FTX insisted that returning the value of cryptocurrencies at the time of filing for bankruptcy 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
Celsius customers who are sued have a couple of defenses to pursue, other than quibbling over who actually owned the assets.
For example, they may argue that the withdrawals were made in the ordinary course of business.
A landlord who receives rent from a tenant who files for bankruptcy less than 90 days later may be able to rely on what is known as the ordinary course objective defense, Weingarten said.
Whether that will protect former Celsius customers will depend on a couple of factors.
Such 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 item in the New York Law Journal.
Another alternative is to rely on the protection of the bankruptcy code for some transactions involving securities, ironic, given the industry vehement opposition to that classification.
“While some regulators have suggested that some cryptocurrencies are, in fact, securities, no court has ruled on the issue in this context,” Weingarten wrote. “As a result, and for other reasons, the application of this defense is uncertain.”
Aleks Gilbert is DL News DeFi Correspondent from New York. You can reach him at aleks@dlnews.com.