In re Cash Cloud, Inc.

1

In re: CASH CLOUD, INC, dba COIN CLOUD, Debtor.

No. 23-10423-mkn

United States Bankruptcy Court, D. Nevada

October 4, 2024

Date October 16, 2023 Time: 9:30 a.m.

Chapter 11

MEMORANDUM DECISION ^[1]

HON MIKE K. NAKAGAWA, UNITED STATES BANKRUPTCY JUDGE

On October 16, 2023, an evidentiary hearing in the above-captioned Chapter 11 proceeding^[2] was conducted on three separate contested matters: (1) the Motion of the Official Committee of Unsecured Creditors for an Order Granting Leave Derivative Standing and Authority to Commence, Prosecute and Settle Claims on Behalf of the Debtor's Estate ("UCC Derivative Standing Motion") (ECF No. 925); (2) Enigma Securities Limited's Application for Allowance and Payment of Administrative Expense Claim Pursuant to 11 U.S.C §§ 361, 362, 363, 364, 503, 507, and Bankruptcy Rules 3012 and 8002 ("Enigma Administrative Expense Application") (ECF No. 873); and (3) the Motion for Entry of an Order Authorizing Debtor to Surcharge the Collateral of Genesis Global Holdco, LLC, Enigma Securities Limited, and AVT Nevada, L.P. ("Debtor Surcharge Motion") (ECF No, 926), The appearances of counsel were noted on the record. Opening arguments were presented^[3], ^[4] and a concurrent trial on all three contested matters was conducted.^[5], ^[6] After presentation of the close of evidence, closing arguments were presented, and the matters were taken under submission, BACKGROUND^[7]

On February 7, 2023, Debtor filed a voluntary "skeleton" Chapter 11 petition ("Petition"). (ECF No, 1),^[8] In 2014, Debtor was organized in Nevada to provide means for consumers to purchase and sell digital currencies ("cryptocurrency") through hundreds of digital currency machines ("DCMs")^[9] placed in retail business locations nationwide, The Petition was signed under penalty of perjury by Chris McAlary ("McAlary") as its president. The Petition is accompanied by a copy of an Action by Written Consent of the Directors signed by McAlary as director of the Debtor, which also includes a provision retaining Daniel Ayala ("Ayala") as an "independent director." Along with the Petition, Debtor filed separate motions to employ the law firm of Fox Rothschild LLP ("Fox Rothschild") as its Chapter 11 counsel, Province LLC ("Province") as its Chapter 11 financial advisor, and Stretto, Inc. ("Stretto") as its Chapter 11 claims, noticing, and solicitation agent. (ECF Nos. 13, 15, and 17).

On February 8, 2023, Debtor filed a Motion for Interim and Final Orders: (I) Authorizing Debtor to Obtain Post-Petition Senior Secured, Superpriority Financing; (II) Granting Liens and Superpriority Claims; (III) Modifying the Automatic Stay; (IV) Scheduling Final Hearing; and (V) Granting Related Relief ("DIP Financing Motion"), (ECF No. 35). In support of the DIP Financing Motion, Debtor filed a Declaration of Christopher McAlary ("First McAlary Declaration")^[10], a Declaration of Paul Huygens^[11] ("First Huygens Declaration"), and a Declaration of Daniel Moses^[12] ("First Moses Declaration"). (ECF Nos. 36, 37, and 38).

On February 9, 2023, an order shortening time was entered allowing the DIP Financing Motion to be heard on February 15, 2023. (ECF No. 43).

On February 13, 2023, Debtor filed a notice of redlined revisions to the DIP Financing Motion. (ECF No. 74).

On February 14, 2023, a Declaration of Paul Huygens ("Second Huygens Declaration")^[13]and a Declaration of Daniel Moses ("Second Moses Declaration") were filed in support of the DIP Financing Motion. (ECF Nos. 91 and 92).

On February 15, 2023, the DIP Financing Motion was heard and granted on an interim expedited basis.^[14]

On February 15, 2023, Debtor filed a Motion for Approval of Rejection of Unexpired Lease with TSSP LLC pursuant to 11 U.S.C. § 365(a) and Abandonment of Any Property That Remains at Premises and supporting declaration of Christopher McAlary. (ECF Nos. 103 and 104).^[15]

On February 16, 2023, an interim order was entered authorizing Fox Rothschild to be employed as Chapter 11 counsel for the Debtor. (ECF No, 126).

On February 17, 2023, the UCC was appointed in this Chapter 11 proceeding. (ECF No. 131).^[16] On February 17, 2023, an interim order was entered on the DIP Financing Motion ("Interim DIP Financing Order"). (ECF No. 132).

On February 17, 2023, Debtor filed a First Omnibus Motion for Entry of Order Approving Rejection of Executory Contracts and Unexpired Leases Pursuant to 11 U.S.C, §365(a) and Disposal of Certain Personal Property Including Abandonment ("First Rejection/Abandonment Motion"). (ECF No. 138). On the same date, Debtor filed a Second Omnibus Motion for Entry of Order Approving Rejection of Executory Contracts and Unexpired Leases Pursuant to 11 U.S.C. §365(a) and Disposal of Certain Personal Property Including Abandonment ("Second Rejection/Abandonment Motion"). (ECFNo. 141). Both motions were noticed to be heard on March 17, 2023, (ECF Nos. 140 and 143).^[17]

On February 22, 2023, Debtor filed a motion to approve procedures for interim compensation and reimbursement of professionals employed in the Chapter 11 case ("Interim Compensation Motion").^[18] (ECF No, 152) On February 22, 2023, an interim order was entered authorizing Stretto to be employed as the claims, noticing and solicitation agent for the Debtor. (ECF No. 155).

On March 2, 2023, a final order was entered authorizing Fox Rothschild to be employed as Chapter 11 counsel for the Debtor. (ECF No. 193).

On March 9, 2023, a final order was entered authorizing Province to be employed as financial advisor to the Chapter 11 Debtor, (ECF No, 223), On March 9, 2023, Debtor filed its schedules of assets and liabilities ("Schedules")^[19] along with its statement of financial affairs ("SOFA"). (ECF Nos. 239^[20] and 240). Part 13, Section 28.1 of the SOFA attests that McAlaiy is the Chief Executive Officer who holds 100% of the interest in the Debtor. The Schedules and SOFA are signed under penalty of perjury by McAlaiy as the chief executive officer.

On March 13, 2023, an application was filed to employ Seward & Kissel LLP ("Seward & Kissel") as bankruptcy counsel for the UCC. (ECF No. 271).

On March 14, 2023, an application was filed to employ McDonald Carano LLP ("McDonald Carano") as local bankruptcy counsel for the UCC. (ECF No. 279).

On March 20, 2023, a final order was entered on the DIP Financing Motion ("Final DIP Financing Order").^[21] (ECF No. 315). The order authorizes the Debtor to borrow up to $5,000,000 from CKDL Credit, LLC or its designee ("DIP Lender") through a Senior Secured Superpriority Debtor-in-Possession Promissory Note.^{[22] [23]} On March 20, 2023, an order was entered approving procedures for Interim Professional Compensation ("Interim Compensation Order")-^[24] (ECF No, 321).^[25] On March 21, 2023, a final order was entered authorizing Stretto to be employed as the claims, noticing and solicitation agent for the Debtor, (ECF No. 340).

On March 23, 2023, an application was filed to employ FTI Consulting Inc. ("FIT') to serve as Chapter 11 financial adviser to the UCC. (ECF No. 348).

On March 27, 2023, AVT Nevada, L.P. ("AVT") filed a secured proof of claim ("POC 38-1") in the amount of $1,314,335 with the collateral described as "equipment" and perfection based on "UCC filing statements." Attached as an exhibit to POC 38-1 is a copy of UCC Financing Statement describing the collateral as "All equipment, machinery, goods, personal and other property, however described, leased pursuant to Lease Schedule No. CSHCJ)01 to Master Lease No. 2056266, as amended, whether now or hereafter existing..." Also attached are copies of an exhibit listing a number of DCM at retail locations in Nevada. POC 38-1 does not identify the Cash Cloud Operating System Software as being encompassed by the Master Lease.

On April 7, 2023, Debtor filed a motion for entry of an order approving auction and bidding procedures for potential plan sponsors or the purchase of substantially all of the debtor's assets ("Auction Procedures Motion"), along with supporting declarations of Chris McAlary and Daniel Moses ("Third Moses Declaration"). (ECF Nos. 392, 393, and 394).

On April 12, 2023, an order was entered shortening time scheduling the Auction Procedures Motion to be heard on April 26, 2023, (ECF No. 415).

On April 27, 2023, orders were entered granting the applications authorizing the UCC to employ Seward & Kissel, McDonald Carano, and FTI. (ECF Nos. 479, 480 and 481).

On April 27, 2023, an order was entered approving the Auction Procedures Motion. (ECF No, 483).

On May 8, 2023, Debtor filed a proposed "toggle" Chapter 11 plan of reorganization providing for implementation alternatives based on whether the Debtor completed a sale of its assets ("Asset Sale"). (ECF No. 528), Debtor also filed a disclosure statement ("Disclosure Statement") describing its proposed plan. (ECF No. 529). The proposed Chapter 11 plan was signed by McAlary as chief executive officer.

On June 8, 2023, McAlary resigned.

On June 9, 2023, Enigma filed a secured proof of claim ("POC 100-1") in the amount of "not less than $7,553,699 in principal, plus any accrued but unpaid interest thereon." Attached as Exhibit 3 to POC 100-1 is a copy of a UCC Financing Statement with the collateral described as "The 3677 cryptocurrency ATMs listed on Schedule 1 (including the location of each machine) attached hereto and incorporated herein by reference." POC 100-1 does not identify the Cash Cloud Operating System Software as being part of Enigma's collateral.

On June 14, 2023, Genesis filed two separate proofs of claim: (1) POC 121-1 is a secured claim in the amount of "not less than $7,981,536.27" in addition to interest of "not less than $523,281.13" as well as lender costs of "not...